Skywest Inc. (NASDAQ: SKYW) Q4 2019 Earnings Call Transcript

Skywest Inc. (NASDAQ: SKYW) Q4 2019 Earnings Conference Call

January 30, 2020

Corporate Participants:

Robert J. Simmons — Chief Financial Officer

Eric Woodward — Chief Accounting Officer

Chip Childs — President and Chief Executive Officer

Wade Steel — Chief Commercial Officer

Analysts:

Savi Syth — Raymond James — Analyst

Michael Linenberg — Deutsche Bank — Analyst

Duane Pfennigwerth — Evercore — Analyst

Joyce Koltisko — Goldman Sachs — Analyst

Bert Subin — Stifel — Analyst

Conor Cunningham — Cowen — Analyst

Scott Schoenhaus — Stephens — Analyst

Presentation:

Operator

Good afternoon and welcome to the SkyWest Incorporated Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Robert J. Simmons — Chief Financial Officer

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; and Mike Thompson; SkyWest 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?

Eric Woodward — Chief Accounting Officer

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 2018 Form 10-K and other reports and filings with the Securities and Exchange Commission.

With that, I’ll turn the call over to Chip.

Chip Childs — President and Chief Executive Officer

Thank you, Rob and Eric, and good afternoon everyone. Thank you for joining us on the call today.

The fourth quarter completes a strong 2019 for us. For the full year 2019 we grew earnings per share by 18% over 2018, and we monetized our fleet transition initiatives and moved forward as a single airline with a more efficient footprint.

Our employees, once again, did a remarkable job, delivering a solid 99.9% adjusted completion in 2019. I don’t want to thank our more than 14,000 employees for their efforts to work together and deliver a great product for our customers.

Today we announced a new flying contract with American Airlines to own and operate 20 new E175s. Half of these planes are expected to be placed into service in late 2020 and half in 2021. Additionally, we expect to take delivery of six E175s which we will own and operate in the first half of 2020 for Delta under our previously-announced agreement. These additional aircraft and agreements will certainly not be — would certainly not be possible without a reliable and efficient product. The people of SkyWest have a significant task of executing these deliveries as we work together to deliver quality service onboard of up to 2,500 departures every day.

We continue to manage through a changing market for our product. Scope limitations and competitive dynamics have led to a much stronger demand for the older sectors of our fleet. In response to the strong customer demand, we are planning to invest in additional maintenance on our CRJ fleet during the first half of 2020 even beyond what we discussed last quarter. This year represents the start of the next phase of our fleet transition as we increase the new E175 aircraft in our fleet and prepare CRJ fleet for the future.

Given the demand we’re seeing, we’re changing our overall maintenance approach on our CRJ fleet to improve its reliability and performance in the long run. The impact of these changes will drive additional short-term costs in the first half of 2020. However, we anticipate these investments will translate into long-term value for SkyWest and for our customers. All of this makes 2020 a pivot point for us.

Given this investment in our fleet, we expect 2020 earnings to be relatively flat with 2019, but this positions us for a new trajectory in 2021 and 2022. We intend to continue leveraging our position in the market to realize the value of the assets within our operational scope. We’re also in the fortunate position to be able to convert strong pilot availability into market opportunity and to respond quickly to our partners’ need.

With our strong team culture, quality product and opportunities, pilot hiring and recruiting is still running well above last year’s levels. As we mentioned last quarter, about half of our current hiring is from our existing cadet pipeline, up from about 10% just five years ago.

The contract win announced today, combined with the reshaping of our business model last year, reduces our overall enterprise risk and will help us drive the healthy balance of earnings growth and cash flow generation. We remain very focused on sustainable opportunities that position us for long-term success.

I want to again thank our great team of aviation professionals for their excellent work during 2019.

Rob?

Robert J. Simmons — Chief Financial Officer

Today we reported fourth quarter net income of $73 million compared to $67 million in the fourth quarter last year. Fourth quarter earnings per share is $1.43, up 12% from $1.28 per share in the fourth quarter of 2018.

