Skywest Inc

Case 6 : Sky West Inc. and the Regional Airline Industry 1. 3 Business Model 1. Network Carriers legacy carriers Hub-and-Spoke 2007 United, Northwest, American, Continental Delta 2005 5 82 % 10 0 25. 3 2. Low Cost Carriers low cost business model point-to-point Southwest JetBlue legacy Low Cost Low Cost United Airlines Low Cost United Ted Airlines Delta Low Cost Delta’s Song Airlines 3. Regional Carriers Jets Legacy Network (Hub-and-Spoke) short-haul flight Regional Airlines block-hour incentive Regional 95 % Regional Regional Hub-and-Spoke Legacy Regional Airlines Partner SkyWest Inc History Origins in the Early 1970s SkyWest Dixie Airline St. George Utah 1972 J. Ralph Atkin 4 Dixies Commuter Airline Atkin Fixed Base Operation (FOB) Air Charters Air Ambulance Service Mar 1972 Atkin SkyWest Airlines 1974 Jerry C. Atkin Ralph Atkin's nephew $25,000 Oct 1975 Reorganized 3 SkyWest Expansion in the Late 1970s 1976 Hughes Air West Cedar City-Salt Lake City SkyWest Navajo Chieftans 5 National Parks Transportation Company Avis Franchises 2 Cedar City St. George. 1977 Interline American Airlines ? Check-in Interline SkyWest 1978 1. SkyWest Commuter Airline ( Regional Airline) 3 Certified Air Carrier Federal Government Regulations Major Airlines 2. Civil Aeronautics Board (CAB) SkyWest 3 $160,000 Page Arizona Yuma, Kingman, Prescott, Grand Canyon, Tucson, Winslow Phoenix, Arizona, Blythe, Los Angeles, and El Centro, California. 3. SkyWest Fairchild Metroliner II $1. 4 ( $150,000) Growth from Deregulation, Acquisition, and Affiliations in the 1980s 1978 Major Airlines United, Western American Airlines Regional Airlines SkyWest 1983 Metros 7 Navajo Chieftans 5 Cessna 207s Charters SkyWest Reagan Reagan Professional Air Traffic Controllers Association 24 Sep 1981 SkyWest Arizona Metro SkyWest 1982 SkyWest 10 Republic's Escort 1980s SkyWest Mail, Small Packages, and Bank Documents 10 % 1983 SkyWest 2 Regional Airlines St. George 17 6 250 Customer Service Aug 1984 SkyWest Las Vegas Palm Springs, California Southern California Palm Springs Sun Aire 1968 Borrego Springs, California San Diego 90 1983 Sun Aire 330,000 1985 Sun Aire SkyWest Metros SkyWest 12 14 Sun Aire 28 Sun Aire Facilities American Airlines Los Angeles SkyWest/Sun Aire Major Market SkyWest Regional Carrier 11 Holding Company SkyWest, Inc. , 3 1. SkyWest Airlines Inc. SkyWest Aviation Inc. ) 1998 Regional Airline 5 12 Business Travelers SkyWest Commuter Airline Ski Resorts California SkyWest Airlines Delta Continental Airlines 2. Scenic Airlines Air Tours, General Aviation Scheduled Flights Grand Canyon Arizona, Utah, Nevada 3 . National Parks Transportation franchise Avis 1985 SkyWest Code-Sharing Western Airline Salt Lake 70% 1987 Delta Airlines Western Airlines SkyWest Delta Code : DL SkyWest SkyWest/Sun Aire Western Express Delta Connection. Logo Code-Sharing Major Regional Airlines 1980 United Airlines Regional United Express American Airlines American Eagle Network 1980 SkyWest Brasilia EMB-120 Turboprop Regional Airlines SkyWest California 1986 Sun Aire acquisition SkyWest NASDAQ 1987 SkyWest Air Transport World's Commuter/Regional Airline 500 Regional Airlines 988 SkyWest $2. 