SkyWest and the Regional Airline Industry

Webster University

MNGT 6000

15 November 2012

Table of Contents

History: Page 3

Company Introduction & Products Page 3-5

Company S.W.O.T. analysis Page 5-8

Company Strategy/Goal/Vision/Recommendation Page 8-11

To be competitive in today’s airline industry, airlines face an increasing number of social and economic challenges. Inflation, a slumping economy, high fuel prices, and high unemployment all serve to add to consumer uncertainty toward the future. Taking this into consideration, there is perhaps no other industry directly impacted by these issues than the airline industry. With high unemployment and a recessive economy, families cannot afford to take vacations that require flying. Businesses that are hurting financially will use other means, (such as Teleconferencing) to coordinate nationally and internationally instead of flying. Today, many consumer attitudes towards the entire flying experience range from a necessary nuisance to a nightmare. Flying today in the post 9-11 world, has become an unpleasant experience to say the least. From check-in to baggage pick up, consumers are often confronted with a multitude of unpleasant experiences. Rude employees, lengthy security lines, unexpected baggage fees, late departure times, over booked flights, and lost baggage all contribute to negative consumer feelings toward the airline industry. This case study will examine how Sky West has managed to deal with these issues and still maintain a respectable reputation and leadership position within the airline industry in comparison to its rivals, Mesa Air Group Inc., Express Jet Holdings Inc., Republic Airways Holdings Inc., and Pinnacle Airlines Corp. SkyWest Airlines was started in 1972 and is headquartered in St. George, Utah. In 1984 it acquired Sun Aire airlines, entered into a partnership with Western airlines in 1985 but sold Western to Delta airlines in 1986 and then went public. SkyWest built its reputation and was named the “Regional Airline Company of the Year” since 2002. Regional Carriers specialize in short-haul flights that service small communities that cannot support larger aircraft. In 2005 SkyWest acquired Atlantic Southeast Airlines from Delta. ASA is another regional airline based out of Atlanta, Ga. As of 2009 both companies, SkyWest & ASA, were run as two separate companies but the acquisition has greatly increased the company’s territory within the United States and internationally. SkyWest Inc. (SkyWest) primarily competes as a domestic regional carrier. In this capacity SkyWest provides service from small cities using regional jets to support the network carriers’ hub-and-spoke system (Northwest, Delta, United, etc.). Regional airlines feed the large national carriers by bringing customers from small airports to major hubs to catch connecting flights. Most of the flights operated by regional carriers are in partnership with the major carriers. SkyWest has partnerships with Delta, United, and Midwest Airlines. At the beginning of 2009 SkyWest served 158 cities in 42 states, 5 Canadian provinces, and Mexico. In comparison Atlantic Southeast Airlines serves 130 airports in 30 U.S. states, Canada, Belize, Mexico, The Bahamas, Jamaica, Puerto Rico, the Turks, and the Caicos Islands. SkyWest is also doing well financially considering the economy. During the first 5 months of 2009 combined (passenger miles) revenues increased by 4.9% and a load factor increase from 80% in 2009 to 82.3% in 2009. The company’s operating revenue was $3.4 million dollars in 2008. The company’s Mission Statement is: “We understand and value the priceless commodity of time. We respect every individual's quality of life and are committed to promoting dignity and trust in all we do. We Strive To Be: The Airline of Choice, The Employer of Choice, The Investment of Choice”.

SkyWest’s also states their values as: Health & Safety First, Excellent Service & Quality, Personal & Operational Reliability, Fairness & Consistency, Respect & Teamwork, Personal & Corporate Integrity, Superior Profitability and Efficient Use of All Resources.

While most Regional airlines are subsidiaries of larger airlines, SkyWest is the largest independently owned regional airline.

The company maintains a functional structure since it is characterized by grouping people based on their expertise and skills. Although the airline is structurally centralized, with clear lines of authority and reporting responsibility, the company seems good at managing external relationships as it has proven with the unions.

In constructing a SWOT analysis SkyWest has many strengths that compliment the company. It has a commanding reputation for customer service, highest on-time arrivals, and a great safety record that customers recognize. SkyWest also does not have to contend with the high cost of unions. Money spent on union demands can be spent on other critical areas. The acquisition of ASA resulted in SkyWest expanding their territory both nationally and internationally with the end result being an increase in market share and revenues.

One of the key weaknesses for SkyWest to consider is the company’s reliance on United and Delta for the majority of its business. The fact that these major carriers run similar business models and were both in bankruptcy adds to the severity of this weakness. Also since SkyWest acquired ASA it now has to contend with a unionized workforce. In an industry where it is imperative to manage costs, SkyWest is now vulnerable to its entire workforce possibly coming under control of a union.

There are plenty of opportunities for SkyWest in the airline industry. Partnerships can always be formed with bigger carriers that can use regional services. Also, opportunities to acquire smaller struggling rivals or new entrants are always present. Finally more business travelers are now traveling on low-cost airlines. Business travelers are valued due to the frequency in which they fly.

