SkyWest Airlines 2009 Annual Report Download - page 11

In contrast to low cost carriers, regional airlines generally do not try to establish an independent
route system to compete with the major airlines. Rather, regional airlines typically enter into
relationships with one or more major airlines, 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.
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 Milwaukee as
an AirTran carrier. ASA operates as Delta Connection out of Atlanta and Cincinnati. 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 contractual, 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 for each departure, 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.
•Revenue-Sharing Arrangements. Under a revenue-sharing arrangement, the major airline and
regional airline negotiate a proration formula, pursuant to which the regional airline receives a
percentage of the ticket revenues for those passengers traveling for one portion of their trip on
the regional airline and the other portion of their trip on the major airline. Substantially all costs
associated with the regional airline flight are borne by the regional airline. In such a revenue-
sharing arrangement, the regional airline realizes increased profits as ticket prices and passenger
loads increase or fuel prices decrease and, correspondingly, realizes decreased profits as ticket
prices and passenger loads decrease or fuel prices increase.
Code-Share Agreements
SkyWest Airlines and ASA operate under United Express Agreements with United, and SkyWest,
SkyWest Airlines and ASA operate under Delta Connection Agreements with Delta. During the fiscal
year ended December 31, 2009, SkyWest Airlines operated under the Midwest Services Agreement with
Midwest. On November 4, 2009, SkyWest Airlines entered into a code-share agreement with AirTran.
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