Pretax income of $98 million for Q4 2019 is up from pretax income of $91 million in Q4 2018. Our diluted share count of 50.8 million is down 3.4%, or 1.8 million shares from Q4 last year. Our effective tax rate in Q4 was 25.8%, down slightly from 26% in Q4 2018. We continue to expect our tax rate to be approximately 25% for fiscal year 2020.

Let me say a couple of things about our balance sheet as of December 31st, 2019. We ended the quarter with cash of $520 million, down from $572 million last quarter. Our capex during the fourth quarter was $181 million, including $18 million in cash and $100 million of debt issued to acquire five new E175s. $39 million was spent for spare engines and used airframes and $24 million for other spare parts and maintenance assets.

As you recall the last few years, we’ve invested heavily in growth aircraft for our fleet. In 2018 we spent $1.1 billion in capex, driven primarily by the acquisition of 39 new E175s. In 2019 we spent $636 million in capex for the full year, including 10 new E175s. Including the acquisition of 16 new E175s in 2020, we expect capex to be in the range of $650 million to $700 million.

Debt for the quarter ended at $3 billion, up slightly from last quarter. Including the effect of financing 16 new E175s in 2020 and 10 more in 2021, debt levels should be approximately $3 billion at the end of 2020 and around $2.8 billion by the end of 2021, again depending on additional orders.

Just a reminder that all of our debt is financing aircraft and engines and the bulk of our $3 billion in debt is financing our fleet of 156 E175s that are under flying contracts, largely coterminous with the related debt. Beyond 2021, we continue to expect to delever via repayment of $350 million to $400 million in debt each year through the embedded amortization of principal in this mortgage style term debt before any new financings for new aircraft pursuant to any future new orders.

We expect strong cash generation over the next couple of years that will allow us to maintain strong liquidity, delever our balance sheet and maintain the agility to respond quickly to any incremental market opportunities. During Q4, we repurchased $10 million of stock under our $250 million program approved by the Board last February. This leaves us $160 million in authorization remaining under this program. We remain committed to returning capital to shareholders via a combination of dividends and share repurchases.

As per our policy and practice, let me say a few things about fiscal year 2020 without giving formal earnings per share guidance. As Chip mentioned earlier, 2020 is the start of the next phase of our ongoing fleet transition. We now expect an extra $15 million in maintenance cost in the first half of 2020 along with $7 million of transition costs, which leads us to expect full year 2020 earnings to be flat to slightly up from 2019. Note that this $15 million is in addition to the $30 million we estimated last quarter. This first-half investment in our CRJ fleet is making 2020 a transition year for the purpose of putting us on a new trajectory for 2021 and 2022.

Free cash flow in 2020 will likely be approximately $250 million, similar to 2019 driven by relatively flat levels of EBITDA and capex compared to 2019. Free cash flow could be up nicely in 2021 over 2022, depending — over 2020, depending on aircraft orders. We would expect earnings per share in each quarter of the first half of 2020 to be slightly down from the first half of 2019 due to the investment in the CRJ fleet referenced earlier.

The investment to improve operational performance and reliability of our CRJ fleet is in response to stronger customer demand further into the future than we would have originally expected and ongoing scope limitations.

We would expect earnings per share growth in the second half of 2020 with the second half up nicely over both the first half of 2020 and the second half of 2019.

Our visibility to future cash flows gives us the confidence to continue to make disciplined investments to create shareholder value as market opportunities present themselves. As we continue to demonstrate, when circumstances align we will be ready with a strong and liquid balance sheet to help our partners optimize their scope or consolidate market share. We continue to strive to drive a healthy balance between earnings growth and cash flow.

Wade will now give you some details on fleet initiatives, fleet movements and other commercial opportunities. Wade?

Wade Steel — Chief Commercial Officer

Thank you, Rob. Today we announced a new flying contract with American for which we will own and operate 20 new E175s under a 10-year contract. We anticipate delivery of 10 of those aircraft late this year and the remaining 10 during the first half of next year. We anticipate financing all of the aircraft through long-term debt.

As we announced last August, we have an agreement with Delta to operate six used E175s under a multi-year contract, scheduled to begin in the first part of this year. The aircraft are financed by Delta and will be sourced from a regional operator transitioning out of Delta Connection. As part of the same announcement SkyWest agreed to purchase and operate seven new E175s for Delta instead of SkyWest operating seven new CRJ900s that were to be financed by Delta and scheduled for delivery this year.

