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'05 SkyWest Strategy

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Dec 16, 2004
SkyWest Thrives on the Atkin Diet
Under CEO Jerry Atkin, the Utah-based Regional has found the recipe for success

By Sandra Arnoult

Air Transport World, April 2005

The view from this small town in the high desert of southwestern Utah is a panorama of valleys, patches of black lava and steep red cliffs topped by a canopy of endless sky that never seems to want for color.

The sky--literally--is the limit in St. George, the headquarters of SkyWest Airlines. You could say the same about the future of this carrier, which was founded by Ralph Atkin in 1972 and has grown from operating a single Piper Seneca into one of the largest and most profitable Regionals in the world.

His nephew, Jerry Atkin has been leading SkyWest for more than two decades, keeping it healthy on a diet of new airplanes and routes. Revenues have more than tripled since 2000 and last year the publicly traded company reported an after-tax profit of $82 million, up 21.7% over the previous year, on revenue of $1.6 billion, up 30.2%. Operating income soared 25% to $144.8 million. The airline currently operates 217 regional jets and turboprops with 1,300 daily departures to 116 cities in the US and Canada, flying in the United Express and Delta Connection codeshare programs. It employs more than 8,000 and in 2004 carried more than 13.4 million passengers.

Growth has accelerated rapidly over the past five years. In 2000, SkyWest operated just 16 CRJs, according to Raymond James & Assoc. At the end of 2004, it was up to 137 CRJs (125 CRJ200s and 12 CRJ700s), including 28 added last year of which 24 were new and four were purchased from Independence Air. It will take a further 20 CRJ700s this year, a move that will require hiring 200 more pilots. Sixty-nine Brasilia turboprops round out the fleet.

The carrier also enjoys "the strongest balance sheet in the Regional airline industry," according to RJ&A. Its long-term debt to capitalization ratio was 61% at Sept. 30, 2004, compared to an industry average of 92% among its peers. Long-term debt totaled $463.2 million at year end and it was sitting on a cash hoard of $550 million.

Rainy-Day Fund

That makes a nice rainy-day fund, but it also could be used for internal expansion or acquisitions. "In a non-noisy way we spend a fair bit of effort developing potential additional business," CEO Jerry Atkin tells ATW. "We have gobs of proposals out there. It's a weird time [because] there is so much in play. You don't know what will develop or not. That's why we have so many proposals out, because we can't figure out which one is most likely to be productive."

Last month, CFO Bradford Rich, speaking at an investment conference, let the cat out of the bag that SkyWest has been in preliminary discussions with Delta Air Lines over the possible acquisition of one or both of the Major's wholly owned subsidiaries, Comair and Atlantic Southeast Airlines. Other officials downplayed the possibility of an imminent acquisition.

SkyWest flies as United Express in Los Angeles, San Francisco, the Pacific Northwest, Denver and Chicago, operating 881 daily flights under the UA code. It is the largest Regional serving LAX and SFO, with a 61% market share at the former and an 84% share at the latter, according to RJ&A, which notes that the fixed-fee arrangement with United Airlines accounted for around 61% of the smaller carrier's revenue last year.

It generated a further 37% of revenue (35% from fixed fees, 2% from pro-rates) through its participation in the Delta Connection program, primarily out of Delta's Salt Lake City hub. It operates 450 daily flights at SLC under the DL designator and has an 87% share of Regional traffic there. Its remaining revenue came from a turboprop feeder deal with Continental Airlines that since has ended.

Atkin continues to study potential opportunities with existing partners, but he also is interested in taking on a new role as a partner to a low-cost carrier. He reveals that he proposed operating Embraer 190s on behalf of JetBlue: "We tried to be their 190 provider. They chose to do it in-house." SkyWest offers unsolicited proposals to a number of LCCs, including Southwest Airlines, on a regular basis. "We shove proposals across to them all the time. They talk to us a little about it. I think they are looking at ours and other proposals, but it is in the evaluation mode," he says, adding, "We would love to have part of our operations with low-fare airlines instead of relying solely on network carriers."

He also doesn't rule out the possibility of developing an independent operation with aircraft in the 100-plus seat range. "A platform with larger airplanes that would be extremely cost-competitive is something we do spend a lot of time looking at," he says. SkyWest would "like to do business in the low-cost arena as a feeder or by ourselves." However, "The challenge is, how do you move into that without giving up what your core business has been? I don't know exactly how that is done."

