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SkyWest pledges to buy 100 Mitsubishi jets as it attempts to recover from stinging financial losses

12-Jul-2012

SkyWest has announced at the Farnborough Airshow a fleet replacement plan involving a tentative commitment to order up to 100 Mitsubishi MRJ regional jets. While the order may be seen as a boost for the programme, which has only 70 firm orders, it comes as SkyWest struggles to return to profitability after losing money during 2011 and recording a loss in 1Q2012. As Mitsubishi celebrates securing a high-profile US customer for the MRJ, SkyWest is basing its fleet plans on tenuous scope clause relief to create a small amount of growth in the stagnant US regional market.

Integration challenges created by its acquisition of ExpressJet in 2010 resulted in SkyWest missing its financial results target in each quarter for 2011, which culminated in the company’s first annual loss in 23 years. While the carrier shrank its 1Q2012 losses and promises a return to profitability in 2012, the carrier is embarking on a fleet revamp with little visible growth on the horizon for US regional carriers. The market must undergo change if SkyWest is to receive all 100 aircraft – or even a notable amount.

See related article: Viable business model continues to evade US regional airlines

SkyWest’s business plan going forward is to compete for existing business from US majors once contracts between those network carriers and their regional partners begin to expire later this decade, which is the strategy all regional carriers are adopting as they fight for survival in an increasingly shrinking US domestic market place.

But if SkyWest opts for all 100 MRJs it has pledged to acquire (in a USD4.2 billion list price deal), the company may not be sizing its operations based on the reality of the US market. By the end of 2015 SkyWest expects its fleet to fall to 538 aircraft from its year-end 2011 levels of 732 aircraft. SkyWest's MRJs are scheduled for delivery between 2017 and 2020, during which time its current fleet is likely to further decrease.

US majors are pushing to shed smaller 50-seat jets in favour of the larger jets being manufactured by Mitsubishi and its regional jet manufacturing peers, but overall network carriers will require fewer regional jets from their regional partners.

SkyWest fleet projections: 2012-2015

SkyWest and it US regional partner peers are also banking on further loosening of scope clause restrictions in legacy airline pilots contracts which now limit the number of jets in the above 50-seat category that can be operated by regional airlines. SkyWest’s deal with Mitsubishi reflects a hope by the company that scope clauses will relax, but gives SkyWest flexibility to opt for the smaller MRJ70 variant instead of the larger 90-seat MRJ90.

The new contract recently endorsed by Delta’s pilots allows for an increase of 70 larger gauge 76-seat jets to 325, while creating an opportunity for the carrier to significantly reduce the number of undesirable 50-seat jets in operation.

SkyWest will likely try to capitalise on large-jet opportunities at Delta, but at year-end 2011 Delta accounted for 34% of SkyWest’s business, and 50-seat jets represented about 60% of the operations SkyWest conducted on behalf of Delta.

SkyWest's regional jet allocation among partners: 31-Dec-2011

Overall higher-density Bombardier CRJ700s/900s only account for only 24% of SkyWest’s total fleet, while 50-seat CRJ/ERJ jets represent nearly 70% of the company’s fleet.

SkyWest takes great pains to explain that it has limited risk in aircraft leases expiring after its contracts with major carriers are scheduled to end. But according to SkyWest data the company owns 87 50-seat CRJ200s, a significant number the carrier will need to dispose of during the next few years.

SkyWest owned and leased aircraft: 31-Dec-2011

Large order is bullish amidst US regional industry uncertainty

SkyWest does have the 10-year agreement it signed with Continental in 2010, at the same time it purchased ExpressJet, that covers 206 aircraft and up to 75 replacement jets (presumably larger aircraft). But since the merger between United and Continental pilot negotiations to reach a single contract have been contentious, and there has been vocal opposition by Continental’s pilots over the loosening of scope clauses. Pilots recently asked for release from mediated negotiations, which means it will be some time before United has any clarity on the future make-up of its large regional jet operations.

With so much uncertainty at United, which accounts for 65% of SkyWest’s total business, and the fight for Delta’s future large jet business, these are certainly not the boom days of the early 2000s when US regional carriers were placing massive 50-seat regional jet orders. Those times have faded. Although SkyWest and Mitsubishi expect to sign a firm commitment in the short-term, it is exceedingly difficult to envision a scenario of SkyWest taking the order in full without a change in the market's status quo.

While Mitsubishi expects SkyWest to place a firm order in the coming weeks, if history is any indication weeks could turn into months or years as it took US regional operator Trans Stats Holdings about a year and a half to firm its order for 50 MRJs. In the meantime the US regional industry is likely to look significantly different in 2017, when SkyWest is due to accept delivery of its first MRJ.

SkyWest’s share price notched up about 14% on 11-Jul-2012 after it unveiled plans to order the MRJ, but the USD7.85 share price is still far below the company’s 52-week high of USD15.26, and it will take more than the pledge to order 100 aircraft to return SkyWest to adequate returns.


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