3 California 28 Events in the 1990s Jun 1993 Aviation Services West, Inc. Flight Tour Scenic Airlines, Inc. , Las Vegas Grand Canyon Aviation Services West Scenic Airlines, Inc. 1994 SkyWest Delta Salt Lake City 5 Casper, Wyoming; Butte, Montana; Burbank, California; Rapid City and Sioux Falls, South Dakota SkyWest Canadair Regional Jets (CRJs) Bombardier, Inc. Brasilias 50 540 1,200 miles 41,000 Oct 1995 SkyWest Continental Airlines Code-Sharing SkyWest Continental Connection Los Angeles SkyWest 3% Continental Flights 1996 48% Delta 1996 SkyWest 2. 5 16 SkyWest Brasilias 50 Canadair Regional Jets 10 Metroliner 1 Oct 1997 SkyWest United Airlines United Express SkyWest Connecting Flight Los Angeles 1997 SkyWest 25 SkyWest 585 45 12 Salt Lake City Vancouver Canadair Regional Jets 19 Jan 1998 SkyWest United United Express San Francisco Hub United June 1, 1998 1998 SkyWest Connecting flight 3 Major Airlines Delta, United Continental 1 July 2002 SkyWest Tucson Arizona. 8 Dec 2002 United Airlines Partner SkyWest Chapter 11 2003 SkyWest Bombardier CRJ700 70 30 United Express 9 May 2003 SkyWest code-share Continental Airlines SkyWest regional Continental Houston, The US Department of Transportation SkyWest 2003 SkyWest DOT SkyWest 1 5 regional carriers DOT 2004 †¢ hub Chicago, IL (ORD) †¢ Colorado Springs, CO (COS) CRJ †¢ Delta Dallas/ Fort Worth Hub (DFW) SkyWest †¢ SkyWest ,000 †¢ DOT SkyWest 2004. [pic]2005 †¢ SkyWest, Inc. Atlantic Southeast Airlines Delta Air Lines. †¢ Chicago O’Hare. †¢ Sky West Inc. Partner United Delta 2006 Legacy 2 2006 †¢ SkyWest CRJ900 †¢ Dec 2006 SkyWest Inc. SkyWes t Midwest Partner [pic]2007 †¢ SkyWest Airlines Midwest Connect / Delta Connection / United Express Legacy 2 (Delta Connection / United Express) Outsource 20 SkyWest Inc. Denver, Chicago, Los Angeles San Francisco United express SkyWest Inc. Outsourcing Delta †¢ SkyWest Delta Connection Department of Transportation Cedar Utah 8 Jan 2008. Source: Annual Report 2007 SkyWest Inc. Skywest Inc. 2. : Bridging the Region Gap from West to East SkyWest Inc. Regional Airline Western Eastern SkyWest Airlines ASA artner Legacy Airlines : safety / on time arrival / service and quality / fairness and consistency / working together as a team / personal and corporate integrity and maintaining profitability & Efficient Use of All Resources. SkyWest Inc. : Partner Legacy Airline / : Developed industry-leading reputations for providing quality, low-cost regional airline service. 3. (Functional Level Strategy) [pic] Inbound Logistics: Service , , , Ground Handling Equipment, Operations: Outbound Logistics: Marketing and Sales: †¢ Distribution Legacy Airline Partner †¢ Product Design Service : (Functional Level Strategy) (Competitive Advantage) 3. 