"Top To Bottom" Survey To Increase Efficiency

SkyWest Airlines is battening its financial hatches, preparing for a storm it knows is coming. The St. George, Utah-based carrier is all too aware that contracts with its two code-sharing partners are going to be reduced, requiring a re-evaluation of every aspect of its operations to ensure survival, according to Steve Hart, SkyWest vice president for market development.

To date, the carrier has continued to prosper, despite the poor economy, 9/11, the Iraqi war and the outbreak of severe acute respiratory syndrome (SARS). But continued prosperity "will certainly come at a greater cost in the coming months," Hart said. SkyWest's code-sharing partner carriers, Delta Air Lines and United Airlines have already indicated that future contracts for its Delta Connection and United Express carriers are going to be significantly less than the current contracts. It is now up to the contract carriers to cut costs to ensure profit margins suffer as little as possible.

"But we're a feisty, persistent survivor," Hart said. "Even in the face of more difficult times ahead as Delta and United tighten their budgets, we will prosper. We are already taking steps today to ensure our continued profitability as we move forward, still providing the quality of service that United and Delta greatly appreciate."

One of the biggest steps being taken to ensure survival is pay cuts at the managerial level, ranging from 5 to 20 percent, Hart said. Additional steps include a close inspection of staffing at every level in every department throughout the company, paring back goods and services that are not essential - "in general a top to bottom survey to gain more efficiency for less cost," he said.

SkyWest serves an area that covers the region west of the Mississippi River as well as southern states from Kentucky to Florida. It operates out of seven hubs as a feeder for United and Delta, including operating out of Los Angeles, San Francisco, Portland (Ore.), Seattle/Tacoma and Denver as a United Express carrier, and out of Dallas/Fort Worth and Salt Lake City as a Delta Connection carrier.

SkyWest was founded in 1972 by Ralph Atkin, a St. George-based lawyer. He started the service with Piper Senecas and Navajo Chieftains, flying business travelers between St. George, Cedar City and Salt Lake City, Utah. The flights would take off from St. George, fly to Cedar City, then on to Salt Lake City. Flights would depart at the convenience of the people traveling on any particular day, with one round trip three days a week.

Today, the airline serves 98 cities in 27 states plus Vancouver and Calgary, Canada. It operates 74 30-passenger Embraer Brasilia EMB-120s and 90 50-passenger Bombardier CRJ 200s. Of the EMB-120s, 16 are operated as a Delta Connection carrier and 58 are for United Express. Fifty-three of the CRJ 200s are operated for Delta and 37 are for United. An additional 13 CRJ 200s are scheduled for delivery this year for the United operation and three more CRJ 200s are on order this year for Delta.

Hart said that the Brasilias are primarily dedicated to United's operations at San Francisco and Los Angeles, with limited operations out of Denver, Seattle and Portland, Ore. There are also a limited number flying for Delta out of Salt Lake City.

Hart said that while the additional CRJ 200s will allow some growth with United, it does not have any growth plans for the Delta operations. "There are some discussions about future possibilities, but nothing serious at this point. It's all kind of theoretical."

With the loosening of its pilots' scope clause, United is expected to place an order for 70-seat regional jets at some time in the near future. "We hope to be a part of that," Hart said.

James Parker, managing director of Raymond James & Associates, said that he expects United to increase the number of RJs in its service, particularly with SkyWest, "which could include the use of 70-seat RJs."

SkyWest is responsible for acquiring its own aircraft. "We have a variety of ways to acquire aircraft," Hart said. "Some we buy, some we lease, depending on lease rates. It varies from airplane to airplane, depending on what kind of financing is available. Finding that financing is extremely difficult in today's environment."

Despite the depressed environment, however, traffic is growing. "Generally speaking, it is fair to say that since the Iraqi war, tensions have subsided and we're seeing some growth in traffic demand since [the war] began in March. It appears that people are starting to book for the summer, and hopefully it will be a strong travel season again this summer."

SkyWest became a code-sharing partner with United in 1997, operating under the "fee for departure" contract since that time. It began code-sharing with Delta in 1987 out of Salt Lake City. However, it wasn't until October 2001 that it transitioned its CRJ operations into contract flying for Delta. In January 2002, it moved its Brasilia flights to contract flying. As of Dec. 31, approximately 62.7 percent of SkyWest's capacity was flown under the Delta Connection banner and 37.3 percent flown as a United Express carrier.

As for the possibility of operating as a feeder airline to any carriers other than United and Delta, Hart said that SkyWest "is always exploring options." Jerry Atkin, chairman, president and CEO of SkyWest, noted that the airline still remains at risk that United may not come out of bankruptcy. "As a result, we are developing other relationships and aggressively pursuing alternatives and other opportunities as our backup plan in the event United's restructuring efforts are not successful. We also believe that pursuing other relationships will help to further diversify our business risk," Atkin said.

The possibility of United having to declare Chapter 7 liquidation is continuing to appear "less and less likely," Hart said. "That is the sense we are getting generally and in talking to the people at United." He further noted that the airline "takes seriously" the role with its partners, "so we are willing to bite the bullet and do painful things to make sure that we are an efficient provider in helping both of our partners return to financial health."

The airline currently serves two communities under the Essential Air Services (EAS) program: Crescent City, Calif., and Cedar City, Utah; it plans to add a third this summer. "We had petitioned to vacate West Yellowstone [Mont.], a market we have served since 1986, but without a subsidy. We have a general policy to vacate those markets that haven't been able to support service," Hart said. When the airline petitioned to discontinue the service, the Department of Transportation (DOT) offered to subsidize the service through the EAS. "So that will make our third EAS market," he said.

He noted that a lot of communities "need and deserve" air service, but given the development of the air transportation system in the United States, "particularly in the western U.S., people's proclivity to drive three or four hours if they can save a hundred bucks has really made the plight of subsidized communities that much more difficult. In many cases, people are more willing to drive to a low-fare gateway than they are to use the local service available to them."

SkyWest is a publicly traded company on the Nasdaq national market (SKYW). In its 2002 annual report, it posted revenues of $774.4 million in 2002, up 28.6 percent over $601.9 reported in 2001. Operating income was $119.6 million, an 82.3 percent over the $65.6 million in the previous year. Net income was $86.9 million, up 72 percent over net income of $50.5 million in 2001. It also showed total assets of $999.4 million last year, a 20.1 percent increase over assets of $831.6 million in 2001. Passenger traffic increased 34.7 percent for the year, going from 6,229,867 passengers in 2001 to 8,388,935 last year.

Over the long term, SkyWest total operating revenues have risen steadily from 1998 at an annual growth rate of approximately 21.8 percent. Passenger traffic has grown 23.1 percent per annum during the same period.

>>Contact: Sabrena Suite, tel: 435-634-3546; e-mail: ssuite@skywest.com<<

SkyWest Airlines

444 South River Road
St. George, Utah 84790
(435) 634-3000
http://www.skywest.com

• Code-share partners: United Express/Delta Connection
• Fleet: 74 Embraer Brasilias, 90 Bombardier CRJ 200s
• President/CEO/Chairman: Jerry Atkin
• Exec. VP/CFO: Bradford Rich
• Exec. VP/COO: Ron Reber

2002 Statistics:

• Revenue: $774.5 million
• Net Income: $ 86.9 million
• Passengers: 8.389 million
• RPMs: 2.99 billion
• ASMs: 4.36 billion
• Load Factor: 68.7 percent