SkyWest loan to UAL buys ‘risk mitigation’

 - November 24, 2009, 7:23 AM

SkyWest Airlines’ decision to lend United Airlines $80 million in no way signals any particular interest on the part of the St. George, Utah-based regional to help finance the operations of its code-share partners, a point SkyWest executive vice president and CFO Brad Rich clearly wanted to emphasize during the company’s third-quarter earnings conference call last month. “I think it’s [worth pointing] out here that we have no aspirations of diversifying away from our core business, which is the best regional airline flying in the world, to financial services,” said Rich. “We did it because it gave us a significant amount of risk mitigation on [Bombardier] CRJ200s.”

The agreements signed between SkyWest and United in mid-October extend SkyWest Airlines’ existing rights to operate 40 regional jets under the United Express agreement until the end of their current lease terms, which average 8.4 years. “To put this is real terms, we’ve got aircraft extensions that amount to just short of 5,000 months worth of aircraft flying. And at the same time we know with very high precision what our rates are going to be through that whole extension period,” noted Rich.

The contract also calls for SkyWest subsidiary Atlantic Southeast Airlines to launch United Express service during next year’s first quarter, placing back into service 13 idle CRJ200s, along with a spare, by next May. Rich explained that the contract it signed with Delta last year that added 10 CRJ900s into the Delta Connection system also called for it to remove 20 CRJ200s from the system. Now most of those airplanes will go to work for United.

“Ever since we [purchased ASA in 2005], we’ve had an objective to align ASA with an addition code. It certainly does that,” said Rich. “And we certainly feel that the total transaction strengthens our relationship with United Airlines.”

AirTran Code-Share
While Rich and company awaited a decision on its answer to yet another RFP recently issued by United, SkyWest last month diversified its revenue base further with a new three-year, pro-rate-based code-share deal with AirTran. That contract calls for the St. George, Utah-based regional to fly five CRJ200s starting this month out of Milwaukee–the same base from which it will soon stop flying the airplanes for Midwest Airlines, now a subsidiary of Republic Airways.

SkyWest expects to fulfill its end of the agreement by February, by which time it will fly as an AirTran partner to Pittsburgh; St. Louis; Akron/Canton, Ohio; Indianapolis; Des Moines, Iowa; and Omaha, Neb. Reminded of AirTran’s previous, ultimately failed effort to partner with a regional airline–namely, Air Wisconsin–to supply CRJ200 feed, Rich noted that the previous effort differed in a few essential ways.

“First of all the expenses of this operation will be much different from the cost structure that was [used] previously,” said Rich. “The previous structure as we understand it was a contract flying relationship. We are willing to take the risk because we have analyzed very specifically the revenue patterns, the airplanes are going into previously established markets and the cost structure is lower.”

Finally, in the event SkyWest’s analysis proves inaccurate, the airline can opt out of the agreement at any time after issuing a 120-day termination notice. “We do not have long-term agreements on these airplanes,” added Rich, “and we can make modifications as we need to.”