Good afternoon. Thank you for standing by, and welcome to the SkyWest Inc. 2nd Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Rob Simmons, SkyWest's Chief Financial Officer. Thank you. Please go ahead.
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 Chip Childs, President and Chief Executive Officer Wade Steele, 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 and A session with our sell side analysts only.
Eric? Today's discussion contains forward looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward looking statement. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2020 Form 10 ks and other reports and filings with with the Securities and Exchange Commission.
And now I'll turn
the call over to Chip. Thank you, Rob and Eric. Good afternoon, everyone, and thank you for joining us on the call. Today, we announced agreements for 12 additional aircraft, including 11 more CRJ 700 for American and one more E175 for Alaska. That E175 is in addition to the 8 others for Alaska that we announced last quarter.
These agreements reflect the current work we're doing to help lead the recovery as well as the importance of the dual class We placed 6 CRJ700s into service during the Q2, while securing extensions on over 50 aircraft Various partners to minimize our risk. Overall, we continue to make meaningful progress on our fleet transition during the quarter by adding dual class aircraft, enhancing fleet flexibility and mitigating risk. During the Q2, we reported pretax income of 81,000,000 and net income of $62,000,000 The pre tax results include $114,000,000 in payroll support program grants as reflected in our operating results. This improvement is a result of significant increase in production since last year and a 17% increase over the Q1. While we continue watching the COVID-nineteen data closely, We believe our fleet will remain critical in the recovery even if that recovery slows.
Our strong balance sheet and cash position remain key differentiators for SkyWest. Based on what we're seeing today, we expect demand for our product will continue to increase and currently anticipate reaching pre pandemic levels by early 2022. The quarter's revenue was up 23% from last quarter and up 88% compared to the same quarter last year. As we witnessed, demand is returning first domestically and particularly in the size of markets that we serve. We continue to prepare for and invest for the long term, And this includes significant investments in maintenance and building reliability into our fleet, maintenance costs Associated with that investment and with bringing used aircraft into service remain elevated and the volume and duration of these maintenance events are much higher than they've been historically.
We expect these costs to plateau this year before training back down next year. We continue our efforts to lead the recovery by working to provide the best possible product for our partners and customers. This has not been a simple task because operations across the industry have increased against the nationwide backdrop of fuel supply issues, MRO provider delays and general infrastructure challenges from hotel staff to ground transportation. These issues have affected the entire industry, and we're certainly not immune to those challenges. Operational Performance remains a focus and despite the clear difficulties associated with an uneven recovery, we achieved 99.96 adjusted completion for the quarter with nearly 100,000 more scheduled flights than the same quarter last year.
We are working across all areas of the operation To ensure we're continually adapting to the changing climate and responding to what our partners need from us. I want to thank our incredible team of professionals who continue to demonstrate flexibility, teamwork and dedication to delivering an exceptional product in any situation. Taking care of our people remains a priority at SkyWest. We have never furloughed a pilot, flight attendant, mechanic or dispatcher in our nearly 50 years, a claim we are especially proud of after the most difficult year on our industry's history. Additionally, we have fully resumed our hiring and our pilot pathway and Mechanic Apprentice programs and are again accepting new participants, which is great news for the many aspiring aviation professionals across the nation as well as for the industry.
We're very focused on staying proactive and continuing to attract the best professionals as we navigate through the end of this pandemic and beyond. In summary, while we are still below 2019 levels, we remain optimistic about the shape of the recovery so far and we are confident our fleet will continue to fill a critical role in the return to travel. We're focused on remaining aggressive and deliberate to take care of our people and our customers as we preserve Our liquidity and execute on the recovery to emerge as a better, stronger business. Rob will now take us through the financial data.
Today, we reported 2nd quarter net income of $62,000,000 or $1.22 of diluted earnings per share. Q2 pretax income was $81,000,000 Our diluted share count for Q2 was 50,700,000 shares And our effective tax rate in Q2 was 23.8%. First, let's talk about revenue. Total Q2 revenue of $657,000,000 is up 88% from Q2 2020 and is up 23% from last quarter. Q2 2021 revenue is only down 12% from Q2 2019 as the recovery continues.