To summarize, our E175 and our CRJ900 delivery streams we are scheduled to take delivery of one more Delta owned CRJ900 in the second quarter of this year which will conclude our delivery stream for the fleet at 13 aircraft. We took delivery of five new E175s for Delta during Q4. We are scheduled to take delivery of four new and six used E175s in the first half of this year.

During the second half of the year, we are scheduled to take delivery of 12 new E175s with the final 10 E175s for American scheduled for 2021. This will bring our total E175 fleet to 188 by the middle of 2021.

Let me talk about our CRJ700s and our American partnership. As previously discussed, we announced an agreement to add 10 additional CRJ700s to that contract. We anticipate these aircraft being placed into our American system throughout this year. This will bring our fleet total to 70 CRJ700s under long-term contracts.

As Rob mentioned, demand for our CRJ flying remains very strong and as a result of that strong customer demand, we anticipate investing in our CRJ fleet during the first half of 2020 to improve reliability and customer experience. As Chip mentioned, while these changes will drive additional short-term cost for the first half of 2020, we anticipate this investment to show an attractive return over the long term as we — as it will allow us to work with our major partners on further contract extensions. We are also expecting to incur approximately $7 million in the first half of the year on fleet transition expense. These expenses include aircraft out of service time, pilot training, bringing used aircraft on our certificate and transitioning aircraft to different partners.

Let me shift gears to our leasing business where we continued to leverage opportunity. This quarter we delivered six additional CRJ700s under our previously-announced agreement with a domestic third party bringing the delivery count to 10 of the 29 aircraft. These aircraft are under a 10-year lease agreement and we anticipate the remaining aircraft will be delivered through the middle of this year.

As we communicated previously, the majority of these aircraft will be sourced from the 30 CRJ700s from our previous ExpressJet operation. Additionally, we have delivered all five CRJ900s leased by Air Canada under a six-year lease agreement. We have also agreed to purchase seven used CRJ700s from a third party. At year-end we had closed on two of the seven aircraft. We anticipate utilizing these aircraft through a combination of operating the aircraft for other partners and leasing the aircraft to a third party.

Finally, during the fourth quarter, we invested $39 million in spare engines and used airframes which will be used to support our fleet this year. The engines will be used to help fund the 40 CF34-3 engines we will lease to Delta with an anticipated five-year term. This is in addition to the eight CF34-8 engines already under lease with Delta.

We expect the deliveries on the 40 engines to begin late this year through mid-2021.

As I’ve discussed, we continue to utilize our flexible fleet and platform for profitable opportunities, leveraging the unique position, we’ve built over the past several years to enhance our model and to minimize risk. We anticipate ongoing execution of these agreements will help ensure we’re well positioned for 2021 and beyond.

Okay. Operator, we’re ready for our Q&A now.

Questions and Answers:

Operator

We will now begin the question-and-answer session [Operator Instructions] The first question comes from Savi Syth with Raymond James. Please go ahead.

Savi Syth — Raymond James — Analyst

Hey, good afternoon. I just had a quick question. In the past you’ve talked about the duration of the contract. I think you mentioned something like 80% going through the end of 2020. I wonder if you can provide an update on just how many of your CPAs like contract go through maybe kind of ’21-’22 time periods.

Wade Steel — Chief Commercial Officer

Yes, Savi, this is Wade. I’ll kind of break it into two groups here. Our E175 aircraft, they all are under very long-term agreements. As we said the American agreement is a 10-year agreement that we just announced today. The other one still have seven to eight years — seven to eight, nine years left on them.

The CRJ fleet, we’ve recently just extended the vast majority of those. There are still pockets of CRJ that will expire at the end of this year and then some of them in 2021 and 2022. And we’re currently working with our major partners on their needs in the demand for those aircraft.

Savi Syth — Raymond James — Analyst

Got it. And then I am guessing the CRJ200s are just on short-term basis.

Wade Steel — Chief Commercial Officer

The CRJ200s is what I was referring to. Yeah. Those are — there are some that expire towards the end of this year and then some in 2021 and some in 2022.

