New Expansion Opportunities for SkyWest May Take Until Yearend

It will be another six to nine months before the industry gets a peak at the expansion opportunities being explored by SkyWest, Inc, according to Mike Kraupp, vice president finance and treasurer who spoke at the Raymond James & Associates 29th Annual Institutional Investors Conference. At last...

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It will be another six to nine months before the industry gets a peak at the expansion opportunities being explored by SkyWest, Inc, according to Mike Kraupp, vice president finance and treasurer who spoke at the Raymond James & Associates 29th Annual Institutional Investors Conference. At last month’s Raymond James conference, Chair Jerry Atkin said the company is working with regionals in Europe, Latin America and China. Related Story
In addition to opportunities overseas, Kraupp said the airline is actively looking at acquisition opportunities in the U.S. to grow its airline, which will otherwise have a “benign” growth rate along with the rest of the industry. He noted the dearth of requests for proposals in the market and said, “we are also interested in doing business with US Airways, Continental or Northwest who might change their business models and want to do additional CPA flying.”
“As to international joint ventures, the opportunity will be somewhat limited in nature because of foreign ownership limit us to 49 percent,” he said. “We have been nosing around in some of those areas to see what might be available but are very calculated in what we may do. I think it will be of a small investment or a partnership type nature in which we are seeking opportunities where we can grow the CPA models in similar fashion as to what we have done in the U.S.”
The response came as a result of questioning on SkyWest’s healthy cash balance. Noting the company wants to retain its capital to execute its strategies in foreign investment, domestic acquisitions or RFPs, he said “I’m guesstimating that within the next six to nine months you are going to see some visibility on some of the things we are working on both domestically and internationally. You may see us deploy some of that capital or not but at the end of that time, if we do not, we will have to do some serious thinking in going back to stock buybacks.” The company has yet to complete the stock buyback programs okayed by its board last year. He also reported that employees purchased $10.3 million in stock last year as part of its stock ownership plan.
Kraup noted that while SkyWest has bought aircraft that accommodate 90 + seats, it is limited by current scope agreements to a maximum seating capacity of 76 seats. “We can evaluate larger aircraft but we must have scope relief from the majors,” he said, adding currently SkyWest, Inc. has the fifth largest fleet in the world.
In recounting the SkyWest portfolio he said that the company has moved Atlantic Southeast back out of Salt Lake. The subsidiary had annual revenues of $1.32 billion last year. He noted that ASA was not performing to SkyWest standards and the appointment of an operations person -- Bradford “Brad” R. Holt -- at the Atlanta-based airline, is expected to turn that around. Most of the problems at the subsidiary are operationally related.
Kraupp explained to investors attending the event that its capacity purchase agreements pass of the three greatest risks – fuel, pricing and load factors – to its major partners. “We are compensated on block and flight hour production,” he said. “The benefit is margin stability. We have devised our cost models on a narrow range of hours and production and 62 percent of costs are pass-through in nature, including engine maintenance, aircraft ownership, fuel, landing fees and station ramps.
“During the first quarter of ’08, our major partners have moved down to near or at our minimums, predominantly with the CRJ 200s while the CRJ 900s and 700s, have not been affected,” said Kraupp. He addressed merger possibilities and said that all the merger parties discussed to date have announced they would reduce their regional flying in the event of a merger. However, he indicated that mergers would not give its major partners the right to reduce flying beyond the minimums cited in contracts. He reiterated that all the contracts were long term and thus did not present a large risk in the event of a merger.
In response to a question on cost comparisons with other CPA regionals, Kraupp said that SkyWest’s costs may seem higher than Republic, for instance but are actually very competitive once the difference in operations are separated. “They do not have turboprops which fly shorter distances at higher costs,” he said. “In addition, we do a lot of handling for our major partners and others as well for whom we don’t do flying. So we have a cost element on our P&L that relates to handling that shows up in our cost per available seat mile, that doesn’t necessarily related to contract flying. Once your separate those out, we compete very well on a jet cost per ASM.”