Threats for SkyWest come from other airlines that can compete by lowering fares. The economy also is a threat because the industry is very sensitive to economy swings. Unions are also a threat in that they can drive up the company’s costs by employees demanding higher wages.

Mesa Air Group Inc. is a private regional company that was founded by Larry Risley in 1982 and began scheduled service between Farmington, NM and Albuquerque, NM. In its first ten years of business, Mesa grew from a Company with one aircraft serving two cities to an organization operating 38 aircraft serving 63 cities. During this same period, the Company transformed itself from a small closely held corporation to a publicly traded company on the NASDAQ exchange under the symbol “MESA”. Today the company operates 188 aircraft and has flights to 173 cities in 46 states, Canada, and Mexico. The company also partners with United Airlines, U.S. Airways, Midwest Airlines, and Delta. The company’s wholly-owned subsidiaries include: Air Midwest, Freedom Airlines Inc., and Go! Hawaii Airlines. Mesa’s mission is, “to be the premier high quality, low cost regional airline. We also look to innovate and pursue new opportunities in the rapidly changing airline industry”. The company’s operating revenue for 2008 was $1.3 million dollars, a slight drop from 2007. Mesa’s strengths are its partnerships with United, U.S. Airways, and Delta. Much of Mesa’s revenue will come from passengers flying regionally. Of course this could also be a weakness depending on the economy. Mesa is losing money as it applies to operating revenues. The company needs to address this issue and find a workable solution before it spirals downward and declining revenue becomes a serious issue. Mesa’s recently signed agreement with Shenzhen Airlines to create a new regional airline through a joint venture is a great opportunity for the company to expand into Asian territory. Threats to Mesa are from failing economies that curb air travel, high fuel costs that can increase operating costs, and new entrants to the industry. Republic Airways Holdings began as Chautauqua Airlines and was founded in 1973 in Jamestown, N.Y. by Joel and Gloria Hall. At the time, the airline had a code-share agreement with Allegheny Airlines which flew from Jamestown to Buffalo, N.Y. and Pittsburgh, Pa. The airline was started with two new 15-passenger Beech 99 aircraft. In 1984, the airline added five new 19-passenger Fairchild Metro III aircraft to its fleet. In 1986, Chautauqua Airlines was purchased by GAC. Today the airline is headquartered in Indianapolis, In. and schedules 1,200 flights daily to 119 cities in 38 U.S. States. The airline also flies to Canada, Mexico, and the U.S. Virgin Islands. The airline has service agreements with Delta, U.S. Airways, United, and Frontier airlines. The company’s mission statement is: “Working together we will provide the safest, most reliable and convenient travel experience for our passengers, a positive and rewarding work environment for our employees, and develop mutually beneficial working relationships with our business partners”. Their vision statement reads: “We believe that every employee, regardless of personal beliefs or world-view, has been created in the image and likeness of God. We seek to become stronger from our diversity. We seek personal respect and fulfillment from our work. Most of all, we seek to recognize the dignity and potential of each member of our Republic Airways Holdings family”. Republic Airways Holdings is a growing company that enjoyed a jump in operating revenue from $1.29 million in 2007 to 1.48 million in 2008. The company’s strength is its growing reputation in the regional airline industry. On Jan. 28, 2008, Air Transport World announced that it had presented Republic Airways with its prestigious Regional Airline of the Year award. This marked the second time the company was recognized with the industry’s most coveted award; Chautauqua was recognized with the honor for the year 2004. The company has also enjoyed paying considerably less than their rivals for Landing fees and ground handling. Republic’s weakness is they pay out far less in wages & benefits than their rivals. While this is good in terms of profit, it could lead to union unrest if not addressed. Opportunities for Republic are plentiful. It already has service contracts with four of the major airlines and has acquired Midwest & Frontier airlines which will expand the airline and make it competitive with the low-cost airlines. Threats for Republic are downturns in the economy, price wars with rivals, and union strikes at crucial times. ExpressJet Holdings Inc. is headquartered in Atlanta, Ga. and claims it is the world’s largest regional airline with 8,000 aviation professionals, an average of 1,000 daily flights to 125 destinations in North America and the Caribbean. and an all-jet fleet of more than 400 aircraft. The company’s vision statement is: “ExpressJet Airlines is committed to connecting more people, more often, to the places they love, by becoming the world’s first super regional airline”. The company lists its values as: Putting safety first in everything we do, treating all people with dignity and respect, operating with honesty, integrity and transparency in everything we do, working smart with commitment to continuous self improvement and taking pride in making sure the job is done right. Operating Revenues for ExpressJet Holdings Inc. declined from $1.6 million in 2007 to $1.3 million in 2008. Strengths for ExpressJet are its numerous hubs from which the company operates. The company is widely dispersed with operating hubs in Atlanta, Chicago, Cincinnati, Cleveland, Denver, Detroit, Dulles, Houston, Memphis, Minneapolis-St.Paul, and Newark. The company also maintains a fleet of aircraft with an average age of 10.5 years. This serves to keep safety in the forefront while keeping repair costs down. Weakness for ExpressJet can come from the recent merger with Atlantic Southeast Airlines in the form of change resentment and restructuring. Employees may find it hard to adapt and unions may present problems. Opportunities exist for ExpressJet because the company was just purchased in August 2010, by SkyWest Airlines whereby SkyWest's wholly owned subsidiary, Atlantic Southeast Airlines, would purchase ExpressJet for $6.75 per share. Atlantic Southeast Airlines and ExpressJet became the world's largest regional airline on November 12, 2010 once the purchase was final. Threats for ExpressJet are downturns in the economy, price wars with rivals, and union strikes at crucial times. Pinnacle Airlines is headquartered in Memphis, Tn. The company has 5,644 employees and is the parent company of Pinnacle Airlines, Inc. & Colgan Air Inc. Flying as Delta Connection, Pinnacle Airlines, Inc. operates 142 regional jets with Colgan Air operating all turboprop aircraft. Hub operations are located in Atlanta, Detroit, Memphis and Minneapolis, and Indianapolis. The company’s mission statement is: “The mission of Pinnacle Airlines, Inc. is to provide safe and convenient air transportation and to involve our People and our Customers in the product and the process, making the airline a rewarding, profitable, and quality experience”. The company states their values as: “At Pinnacle Airlines, we will operate by the Golden Rule. This applies to our relationships with all constituencies including Employees, Customers, Suppliers, and Stockholders. As a company and as individuals, we highly value integrity and are intolerant of dishonesty, maliciousness, or deceit”. Pinnacle’s operating revenue for 2008 was $865 million, an increase from 2007 when it was $787 million. Of the above mentioned rivals Pinnacle is the smallest in terms of aircraft and partnerships. Strengths for Pinnacle include their lower costs for fuel due to smaller jets and turboprop aircraft. Weakness for Pinnacle is the negative publicity of the company’s recent crashes and public mistrust of turboprop aircraft. Also the company’s recent workforce reductions can have a negative effect on employee morale. Opportunities for expansion or mergers exist for Pinnacle. Because they are smaller than their rivals the company may look for expansion in those areas. Threats for Pinnacle are from takeovers by bigger rivals, the economy declining, or even union issues. In studying the airline industry it doesn’t take long to see it is a dynamic industry that seems to be in constant change. To stay competitive rivals must be on their toes and be ready to exploit opportunities as they unfold. SkyWest Airlines is the undisputed leader among the regional airlines. Their recent merger of Atlantic Southeast Airlines with ExpressJet Holdings has solidified their position in the industry. Mesa Air Group is actively pursuing avenues to grow and needs to continue on this path. If it can get a foothold in Asia there is an opportunity for massive expansion. Much like their rivals, Republic Airways Holdings Inc. is actively pursuing expansion also. For all of these companies, expansion is the key for greater profits. It appears all the companies that have merged or formed partnerships have been ready, mentally, materially, and financially to make the transition a smooth one. This is a testimony to good leadership at the corporate level.