Savi Syth — Raymond James — Analyst

Got it. And then, just curious on the prorate side, you have much connections that go beyond kind of domestic. Just wondering with all the — some of the international news if there is any exposure there on the prorate side?

Wade Steel — Chief Commercial Officer

Yes, Savi, this is Wade again. Our pro rate network is a 100% domestic. There is no international and the connectivity internationally to China, I think is what you’re referring to is very, very, very minimal.

Savi Syth — Raymond James — Analyst

Yeah, makes sense. And if I might ask just one more question, the raw completion factor, it was down year-over-year. Just curious in this last quarter, I’m guessing that’s kind of weather related. Curious does that have a meaningful impact on earnings or is it really the kind of a controllable completion factor that drives earnings?

Wade Steel — Chief Commercial Officer

Savi, this is Wade again. Yeah, the completion factor is down slightly year-over-year and the — and all of that is due to weather and ATC type issues. There is always a little bit of friction when you don’t complete the flight but all of our incentives are based on adjusted completion. And so it has an impact, a lot of it can be mitigated through the contracts and through our labor groups, but there is some small friction there.

Savi Syth — Raymond James — Analyst

Makes sense. All right. Thank you.

Operator

The next question is from Mike Linenberg with Deutsche Bank. Please go ahead.

Michael Linenberg — Deutsche Bank — Analyst

Oh, yeah. Hey, everyone. Just a couple here. When we look at just your revenue lines and just the growth in this airport customer service and other, I guess, presumably the leasing pieces in there as well, and so I’m not sure if you can give us maybe some breakout there or will you get to a point where you will start breaking that out? I’m not sure what the — what materiality is, what as a percent of total revenue, which forces you or maybe requires you to do that. Thanks.

Robert J. Simmons — Chief Financial Officer

So look, I think, Mike, on the way that our P&L is structured, airport customer service and other, the bulk of that is going through some mix changes as our model is changing and evolving. And I think we’ll consider additional breakouts. But at this point, I think that we’re happy with how we’ve got that structured.

Michael Linenberg — Deutsche Bank — Analyst

Okay. And then the E175s that are going to American, are those all 76 seaters with, I guess, there are three Class airplanes?

Wade Steel — Chief Commercial Officer

Yeah, Mike, this is Wade. Yeah, they’re all 76-seat aircraft, yeah, three-class consistent with how the rest of the industry is doing it.

Michael Linenberg — Deutsche Bank — Analyst

Okay, great. And then just last on the — on the prorate business, how — what percent does prorate represent, I guess maybe for 2019, if you could give me a rough number what it represented and how did it perform maybe versus 2018 overall profitability? Thanks. Thanks for answering my questions.

Robert J. Simmons — Chief Financial Officer

Yeah, Mike, it’s Rob here. So our prorate is about 13% of our business, still very consistent with what it’s been. And again I think our focus has been and will remain on the contract side of our business. And so I think it’s probably fair to expect prorate sort of in the same range that you’ve seen at cargo in the last couple of years.

Michael Linenberg — Deutsche Bank — Analyst

Okay. Very good. Thanks. Thanks to everyone.

Chip Childs — President and Chief Executive Officer

Thanks, Mike.

Operator

The next question is from Duane Pfennigwerth with Evercore. Please go ahead.

Duane Pfennigwerth — Evercore — Analyst

Hey, thanks. Just with respect to the incremental investment that you’re calling out here, can you just go into more detail what is driving that and what caused you to not have your arms around that late last year?

Robert J. Simmons — Chief Financial Officer

Yeah, thanks. I think that as you look at what we’re talking about is an incremental $15 million over what we signaled last quarter. And I think as we’ve just gone through, we’ve identified sort of incremental opportunities and I think it makes sense for us to do — to make these investments in the short term that will help position us for better growth and better profitability in the future.

I think this is a story about we’re really taking two quarters to make this investment in Q1 and Q2 of 2020, and then we start to see the returns on that investment in the second half of the year, I mean right away. And obviously this positions us for a better growth story in 2021 and 2022.