Our Q2 block hour production was up 17% sequentially from Q1 compared to the 23% sequential increase in revenue. Q2 revenue breaks down with contract revenue up 76% from Q2 2020 and up 20% from Q1. We have temporary partner revenue concessions impacting Q1 and Q2 of 2021 and in Q2 2020 for comparative purposes. Q3 will likely be the last quarter with temporary revenue concessions. Pro rate revenue was $103,000,000 in Q2, up 185% year over year and up 50% from last quarter due to seasonality and the recovery of the industry.
As we have previously said, Pro rate revenue is nicely levered to a demand recovery. Leasing and other revenue was up 76% year over year and 3% sequentially. These GAAP results include the effect of the deferral of $6,000,000 of revenue this quarter compared to $21,000,000 deferred during Q1. As of the end of Q2, we have $138,000,000 of cumulative deferred revenue that will be recognized in future periods. As discussed last quarter, the timing and amount of future deferrals and the reversal thereof into revenue depends on the shape and cadence of the recovery of our All deferred revenue will be reversed into revenue by the end of the various contract periods.
At this point, it appears likely that we will begin reversing some deferred revenue in the second half of twenty twenty one. Let me move to the balance sheet. We ended the quarter with cash of $956,000,000 up from $836,000,000 last quarter. Our CapEx during the Q2 was $16,000,000 for 2 used aircraft, spare engines and other fixed assets. Our expectation for 2021 CapEx is approximately $600,000,000 to $650,000,000 including the purchase of 18 new E175s later this year under our previously announced contract with American.
This compares to $438,000,000 in CapEx in all of 2020. We ended Q2 with debt of $3,000,000,000 down from $3,200,000,000 as of year end 2020. Our debt net of cash is lower as of June 30th than it has been since Q4 of 2017. Let's talk about liquidity. As of June 30, 'twenty one, our cash position was 9 $6,000,000 including the effect of having repaid fully the $60,000,000 outstanding under our CARES Act secured loan.
We made the decision to cancel that $725,000,000 government loan facility, which released $1,500,000,000 of pledged collateral back to us. We also have approximately $40,000,000 available on our bank revolving line of credit. During Q2, dollars 114,000,000 in PSP3 grants was recognized as income in the form of a contra expense laid out clearly as its own line item in our P and L. This is a change from grant income of 190 $3,000,000 recognized in Q1. We would expect a similar grant P and L benefit in Q3 as in Q2, Absent any PSP-three top up amounts, dollars 45,000,000 of the funding of PSP-three this quarter was in the form of a low interest 10 year unsecured no amortization loan.
We now have a total of $201,000,000 in In total, we have issued 785,000 warrants to treasury with exercise prices ranging from $28.38 to $57.47 At the beginning of the year with cash of $826,000,000 we estimated that we would burn cash in the first half of twenty twenty one at a rate of about $250,000 per day or $7,000,000 per month. Based on June ending cash of 9 $6,000,000 We are pleased to have achieved better than our target for the first half. As previously discussed, We completely repaid the $60,000,000 CARES Act secured loans during the quarter. We also placed another $60,000,000 in deposits during the first half toward future aircraft deliveries. During Q2, we received $285,000,000 in PSP funding from the government before the payment of related temporary concessions to our partners.
Depending on the pace of the recovery, we expect to generate meaningful cash from operations and EBITDA in the second half of twenty twenty one. If the economic effects turn out to be worse and the recovery is slower than we currently expect, we have additional liquidity tools we can call on, including our cash balances, our revolver and the $1,500,000,000 of unpledged collateral that we have now freed up from the decision to let the where we continue to focus on our balance sheet. As of sixthirtytwenty one, our debt net of cash Balance is actually $416,000,000 lower than it was as of Twelvethirty Onetwenty 19. In 2021, we expect to repay over $400,000,000 in principal debt balances related to existing aircraft financing. Of course, we continue to expect to take delivery of additional aircraft in 'twenty one and 'twenty two that as usual will be financed with long term debt financing.
