There are two ways Skywest can make more money on the fee structure that brings in their revenues.
The first is to continue to find ways to lower cost. This will be done by converting inefficient aircraft (E120 and Cr200) to more efficient aircraft (Cr700/900 and large turboprops.) Another way is to continue to grow and bring in lower paid employees. To add to this, because of attrition at both ASA and Skywest in the amount of at least 60+ pilots a month, pilots are replaced with lower cost pilots.
Inaccurate: supply and demand in the labor market. The market is already showing signs that it needs to increase labor costs to function. Reference the overall pilot shortage and the trend of increasing first year FO rates and first year signing bonuses. At the moment, (granted this could change literally, overnight) the current cost structure, combined with labor group politics at the local levels, does not make an airline career an attractive option to a prospective pilot. In today's landscape, there will be no 'swapping' of the labor group from a more expensive one to a cheaper one by the various managerial teams.
[There will be some natural turnover due to career advancement, but I think that it's effect would be extremely difficult to quantify on the P&L. As well, factor in the increased training costs with hiring lower experienced, cheaper pilots.]
Speedtape's First rebuttal
There is only a labor shortage until the first or more airlines fail. Then there will be plenty. The present situation with labor could be temporary. However, there were only about 300 commercial licenses issued last year, so, yes, there were much fewer new pilot entrants which will create the long term problem until there is an incentive. But for today, when a pilot leaves Skywest, Inc. he is replaced with a new hire at lower rates. When the airline grows, they are hiring more pilots at low rates. This is part of the benefit that SOUTHWEST has enjoyed with their growth--lower average labor costs.
The second is to increase the number of units that create the revenue--more departures. This can easily be done by purchasing Comair.
Purchasing Comair, et al., would increase revenue. However, when the additional entity is acquired, the additional costs of that entity are acquired as well. You can't buy the revenue of a going concern without buying at least some, if not all of its costs. Usually, if the profit margin of the going concern was acceptable, it wouldn't be for sale.
I agree strongly that to move forward, the regional airline model needs an overhaul. The winner, 20 years from now, will be the managerial team that redefines how to produce revenue in the transportation industry. Note, I did not specifically say the airline idustry.
Speedtapt's First response
I will gladly agree with your first 3 sentences. However, you failed to mention, in addition, the net profits of the acquisition are also acquired. Increased profits are the goal. I would respectfully dispute the assumption in the fourth sentence, however, YOU did use the word "usually," which lets you off the hook of making an absolute statement!
ASA had very respectable returns before their sale. Delta needed cash to enter bankruptcy and so they were sold because there was value to the purchaser and seller. Comair had to weather bankruptcy which brought their costs down--to about the same as Skywest (not a coincidence.) Comair was making money before Delta's bankruptcy. For a variety of reasons, Delta still needs Cash.
As Grinstein said, Delta does not need to own Comair or ASA to get the benefit. Comair will be sold because Delta needs all the cash they can garner with looming economic concerns.
NOW, that having been said, Skywest Inc. has drastically lowered costs at ASA. They have eliminated every administrative costs that they could and still operate a separate certificate. In addition, because ASA had much higher MTC costs than Skywest (somewhere around $80 per block hour higher), Skywest, Inc. has modeled ASA's MTC staffing and processes to mirror that of Skywest Airlines (Best and Cheaper costs). Today, ASA has benefitted from lower costs processes, which should raise net profits.
Skywest could achieve the same if not better cost savings if they purchased Comair. How does Delta benefit? First, they receive needed cash from the sale. Secondly, they turn over the management of Comair to Skywest, Inc. to achieve similar if not same cost savings that they achieved at ASA. Third, Delta still receives the same benefit without ownership. Unlike ASA, Comair is a well run company from an operational perspective. There would not be the same amount of challenges operationally with a Comair purchase.
But, Skywest Inc. could greatly reduce the admininstrative expenses by running the administrative side under one roof. Labor costs at Comair are probably the same or cheaper than Skywest Airlines. Skywest, Inc. could greatly increase revenues and enhance their value to Delta without Delta losing the benefit of the Comair feed.
We are headed for a recession. The home building industry is down. Car sales are in the basement. Increased fuel prices are fueling inflation. The value of U.S. dollar on an international comparison is at all time low. China is about to dump billions of U.S. green backs in favor of a more stable currency which will further drive the dollar down. There will be massive layoffs. Home Mortagage defaults are at a all time high with larger increases to follow as more consumers lose their jobs.
It's difficult to tell if the VSI on the overall economy is racing toward the bottom of the case, or, more likely, in my opinion, quietly reversing trend.
Speedtape's first rebuttal:
One other thing that was not mentioned was the war debt. The war debt has increased our national deficits. It will not go away soon--the war or the deficit spending. Study what happened in the economy in the years near the end and aftermath of the Vietnam War. Oil prices rose steeply in the late 70's and early 80's. The economy went into a recession and many airlines went bankrupt.
Today, we find many of the same factors. In addition, the developing Chinese economy is placing upward pressure on fuel costs. Increasing and unstable fuel costs drive inflation. The cost of a gallon of gas will soon be that of a cost of a gallon of milk--$3.50 to $4.00 per gallon! Oh yeah, how many people drive SUV's? They want be able to give an SUV away soon!
Our industry is dynamic and will be more so in the coming months and years. Skywest, Inc. is well positioned for growth opportunities with a strong balance sheet. There is no reason to turn the apple cart upside down by eliminating ASA. Skywest, Inc. has tremendous flexibility. This part of the industry has always grown in bad economic times.