With respect to the incremental transition costs, as Wade mentioned, there’s just a lot of moving parts this year, a lot of movement between partners. There will be some out of service time as we bring in new airplanes moving around. There is some pilot training incremental cost, some cost of bringing new aircraft on to our certificate.

So there is just a bit of friction during this year. But all of this is great stuff. All of this is really exciting for us as we look to 2021 and 2022.

Duane Pfennigwerth — Evercore — Analyst

Thank you. And then as we think about kind of the leverage points of earnings growth into next year, obviously you have the contribution of these incremental 20 E175s. Is it fair for us to think that you’ll get all of this kind of $45 million back next year, or will there be other sort of growth investments that you need to make? And any other kind of leverage points into 2021 that you would care to highlight? Thanks.

Robert J. Simmons — Chief Financial Officer

The investment — the investment in that maintenance is — it’s largely a one-time event for the first half that we will start to see the return on that investment, as I mentioned right away in the second half of the year. We expect that the second half of 2020 to show nice growth over the second half of 2019, as well as just over the first half, obviously, where the first half has the bulk of that investment.

Duane Pfennigwerth — Evercore — Analyst

And anything else you’d care to comment on earnings growth drivers into 2021?

Robert J. Simmons — Chief Financial Officer

Well, I think just the point that we’ve got a lot of interesting conversations going on with our partners. I think you’ve hit on it that the bulk of that — the new airplanes with American that we’ll be bringing in will be in the latter part of the year. So we won’t see a full-year effect of those until next year. And then obviously with 10 more coming in 2021 we’ve got that virtuous cycle as we continue to have the full-year effect, pushing growth on the following year after delivery.

Duane Pfennigwerth — Evercore — Analyst

Okay, thank you.

Operator

The next question is from Catherine O’Brien with Goldman Sachs. Please go ahead.

Joyce Koltisko — Goldman Sachs — Analyst

Hi, good afternoon. This is actually Joyce on for Cathy. Just a question on the contract that you have with your major airline partners. I’m guessing you guys guarantee a minimum amount of block hours every year, but correct me if I’m wrong. And I was just wondering just over the last couple of years, what the average block hours you have actually sold [Phonetic] versus the minimum and it is typically right in line with the minimum or maybe 10% or trying 20% higher than that?

Wade Steel — Chief Commercial Officer

Yeah, Joyce, this is Wade. That’s a very good question. So most of our contracts do have contractual minimums. We are well in excess of those contract minimums. SkyWest has typically flown these aircraft very hard. A lot of utilization in them. We’re at least 10% to 15% above the contractual minimums in all fleets and it’s been able to add a lot of value to us and our major partners.

Joyce Koltisko — Goldman Sachs — Analyst

Okay, that’s really interesting. Thank you. And then just another question on costs. Just given that none of your labor force is represented by union following the divestiture of ExpressJet. Just how should we think about step-ups in labor costs? Is that fairly ratable or are there typically larger raises every couple of years? Any thoughts on that?

Chip Childs — President and Chief Executive Officer

Yeah, this is, Chip. Thanks for the question. So the way it works at SkyWest we’ve got some of the best aviation professionals in the entire world. We do have — continue to have collectively bargained agreements within our work groups that we have at SkyWest. And so these are very, very consistent with what you see within the industry and our philosophy is that in order for our business model to be successful we want to hire the best. We’re going to do the very best we can to take the best care of our employees, compared to what our competition does. And in turn that model has returned a very, very good return for all the stakeholders involved, at SkyWest, both shareholders as well as the employees and customers.

So the way I would think about it, I would say it’s pretty traditional within the airline industry, in fact quite traditional, the same, but we are not entirely shy about the fact that we want the best professionals working at SkyWest. We do have them and we do all we can within our model to take better care of them than anybody else could. So I think that’s basically the summary.

Joyce Koltisko — Goldman Sachs — Analyst

Absolutely. It seems like a pretty strong pipeline sale. I guess, just a quick follow-up to that then. Are there other areas of cost inflation over the next couple of years that we should be thinking about that could potentially impact margins on the contracts that you or is that all?

