While rest of industry shrinks, SkyWest takes terror in stride

 - May 27, 2008, 5:53 AM

The profound damage inflicted by the September 11 terrorist attacks brought changes to the U.S. airline industry the most prescient observer could not have envisioned three months ago. Twenty-percent industrywide capacity cuts, furloughs and layoffs, large-scale route transfers from mainline carriers to regional affiliates and aircraft delivery deferrals have all marked one of the most volatile periods in the industry’s history. But while even the most financially sound regional carriers announced layoffs and pay cuts, one airline in particular–St. George, Utah-based SkyWest Airlines–emerged from the crisis with its core organization and workforce fully intact.

In fact, the airline plans no changes to a long-term strategy devised well before anyone considered the possibility of the September 11 horrors. Jerry Atkin, SkyWest’s chairman, president and CEO, reported a temporary financial hit and a hiring freeze due to service reductions, but the company furloughed none of its current staff nor does it anticipate any changes to its aircraft delivery schedule.

Although SkyWest saw passenger loads drop along with the rest of the industry, by early November the airline’s regional jet networks had yielded nearly “normal” passenger loads, while its turboprop load factors returned to within roughly five points of its historic average, according to SkyWest CFO Brad Rich. On September 20 the airline’s total load factors ran at about 34.5 percent, barely half of the 60-percent average SkyWest enjoyed before September 11.

Overall for the month of September SkyWest registered an 18.2-percent drop in passengers. It canceled some 4,200 flights during the month, of which 3,750 it attributed to the terror campaign. Still, revenue passenger miles increased 9.4 percent as available seat miles jumped 21.9 percent, resulting in a monthly load factor of 50.8 percent.

Atkin stressed that SkyWest’s strong balance sheet and liquidity place it in position to weather a crisis in the commercial air travel market–even the serious downturn brewing for months before terrorists struck. “This situation will pass,” he said. “In the meantime, there will still be a demand for service, and we are well positioned to provide it.”

SkyWest’s solid market position and equipment deliveries allowed it to begin moving Canadair Regional Jets from Salt Lake City to Dallas-Fort Worth International Airport (DFW) in October as part of a realignment strategy devised to compensate for Delta’s drop in capacity. The first route from its new base–a single round trip between DFW and Pensacola, Fla.–opened November 1. On the first of this month SkyWest planned to replace Delta mainline service with CRJs from Dallas to Memphis and Colorado Springs, and supplant turboprop service provided by Atlantic Southeast Airlines with a CRJ flight between Dallas and Oklahoma City. Other new destinations from Dallas include Tallahassee, Fla., and Mobile, Ala., starting January 1.

Earlier, SkyWest became a beneficiary of United’s decision to park its Boeing 727s and 737s and dissolve its low-cost United Shuttle operation when it won 20 daily CRJ departures from Los Angeles International Airport (LAX) to five destinations–Fresno, Oakland and San Jose, Calif., and Phoenix and Tucson, Ariz.–starting October 31. Originally slated for service out of Denver, the new 50-seat CRJs complement existing Embraer Brasilia service from Los Angeles to Fresno and Santa Barbara, Calif.

In turn, SkyWest moved Brasilias from Pacific Northwest bases in Seattle and Portland, Ore., to Denver to assume responsibility for service originally slated for the RJs in the Mile High City. United “repositioned” SkyWest’s RJs to Los Angeles as part of a systemwide adjustment that saw Air Wisconsin Dornier 328s return to Chicago to make way for SkyWest Brasilias in Denver. Almost simultaneously, Air Wisconsin sent more of its own 50-seat CRJs to Los Angeles to fly former United mainline service to Sacramento, San Jose and Santa Barbara. Despite the ostensible downgrade in service at Denver International Airport (DEN), Rich said he believes the moves constitute a temporary stopgap measure, and that future RJ deliveries will undoubtedly fill further requirements for jet capacity in Denver.

United Airlines pilots have filed a grievance over the airline’s plans to park all of its 727s and 737s in favor of regional jets flown by its regional partners. Local ALPA MEC representative Herb Hunter said the airline’s plans would drop the number of mainline narrowbody jets below the 451-unit threshold required to maintain the current level of RJs at United Express. However, Rich insisted that, according to its delivery schedule, SkyWest would not exceed any scope-clause limits until next November, by which time, he said, the sides would likely come to a mutually satisfactory solution on the issue.

