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By Kent Larsen
Mormon-Run Airline Expanding, Despite September 11th
ST. GEORGE, UTAH -- While almost every other airline is cutting back because
of the drop in air travel follwing the September 11th terrorist attacks,
SkyWest Airlines is actually expanding, thanks to its unique position in the
market. Like other airlines, SkyWest has seen a drop in the passengers it
carries, but it also benefits from its relationship with Delta Airlines and
United Airlines, which have both shielded SkyWest from the drop in
passengers and actually increased the number of routes it flies.
SkyWest is one of the largest regional U.S. airlines, specializing in routes
that are too small for the major airlines to serve. While the major carriers
fly planes with hundreds of seats, SkyWest's planes usually don't seat more
than 100. As a result, Delta and United contract with SkyWest to serve
smaller routes for them.
The company operates many of its routes on what is known in the industry as
a 'fee-for-departure' basis, under which it gets paid a fee from Delta or
United that covers the cost of operating the flight along with a negotiated
profit. This arrangement effectively shields SkyWest from losing money if
the plane doesn't carry enough paying passengers. But it also keeps the
company from profiting much if the plane is full. Other SkyWest routes are
operated on a traditional basis.
Essentially, the events of September 11th have changed the size of many
routes. With airline traffic off, Delta and United can't fill their planes,
so they are instead substituting regional jets for the larger planes they
used before September 11th. While both Delta and United actually own
regional airlines (and Delta owns a stake in SkyWest), the number of routes
affected are too many for their inhouse regional airlines to absorb.
In the weeks following the September 11th attacks, the strength of SkyWest's
position wasn't immediately apparent. The company's stock price dived 65%
during the week that trading resumed after the attacks, and analysts quickly
suggested that some regional airlines could fail as a result of the dive in
air traffic. Analyst UBS Warburg cut its estimate of earnings for SkyWest on
September 18th, and even SkyWest was uncertain, saying on September 20th
that further cutbacks at Delta or United could lead to cuts at SkyWest. The
Reuters news service even quoted an unnamed industry source as indicating
that the risk of default by Delta, United and other majors on their
contracts with regional airlines like SkyWest was high.
But SkyWest's contracts did shield the company from most of the drop. Delta
and United have so far honored their contracts. SkyWest's only drop in
revenue from its operations with Delta and United has come because United
cancelled 19% of its flights that SkyWest operates. Delta kept all its
flights under contract with SkyWest, leading SkyWest spokesman David Clark
to express optimism, "The major airlines still need to get passengers to
their hubs, so I don't expect that the number of our flights will be
severely impacted."
Then, in the past few weeks, SkyWest actually started benefiting from the
circumstances, as the airlines asked it to cover routes that had become
unprofitable with larger planes. Delta has struggled to fill its large jets,
flying most planes a little more than half full, but some routes have flown
with much fewer passengers, leading the company to shift to regional jets,
"We've started to treat them as interchangeable parts, depending on what the
demand is," says Delta Spokesman Steve Forsyth.
Delta has asked SkyWest to shift flights from its Salt Lake City hub to
Dallas-Fort Worth, taking up some of the slack. The added routes include
flights to Pensacola, Colorado Springs, and Memphis as well as additional
service from Salt Lake to Phoenix. SkyWest also added United routes from
Denver to Bismark, Durango, Grand Junction, Montrose and Rapid City once
flown by Air Wisconsin. SkyWest's spokesman Clark says, "We're into 72
cities now. I still can't believe [the Pensacola route]. That puts us clear
on the East Coast."
SkyWest did cancel some of its plans to expand service, but overall it has
actually increased the number of flights that it operates. Unlike other
airlines, it hasn't laid off any employees, and will still take delivery of
106 jets it ordered from Canada's Bombadier. The company also says that it
has enough capital available to meet its needs for at least the next 12
months, including anticipated expansion.
And Wall Street is starting to take notice. The company's stock price has
rebounded to about $19 a share, from $11.25 at the end of the first week of
trading following the terrorist attacks, but still off its $31.65 price
before the terrorist attacks. Analyst Goldman Sachs upgraded the company to
"market outperformer," saying that the sell-off in regional airline stocks
is "significantly overdone" and that none of the regionals are at risk of
bankruptcy. Goldman Analyst Glenn Engel indicated that SkyWest's shares
could rise 50% or more in the next six months.
Sources:
SkyWest soars despite attacks
St George UT Spectrum 6Oct01 B4
By Amie Rose
Delta Air Lines to Use Regional Jets on More Routes
Atlanta Journal &Constitution 6Oct01 B4
By Nancy Fonti, The Atlanta Journal and Constitution
Delta Connection Carriers to Realign Regional Jet Service
PRNewswire 5Oct01 B4
United Express Transition Announced for Denver
PRNewswire 4Oct01 B4
Air Wisconsin to Idle 130 in Colorado
Denver Post 3Oct01 B4
By Greg Griffin, The Denver Post
SkyWest added to recommended list
Reuters 2Oct01 B4
SkyWest plans no layoffs
Deseret News 20Sep01 B4
By Max Knudson: Desert News executive business editor
But future of small airline -- and its rivals -- is iffy
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