SkyWest Airlines 2010 Annual Report Download - page 11

allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The
airline industry is particularly susceptible to price discounting because airlines incur only nominal costs
to provide service to passengers occupying otherwise unsold seats.
Generally, the airline industry is highly sensitive to general economic conditions, in large part due
to the discretionary nature of a substantial percentage of both business and leisure travel. Many airlines
have historically reported lower earnings or substantial losses during periods of economic recession,
heavy fare discounting, high fuel costs and other disadvantageous environments. Economic downturns,
combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies,
liquidations and business combinations among major and regional carriers. The effect of economic
downturns may be somewhat mitigated by the predominantly contract-based flying arrangements of
SkyWest Airlines, Atlantic Southeast and ExpressJet. Nevertheless, the per passenger component in
such fee structure would be affected by an economic downturn. In addition, if Delta or United, or one
or more other code-share partners we may secure in the future, experience a prolonged decline in
passenger load or are harmed by low ticket prices or high fuel prices, they will likely seek to
renegotiate their code-share agreements with SkyWest Airlines, Atlantic Southeast and ExpressJet, as
applicable, or cancel flights in order to reduce their costs.
Industry Overview
Majors, Low Cost Carriers and Regional Airlines
The airline industry in the United States has traditionally been dominated by several major
airlines, including American, Delta, US Airways and United. The major airlines offer scheduled flights
to most major U.S. cities, numerous smaller U.S. cities, and cities throughout the world through a hub
and spoke network.
Low cost carriers, such as Southwest Airlines Co. (‘‘Southwest’’), JetBlue Airways Corporation
(‘‘JetBlue’’), Republic and AirTran, generally offer fewer conveniences to travelers and have lower cost
structures than major airlines, which permits them to offer flights to and from many of the same
markets as the major airlines, but at lower prices. Low cost carriers typically fly direct flights with
limited service to smaller cities, concentrating on higher demand flights to and from major population
bases.
Regional airlines, such as SkyWest Airlines, Atlantic Southeast, ExpressJet, Mesa, Pinnacle,
Compass, Mesaba, Trans State and Republic typically operate smaller aircraft on lower-volume routes
than major and low cost carriers. Several regional airlines, including American Eagle, Comair, and
Horizon, are wholly-owned subsidiaries of major airlines.
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), Washington Dulles,
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