In fact, a scope-clause amendment ratified by United and its pilots in November last year allows United Express affiliates to replace 150 turboprops with regional jets on a “demonstrated one-for-one basis.” SkyWest reasons that because it plans to retire eight Brasilias by the end of this year, it may add another eight CRJs to its United system, apart from the 10 originally allocated to the regional airline by United under the original scope clause, which allowed 65 RJs systemwide. SkyWest currently flies six CRJs in United Express livery, meaning it may add another 12 of the Bombardier jets before it breaks any scope restrictions at United, the airline argued.

SkyWest’s apparent ability to weather this most recent industry storm represents just another in a long line of successes for an airline that began modestly enough in 1972, when Jerry Atkin’s uncle, Ralph Atkin, started service between St. George and Salt Lake City with a small fleet of piston-powered Pipers. That year, the airline carried 256 passengers.

Today, SkyWest lays claim as the largest independent regional airline in the U.S., and possibly the world. The carrier employs more than 4,400 people and as of November 1 flew a fleet of 82 thirty-seat Embraer EMB-120 Brasilia turboprops and 40 fifty-passenger Bombardier CRJ-200s. By year-end it expects to retire four more Brasilias and add another seven CRJs. Operating an average of some 1,000 daily flights throughout the Pacific, Mountain and Central time zones, SkyWest’s route network now extends as far east as Memphis, Tenn., and Pensacola, Fla., and to principal cities on the U.S. and Canadian west coast.

SkyWest is unusual among large regionals in its ability to successfully balance relationships with two competing global air carriers. Operating since 1987 as a Delta Connection carrier at Delta’s Salt Lake City hub, the airline also became a United Express affiliate in 1997, when it assumed responsibility for service on the West Coast from former Mesa Air Group subsidiary WestAir.

Delta held an 11.1-percent equity position in SkyWest until October, when the major carrier sold all 6.2 million of its shares in the regional for $125 million in a block trade. A Delta spokesperson told AIN that the company based its decision solely on its need for capital, and that it planned the move months before  September 11. “Delta has an excellent relationship with our partner SkyWest,” said Delta CFO Michelle Burns. “This transaction in no way changes our operating relationship.”

In fact, Delta bought its now wholly owned subsidiaries Comair and Atlantic Southeast Airlines during the past year to gain more strategic control over those carriers. If anything, the sale of its stake in SkyWest represents a vote of confidence in its Utah-based partner, as has its decision to award the St. George-based carrier routes from Dallas.

Despite SkyWest’s expanding Delta network, overall departure numbers show that the United Express operation stands as the dominant service, feeding United Airlines at Los Angeles, San Francisco, Portland and Seattle. “As it is right now, the ratio of service is almost three to one United Express to Delta,” remarked Steve Hart, SkyWest’s vice president of market development. However, with regard to available seat miles [ASMs], the United contract accounts for just 44 percent of SkyWest’s flying. I expect that this figure will stay about the same over the next few years.”

SkyWest’s schedule from September 19 through the end of October showed a 19-percent reduction in Embraer Brasilia flying, prompting the airline to park six of the twin turboprops. By the end of the year it expects to shed eight Brasilias in all, forcing it to take a $3.7 million writeoff connected with unamortized engine overhauls on the airplanes. Other than the maintenance writeoffs, SkyWest suffered no financial penalties connected with the early retirements. “The aircraft were scheduled to go away through the end of next year anyway,” said Rich.

Aside from the costs associated with the Brasilia retirements, he said the airline would incur additional costs associated with liability insurance and security, although the extent to which those items would affect profits in the coming quarter remained unclear. For the quarter ending September 30, the airline reported net income of $14.5 million, compared with $17.8 million during the same period a year earlier. The figures included a $5.6 million grant as part of the federal government’s Air Transportation Safety and System Stabilization Act.