But over the next couple of years, we expect to reduce both our absolute debt balance along with our calculated leverage while maintaining strong liquidity. Including partner owned aircraft, over 50% of our fleet in service now has no financing obligation. Especially in times of great uncertainty like this and consistent with our policy and practice, we are not in a position to give Less temporary partner concessions, we expect Q3 to be similar to our Q2 GAAP results. Q4 is not expected to have any net PSP benefit and will likely be much lower than Q3, but Still EPS and cash flow positive. Continued headwinds to our model include several factors I'd like to call out.
Number 1, our pro rate business was still slightly unprofitable in Q2. Wade will talk more about this in a minute. Number 2, maintenance expense was down $13,000,000 from Q1 as we continue to prepare our fleet for ongoing and future customer demand. Maintenance expense for the rest of 2021 will likely continue at approximately $200,000,000 per quarter before finding a lower new normal level in 2022. Number 3, Deferred revenue was $6,000,000 in Q2 2021 and is now a cumulative $138,000,000 And number 4, COVID is still creating some uncertainty about the shape and timing of the recovery.
And now some tailwinds. Number 1, deliveries of new growth aircraft are not far out with 20 American 175s, 9 Alaska 175s and 21 additional 700s going into service with American. Number 2, deferred revenue may begin reversing later in 2021, pending the timing of the recovery. We are excited that the actions we are taking now and expect to take over the next few quarters are setting us up nicely for the new normal in the future. Wade?
Thank you, Rob. Today, we announced an agreement to add 11 CRJ700s with American. We anticipate these aircraft will be placed into service beginning late 2022 through the middle of 2023. We also extended 22 CRJ700s with American for another 3 years. Those 22 aircraft were beginning to expire in the back half of twenty 21, we put 15 CRJ700s into service with American.
Including those announced today, we still have 21 more CRJ700s to add to our contract, bringing our American CRJ700 fleet total to 101 by the middle of 2023. The majority of these CRJ700s have been in long term storage for the past few years and require extensive maintenance work to return to service. Also with American, we have 20 New E175 scheduled for service next year, with delivery scheduled from Q3 of this year to the Q4 of 2022. Together, these E175s and CRJ700s will bring our total American fleet to 121 by the middle of 2023. We also announced an agreement with Alaska to add One more E175 in addition to the 8 we announced last quarter.
We expect to place 8 of those aircraft into service during 2022 and 1 aircraft during the first half of twenty twenty three, bringing 41 total aircraft under long term contracts with Alaska. We have also extended the current fleet of 32 E175s, which put all of these aircraft under contract with Alaska for the rest of this decade. Let me talk briefly about our United agreement. As of June 30, 2021, We have 179 aircraft under contract with the United. This includes 90 E175s, 19 CRJ-seven hundred and seventy CRJ-two hundred.
Our CRJ-two hundred start to expire towards the end of 2024. We have no debt left on these aircraft and we believe the book value of these assets approximates the part out value of the aircraft. During the quarter, we worked with all of our major partners on a 3rd round of contract concessions that included temporary rate reductions. These concessions are reflected in our 2nd quarter results and will also be reflected in our 3rd quarter results. All concessions will expire at the end of the Q3.
Let me review our current production. During the Q2, our completed block hours were down by approximately 13% compared to the same quarter in 2019. Based on the current schedules we have from our major For the Q3 of 2021, we anticipate that our block hours will increase by approximately 13% compared to the previous quarter. As we look at the 4th quarter, we anticipate that our block hours will 3% lower than Q4 2019, pending continued improvement in the recovery curve. The E175 fleet continues to fill an important need for our major partners.
While the majority of the reduction in block hours have been on the CRJ200 Our Q2 E175 block hours were up by 12% compared to Q2 2019, while our Q2 CRJ200 block hours were down by 44%. Let me talk a little bit about our prorate business. During 2nd quarter, our pro rate revenue decreased by 24% or approximately $33,000,000 compared to Q2 2019. As we see demand continuing to recovery, we anticipate our prorate revenue to increase by 20% as compared to Q2 2021. Our prorate model is nicely levered to the recovery With prorate revenue down 24% as compared to Q2 2019, we continue to expect that incremental revenue coming back to the pro rate business will have attractive margin characteristics.
