Monday, February 4, 2008
Regionals Offer Glimpse into Future
SkyWest is holding back its cash instead of going beyond the $125 million in stock repurchases done last year. It wants the cash available until it can determine how various opportunities on which it is now working develop. CEO Jerry Atkin said that the opportunities would take most if not all the cash on hand for the two the three opportunities under development.
“We are open to acquisition but we are not drunk on it,” he said. “It takes a very, unique set of circumstances to make it work as it did with Atlantic Southeast Airlines a couple of years ago. We have earmarked 10 percent of capital to go into foreign, fast-growth markets over next couple of years by acquiring a minority interest. Our aim is to help other carriers develop more quickly than they might otherwise be able to do and share with them our buying power as well as technical and management expertise. We already have a very open working relationship with at least a group or carrier in each of China, Brazil, Mexico and Europe. While I wouldn’t expect those to be great value propositions in the near term, in the long term, they could be substantial and is the broadening of where we are going.”
While noting the domestic regional industry will not grow substantially, SkyWest is looking for opportunities to broaden domestically with new major carrier partner. “Within the regional industry space, we are talking about several opportunities that are appreciable in size,” he told investors. “I also believe over the next five years, there will be fewer players in the regional sector and within a fairly low growth industry we will have some substantial growth opportunities and are prepared to do that with our quality operation, competitive costs and financial strength.”
Republic CEO Bryan Bedford said his companies – Republic, Chautauqua and Shuttle America – plan to grow organically and he is not particularly interested in acquisitions. “Even organically we have maintained the highest growth rate in the last six years in regional airline space,” he said. “While that space may be lacking in growth, Republic will maintain +25 percent growth rate for 2008 and +20 growth rate in 2009 based on current contracts.”
Despite share prices under $3 and assumptions it would was going under, ExpressJet still has 75 percent of its business in contracts with Continental, making it really less risky than popular misconceptions would have it. With that as an introduction, CEO Jim Ream agreed XJT was now a good value because, as one commenter put it, it is unlikely the company would let 25 percent of the business take down the rest.
“I don’t know how I got roped in following three guys who are promising predictability as far as the eye can see, but we are in somewhat of a different situation,” he told investors as he recounted the difficulties of the last two years during which ExpressJet jump started a completely new airline. Normally, he said, one could take time to put everything in place, take aircraft and grow slowly. But, when Continental pulled 25 percent of its feeder operation out, the regional was forced to learn how to be an independent carrier after having grown up in the shadow of its Continental partnership.
Ream described the airline’s biggest asset as its flexibility, unlike other regionals, such as Fly I which tried and failed at independence. In response to a question as to why Mesa has failed twice to make money at independent flying and Fly I did not make it, Ream noted that those operations were more complex.
“They were either committed to a geographic region or trying to transition to completely different carriers,” he said. “Express jet has always done a good job at small communities and has had segment profitability down on these aircraft for quite awhile. We know there are markets out there which are the perfect size for [the 50-seat ERJ 145] and on which we can make money on a segment basis. The challenge was in doing it so fast. While the similarity is that we were pressured into this, the fact of the matter is we’ve got markets today that make sense with what we’ve done so far. We’ve just finished our second quarter. It takes a while to build a transportation network and we feel we have the financial resources for it and to continue to morph it to fit where aircraft makes sense. We don’t have to charge folks very much money and, with a 35-people-on-board load factor, you can make money as a niche operator. The industry hasn’t overreacted the way they did with Fly I because we are doing something new. We saw the first three quarters of data and we know we have stimulated traffic greatly. We are not trying to steal traffic and as we continue to do a mixed shift on the type of folks we are carrying on the aircraft, we will be successful.”
For now, the tactical tasks including getting better at selling. “People are aware we are in their community, the brand consciousness is increasing and reservations, our selling capability, is improving,” he said. “We have the ability to shift aircraft around to match supply and demand. We are not locked into one geographic area so we can find the best applications for this aircraft. There are a lot of opportunities majors are bringing to us to move our aircraft around to make their networks work better.”
Ream also pointed out that its 10-aircraft corporate charter division “will make as much money as anything on CPA side,” adding, “that’s a direction we can add real value to all majors to be able to be the pro-rate operator to doing as good a job selling seats as operating aircraft.”
ExpressJet’s Delta operation at LAX is doing well, he reported, saying it was a unique opportunity to help a legacy carrier grow a hub. As for Continental, its 205 aircraft, he echoed statements made at the last ExpressJet conference call saying the major carrier has a lot of flexibility in its contracts that should be paid for at a premium compared to other carriers. “We are able to negotiate by offering economic concessions in exchange for predictability in the agreement,” he said, adding that at present, Continental continues to work through its options now that there is no much uncertainty in the market. “You can see why Continental is working through its options in terms of maintaining fleet flexibility versus the economic concessions we could provide them.”