Ménàge a Trois

Atkin said that about 75 percent of SkyWest’s passengers connect with its major airline partners. For that reason, decisions regarding deployment of SkyWest’s aircraft come largely from Delta and United. That, explained Atkin, enables SkyWest to avoid conflicts of interest in its relationship with the two giants, which he refers to as a “ménàge a trois.”

“If the decision were ours as to which program to assign the airplanes, then there would be problems. But since the competition is between the majors, we simply deploy our airplanes where we are told, which puts the decision-making process with our partners,” said Atkin. “At the same time, because we have been able to procure and maintain enough aircraft for both programs, we have been able to meet the needs of both.”

Atkin cited as an example SkyWest’s operations as United Express at Denver, which it began serving in October last year. “United has asked us to serve some Montana markets that have historically been Delta’s. That was United’s decision. We did not decide to do that at the expense of our Delta partner,” he stressed.

SkyWest’s Denver operation put the carrier into a hub also served by Air Wisconsin. Before October 31, SkyWest fed United at Denver from Fresno, Memphis and the Montana cities of Bozeman and Missoula. With the redeployment of Brasilias from the Pacific Northwest, SkyWest added the former Air Wisconsin destinations of Bismarck, N.D., and Durango, Grand Junction and Montrose, Colo. A United Airlines spokesman at that airline’s Elk Grove, Ill., headquarters said that both SkyWest and Air Wisconsin will be encouraged to expand operations at Denver, although United harbors no plans at this time to ask the two airlines to fly in each other’s markets.

Despite the Brasilia redeployment in Denver, the success of the service expansion program at SkyWest depends largely on the airline’s ability to enlarge its regional jet fleet and decrease the number of turboprops. SkyWest has flown CRJ-200s since 1994. As of November 1, the Delta Connection service employed 34 dedicated jets, while six flew for United Express. In addition to those 40 airplanes, which average just 3.5 years of age, the airline holds firm orders for another 28 CRJs for Delta Connection and 78 for United Express. Deliveries resumed in September and will run through the end of 2004.

SkyWest also holds options on another 119 CRJs–35 for Delta Connection and 84 for United Express. The contract with Bombardier allows SkyWest to exercise these options through 2008.

In an effort to accelerate the growth of regional jet service, the current 40-jet fleet includes five RJs remarketed by Bombardier in the wake of the Comair strike. Those airplanes, which did not change the number of firm orders and options placed by SkyWest, may or may not go back to Comair, their original customer. According to Atkin, much depends on the market demand for the aircraft at SkyWest. He added that usage of the jet fleet, while heavily weighted toward Delta right now, will equalize by the end of 2003, when contracts with both major partners come up for renewal.

The fate of the remaining turboprops after 2003 remains unclear at this time, but according to Steve Hart, Delta and United are philosophically in favor of all-jet service among their regional partners. He said for SkyWest that raises some issues that need to be resolved.

“Although the Brasilia fleet is being reduced, a number are still under long-term leases,” Hart reported. “Along with this, SkyWest serves some airports that don’t have the facilities to support regional jet operations, even though they may be located in markets that could justify a 50-seat jet in terms of passenger loads. So, at least for the midterm–and possibly the long term–SkyWest will continue to operate turboprops in certain selected markets.” Hart added that SkyWest may elect to configure at least some of the regional jets on order with a 40- or 44-seat cabin to address needs in some of the turboprop markets.

SkyWest’s expansion plans still include Delta’s Salt Lake City hub, as well as United hubs in Los Angeles and Denver. About half of the 10 new jets slated for delivery between September 1 and year-end were to have flown from Salt Lake City, but Delta’s decision to reallocate CRJ capacity to Dallas prompted SkyWest to cancel its plans to open new routes from its Utah hub to Eugene, Ore., Great Falls, Mont., and Burbank and Monterey, Calif., on November 1.

Salt Lake City now hosts some 130 SkyWest operations per day. However, as Hart noted, plans call for further expansion of the United Express operation first in Los Angeles during the first half of next year, and then at Denver in 2003. The Denver expansion, said Hart, could likely see more service to the Midwest.

SkyWest’s growing presence at LAX has made it the dominant regional carrier there, with close to 200 daily departures. In fact, LAX now accounts for more flights than either of SkyWest’s other hubs.

