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Copy of Copy of SkyWest Case Presentation

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Helfried Franz

on 4 February 2014

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Transcript of Copy of Copy of SkyWest Case Presentation

Ethical issues in the airline industry:
- Introduction of SkyWest Inc.
- The Regional airline industry
Key characteristics/ Relationship to major airline industries
Factors causing change and their impact
- Porter’s 5 Forces Model
- Key success factors
- SkyWest’s strategy and competitive advantages
- SWOT analysis
- Value chain analysis
- Financial statements analysis
- Recommendations
- Q&A
The Regional Airline Industry
Factors causing change in the Regional Airline industry
- Internal factors

- External factors

Their Relationship to the Global Airline Industry
Skywest Inc. and
the Regional Airline Industry
in 2009

Team members: Au Eong Tian Ying Candice, Franka Lonsdorfer, Dominik Scheibe, Furkan Aybar, Nils Beyer
Internal factors
External factors
Economical I
Security concerns (Terror attacks- 9/11)

People are afraid to fly

Individual impact:
People feel safer in smaller planes

Collective impact:
Fewer demand
Financial uncertainty

Less demand on flights

Individual impact:
Fewer growth possibilities because of mergers between major airlines

Collective impact:
Legal restrictions
Porter's 5 Forces

Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of New Entrants
Threat of Substitute Products
Key Success Factors
in the
Regional Airline

Good performance on customer service metrics
- Higher level of customer satisfaction: More Repeat business
- Reliable service: Baggage handling, Number of complaints etc.
- Customer-focused workforce and systems (service-oriented)
Develop and maintain strong safety image
Maximize on-time arrivals - Expectations from both passengers and major carriers
Access to capital and financing to acquire new and superior aircraft to replace aging planes and increase fleet size when routes expand
Ability to secure contracts with major airlines
Efficient Cost Management
Increases and fluctuations in fuel costs (estimated 30-50% of total costs):Limitation on number of flights
Future reimbursements under contracts may not be able to offset expenses
Capability to adapt to economic situations
Industry is highly correlated to the economy
Demand for air travel drops during a recession
Effective strategic and contingency plans will help tide over crisis
Success of partner companies
Interdependence of regional and major airlines due to contract
Financial woes of partner companies will lead to negative impacts
Midwest Airlines turned bankrupt and was bought by a direct competitor of Skywest.
Geographical Reach
More destinations it can serve --> larger customer base and brand recognition --> larger potential revenue
Vision/ Mission:

Contracts between regional and major airlines

Individual impact:
Larger customer base

Collective impact:
Increased competition
Labor contracts

Limited the number of passengers pilots could fly

Individual impact:
Restricted size of aircraft

Collective impact:
Support their dominat position
competition in the U.S. airline industry is very strong
regional carriers contend for partnerships contracts with major airlines
price and service competition
firms seek to expand their sales
high level of saturation in the industry
fuel and aircraft suppliers are the two most important
regional carriers with contracts to major airlines are less vulnerable
fuel costs, lease costs and maintenance expenses are reimbursed to some extent
there are a number of makers of regional aircraft
therefore, the bargaining power of suppliers is a relatively weak force
a strong competitive force
customers of regional airlines
access to prices across all airlines
low switching costs
major airlines are buyers of the services provided by regional airlines
rivalry between the regionals for contracts indicates of strong buying power
passengers purchase tickets from major carriers who use regional partners
reduce costs or lose contracts
a moderate competitive force
high barriers to enter such a large capital investment
acquiring contracts with major airline partners
fleet of aircraft needed
low industry profitability
creating a competitive threat requires substantial resources
major carriers already have the resources to start up their own regional airline
a weak to moderate competitive force
low-cost carriers, rail, water, road transport
customers prefer travel by air as it is faster, more convenient and reasonably priced
"We understand and value the priceless commodity of time. We respect every individual's quality of life, and are committed to promoting dignity and trust in all we do."

SkyWest Inc. strive to be:
The Airline of Choice – The Employer of Choice – The Investment of Choice
- SkyWest Inc. is the owner of two airlines;
one of them is SkyWest airlines while the other one is Atlantic Southeast Airlines
- SkyWest Inq. serves approximately 208 cities in the United States, Canada, Mexico and the Caribbean
- nearly 2,400 departures a day
- usually wholly-owned subsidiaries of major airlines
- base most of their operations on partnerships with major carriers
- In the past: own responsibility of flights and ticket pricing
- Now: the main source of revenue arises from contracts with major airlines
- Major carriers pay regional airlines a fee for every departure
-Therefore high dependency due to their contractual relationship
Introduction of new, longer range, regional jets

Faster and more efficient jets

Individual impact:
Service longer routes, direct competition with major carriers

Collective impact:
Direct competition with low-cost carriers
Economical II
Increased fuel prices

