SkyWest, Inc. (SKYW) is examining opportunities that may be coming for 100-seat aircraft, according to CFO Brad Rich, who spoke before the Merrill Lynch Global Airline Conference. He also noted that despite its operational challenges Atlantic Southeast Airlines had $1.3 billion in total revenues last year and delivered $19 million of excess of the stated Delta (DAL) contract objective in 2006.
Rich said the acquisition, completed in September 2005, created a better balance to the SkyWest portfolio and moved it from what would have been 75 percent United (UAUA), which had filed for bankruptcy, to the current 60 percent Delta flying and 40 percent United. ASA also gave the company geographic diversity with the economics contributing exactly as projected. He noted the combined airlines offer a comprehensive national network, allowing it to leverage a nationwide platform in gaining new business.
While it has struggled operationally, the issues, said Rich, are unique to Atlanta. “I can’t stress enough the importance we place on quality service so we are focused on improving what we control,” he said. “But when you are handed a schedule by your major partner and they have total control, that presents you with challenges,” he said. “In our industry we like to work to increase utilization; the higher the utilization, the higher the productivity and that translates to significantly improved economics. When utilization is pushed to levels that are logistically impossible it becomes counterproductive. In some respects that’s what we’ve experienced in Atlanta. The utilization and experience of turning the volumes scheduled is logistically impossible given the restraints on facilities and access to gates and ramps. We are working with DL on this.”
In responding to whether or not the operational problems and the seemingly increased costs at ASA put that airline at risk of being shut out of future bids, Rich explained “regardless of what we have, we never expect to be held to a certain percentage if we can’t be cost competitive. The whole premise of the contract is we would take full responsibility for things we control. If we can’t produce on the controllables, we know bad things could happen. If we are not competitive, we have the right to match a bidder’s costs. We are making good progress on cost structure. The cost structure is not the problem. As it relates to quality, we have to take responsibility for things we control rather than displace responsibility. We also have to recognize some things we can’t control or won’t make progress in unless we have the full cooperation of our partners. Delta has taken control of ground services at Atlanta, which is something we are not pleased with, but at the end of the day, if it leads to a better product for passenger, it’s hard to find fault with it whether or not it impacts our economics. We need to have continued cooperation and, with that, we can make Atlanta a high-quality operation.” His assertions about Delta scheduling practices are someone at odds with what Delta told Regional Aviation News last week. Related Story
When asked about the new ExpressJet (XJT) Delta Connection operation at Los Angeles, Rich said it was something SkyWest encouraged. “Delta asked us to do it but the only way we could was with ASA, given the exclusivity clause we have with United,” he said. “We did it with ASA, shifting operations away from its home base temporarily but we knew that would not be efficient.”
Rich cautioned about cost structure comparisons within the peer group. “It is not apples to apples,” he said. “We still have 72 turboprops while others are now pure jets. We do all of our own handling in addition to 11 other airlines all running through our cost per ASM and that is a significant cost component. I would say that we have been successful in winning a large amount of bids and that says a lot about our cost structure. But we are still focused on continued improvements within cost structure and I am very exciting about some of the things we are pursuing related to significant cost reductions in the near term.”
SkyWest’s 27 Brasilias operate on a pro-rate basis, 15 of which are at United and 12 with Delta. He also noted that the company has a higher percentage of CASM in employee-related equity based and incentive-based compensation, more than anyone else in the industry. Sixty nine percent of its fleet is leased versus owned, with the decision as to whether or not to lease based on tax management more than anything else.
He noted that over 50 percent of the company’s net worth is in cash but added there is nothing wrong with good strong cash position. “We’ve been asked why we still refer to ourselves as a regional airline with revenues of over $3 billion,” he said, in response to a question about stock repurchases. “We know we have a responsibility about cash so we have been aggressively repurchasing shares. We also know our broad-based equity compensation programs create some dilution so we have begun a consistent program to repurchase enough shares to offset that.”
The company, he said, is in an unusual position since it has no firm deliveries scheduled from a manufacturer although it has seven or eight used CRJ-200s remaining to be delivered for its Midwest (MEH) operation. Rich reminded investors that the last time SkyWest was in a similar position, concerns were raised about its growth potential which occurred on the eve of its greatest growth in history with the acquisition of ASA.
“We are confident that, as the evolution continues and mainlines put more emphasis on international routes and heavy equipment, there will be continued reductions in narrow-body fleets and we see that as an opportunity,” he said. “We don’t think the growth is over and we see opportunity both within and outside our current partners. Our objective is to pursue those outside opportunities to diversify beyond our current partners. We are carefully studying and analyzing larger regional aircraft opportunities in 100-seat category.”