1 Superior Efficiency : Superior Efficiency SkyWest Inc. Product Design: †¢ 0. 03 USD 0. 095 USD. †¢ Partner Legacy Airline †¢ (routine maintenance) Human Resource: †¢ †¢ – 90 - Retirement Plans SkyWest Inc. – Teamwork Information System Function: †¢ Interline American Airlines Check-in †¢ Republic's Escort Marketing: Product: (Cost per Available seat mile) Place: – Code Sharing Market Share – Partner Legacy SkyWest Inc. 2006 SkyWest Inc. 3,114 2005 1,964 ( Exhibit 6) 3. 2 Superior Quality Superior Quality SkyWest Inc. Reliability: The Aviation Safety Action Program Program Stetson Quality Suite SkyWest Inc. SkyWest Airline Regional Airline 15 2004 2005 SkyWest 84. 5% SkyWest 1% 50% 2006 SkyWest Airlines 1. 2 % 1. 7 % Reliability SkyWest Airlines . 3 Superior Innovation: Process Innovation – SkyWest Airline ASA 2 – Partner Legacy Airline 3. 4 Superior Customer Responsiveness SkyWest Airlines DOT 2 2003-2004 Functional Strategy SkyWest Inc. Superior Customer Responsiveness †¢ Superior Efficiency : Product Design Upgrade 0. 103 USD 0. 095 USD. †¢ Superior Quality : Customer Service 4. (Business Level Strategy) (Functional Level Strategy) . What needs will be satisfied? SkyWest Inc. Regional Airline Legacy Airlines partnership 2. Who will be served? Connecting flight Legacy Airlines (Broad Target) 3. How will those needs be satisfied? On-time service with quality. Business Strategy SkyWest Inc. Cost Leadership Competitive Positioning Efficiency Quality – – Business Leisure (Broad Target) Legacy Airlines partner – Western Eastern – Customer Services) Business Strategy Functional Strategy Superior Efficiency Superior Quality Superior Customer Responsiveness 5. (Corporate Level Strategy) SkyWest Inc. 1. Concentration Growth: †¢ Horizontal Growth ASA Partner Legacy Airline Partner Legacy Airline Partner (Contract Agreement Term) †¢ Intensive Growth Improve Competitive Position Regional Airline 2. Retrenchment Sell-out National Parks Transportation Scenic Airlines Atlantic Southeast Airlines (ASA) [pic] (Concentration Strategies) 1. Market Penetration SkyWest Inc. Upgrade ( CRJ 50 ) Legacy Airline (Contract Agreement Term) Legacy Airlines 2. Market Development ASA ( ) Eastern Partner Legacy Airline 6. 6. 1 (Organizational Structure) SkyWest Inc. Geographic Structure (Destinations) SkyWest Airline Atlantic Southeast Airline (ASA) Functional Structure Decision Making SkyWest Inc. Centralized ( www. SkyWest. com/about/exec. php , www. flyasa. com , www. SkyWest,Inc. htm ) 6. 2 (Organizational Culture) SkyWest Inc. Efficiency and Quality Efficiency : Part Time 3 Ticket Agents / Baggage Handlers SkyWest Airlines $40,000 $202,000 ASA Airlines Quality: †¢ SkyWest Airline Maintenance Department AMT Award 3 2004 – 2006 †¢ The US Department of Transportation SkyWest 2003 2004 6. 3 (Organizational Leadership) â€Å"Chairman, President and CEO Jerry Atkin accept the Airline Business magazine award for Regional Airlines Leadership† Efficiency and Quality 7. (Strategic Control) 7. 