SkyWest (SKYW), the largest regional airline in the U.S., is weathering the effects of two costly problems: a huge subsidiary that’s expected to lose money until 2015 and a new jet from Japan that has been delayed.
The carrier moves passengers to larger hubs for United (UAL) and Delta Air Lines (DAL) with a fleet of more than 750 airplanes. The Utah-based company purchased regional rival ExpressJet Airlines in 2010 for $133 million, virtually doubling in size to nearly 20,000 employees and 4,100 daily flights. But the ExpressJet unit—representing roughly 45 percent of SkyWest’s post-merger revenue—has been a financial albatross because of contracts on its 50-seat Embraer (ERJ) jets. Regional planes of that size have quickly fallen out of favor in the industry due to their higher operating costs.
Raymond James Financial (RJF) downgraded SkyWest last week and lowered its full-year earnings forecast, citing maintenance expenses and the training costs associated with adding new, larger Embraer jets to its fleet next spring. The airline could allocate all-new flying contracts to its lower-cost SkyWest subsidiary, analyst Savanthi Syth wrote, but only 25 of ExpressJet’s 250 50-seat and smaller jets are due to be off-contract next year.
SkyWest is also experiencing heartburn with a new regional aircraft it bought from Mitsubishi Aircraft (7011:JP), the first-ever commercial passenger jet made in Japan. Last year, SkyWest ordered 100 of the new MRJ regional jets, and those aircraft have been delayed twice due to development snags. Now SkyWest won’t obtain its first MRJ until 2018. The jet will be equipped with a new-generation engine from Pratt & Whitney (UTX),which is expected to be more fuel-efficient than current airplane models on regional routes.
SkyWest President Brad Rich called the delay “not particularly helpful,” during a conference call with analysts last week. “You have to deliver all the airplane as advertised, and they need to do it in a time frame that makes sense for us,” he said. “And if that doesn’t happen, then of course we have no financial obligations or commitments to take the type.”