The plans for further expansion there could give rise to some type of code-sharing arrangement with an international carrier for the first time. “We have had some discussions with United about doing a code share with one of the Star Alliance members at Los Angeles within the near future, although nothing has been decided at this time,” said Hart.

Along those lines, there is the strong likelihood that SkyWest will become more international through additional cross-border services. Today, the airline links its Salt Lake City hub with three Canadian destinations: Vancouver, Victoria and Calgary.

“We are actively studying additional Canadian markets from Salt Lake City for Delta, and from Denver for United,” said Hart. “While there are no definite plans in place at this time, it is still very possible that we will establish additional service to Canada in 2002 or 2003. We have also held some discussions with United about new regional jet service to Mexico either from Los Angeles or Denver.”

The growth plan, of course, remains subject to changing market conditions. But SkyWest has shown amazing resilience with its performance in an already depressed air-travel environment. “Because the markets we serve are more heavily weighted to business we were not affected by the economic slowdown quite to the degree of our major partners,” said Atkin, who did not want to make any projections concerning SkyWest’s performance for the remainder of its current fiscal year. “Regional airlines generally tend not to be as cyclical as major carriers because most regional traffic is business related and connects to a major carrier’s flights.”

All-contract Flying Next Year

Atkin also pointed out that in a further step to protect revenue, SkyWest will move all its Delta Connection services to a contract flying arrangement by January 1. Under contract flying, the major carrier controls scheduling, ticketing, pricing and seat inventories, and pays its regional partner a negotiated flat fee per flight departure, along with some incentives for passenger volume and customer-service levels. This differs from the more traditional pro-rate arrangement, in which the regional controls ticketing, pricing and seat inventories, and receives a portion of ticket sales on trips involving the major partner. Atkin said that SkyWest has pursued the contract arrangement with United since it became a United Express affiliate.

Along with the fleet buildup, pilot staffing was scheduled to increase at least through next year, according to Jim Breeze, SkyWest’s director of flight operations. As of September 11, the carrier employed roughly 1,275 pilots and had expected to add 30 to 45 pilots per month through the end of this year. Projections also indicated that the airline would hire a monthly average of 60 pilots next year. The hiring freeze has temporarily delayed those plans, but with normal attrition and the reduction of Brasilia flying, some of the current turboprop pilots will move into regional jets that much faster.

SkyWest requires a new-hire pilot to have logged 1,000 hr TT, 100 hr of instrument flying and 100 hr in multi-engine aircraft. Most, Breeze said, have previously flown for Part 135 charter operations and other regional carriers, as well as for flight schools as instructors. About 50 percent of the new recruits arrive with a recommendation from a SkyWest employee, which Breeze said gives them some advantage in the hiring process.

Traditionally, SkyWest’s new-hire pilots began as first officers on the Brasilias, but with the increasing number of regional jets, more start in CRJs. “By policy, we are trying to start more pilots on the regional jet, because it eliminates an entire training cycle,” Breeze remarked. “A first officer on the Brasilia moves from that seat to first officer on the jet. From there, the next step is the captain’s seat on the Brasilia, with the final promotion to captain on the jet. But first officers who start out on the jet go from there to the captain’s seat on the Brasilia; and from there they will be promoted to captain on the CRJ-200. Elimination of the fourth training cycle reduces costs.”

Since 1994 an in-house pilot-management liaison organization known as the SkyWest Airlines Pilots Association (SAPA) has represented SkyWest’s pilots. Chris Abell, a Palm Springs, Calif.-based Brasilia captain, serves as president of SAPA. Abell said that because of the pay, benefits and work rules now in effect at the airline, he ruled out any possibility of a strike occurring at SkyWest, even after the airline industry emerges from its current crisis.

“SkyWest already had much of, if not more of, the work rules already in place that were a major issue with Comair pilots,” Abell remarked. “As for pay, our management has consistently tried to keep our pilots at the top of the payscale for regional airlines.” The current payscale became effective this past July 1, and will run through June 30, 2003.

This is not to say that there have not been attempts to unionize SkyWest pilots. According to Atkin, three have been made to date, including one several years ago by the Air Line Pilots Association (ALPA), which came within a handful of votes of succeeding.