1 Efficiency: †¢ SkyWest Inc. ASA Delta SkyWest Inc. SkyWest SkyWest 70 90 50 †¢ 2007 SkyWest Inc. SkyWest ASA ? †¢ ASA Regional SkyWest ASA Cost per available seat [pic] 7. 2 Quality: †¢ SkyWest Inc. The US Department of Transportation SkyWest 2003 2004 †¢ SkyWest Inc. the Department of Transportation Federal Aviation Administration Stetson Quality Suite software SkyWest Inc. ? Partner Legacy Airline 7. 3 Innovation : †¢ Midwest, Bradford R. Rich , CEO Treasurer SkyWest Inc. SkyWest Midwest †¢ ASA Teamwork ? 7. 4 Customer Responsiveness : The US Department of Transportation SkyWest 003 2004 Legacy Airlines 8. (Strategic Evaluation) 8. 1 Established standards and targets : Regional Airline Partner Legacy Airline FAA / DOT TSA Regional Airline Legacy Airline Partner Legacy Airline 8. 2 Create measuring and monitoring system : Yield/RPM, Revenue/ASM, Cost/ASM Miss baggage handling rate 8. 3 Compare actual performance against the established targets : ? 8. 4 Evaluate result and take action if necessary : (Statements of Income / Balance Sheets / Air Travel Consumer Report) easuring and monitoring system 9. SkyWest Inc. (Functional Level Strategy) : Superior Efficiency Superior Quality Superior Customer Responsiveness †¢ Superior Efficiency : Product Design 0. 103 USD 0. 095 USD. Superior Quality : (Customer Service) (Business Level Strategy) : Cost Leadership Competitive Positioning Efficiency Quality – – Business Leisure (Broad Target) Major Airline Partner – (Customer Services) – Western Eastern (Corporate Level Strategy) : 1. Market Penetration SkyWest Inc. ( CRJ 50 ) Legacy Airline (Contract Agreement Term) 2. Market Development ASA ( ) Eastern Partner Legacy Airline Bridging the Region Gap from West to East Regional Airline Western Eastern Operations Developed industry-leading reputations for providing quality, low-cost regional airline service. 10. (Effectiveness of Strategies) Profitability (ROIC) Profit Growth 5 5 5 MESA AIR, ALASKA AIR, EXPRESSJET, PINNACLE AIRLINES REPUBLIC AIRWAYS 6 002-2006 : |Airlines |2002 |2003 |2004 |2005 |2006 | |SKYWEST |86. 87 |66. 79 |81. 95 |112. 27 |145. 81 | |MESA AIR |-11. 27 |25. 31 |26. 28 |56. 87 |33. 97 | |ALASKA AIR |-118. 60 |13. 50 |-15. 30 |-5. 90 |-52. 60 | |EXPRESSJET |84. 28 |108. 18 |122. 77 |97. 99 |92. 7 | |PINNACLE AIRLINES |30. 79 |35. 07 |40. 73 |25. 70 |77. 80 | |REPUBLIC AIRWAYS |7. 69 |36. 14 |38. 85 |60. 65 |79. 51 | |Total |79. 75 |284. 98 |295. 28 |347. 58 |377. 05 | (Source : Annual Report year 2002-2006 ) Plot 2002-2006 [pic] SkyWest Inc. SkyWest Inc. 2005 SkyWest Inc. SkyWest Inc. ASA Delta 2005 ASM (Available Seat mile) SkyWest Inc. (Passenger Revenue) Ground Handling Service Major Airline Partner ASA 2005 SkyWest Inc. 2002 – 2006 :    |   |   |   |   |   | |   |2002 |2003 |2004 |2005 |2006 | |OPERATING REVENUES: | | | | | | |Passenger | 769,427 | 882,062 | 1,139,580 | 1,938,450 | 3,087,215 | |Ground handling and other | 