Let me shift gears to our leasing business. We have previously announced that we signed a purchase agreement to acquire 13 additional used CRJ700s. As of today, We have closed on 8 of the 13 aircraft and expect to close on the others throughout 2021. With the contract announced with American today, all of our CRJ700s are either under long term flying agreements or long term leases to a 3rd party. Following the purchase of these 13 aircraft, we will own or control 169 CRJ700 aircraft.
The CRJ700 is an exceptional asset that will continue to set SkyWest apart with strong demand from our major partners. Let me talk briefly about our current maintenance expense, which continues to run higher than our historical norms. This increase is primarily due to the recovery of our flying and bringing the aircraft for American for the American agreement out of long term storage. We currently have over 30 lines of heavy maintenance at our 3rd party providers and the ramp up of these suppliers have been slower than anticipated. To provide some context, this level of maintenance is unprecedented in our history.
We anticipate that we will continue maintenance at roughly these levels through the end of this year and expect to trend down starting next year. We have spent the last several years reducing risk and enhancing
Please stand by while we compile the Q and A roster. Your first question comes from the line of Salvi Syth from Raymond James. I can just elaborate on
the CRJ side. There were news reports that possibly SkyWest was talking to Bombardier about Starting up building those new CRJ700s and I know you've been collecting a lot of them here. Just your view on kind of the outlook for the CRJ700 and what more you'd like to do in that area?
Well, Savi, this is Thanks for your questions. It's a good question. I think that there's a fair amount of always a fair amount of information floating around given what we would like to Some things that we would like to continue to pursue. As you know, we're deeply invested in the CRJ fleet. I can tell you from our strategic perspective, we are doing a lot of things, trying to What we can do long term to shore up this fleet?
Right now, we're in a big process of taking a lot of 175 aircraft. We love that aircraft. But in the event that we continue to see strong demand across the board for the regional space, which we do believe post pandemic, We'll be talking to a lot of people about ways in which we can re fleet. So I wouldn't say there's a tremendous amount to substantiate, but certainly The rumors are consistent with what our strategy is, is to find ways in which we can continue to provide great service to our partners and the flying public.
That's helpful, Jeff. And then, if I might ask on the pilot side, just Curious, I know you talked about bringing the training back, starting hiring. What are you seeing in terms of Attrition with legacy partners starting to hire here again and your expectations into What might need to be done over the next year or 2 to make sure you have the right staffing levels?
Well, I think, sorry, that's a good question as well. This is Chip. I think back to the point I think that we've talked about the last couple of quarters. We're blessed to have a great culture at SkyWest. We're very deliberate pre pandemic in the pipeline that we've developed Relative to identify and recruit the best recruits in the entire industry and from our perspective, We are full we're full set on moving forward at levels that are as strong, if not even stronger than in the 20 We've said a couple of quarters ago, I think last quarter specifically, We're amazed at the interest in SkyWest.
Our pipeline is extraordinarily full. With that being said, we certainly do anticipate Some different levels of attrition that we've seen in the past, primarily because of the circumstances of coming out of a pandemic and some of the things that the major carriers have done. But at this point, We're going to lean on a tremendous culture. Some of the comments that I've mentioned in my script about how we feel about Good strong professionals here at SkyWest and on our priority of taking care of them, which is a big part of what we're trying to do during this busy season. And a very strong pipeline and interest out there.
We feel very confident in the things that we can do in the next Couple of years and maybe even capitalizing the industry.
From that, just a follow-up, Chip, on that, is it fair to say that your attrition rates aren't any Right now, you haven't really seen a step up?
No, we've seen a step up certainly since the last since last fall, we've seen sort of a steady increase And attrition, but the starting point last fall was relatively low. So our anticipation is going to be Listen, with what we've been working on with our pipeline in the 2019 levels, we're certainly not there yet, but we anticipate that So we may very well need to plan for that. But again, the focus is still making sure that we're identifying a very good strong pool of candidates today.
Excellent. Thank you. Your next question comes from the line of Mike Linenberg from Deutsche
Just a couple of questions here. Wade, I want to just talk about on the prorate business, you talked about it having attractive margin characteristics as it ramp back up. I guess this last quarter revenue was down 24% versus 'nineteen and then I think you guided to the 3rd quarter being up 20% versus 2Q 2021. So we're getting back there. But with that type of improvement, will prorate be profitable?