Higher operating costs

Individual impact:
Less profits, higher pressure

Collective impact:
Less profits, higher pressure
Financial Growth
* all numbers are in thousands
Expenses over the years
Increasing Fleet
economic downturn 2007 influenced the financial performance
increasing expenses may undercut revenues
revenues and income have grown, but the profitability has declined
$18.3 million of revenue decline was due to reductions in flight schedules
weather-related cancellations and safety inspections reduced the revenue about $7.6 million
Competitive advantages
SWOT Analysis
Strategic partnerships with well known legacy airlines
Lowest cost provider of regional air service for United and Delta airlines
Good reputation for on-time arrivals and low cancellations
High safety standards
Heavy dependence on Delta and United airlines
Highly susceptible to economic conditions
Bad reputation of lost baggage (ASA)
High number of customer complaints (ASA)
High customer satisfacation
Increasing number of world-wide travelers
International flights
Major airlines outsource their flights
highest on-time arrival rate among U.S. regional carriers
lowest in customer complaints and involuntary denied boardings
Increasing fuel prices
Increased government regulations
Possibility of major carriers starting their own low-cost flights
good reputation for safety
Financial Strength
Scale advantage
scale confers significant advantages in reducing overhead costs
taking advantage of economies of scale in purchasing and maintenance planning
broad service capabilities and network allows to respond to opportunities
SkyWest Inc.'s Strategy
Growth Strategy
growth through acquiring new route contracts with major airlines
growth through acquisition e.g. Atlantic Southeast Airlines
develop and maintain high levels of customer service
Low-cost Strategy
achieve lower costs than rivals
minimize investment and operating expenses
integrated aircraft replacement and acquisition strategy based on aircrafts´s total lifecycle costs
Rivalry among Industry Competitors
Ethical issues for SkyWest Inc.:
- Corporate Governance Guidelines (2006)
"Provide strong, principled and ethical leadership"
- Regional carrier saftey
- Regional carrier pilot wages
Inbound Logistics
Route Selection
Passenger Service
Yield Management
Flight/Crew Scheduling
Facilities Planning
Aircraft Acquisition
Ticket Counter
Gate Operations
Aircraft Operations
On-board Service
Baggage Handling
Ticket Offices
Outbound Logistics
Baggage System
Flight Connections
Rental Car/Hotel Reservation System
Marketing and Sales
Advantage Program
Travel Agent Program
Group Sales
Lost Baggage Service
Complaint follow-up
Value Chain Analysis
Characteristics of the Regional Airline Industry
Issue: Increasing operating expenses,cost disadvantage relative to Republic Airways Holdings

Importance of low costs: Strong bargaining of buyers (Both flight passengers and major airlines), Intense price competition in the industry

Recommendation (Business level strategy):
Lower operating costs
ASA is largely responsible for its high operating costs so it is important to successfully integrate ASA operations
Board more of the larger jets to cut down on the number of flights to minimise fuel expenses
Issue: ASA´s bad reputation in the area of customer service (on-time arrivals, mishandled baggage, cancelled flights)
- Importance of good customer service: Acquiring contracts and generating repeat business

Recommendation (Business level strategy):
Introduce Skywest Airline´s best practices to ASA
The merger isn't successful until ASA’s operations are improved dramatically
Issue: Major carriers dominating contract negotiations (Delta reduced Skywest´s block hours and flight distances, causing costs to exceed compensation of expenses)

Recommendation: Consider further acquisitions of other regional carriers and low cost airlines
Skywest has financial strength to do so
Past acquisition of ASA was effective (Increased route coverage)
Ability to combat the power of their major carrier partners
Possible expansion of routes where it is lacking in presence
Potential achievement of greater efficiencies through consolidations of operations
Issue: Overdependence on Delta and United Airlines
- Skywest currently uses major airlines´ systems and services
- Main source of revenue: Contracts with major airlines

-->Termination of any agreement will lead to serious consequences

- Delta and United have similar business models: Increased business risk
- Unstable relationship with Delta (Litigation case)

Recommendation (Corporate level strategy):
- Diversify and expand partnership agreements with major carriers to protect its revenue streams in the event that one of its partners could cease operations or be acquired
- Carry out thorough analysis before engaging in partnership contracts
-Form good relationships with partners
achieve lower costs than rivals through acquiring new route contracts
minimize investment and operating expenses
seperate handling of SkyWest Inc. and ASA operations to understand better each of its best practices
International Strategy
- Increase profitability and revenue

To capitalise on opportunities:
- Increased tourism worldwide
- Shifting preference of business travelers for low-cost carriers

Expansion to emerging markets
E.g. Brazil, China, India

- More direct competition with low cost carriers that serve these routes
- Additional debt burden as international expansion requires large amount of resources
To realise maximum value from acquisitions:
- Retain the targeted valuable components of acquired company
- Discard underperforming constituents

Possible approach
- First develop strategic alliance to get a better understanding and working knowledge of strengths, weaknesses, capabilities and cultures
- Evaluate if company is beneficial for Skywest
Thank You
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