Chip Childs — President and Chief Executive Officer

I think — again this is Chip, I think philosophically, when we take a look at our CRJ fleet, as we’ve talked about in our script, as — the philosophy behind the investments that we’re making in maintenance on our CRJ fleet is just simply the fact that today performance is more paramount than it ever has been. So although we will potentially have some costs creep relative to that reliability, the overall value that we see within our fleet, particularly the older fleet with scope restriction in the competitive landscape is driving a tremendous amount of value and return for our shareholders and our people.

So it’s more not that we missed something, it’s more that we’re seeing something and we’re seeing some good opportunity and are moving that particular fleet into a more proactive help maintenance system and from that perspective, I don’t know that the costs associated with that are going to eat into the overall return in the long term.

Joyce Koltisko — Goldman Sachs — Analyst

Got it. Thank you.

Operator

The next question is from Bert Subin with Stifel. Please go ahead.

Bert Subin — Stifel — Analyst

Hey, good afternoon guys. Thanks for the time.

Chip Childs — President and Chief Executive Officer

Hey, Bert.

Bert Subin — Stifel — Analyst

So today’s contract announcement with American highlights that your mainline partners are still looking to the independent market for regional flying. How are you positioning your business to compete against, I guess at one end the low cost independents, and then at the other spectrum the wholly-owns?

Chip Childs — President and Chief Executive Officer

This is Chip. Thanks for the question, it’s a very good question. Part of what our strategy is with all of this is to stay very close and in good contact with our partners and what they want. And so all of our business model that we’ve developed over the last five to six years has been in conjunction with them. Like I just answered on the previous question, performance is paramount and I think that’s a differentiating factor. We have a very good performance on our 175. Like I said previously, we want to significantly increase the long-term performance of our CRJ fleet. So from the wholly-owned perspective and for the lower-cost elements we just — I — with the wholly-owned perspective, we work with our partners and we’re team working with them on ways in which we can provide value to their overall Express or Connect product.

On the other end of the dynamics who we compete with, to be candid, where we have a completely different philosophy. We have a completely different business model. We find that when we focus primarily on performance and value and flexibility and deliver exactly what our partners want that enables us to do some things to make sure that we have pilots, mechanics, flight attendants, the very best there is. And the carrier to them that they don’t have to worry about to say that they know is the solid section of their Express or Connection portfolio, and that’s what we drive to do, and we still see a very bright future and growth within that philosophy that we have.

Bert Subin — Stifel — Analyst

Yeah, that’s helpful, thanks. Just as a quick follow-up, you talked a lot about sort of this pent-up demand for CRJs. Is that just being driven by scope limitations or is there something else there, just demand for smaller jets?

Chip Childs — President and Chief Executive Officer

I think it’s probably both, but primarily the scope limitation. One is putting a lot of pressure on being able to fly 50-seaters. And our philosophy and approach is going to be that we — that’s what we have today. We believe that these investments are going to continue to add long-term sustainable performance on the CRJ200 fleet. As we look at that fleet differently and if in fact something does change relative to scope for demand, we have the aviation professionals. We have a broad base of fleet that we can tap into and plenty of capital to pivot in a different direction if need be, but we stay very astute on all of those opportunities.

Bert Subin — Stifel — Analyst

Great, thanks for the time.

Operator

The next question is from Helane Becker with Cowen. Please go ahead.

Conor Cunningham — Cowen — Analyst

Hey guys. It’s actually Conor. Just a couple of questions. On the — I mean, there continues to be a lot of fleet movement. This may not be as relevant as it has been in the past, but just curious if you have any idle aircraft that are not under CPA or pro-rate or being leased out currently. And then I think you kind of answered this, but in terms of utilization on the pro-rate business, has that increased with the Max being out at all? Curious, your thoughts there. Thanks.

Wade Steel — Chief Commercial Officer

Yes. So Conor, this is Wade. So the first question just on the idle aircraft, so the last couple of years we’ve been transitioning a lot of airplanes. There are still airplanes in transition. As we talked about some of those transition costs there — one of the frictions that we are facing is still transitioning airplanes from different partners into our leasing business, all of that. So there are still some of that and we are still going to face some of that in Q1 and Q2. As far as — so there will be the transition. But overall, we have the vast, vast, vast majority of our entire fleet committed. It’s just it’s in a transition phase.

