SkyWest Airlines 2007 Annual Report Download - page 8

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pursuant to which the regional airline agrees to use its smaller, lower-cost aircraft to carry passengers booked and ticketed by
the major airline between a hub of the major airline and a smaller outlying city. In exchange for such services, the major
airline pays the regional airline either a fixed flight fee, termed “contract” or “fixed-fee” flights, or receives a percentage of
applicable ticket revenues, termed “pro-rate” or “revenue-sharing” flights.
Growth of the Regional Airline Industry
According to the Regional Airline Association, the regional airline sector of the airline industry experienced
compounded annual passenger growth of 11.8% between 2002 and 2006. We believe the growth of the number of passengers
using regional airlines and the revenues of regional airlines during the last decade is attributable to a number of factors,
including:
• Regional airlines work with, and often benefit from the strength of, the major airlines. Since many major
airlines have incorporated increased use of regional airlines into their future growth strategies, many regional
airlines have expanded, and may continue to expand, with the major airlines they serve.
• Regional airlines tend to have a more favorable cost structure and leaner corporate structure than many major
airlines. Many regional airlines were founded in the midst of the highly competitive market that developed
following deregulation of the airline industry in 1978.
• Many major airlines have determined that an effective method for retaining customer loyalty and maximizing
system revenue, while lowering costs, is to outsource shorter, low-volume routes to more cost-efficient regional
airlines flying under the major airline’ s code and name.
• Regional airlines have replaced many smaller turboprop planes with 32 to 110-seat regional jets. Such regional
jets feature cabin class comfort, low noise levels and speed similar to the 120-seat plus aircraft operated by the
major airlines, but are cheaper to acquire and operate because of their smaller size. We believe the increased use
of regional jets has led, and may continue to lead, to greater public acceptance of regional airlines.
Relationship of Regional and Major Airlines
Regional airlines generally enter into code-share agreements with major airlines, pursuant to which the regional
airline is authorized to use the major airline’ s two-letter flight designator codes to identify the regional airline’ s flights and
fares in the central reservation systems, to paint its aircraft with the colors and/or logos of its code-share partner and to
market and advertise its status as a carrier for the code-share partner. For example, SkyWest Airlines flies out of Chicago
(O’ Hare), Denver, Los Angeles and San Francisco as United Express and out of Salt Lake City as Delta Connection and
Kansas City and Milwaukee as Midwest Connect. ASA operates as Delta Connection out of Atlanta, Cincinnati and Salt Lake
City. In addition, the major airline generally provides services such as reservations, ticketing, ground support and gate access
to the regional airline, and both partners often coordinate marketing, advertising and other promotional efforts. In exchange,
the regional airline provides a designated number of low-capacity (usually between 30 and 70 seats) flights between larger
airports served by the major airline and surrounding cities, usually in lower-volume markets.
The financial arrangements between the regional airlines and their code-share partners usually involve contract, or
fixed-fee, payments based on the flights or a revenue-sharing arrangement based on the flight ticket revenues, as explained
below:
• Fixed-Fee Arrangements. Under a fixed-fee arrangement, the major airline generally pays the regional airline a
fixed-fee based on the flight, with additional incentives based on completion of flights, on-time performance
and baggage handling performance. In addition, the major and regional airline often enter into an arrangement
pursuant to which the major airline bears the risk of changes in the price of fuel and other such costs that are
passed through to the major airline partner. Regional airlines benefit from a fixed-fee arrangement because they
are sheltered from most of the elements that cause volatility in airline earnings, including variations in ticket
prices, passenger loads and fuel prices. However, regional airlines in fixed-fee arrangements do not benefit from
positive trends in ticket prices, passenger loads or fuel prices and, because the major airlines absorb most of the
risks, the margin between the fixed-fees for a flight and the expected per-flight costs tends to be smaller than the
margins associated with revenue-sharing arrangements.