5,020 | 5,964 | 16,464 | 25,598 | 27,441 | |Total operating revenues | 774,447 | 888,026 | 1,156,044 | 1,964,048 | 3,114,656 | |   | | | | | | |OPERATING EXPENSES: | | | | | | |Total operating expenses | 654,892 | 779,546 | 1,011,268 | 1,743,640 | 2,775,496 | |   | | | | | |Interest expense |3,611 |9,891 |18,239 |53,330 |118,002 | |   |   |   |   |   |   | |   |   |   |   |   | |   |2003 |2004 |2005 |2006 | |OPERATING REVENUES: | | | | | |Passenger |14. 64% |29. 19% |70. 10% |59. 26% | |Ground handling and other |18. 80% |176. 06% |55. 8% |7. 20% | |Total operating revenues |14. 67% |30. 18% |69. 89% |58. 58% | |   | | | | | |OPERATING EXPENSES: | | | | | |Total operating expenses |19. 03% |29. 73% |72. 42% |59. 18% | |   | | | | | |Interest expense |173. 91% |84. 40% |192. 0% |121. 27% | |   |   |   |   |   | 2002 -2003 2004 2002 – 2006 |Airlines |2002 |2003 |2004 |2005 |2006 | |SKYWEST |71. 96% |-23. 11% |22. 71% |36. 99% |29. 87% | |MESA AIR |76. 56% |324. 57% |3. 86% |116. 37% |-40. 27% | |ALASKA AIR |-173. 27% |111. 38% |-213. 33% |61. 44% |-791. 53% | |EXPRESSJET |75. 31% |28. 36% |13. 49% |-20. 18% |-5. 4% | |PINNACLE AIRLINES |116. 10% |13. 91% |16. 13% |-36. 90% |202. 74% | |REPUBLIC AIRWAYS |26. 73% |370. 00% |7. 51% |56. 12% |31. 09% | |Total |190. 78% |257. 33% |3. 62% |17. 71% |8. 48% | Plot 2002-2006 [pic] SkyWest Inc. 2002-2006 2003 CRJ200s EMB120s ROIC |ROIC |= |Net Profit (After Tax) | |   |   |Invested Capital | ? Invested Capital = Total Equity + Total Long-term Debt ( http://finapps. forbes. com/finapps/jsp/finance/compinfo/) (Annual Report) Sky West 2001-2006 ROIC : | |2002 |2003 |2004 |2005 |2006 | | | | | | | | |Net Profit (After Tax) | 86,866 | 66,787 | 81,952 | 112,267 | 145,806 | | | | | | | | |Total Asset | 999,384 | 1,529,210 | 1,662,287 | ,320,646 | 3,731,419 | | | | | | | | |Total Equity | 638,686 | 709,063 | 779,055 | 913,198 | 1,178,293 | |Long-Term Debt | 125,379 | 462,773 | 463,233 | 1,422,758 | 1,675,626 | | | | | | | | |Total Invested Capital | 764,065 | 1,171,836 | 1,242,288 | 2,335,956 | 2,853,919 | | | | | | | | |ROIC |11. 37% |5. 70% |6. 60% |4. 81% |5. 11% | (Source: Annual Report from www. SkyWest. com) ROIC SkyWest Inc. ROIC 5 MESA AIR, ALASKA AIR, EXPRESSJET, PINNACLE AIRLINES REPUBLIC AIRWAYS 6 2002 – 2006 ROIC Airlines |2002 |2003 |2004 | 2005 |2006 | |SKYWEST |11. 37% |5. 70% |6. 60% |4. 81% |5. 11% | |MESA AIR |-5. 67% |8. 14% |3. 87% |6. 99% |4. 44% | |ALASKA AIR |-7. 84% |0. 85% |-0. 92% |-0. 33% |-2. 74% | |EXPRESSJET |31. 53% |39. 46% |42. 49% |27. 21% |20. 37% | |PINNACLE AIRLINES |37. 52% |48. 96% |34. 67% |18. 41% |35. 68% | |REPUBLIC AIRWAYS |- |7. 18% |3. 97% |3. 44% |3. 99% | Plot [pic] SkyWest Inc. ROIC 2003, 2005 2006 2003 CRJ200s EMB120s 005 ASA Delta ROIC 2005 ROIC 11. (Problems) SkyWest Airline : (Miss baggage handling) Atlantic Southeast Airline : – Cancel flight – – (Miss baggage handling) – (On-time) ASA 12. (Issues) 1. Partner Low Cost Airlines (South West Airline and Jet Blue) 2. Partner 13. (External Environment Analysis) (External Strategic Factors) (Opportunity) (Threat) (Attractive or Unattractive Industry) 13. 