SkyWest Airlines 2014 Annual Report Download - page 12

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 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’’) and JetBlue Airways Corporation
(‘‘JetBlue’’), 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, Endeavor, Trans
State and Republic, typically operate smaller aircraft on lower-volume routes than major and low-cost
carriers. Several regional airlines, including Envoy, PSA, Piedmont 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 passenger ticket revenues, termed ‘‘pro-rate’’ or ‘‘revenue-sharing’’ flights as
described in more detail below.
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 primarily operates as United Express out of Chicago
(O’Hare), Denver, Houston, Los Angeles and San Francisco; as Delta Connection out of Salt Lake
City, Detroit and Minneapolis; as an Alaska carrier out of Seattle and Portland; as a US Airways
carrier out of Phoenix; and as American Eagle out of Los Angeles. ExpressJet operates primarily as
Delta Connection out of Atlanta and Detroit; as United Express out of Chicago (O’Hare), Houston,
Cleveland, Newark, Denver and Washington Dulles; and as American Eagle out of Dallas. Code-share
agreements also generally obligate the major airline to provide 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 76 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 (referenced in this report as a ‘‘fixed-fee
arrangement,’’ ‘‘contract flying’’ or a ‘‘capacity purchase agreement’’), the major airline generally
pays the regional airline a fixed-fee for each departure, flight or block time incurred, and an
amount per aircraft in service each month with additional incentives based on completion of
7