SkyWest Inc. (SKYW)’s preliminary agreement to buy 100 regional jets from Mitsubishi Aircraft Corp. is the first step in a plan to replace hundreds of planes that will probably trigger more orders in the next year, the company’s chief financial officer said.
Yesterday’s letter of intent with Mitsubishi may result in a final deal within the next month, SkyWest CFO Michael Kraupp said. Deliveries of the Mitsubishi Regional Jet, which has as many as 90 seats, will start in 2017 under the accord announced at the Farnborough air show outside London. SkyWest’s commitment is valued at $4.2 billion at list prices.
SkyWest, the world’s largest operator of Bombardier Inc (BBD/B).- built regional jets, is looking to replace most of its fleet of 718 planes over the next 10 to 12 years as their leases end and the aircraft are returned to lessors. The company is holding discussions with Bombardier, Mitsubishi and Brazilian rival Embraer SA (EMBR3) as it weighs which aircraft to purchase to meet its future needs, Kraupp said.
“Our order with Mitsubishi is really just a first tranche within an overall fleet replacement strategy,” Kraupp said late yesterday in a telephone interview. “We’ve had ongoing dialogue and discussion with Bombardier on new aircraft orders and that won’t change. We will just wait and see if Bombardier is able to bring an attractive deal to the table.”
Based in St. George, Utah, SkyWest operates regional flights for carriers that include United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL) SkyWest Airlines (SXR) and ExpressJet Airlines, the company’s two units, have a combined fleet that includes 291 Embraer jets and 427 Bombardier planes, according to the company’s website. Together, SkyWest and ExpressJet fly 266 of Bombardier’s oldest regional jets, the 50-seat CRJ200s.
“Losing out to Mitsubishi is a disappointment for Bombardier, but there will be other orders from SkyWest and they will be sizable,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a telephone interview. “Winning at least a part of the follow-on business would be a big vote of confidence in the product and help the backlog.”
Mitsubishi’s MRJ is scheduled to make its first flight in late 2013. The Tokyo-based company has been working to reassure potential customers about the plane after a one-year delay and has said it is targeting airlines in North America and Asia as Europe’s debt crisis damps optimism about sales there.
Kraupp said economics and financing availability both played a part in SkyWest’s decision to choose the MRJ. He declined to estimate how much SkyWest may save by flying the new jets, citing “competitive” reasons.
The MRJ will be equipped with engines from United Technologies Corp. (UTX)’s Pratt & Whitney unit, which are similar in design to power plants under development for Airbus SAS’s A320neo narrow-body jet.
“The advertised economics, the fuel burn, the technological advances that exist in this aircraft basically make it new technology,” Kraupp said. “All of that translates into reduced operating costs. It just so happens that we were able to get satisfactory terms and conditions quicker with Mitsubishi than with other parties.”
SkyWest and Mitsubishi are “very close” to finalizing the agreement announced yesterday, Kraupp said. “We now have attorneys that are drafting the language, the actual definitive agreement that supports that. I wouldn’t be a bit surprised if within the next 30 days, we end up having a formal definitive agreement.”
Bombardier, Embraer and Mitsubishi are all in the running for future regional jet orders, Kraupp said. The company will also consider buying turboprops, he said.
“We like the Q400,” he said, in reference to Bombardier’s newest turboprop model.
SkyWest’s next aircraft purchase “could happen easily within the next 12 months, if not less than that,” Kraupp said. “We are not going to order 100 percent of our fleet from one particular manufacturer. We’ve been very open with the manufacturers about that.”
Shares of SkyWest fell 1.3 percent to $7.75 at the close in New York, taking their decline this year to 38 percent. Bombardier’s Class B stock fell 3.7 percent to C$3.86 in Toronto.
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