Tough Lesson

The experience of Independence Air, which has been driven nearly to the steps of the bankruptcy courthouse since it left the United Express program and tried to go it alone, has given Atkin pause. "Their experience kind of clouds the radar and moves it down on the screen a little lower," he agrees. He declines to comment on Independence Air's strategy except to say that "the timing couldn't have been worse."

And of course SkyWest continues to look for new business among the legacy carriers, such as Northwest and Continental, along with its existing partners. Despite the financial problems at Delta and United, he is confident both will survive. "It will be painful, but they will make the adjustment to compete in today's environment." He points to United's ability to renegotiate its scope clause with its pilots union to permit the operation of 70-seat RJs by Regional codeshare partners. "That's what has to be. The competition has bludgeoned them into saying yes."

Earlier this year, Continental ended an agreement under which SkyWest operated nine Brasilias feeding CO's Houston hub. The flying now is done by Colgan Air, which has a fleet of larger Saab 340s. "I know why we lost," says Atkin. "Part of it was the parameters, part of it was voluntary. Continental wanted us to re-bid the nine we were flying and they wanted seven additional airplanes. They wanted one carrier to do both." SkyWest didn't want to seek another certificate to add the seven 50-seat turboprops Continental requested, so "we offered to bow out if they had someone else to do it." The parting was amicable and he expects to do more business with CO in the future after its exclusive agreement with Continental Express expires in the next 18 months. Until then, RJ service with a carrier other than Express is prohibited out of the three CO hubs in Houston, Cleveland and Newark, he notes.

Flexible Workforce

Owing to the fact of a nonunion workforce, SkyWest enjoys more flexibility than many of its competitors. Last year its pilots agreed to operate 70- and 90-seat aircraft at the same rates as 50-seaters. The agreement expires this year, but company officials are hopeful a similar arrangement can be negotiated.

Atkin says union representatives do come courting to St. George to woo the SkyWest pilots but the union pitch is always countered by an informational campaign by the company. Thus far, the fast track for pilot upgrades with the arrival of new RJs, the salaries, a generous bonus plan and an employer-matched retirement savings plan make St. George an unlikely spot for a hotbed of union activism. Employees also are able to purchase company stock at a 15% discount to the market price. "I think beyond the salary part is that we meet the needs of our pilots better," he says. "We aren't the highest paid in the industry and we aren't going to be. But we have incentive-based programs, share-the-wealth types of things."

He agrees that a challenge of having a multimillion-dollar cash surplus-one many airlines gladly would embrace-is that employees may see it as a reason for generous salary increases. But he says the cash just means SkyWest has more options available, has an easier time acquiring aircraft and is guaranteed a better rate of credit than "anyone else in the industry."

The airline currently operates an all-Bombardier RJ fleet. Atkin says he has looked at the Embraer 170/190 family and also is interested to see what Bombardier will offer in its proposed CSeries of aircraft in the 110/130-seat range, particularly whether they will deliver the superior operating economics touted by the Canadian manufacturer. He believes that as scope clauses are relaxed, new opportunities for codesharing with larger jets may emerge. He notes that it has been more than a year since SkyWest took delivery of a 50-seat RJ, though they remain an integral part of the operation.

"If you have one carrier that somehow breaks the barrier-I'll use JetBlue with the 190. That's a very competitively priced airplane with 100-seat capacity and nobody has scope clauses for that," Atkin says. "Competition breaks down these barriers pretty quickly. [It] hasn't happened yet, but if that airplane is relatively successful, I don't think the Uniteds, the Deltas and the Northwests can sit there and say we're not budging on scope clause, never mind that we are getting our butts kicked by an airplane in the marketplace that we are going to deny you the right to fly. I don't think that is going to happen."

So the landscape, like the desert sands, continues to shift. And SkyWest continues to adjust its playbook. "In challenging times, there are usually opportunities for anyone who is prepared," Atkin says. "We are in a good spot. It's not that the cash is burning a hole in our pocket, either. We look at options judiciously. Now is a kind of unusual time."
It's an interesting read. An almost 5 year old article.

Insights about pilot pay, unions, aircraft growth and scope all from SkyWest's number one, Jerry Atkin.

Here's the LINK

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