1 General Environment [pic] a) Economic segment 4 US Inflation rates | |[pic] |Current Inflation Rate | |Year | |Jan | |Feb | |Mar | |Apr | |May | |Jun | |Jul |Aug | |Sep | |Oct | |Nov | |Dec | |Ave | | | |2009 | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | |NA | | | |2008 | |4. 28% | |4. 03% | |3. 98% | |3. 94% | |4. 8% | |5. 02% | |5. 60% | |5. 37% | |4. 94% | |3. 66% | |1. 07% | |0. 09% | |3. 5% | | | |2007 | |2. 08% | |2. 42% | |2. 78% | |2. 57% | |2. 69% | |2. 69% | |2. 36% | |1. 7% | |2. 76% | |3. 54% | |4. 31% | |4. 08% | |2. 85% | | | |2006 | |3. 99% | |3. 0% | |3. 36% | |3. 55% | |4. 17% | |4. 32% | |4. 15% | |3. 82% | |2. 06% | |1. 1% | |1. 97% | |2. 54% | |3. 24% | | | |2005 | |2. 97% | |3. 01% | |3. 15% | |3. 51% | |2. 0% | |2. 53% | |3. 17% | |3. 64% | |4. 69% | |4. 35% | |3. 46% | |3. 42% | |3. 9% | | | |2004 | |1. 93% | |1. 69% | |1. 74% | |2. 29% | |3. 05% | |3. 27% | |2. 99% | |2. 65% | |2. 54% | |3. 9% | |3. 52% | |3. 26% | |2. 68% | | | |2003 | |2. 60% | |2. 98% | |3. 02% | |2. 22% | |2. 6% | |2. 11% | |2. 11% | |2. 16% | |2. 32% | |2. 04% | |1. 77% | |1. 88% | |2. 7% | | | |2002 | |1. 14% | |1. 14% | |1. 48% | |1. 64% | |1. 18% | |1. 07% | |1. 46% | |1. 0% | |1. 51% | |2. 03% | |2. 20% | |2. 38% | |1. 59% | | | |2001 | |3. 3% | |3. 53% | |2. 92% | |3. 27% | |3. 62% | |3. 25% | |2. 72% | |2. 72% | |2. 65% | |2. 13% | |1. 0% | |1. 55% | |2. 83% | | | |2000 | |2. 74% | |3. 22% | |3. 76% | |3. 7% | |3. 19% | |3. 73% | |3. 66% | |3. 41% | |3. 45% | |3. 45% | |3. 45% | |3. 39% | |3. 8% | | | |1999 | |Fiscal Year |Domestic |International |Total |% change | |2006 |660. 9 |89. 7 |750. 6 |0. 46 | |2007 |693. 3 |75. 8 |769. 1 |2. 46 | |2008 |713. 8 |79. 8 |793. 6 |3. 19 | |2009 |735. 7 |84 |819. 7 |3. 29 | |2010 |758. 9 |88. 3 |847. 2 |3. 35 | |2011 |782. 6 |92. 9 |875. 5 |3. 4 | |2012 |807. 7 |97. 6 |905. 2 |3. 39 | |2013 |833. 4 |102. 3 |935. 7 |3. 37 | |2014 |860. 5 |107. 2 |967. 7 |3. 42 | |2015 |888. 4 |112. 3 |1,007. 1 |4. 07 | |2016 |917. 7 |117. 6 |1035. 3 |2. 80 | |2017 |848. 4 |123. 1 |1071. 6 |3. 51 | Source: Forms 41 and 298-C, US Department of Transportation Forecast % Passenger change [pic] Source: RAA Industry Life Cycle †¢ Forecast % Demand Passenger change Airline Industry 2006 Life cycle Airline Industry Airline Industry Regional Airlines Regional Airlines 1970-2006 Life cycle Regional Airlines ? Industry Life Cycle Growth ) Strategic Groups [pic] Y Performance Performance Partner Airline Legacy X c) Strategic Types : Strategic Type Regional Airline Defender Regional Airline Performance Partner Legacy Airline Regional Airline †¢ Legacy Airline †¢ FAA TSA DOT Upgrade †¢ †¢ †¢ †¢ d) Key Success Factors : †¢ On Time Schedule Sector †¢ Regional Airlines ? Hub Time Elasticity †¢ Destinations Regional Airline †¢ Cost Regional Airline Partner