The second question was on pro rate and the Max. Our pro rate business, these are smaller markets that the Max is not serving. Our pro rate business will just — it’s a very niche market and we’re going to continue to serve those. We really haven’t increased our utilization because of that. It’s something that these smaller communities there is good demand, and we continue to serve those, but we haven’t done anything different due to the Max groundings.

Conor Cunningham — Cowen — Analyst

Okay, great. And then just on the $45 million in maintenance investment. I know you talked a bit about it already, but just curious if you could break down maybe like what actually falls in the first quarter versus second like it can be — obviously can be somewhat lumpy, just curious if any thoughts there?

Wade Steel — Chief Commercial Officer

Yeah, Conor, what I can tell you is that again compared to first quarter of the year ago, both first quarter and second quarter will be down by a little bit and then come back in second half we will have growth over first half as well as growth over the prior year second half. So it’s — we don’t have exact timing for you, but it’s largely a first-half event. And again it’s helping us put our fleet in a place where we can start to see a return on that investment right away.

Conor Cunningham — Cowen — Analyst

Okay. And then just on the actual investment, is it across the entire fleet or is it just a pocket of aircraft, and if so, how many?

Wade Steel — Chief Commercial Officer

Well, it’s about the older sectors of our fleet, the CRJ fleet, both 200s and 700s.

Conor Cunningham — Cowen — Analyst

But there is no — is it across all of them, or is there a certain number? If it’s across all of them, it’s not a big deal.

Wade Steel — Chief Commercial Officer

Yeah, I would say this. I would say that there is some things that we’ve been doing with a certain portion of the fleet, very small fleet, relative to what we wanted to accomplish with performance. But I would say, largely, it’s pretty much the bulk of them that we’re trying to get through various programs by summer time.

Conor Cunningham — Cowen — Analyst

Okay, great. And then just one quick one. On the American contract, I assume the financing is kind of how you’ve done in the past, 15% cash, 85% debt financed. Is that correct?

Wade Steel — Chief Commercial Officer

That’s correct.

Conor Cunningham — Cowen — Analyst

Okay, great. Thank you.

Operator

The next question is from Scott Schoenhaus with Stephens. Please go ahead.

Scott Schoenhaus — Stephens — Analyst

Hey, guys. So this is just a follow-up on the last question. You have roughly $520 million cash on the balance sheet. I know you align the debt with the contract and you have — you want liquidity to meet customers’ needs. But just thinking about how you’re thinking about near-term opportunities to use this cash, is it to acquire these used CRJ700s for the previous American contract? Is it something else? Is it continuing to buy back shares? Just help me to walk through like your near-term opportunities with the cash on the balance sheet.

Robert J. Simmons — Chief Financial Officer

Yeah. Thanks, Scott. So I think it’s really all of above. Obviously it’s very important that we have a good strong and liquid balance sheet. I think as we’ve indicated, part of our cash flow over the next couple of years will be to continue to delever a bit. Our leverage has dropped pretty significantly over the last couple of years as we expected it to.

But the cash on the balance sheet — our favorite use of cash is obviously to find accretive ways to put it to work with various investments in our fleet. But we also are very committed to returning capital to shareholders as again we have good visibility to cash flow in the future where we’ve got an active share repurchase program. We’ve got a dividend that we’ve grown consistently over the last five years. So the answer to your question is really all of the above. We intend to use the cash on our balance sheet to create shareholder value in a variety of ways but always within the context that our favorite use of capital is to find accretive uses for that to invest in our fleet.

Scott Schoenhaus — Stephens — Analyst

Great, thanks Rob. And a follow-up, how is the leasing market for you guys whether it be spare parts or airframes engines? I know it’s been a great market for you guys in the past. Just wanted to get a sense of the pipeline there, particularly with the opportunity you will have by the end of the year with the eight CRJ700s and four CRJ900s freed up.

Wade Steel — Chief Commercial Officer

Yeah, this is Wade. So the leasing has been — it’s been a very opportunistic thing for us, right. As aircraft have become available, we’ve worked with several different parties and been able to buy some very good homes and it’s allowed us to re-fleet and bring in new aircraft into our fleet.