Or Do you still is it another quarter or 2 of improvement to get back to these attractive margins that you mentioned? What's the timing there?
Yes, Mike. So this is Wade. Yes, so as we said, you've got those numbers right We are down 24% compared to Q2 2019. As we're not profitable this Quarter in Q2 2021 in pro rate, and I think Rob said that in his script. But as it continues to improve, all the Cost and the reason why we say that it has attractive margin characteristics because all of the costs are essentially in our model right And if the revenue comes back, it's just it's revenue without any cost.
And so that's why it has attractive margin characteristics. And so we will get It'll probably still be a couple more quarters, but we'll we're starting to see some very good bookings and it's trending in a very good direction.
Okay. And can you remind me how many airplanes are there now? What is it like 50, 60 airplanes that were in prorate?
Yes, somewhere in that range. It's probably a little above 60 right now.
Okay. That's helpful. And then just on the Deferred revenue, Rob, you indicated that we could see a turn in the second half. And I guess presumably since this Deferred revenue is tied to multiple contracts. I guess, we could see some reverse before others.
And so, I guess, in the back half The year you're going to give us a net number, is that how we should think about it because not every single contract is structured the same way?
Yes, that's right. When we record that deferred revenue, you'll see that as a single net number. But yes, we do expect that in the 2nd half of the year, we'll likely start to see the reversal of that $138,000,000 of Cumulative deferred that we've put on our books during this COVID window.
Okay, great. And then just lastly on the extensions, Congrats on getting lots of different extensions there, 175, CRJ700s. How do you shake out Now with respect to tail risk, previously, where were you with respect to like coverage? Was it As I recall, you always were in a very good position, lining up the liabilities on the aircraft when they came due with when the contracts And now that you've been able to extend some of these contracts, I suspect that your tail risk situation is even better. Is there any way that you can just give us some color on maybe how that shifted because of some of these recent wins on extending on current airplanes?
Thanks. Thanks for answering my question.
Yes, Mike, this is Wade. I think last quarter we talked about telerisk a little bit and said we had Approximately about $100,000,000 of tel risk on our fleet and that number obviously got Better this quarter, right. So it's gone down. We still have some very small pockets of TelRisk That are out there, but we are very optimistic that we'll be able to work with our partners to extend those airplanes and continue to fly those with our partners. So I think we've got a lot of that covered off.
Your next question comes from the line of Catherine O'Brien from Goldman Sachs. Your line is now open.
Hey, good afternoon, everyone. So the theme of this earnings season for the U. S. Airline industry seems to be that Aircraft announced today, but just thinking through the puts and takes going forward, some of these legacy carriers retired meaningful portions of their fleets. Right Now there's been kind of backfill of aircraft that might be typically used in international, but maybe that changes next year as international demand comes back.
Can you just Kind of give us some color on the conversations you might may or may not be having on incremental lift for next year to maybe help plug some of these capacity shortfalls? Thanks.
Yes. Katie, this is Chip. That's a very good question. I can tell you right now The dialogue that we're having with all four of our partners is extremely positive. There is some, I don't want to call it confusion, but we're certainly with the strong demand of the summer and with some of the things that we've outlined in the With our eyes wide open, making sure that we are doing the things we need to with people inside and outside of SkyWest To be able to deliver what our partners want.
I can tell you right now that some of these external challenges are Having an impact on what we feel like we can do in the near term, but we're optimistic in 2022 That we can work through some of these things, the fuel shortages, some of the hotel issues and that type of stuff where we can get back to We don't have all things running in a very fluid and efficient manner. That's why we're spending so much time and effort relative to a reliable fleet And making sure that we've got everything moving in the right direction. We also have interesting conversations. If we would have seen this world 12 months ago, we probably would have done a couple of things different. We probably would have done some different things with maintaining aircraft.
But in summary, Katie, the overall conversation with all of our partners is very positive about Lyft. And We're focused internally to make sure that we have the processes that are stronger than what they even were back in 2019 when we were performing so well To get back to that performance in 2022. So I think that there's some good color around all these conversations with the partners. There's good strong demand That we're cautious about making sure that we're delivering what we've always been able to deliver.
