SkyWest, Inc. (SKYW): A Business Under Threat

Indeed, in the past year SkyWest has signed contracts with its top two customers, Delta Air Lines, Inc. (NYSE:DAL) and United, to operate large regional jets for them. However, other regional airlines may be positioned to gain share from SkyWest during the transition to large regional jets. For example, top competitor Republic Airways Holdings Inc. (NASDAQ:RJET) operates a similar number of large regional jets and turboprops as SkyWest; SkyWest currently has 185, versus 183 for Republic.

By contrast, Republic operates just 70 small regional jets, compared to SkyWest’s more than 500. As a result, SkyWest is not likely to replicate its dominance of the 50-seat-jet market in the 70- to 76-seat-jet market. Moreover, since large regional jets have significantly more seats than the 50-seat jets they are replacing, airlines do not need as many of them. This means that SkyWest’s fleet size will shrink dramatically, as will its need for pilots.

The company may be able to manage this downsizing through attrition, as the major airlines (which offer higher pay than regional airlines) have begun hiring again. However, it remains a significant potential risk factor to be aware of.

Long period of transition
SkyWest’s heavy reliance on 50-seat jets means that it is a business facing significant threats. While the company has long-term contracts to fly these small planes for major airlines (primarily United and Delta Air Lines, Inc. (NYSE:DAL)), in some cases the contracts end before the aircraft are scheduled to be retired or returned to the lessor. This creates a risk of future write-downs if SkyWest is unable to dispose of these unwanted assets. Moreover, while the company dominated the 50-seat regional airline business, it is unlikely to replicate that dominance in the large regional jet category.

Republic Airways Holdings Inc. (NASDAQ:RJET), which has lower exposure to the 50-seat-jet market, therefore seems like a safer bet for investors. Although, SkyWest does have the ability to manage this transition to make the best of the situation. In a companion piece that I will publish later this week, I will assess some of SkyWest’s opportunities to fly into a better future.

The article SkyWest: A Business Under Threat originally appeared on Fool.com.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long Sep 2013 $33 Puts on United Continental Holdings and long Aug 2013 $10 Calls on Republic Airways Holdings (NASDAQ:RJET). The Motley Fool has no position in any of the stocks mentioned.

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