The real high demand area that we — that we are focusing very much in is the engine leasing, right. The opportunities there are very good. And we’ve got very good opportunity to continue to grow that business and continue to leverage our platform. Our relationship with our OEM partner on that as well. And so that’s the area that there is a very high demand and that’s the area that we are really focusing in.

Scott Schoenhaus — Stephens — Analyst

Great, thanks Wade. I’ll hop back in the queue.

Operator

The next question is a follow-up from Savi Syth with Raymond James. Please go ahead.

Savi Syth — Raymond James — Analyst

Hey, two follow-ups, just on the — I think it was Bert who was asking on kind of your relative positioning and I was just kind of curious as you look at it, it feels like today the way the marketplace is, and its kind of dynamics — it favors to be a bigger supplier and partner just from sourcing pilots, mechanics and things like that. So Chip, I was wondering if you can just talk a little bit about what might be different in this industry and if that is the right conclusion to say that it helps to be bigger in the current environment?

Chip Childs — President and Chief Executive Officer

Yeah, Savi, that’s a very good question and technically speaking the size is always one that we kind of consider the advantages in that. I can tell you right now that we always evaluate how big we want the fleet to be, we evaluate the type of fleet we want to fly and we get all sorts of question, is there any other partners you are considering and those types of things.

Just philosophically I would kind of step back and put us back on the center line. We really do think that there is good opportunities with these four partnerships we have, they are outstanding partners. They have tremendous operating credibility and one that which enables us to have our culture continue to grow as well. From a growth perspective and how we do that, I think that we’ve always asked that over the last five or six years, what we want the fleet to look like. All of those things are more about where our position is for opportunities. Sometimes we like to plan five years out, but most of the time we like to focus on what we can do today that is just going to continue to give us opportunities in the future. And the more disciplined we are today and the things that we can do culturally and with our balance sheet and with all these relationships gives us opportunity down the road.

And we don’t always take every single opportunity that’s given to us. Many times we have conversation with major partners and we actually say it would be better for somebody else to serve them in certain types of capacities. But the nucleus of everything that we do relative to this is we first go to our people and take a look at how strong our recruiting is and take a look at the ability for us to train and take care of our people safely. That’s the first priority. Secondly, we go to our partners and make sure that we are delivering the product and we have the things we have to deliver our product to them. And as you go through that entire circle, we are very, very comfortable with our cost structure, how we’re investing in our people, how we’re preserving capital for future opportunities and how we are being open and candid and opportunistic with our major partners.

So that having been said, it probably is not the perfect answer to your question about, do we want to get bigger and are there advantages to that. I think that there are advantages to organic growth, and we’re going to continue to provide what we believe is some very good dialog with all four of our partners. That’s a good baseline for us is that we are having good conversations still with all four of our partners on meeting their needs with additional organic growth at SkyWest Airlines.

That having been said, we’re not — we don’t jump on anything we can find. We have to be strategic and disciplined about all of it. But we are genuinely — I would say this Savi we are genuinely as happy and as optimistic with the position that we’re in, with all three of those things I’ve discussed as well as the conversations that we’re having for continued strong future.

Savi Syth — Raymond James — Analyst

Now that makes sense. Thank you. And if I might, quickly just a clarification, Wade. Am I correct in assuming that you have about 68 CRJ700s with American today and that will get to 70 with some of these transitioning in and some transitioning it out, is that correct?

Wade Steel — Chief Commercial Officer

Savi, this is Wade. Yeah, so we are a little bit less actually flying today. Some of them are in the process of transitioning from one partner to another. That’s some of the friction that we were talking about. But by the end of the year, you are correct, we will have 70 in by the end of the year. So there still is some of that transition expense, some of that transition work that’s being done right now to get those all up in service.

Savi Syth — Raymond James — Analyst

All right, thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Chip Childs for any closing remarks.

Chip Childs — President and Chief Executive Officer

Yes, thank you. Thanks everyone for your interest in SkyWest. We appreciate your spending time with us to understand our model and the opportunities, which we have going forward. Again, we appreciate your interest and we will talk to you again next quarter.

Operator

[Operator Closing Remarks]