Got it. And then maybe last quarter you noted that Concessions would largely offset PSP funds and that netting these two impacts would result close to breakeven June quarter So you obviously did better than that. I guess first, what drove that? And then going forward, do you still expect concessions to largely match PSP because you noted earlier that you expect 4th quarter EPS to decline versus 3rd
Katie, it's Rob here. So yes, let me just say, look, we're not going to get into the details of partner concessions, but what I can say is that What you see in the GAAP results in Q2 will be very, very similar to what you see in Q3. The GAAP grant income that was recognized this quarter was about $114,000,000 It'll So I think, look, that's really all we can say about By the time we get to the Q4, some of this noise will be behind us and It will be a little more straightforward in the Q4.
Okay. Maybe if I could just sneak one quick last one in. Your current liquidity balance is running higher than normal, like much for the rest of the industry, just given COVID uncertainty. In the release, you noted a number of deliveries over the next year or 2 you plan to debt finance. Would you consider paying for these in cash To speed up deleveraging given your current cash balances or are those very positive conversations with your partners who just talked about leading you to want more dry powder for other growth opportunities?
Thanks so much.
Yes. Katie, we're obviously one of our big To make sure that we're deploying capital in the most effective way possible. We were pleased Again, our balance sheet is looking very nice with our debt net of cash down $400,000,000 from our pre COVID level going into that. So look, I think that We will look at opportunities to deploy our cash in a way that's very shareholder friendly and Consider all of our opportunities there.
Your next question comes from the line of Jumon Fenningworth from Evercore ISI, your line is now open.
Just a follow-up on Katie's Question, because I think it's a good one in trying to get to like what the earnings power of the business If we just peel back PSP and concessions and deferred revenue and all these moving parts, with block hours down 13% In the 2Q and maybe having a shot at being close to flat in the 4th quarter, what is the underlying kind of Core operating earnings here.
Well, one thing I can say, Duane, is that if you look at our results for the quarter, If you strip out the noise from PSP and partner concessions, we were still profitable. And as we indicated in the prepared remarks We are anticipating that Q4, while it won't have Obviously, the benefit of some of that grant income, we do expect Q4 to be profitable and cash flow positive. So I think we're emerging at this point with the model that looks pretty good. As Wade mentioned a little bit in his prepared remarks, Maintenance will likely continue to run a little hot through the rest of the year and then begin to find a new lower level In 2022, so as some of these things start to normalize again as our pro rate business sort of comes back to A new normal level as maintenance expense finds a new lower level. We feel like we're We set up going into 2022.
Okay. And then on the comment about if everything goes right, and we're not asking Predict the future here, but if everything goes right, you're sort of back to normal in early 'twenty two. Based on what you booked in terms of growth, What sort of block hour growth would we be looking at in 'twenty two, just kind of big picture?
Duane, this is Wade. Obviously, we've talked about some of the things that we have on our books right now. We have the 21 CRJ700s for American. We have And 10 of those are going to come in, in the Q4, then we also have some 175s. We're not going to give Specific guidance right now, but there will be some improvement from where we're at today and where we anticipate in the 4th quarter.
But We'll continue to update you as we see the demand recovery continues, it's still a pretty fluid
Okay. That's fair. And then maybe just lastly, can you help us understand what is it that drives, Sorry, the deferred revenue kind of flipping from deferred to recognize, what is the event That causes that to happen, just practically speaking. And what sort of pacing what's the range of pacing On that $138,000,000 in the back half of the year, what could that be on a quarterly basis if it flips?
Yes. Duane, so that $138,000,000 that we've deferred cumulatively, That will unwind by the end of each individual contract that's part of that, and there are many contracts that make up that $138,000,000 So the timing of the unwind, again, depends on the underlying contract and the volumes And block hours that were flying under those contracts. The original point of the deferral was that our original volumes were So much below what was originally expected. If those volumes come back, that's what's going to create the reversal point and then Eventually, the complete unwind of that. But under no circumstances will that revenue not be unwound by the end of The contract period, it's just so in other words, it'll be unwound over the next sort of 2 to 3 years.
Your next question comes from the line of Helane Becker from Cowen. Your line is now open.