Open Relationship

What may be keeping a union off the property, Abell said, is the “open relationship” between SkyWest pilots and management. In fact, he noted that work rules may be discussed between the two groups at any time, without having to wait for commencement of formal negotiations on pay.

Atkin stressed that SkyWest will remain vigilant with respect to further attempts at unionization. “The company has always given a high pay and benefits package so that employees don’t feel the need to seek unionization,” he noted. “But we are not kidding ourselves. The unions will probably try to make a run at us again and that will constantly keep us on our toes with respect to making sure that we are an industry leader for pay and benefits.”

Under the current SkyWest payscale, a new-hire Brasilia first officer earns at least $18,259 per year and five-year Brasilia captain earns no less than $46,550 annually (80 hr monthly minimum). A new-hire CRJ-200 first officer earns the same as a first-year Brasilia copilot, but the monthly minimum is 75 hr. A five-year CRJ-200 captain earns at least $55,305 per year while flying the monthly minimum of 75 hr each month.

Before September 11, SkyWest planned to expand its maintenance staff to support the growing jet fleet and network. Mike Gibson, the airline’s vice president of maintenance, said the airline employs a maintenance force of 578, which includes 375 airframe and powerplant (A&P) mechanics. Next year, due to the regional jet fleet expansion, an additional 75 were to be hired but, as with the pilots, the hiring freeze will prevent that from happening right now.

However, Gibson said that the arrival of more regional jets could restart the hiring of technical support people “if nothing else happens.” He ventured that any new mechanic hiring will not likely happen for two to three months.

In September the airline opened a new $17 million maintenance hangar at Salt Lake City International Airport. Primarily intended to sustain SkyWest’s regional jet fleet flying for Delta Connection operations, the facility now supports 25 CRJ-200s, but the airline expects that number to grow to 56 within the next 2.5 years.

The new maintenance hangar, which adds 50,000 sq ft to the 70,000 sq ft already in place at the Salt Lake City complex, will also support the 16 Brasilias flown for Delta. “That number will probably remain steady over the next several years,” Gibson said.

Because of SkyWest’s growing participation in United Express, the airline has added a major maintenance facility at Fresno International Airport. Formerly operated by the now defunct WestAir, the facility hosts maintenance of 73 Brasilias and four CRJ-200s used in the program. The Fresno facility, now responsible for some A-inspections and overnight checks on the jets, will expand its capability to include jet C-checks next year. Further expansion at Fresno, should it occur, would probably take the form of a new hangar, said Gibson. Of course, any plans for a new facility will depend on where the growth under the United Express program takes place.

“If that growth develops more at San Francisco and LAX, we will likely see some additional expansion at Fresno,” he said. “But if we find that the major growth with United Express is at Denver, then we will look at establishing a maintenance facility either at Denver International or at another airport nearby.”

Palm Springs (Calif.) International Airport plays host to SkyWest’s other major maintenance base, where mechanics perform a limited number of Brasilia C-checks. The airline also uses it for modification work, including avionics upgrades for both the jets and turboprops. The Palm Springs facility, meanwhile, is undergoing a 16,000-sq-ft expansion to accommodate more regional jet support.

SkyWest also operates what Gibson called “a small maintenance base” at Portland International Airport’s United Express operation. The airline uses the facility mostly for overnight inspections for 12 to 14 United Express aircraft operating in the Pacific Northwest.

Along with this, there are shops dedicated to line maintenance in San Francisco, Los Angeles, San Diego, Seattle, Salt Lake City and Denver. Any of those facilities could expand depending on the growth of the airline, Gibson pointed out.

Of course, the extent of that growth depends on so many variables, Atkin won’t predict anything: “One of the things I’ve learned about the regional airline industry is that you can’t predict where you are going to be for the long term or even the short term because it changes so rapidly. That is especially true now. What you have to do is ensure you have the financial capability to adapt to whatever comes along. Yes, you have to be thinking about some of the trends that will develop, but as we have just seen, there is no way you can predict what will happen even two to three years out in this industry. But there is one thing I can be sure of–our passengers can always expect the best.”