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Monday, May 3, 2004

CRAN's Regional Jet Airline Executive Of The Year: Atkin Smoothly Handles SkyWest's Difficult Transition

Like many regional airlines, SkyWest [SKYW] faced a difficult year in 2003 - a new world was dawning with the majors expecting their regional code-share partners to fly more efficiently and fly for less.

"We had to decide if we were going to salute this new challenge or fight it," said Jerry Aktin, chairman and CEO of the St. George, Utah-based carrier. "We decided to salute it and push our costs down more than anybody else rather than complain. [Last year] was our challenge of going from where we had been to becoming more cost-conscious."

Because Atkin achieved a smooth transition while maintaining a consistently high-level of customer service and sustaining an excellent relationship with his 6,000 employees, Commuter/Regional Airline News has selected Atkin as its 2003 Regional Jet Executive of the Year.

"Jerry had a lot of complicated negotiations to work through, plus take on a lot of planes," said one of the independent judges who reviewed the nominations. "It was another year [that] when they closed out the quarter, they did exactly what they said they would do - no surprises. There was a lot of upheaval surrounding its negotiations with United [UALAQ]. That management team is unflappable. [Atkin] has had to do a fair amount of managing to position the company, and he has done it without fanfare."

While many assumed the most difficult negotiations were with bankrupt United, which wanted to renegotiate the terms of its contract, Atkin said the carrier also had difficult negotiations with Delta Air Lines [DAL] to set up a one-year contract for 2003. "It hit us right between the eyes. We felt bad at the time, but it turned out to be a good thing. Delta preceded the United talks. Delta could see this coming and had the same issues without being in bankruptcy. We had at least as difficult discussions [with Delta] on a special rate for 2003 and made some significant concessions."

SkyWest has reached a verbal agreement with Delta for a new multi-year contract that carries similar provisions as the United pact. Most of these terms have now been summarized in a memorandum of understanding.

The Delta negotiations forced SkyWest to confront the "new world - an industry whose ticket prices went down 20 percent and whose costs needed to go down a similar 20 percent," Atkin said. "We were in a good position to meet United's needs for cost reductions. Our objective and United's objective for us were pretty close to the same. We had to gulp at giving up the additional margin. We had to make a leap of faith that we could accomplish what they needed us to do. We have been successful in delivering what we bet we could do."

SkyWest has set an internal goal of reducing its costs by 20 percent. "We didn't bring our costs down to the objective, but we got close - 15 percent."

The carrier achieved its greatest savings by growing the company. By adding more regional jets, Atkin said the carrier was able to constrain its overhead and support costs while increasing its base. In addition, the entire operation had to tighten up its budget.

As SkyWest last month reported its first quarter earnings, analyst James Parker of Raymond James & Associates, noted that the carrier's earnings were up because of a 28 percent increase in capacity after adding 31 regional jets. SkyWest was able to collect $5.5 million under its new United contract to cover maintenance costs; however, because the planes are new, all the maintenance work has been covered by warranties.

Atkin said that SkyWest sought out new routes when it negotiated its new United contract. "We knew that they and the system needed additional feed. They were short regional jets. Additional orders would help us accomplish our cost goals. The increased opportunity to fly additional planes provides an opportunity to make additional money."

In February, the carrier took deliver of the first of 30 Bombardier [BBD] CRJ-700s, a 70-seat jet that will be used exclusively for United Express routes.

About 90 percent of SkyWest's revenues are earned by flying for United and Delta, while most of the rest comes from Continental Airlines [CAL] as a Continental Connection operator with routes in Texas and Louisiana. It began its new partnership with Continental last year.

"Continental is new and very small," Atkin said. "We hope to develop a larger, long-term relationship."

SkyWest manages the needs of its three major partners with a core staff - and so far without conflicts. As a practical matter, each major carrier has a key contact with the SkyWest organization, but there is one support team that services all three.

One of the trademarks of SkyWest is its corporate culture devoted to the small details and retaining motivated employees.

"They are mindful of their Ps and Qs and are focused on running airplanes and running them well," said Mike Boyd, a Denver-based airline consultant. "You don't get on a dirty SkyWest plane. If you get on a Brasilia and look out the window, you get blinded by the glare off their polished airplanes. It is details like that that set them apart."

To keep in touch with his employees, Atkin spends three days a month visiting as many SkyWest stations as possible. "It is management by wandering around," he said. "I gain the perspective of the real people doing the work. I hear their concerns and bump into a few things we should be doing better. They set the agenda and I talk about what they want to talk about."

Atkin, who will mark his 30th anniversary with SkyWest in September, now manages 6,000 employees compared to the initial 15. Over the years, his management style has evolved into following three basic tenets: "Do the right thing regardless, even when the right thing is not comfortable; be completely open and frank with all stakeholders - the employees, the customers, the stockholder and our communities; and never ask anyone to do anything I would not do myself."

Another CRAN judge who voted to give Atkin this year's executive award pointed to his employees. "I get the most positive feeling about the company when I am around their employees. They have an excellent relationship with their employees."

Frank Jay, a Texas-based headhunter who specializes in filling airline positions, buttressed that view. "We have been very intent on taking a number of his people but, quite frankly, they have been hard to get out of there. Everything we see is impressive. They don't turn over. They stay there because of Jerry and his ability to lead and manage."

As Atkin looks down the road, he hopes that "our quality will be better than anybody else, our costs will be as competitive as anybody's and our financial strength will be stronger than anybody."

It is that financial strength - best illustrated by a cash balance of $456.1 million - that is a constant source of speculation. "We do plan to spend it," Atkin said. "It is a larger amount of money than we need. Our hope is to find a growth opportunity."

While expecting to be the "premier" feeder of small regional jets in the future, Atkin said there are other opportunities the company may explore - especially as the major airlines remain in a state of flux. In the next five to 10 years, he said his firm could do something with "larger aircraft" similar to JetBlue's [JBLU] planned operation of the Embraer [ERJ] 190, a 100-seat plane. "I think there may be opportunities that we will be in a good position to do something with."

As Atkin contemplates future investment, he said he is focused on melding compatible corporate cultures and earning financial rewards. Any future investment also has "play well in the industry for the next 10 to 20 years. Given that the industry is at such a crossroads - this one is tricky, but it is important."

Consultant Boyd noted, "They will not do anything that will fundamentally alter the sprit of SkyWest. I see them doing only what makes sense to preserve what SkyWest has."

>>Contact: Jerry Atkin, SkyWest, (435) 634-3000; Frank Jay, Frank Jay & Associates, (281) 359-9040; Michael Boyd, The Boyd Group, (303) 674-2000; James Parker, Raymond James, (404) 442-5657.<<

SkyWest Profits Grow

1st Q '04
1st Q '03
Revenues
$253.7M
$207.3M
Earnings
$19.3M
$13.3M
Source: Company reports
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