Thanks very much, As you think about capital allocation, how do you think about I think in the short term, you can't necessarily restart the share repurchase program. But how do you think Getting back to returning capital to shareholders in, say, 2022 second half or even 2023.
Hi, Helane, it's Rob. So listen, I mean, as you know, we're limited as to anything share repurchase or dividend wise Until over a year from now under our PSP agreement with the government. But again, like we did This quarter, we found nice opportunities to sort of tactically repay certain debt. And so that was something that we found attractive. So we're going to look at capital allocation very carefully on a risk Adjusted basis, we're going to look at other opportunities to deploy that capital.
But Again, over time, I would say, all options are sort of back on the table.
That's fair. Thank you, Rob. And then the other question, I think it was in Chip's prepared remarks, you talked about the pilot and mechanic training programs and you're accepting new applicants. Can Can you just talk about the quality of those applicants and how you're thinking about bringing them on? And then I just have one more little question.
Perfect, Helane. This is Chip. Yes, we did discuss that in the prepared remarks. I think overall, it's an interesting situation because coming out of a pandemic, you got a lot of applicants. From a pilot perspective, we've got our classes full clear through March of 2022.
That's a tremendous and these are big classes and want to come to work for SkyWest and we think that they are good candidates. As you know and we talked about in the past, we have a very strong, strong training program for pilots and certainly the bar that you have to meet to We've also gone further and deeper into the pipeline to evaluate the candidacy and the qualifications of each student. I mean, we do Assess them along the way even before they come to SkyWest, and I think that's an outstanding opportunity for us to be involved in the 300 schools that we're involved with to help Make sure we're getting the curriculum associated with those schools in a way where they can come to SkyWest and make the cut. So From that perspective, there's just such a strong volume that we're seeing that as we continue to work through it, we're going to keep the bar high and we're comfortable with how we're going to Provide pilots for the airline. Same thing goes for mechanics.
I think from our perspective, it's a completely different Way of recruiting, a completely different way of training. We do see exceptional candidates out there that we're excited to have work for Also from our perspective, we may increase the scope of some of the things that we do. We relied a lot on outside providers to do various things with maintenance Candidly, as of today, are not quite cutting the bar what we would like to see. And so we're probably going to expand some things that we do internally for a bit to make sure that we can get the right level of work done relative to our fleet. So that's probably a long answer as well, but I think that we're Really excited about the energy of everyone who wants to come to work here at SkyWest and we're ready to train them and get them on a great career path.
No, that's actually very helpful. Thank you for that. And then my other little question is on, I guess, eVTOL. Mesa is Going down that path, and I'm just kind of wondering, it's not a short term thing because it's like not even big aircraft, right? We're talking about Up to 7 passengers.
So I don't know how you're thinking about getting involved or if you are, but I have to ask the question.
No, it's a great question and I get the question quite a bit, but I would present it at a high level like this, Helane. At this point in time with SkyWest, I can tell you as we sit here, as management, we are evaluating I don't know the time in our history where we have evaluated stronger opportunities within our core business model, as well as strong opportunities outside of our core business model. So I would tell you that given Obviously, our 50 year reputation, what we've been able to do with just amazing people, that reputation is translating into some things Outside of what we normally do and some we have lots of people knocking on the door wanting us to get involved in multitude of different opportunities. That having been said, It is imperative today at this point in the world that we remain absolutely positively focused on our people And on our partners and our passengers. We fundamentally believe that burning Most, if not all of our calories in that effort is the right thing to do at this time.
And as we continue to Make our progress through that and get life back as an airline. We're certainly going to continue to entertain some of these other concepts that we think we have Tremendous credibility in the sector to capitalize on.
That's great. Thanks for that detail. Really appreciate it. And have a great afternoon.
Thank you.
Your next question comes from the line of Joseph DeNardi from Stifel. Your line is now open.
Thanks. Good afternoon. Wade,
just following up on a comment you made earlier on the maintenance side. Just given how much is maintenance I'll have it in front of you. Can you talk about a little bit more about what you're seeing in that market? Maybe how much of that you're looking to Bring back in house and then what some of the challenges you're facing with your 3rd party providers are?
Yes, Joe. This is Wade. I said in my script, we have right now, it's we have over 30 Lines of heavy maintenance going on right now. And we have great partners in these areas, right. We do a lot of Work with several different people in these areas.