In the United States there were three types of domestic airline carriers, network carriers, low-cost carriers, and regional airlines. Network carriers were the legacy carriers such as United, American, and Delta. Low-cost carriers operated under a low-cost business model and had carved out a niche in the airline industry. The two largest carriers in this segment were Southwest and JetBlue. Regional airline carriers specialized in short flights that serviced small communities and brought passengers to major hubs in the United States. SkyWest was the largest independently owned regional airline. The addition of low-cost and regional carriers into the airline industry led to an even more competitive industry. Rivalry among competing sellers was the strongest competitive force in the industry. This high level of competition led to lower prices and forced each carrier to be very cost-conscious in order to survive. Not only did competition force the airlines to lower their costs, but increasing government regulation, safety issues, terrorist threats, and the rising cost of fuel put even more cost pressures on the airlines.

The U.S. airline industry was a seasonal industry that saw increased travel in the summer months and was negatively affected by bad weather in the winter months. The industry was also cyclical in that its businesses were profitable when the overall economy was strong but struggled when the economy was weak.

The Regional Airline Industry

Regional airlines were either independent organizations, such as SkyWest, or in most cases, were wholly owned subsidiaries of major airlines. Regional airlines based most of their operations on partnerships with the major carriers. Regional airlines and major airlines had a symbiotic relationship in that the major carriers relied on the regional airlines to improve the efficiency of their hubs while the regional airlines gained an existing customer base from the major carriers. Competition for these partnerships was intense. In order to be in the best position to acquire contracts with the major carriers, a regional carrier had to develop and maintain high levels of customer service, develop and maintain a strong safety image, maximize on-time arrivals, and have the ability to acquire new aircraft. As competition increased for the additional routes that major airlines were bidding out, it was imperative that companies excel at these four points. [pic]