SkyWest Airlines 2011 Annual Report Download - page 11

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, Continental, 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’’) and Republic, 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, ExpressJet, Mesa, Air Wisconsin, 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,
Denver, Houston, Los Angeles and San Francisco as United Express, out of Salt Lake City and
Minneapolis as Delta Connection, out of Seattle and Portland as an Alaska carrier and out of Phoenix
as an US Airways carrier. ExpressJet operates primarily as Delta Connection out of Atlanta and
Cincinnati and as United or Continental Express out of Chicago (O’Hare), Houston, Cleveland,
Newark, Denver and Washington Dulles. 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
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