What we talk about when we want to derisk the model a little bit here And bring some of that work in house so that we're not so reliant on the 3rd parties. Obviously, we've got a great reputation, as Chip has Talked about bringing people into SkyWest and we think we can take advantage of some of those situations and do some of that heavy maintenance So there will be some of that that will start to come in house and we'll take that. We think They're ramping up as fast as they can. They're hiring our 3rd party providers. They're going to start getting to a normal level, we hope, In the back half of this year and we start to see a lot of progress.
So we're going to work hard with them and we're going to work hard internally and we'll get through this one.
Okay. Okay. And then Rob, I was hoping maybe you could be a little bit more specific with some of the qualitative guidance you provided. Like is Q4 Finley profitable or something better than that? And then the maintenance expense decline you're expecting in 'twenty two, can you frame the magnitude of that, just Given what Wade referenced in terms of bringing more in house?
Thank you.
Yes. So on the guidance, I mean, we were Tensional about not being specific given the caveats that I laid out in my prepared remarks. But again, I think we're pleased that We're on a good recovery track. Q4 will almost certainly be a drop from what we see in Q2 and Q3 because of the noise from the government programs and the Partner concessions going away, but we are comfortable with the color that we expect to be both EPS Positive and cash flow positive in the 4th quarter sort of on a standalone basis without some of this other noise we've got. And then sorry, what was your other question?
If you could maybe frame the magnitude of the maintenance
Yes. Look, I'm not going to go beyond sort of what Wade went on his script To say that we're going to run hot the rest of the year in the neighborhood of probably a couple $100,000,000 a quarter in maintenance expense. And then starting in 2022, those numbers are going to, we believe, will start Trailing off and find a new normal level as we get through some of this backlog, as Wade mentioned.
Okay. Thank you.
We have a follow-up question from Catherine O'Brien from Goldman Sachs. Your line is now open.
Hey, guys. Thanks for the extra one here. Maybe just one more. Actually, now I just generated a second follow-up, 2 quick follow-up ones. But, so I know we've talked a lot about the reversal of this deferred revenue.
I think you said earlier, it's over the next 2 to 3 years. Could that be more front end loaded if you start to Why at above 2019 levels, maybe faster than anticipated? Like, I'm just trying to kind of get my mind around, Is that straight line of remaining contract wise? Or is that really tied to how quickly you could make Block our production. And then I have just one more quick one on maintenance after that.
Yes, sure, Katie. So look, the model for that Deferred revenue is based on volumes, on block hours over the expected over the remaining contracts. Again, the timing of that reversal is contingent upon the timing, as you mentioned, of Volumes sort of coming back that, again, it's a contract by contract basis that we look at it and we believe That all or most of that should be reversed over the next 2 to 3 years.
Okay. And then maybe just one really quick one to Joe's Question, when we're talking about a new normal maintenance expense, without being too specific, like, does that fall somewhere between 'nineteen And were we running at 2021 or it's like closer to 'twenty one or it's closer to 'nineteen? Just like any really broad
So Catherine, this is Wade. So I'll try to give you a little more specifics on that. So It will not be down to 2019 levels. It will be somewhere between 2019 levels and 2021. And the reason why it won't be all the The mix of some of our contracts have changed as you've heard over the call today, right?
Some of all of our contracts that we're adding today are the E175 contracts were responsible for all the engine maintenance and all of that. Some of the contracts That have gone away, we are not responsible for some of the engine maintenance. So it's a different model that we have going forward. And so It will be at a higher level than 2019, but the revenue models that we have will also reflect the increased maintenance expense going forward. And We are going to find that normal level here in 2022, but it won't be all the way down to 20 19 levels, but it will be somewhere in between.
And the biggest reason is just the mix of the flying contracts and how each of those flying contracts Are different on how we handle primarily engine maintenance expense.
I am showing no further questions at this time. I would now like to turn the conference Back to Chief Childs, President and Chief Executive Officer.
Thank you. Appreciate it. We want to thank everybody for Quarter and a lot of opportunity as well. But we are certainly proud of our airline and our teams and the great work they're doing in light of all
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.