DeLeon Dallas
Administrative Policy
1-21-2013
Sky West Case
1.)
The airline industry allowed for both good and bad macro enviroment because of the
financial issues of the airlines in the 2000’s. Due to major airlines being in debt, they had to
rollback their operations and outsource more of their routes to the regional airlines (Lohman, pg.
201). This then created opportunities for regional airlines to expand their service areas. By
being able to expand their service, this enabled them to compete with low-cost carriers. Overall,
the airline industry correlates with the economy. The recent recession and the post 9/11
fear-of-flying effect hurt the airline industry. The regional airline industry had the same problems
as the major airline industry when it comes to increasing fuel costs and competitive pressures for
low-cost carriers, like Southwest Airlines. This shows the relationship between the regional and
national airline industry. Although the regional airline industry was able to gain some
opportunities from the recession, they still had to deal with a lot of the same problems as the
national industry.
2.)
Which Rivalry among competitors- Within the regional airline industry, there exist fierce
competition. Factors like major and low-cost carrier competitors and low-buyer demand have
contributed to this competition.
Threat of new entrants- The regional airline industry has a low threat of entry. It takes large
capital investments to purchase planes and hangars. Also, with new regulations after the 9/11
attack, it posed additional costs which makes entry much harder. Bargaining Power of
Suppliers-The major suppliers of the airline industry are the airplane manufacturers. There are
few suppliers like Brazil’s Empresa Brasileria de Aeronautica SA, Bombardier, and Jetstream.
With having fewer suppliers, it gives them leverage over regional airline companies and gives
them an opportunity to charge higher prices without losing their customer base. Bargaining
Power of Buyers-There is a fierce competition between regional airlines for contracts with major
airlines. Therefore major airlines can be assumed as buyers of the services offered by the regional
airlines. With limited number of major airlines, it leads to bargaining power of the buyers very
high.Threat of Substitutes-This threat is very low because customers will still prefer the airline
industry over rail and water transportation. This is because of the convenience and fast
transportation of the airline industry.The forces that tend to be the strongest are the bargaining
power of the suppliers and buyers. This is because there are few suppliers and they hold the
leverage to control the costs. The buyers are very strong because there are very few buyers and
multiple regional airlines to choose from. The weakest are the threat of new entrants and the
threat of substitutes. The airline industry takes a tremendous amount of capital and the
convenience and fast transportation of the airline industry cannot be beat.
3.)
There are many factors that are causing change in the regional airline industry. One factor
is the introduction to faster and more efficient commuter jets. This industry was made up of
carriers that specialized in short-haul flights that serviced small communities. Now with more
advanced jets, this industry will be able to expand their routes and be able to serve their customers
more effectively. Another factor is the economic recession. Customers during this recession are
going with low-cost carriers more often than not because of their low cost and their great service
that they offer. This affects the regional airline industry because they have to compete with
airlines like Southwest, which puts pressure on them to contract with more major airlines to
expand their routes. Other factors include rising fuel costs, seasonal fluctuations, and the post
9/11 fear of flying. The impact of these factors is resulting in more mergers and consolidations
and also more pressure to pursue contracts with major airlines. Regional airlines are trying to
pursue contracts with major airlines so that they can offer lower cost to customers and expand their
service. SkyWest is an example of merging with another regional airline by purchasing ASA to
expand their service.
4.)
The key factors for the regional airline industry to be successful are to secure contracts with
major airlines so that they can expand their service and be able to offer lower costs. The need to
expand partnerships will include new routes and will be able to expand their range. By being able
to expand on partnerships, it will diversify their risk because they will not have to rely on just one
major airline. They will also not be subject to more cancellations due to weather because of their
expanded service.
5.)
SkyWest’s strategy is to increase its customer coverage by entering partnerships with
other major airlines. SkyWest’s first objective was to make sure that their service was the best
offered by a regional airline. They reached their objective by being named the Regional Airline
Company of the Year by two airline magazines and it subsidiary (Lohman, pg. 206). By earning
this great reputation they were able to acquire Atlantic Southeast Airlines. This was very
strategic because now they were able to offer to airline coverage to the east coast. Another
strategy of theirs is to cut down on costs while they are closing the regional gap. SkyWest and
ASA are run as separate companies, but are seeking to combine activities in finance, treasury, IT
and administrative services to cut cost (Lohman, pg. 206). Another strategy of SkyWest is
diversifying their risk. SkyWest is operated through United and Delta whom both happen to have
similar business models and were exposed to the same types of risk. So to diversify it risk,
SkyWest made an agreement with Midwest Airlines to take over their regional connection flights.
This agreement put less dependence on United and Delta. The competitive advantage they are
trying to achieve is to become the number one regional airline in the United States and they are
doing this by offering their customers more destinations for fair prices.
6.)
One capability that SkyWest is looking towards is to expand its operations outside the
United States. They will have to get by the “scope” clause which places limitations on the
number and size of aircraft for a regional airline to operate. But, if they could get pass this clause
it could create many opportunities to increase their routes. A very important resource of SkyWest
is their safety and maintenance of their aircraft. SkyWest has a very detailed maintenance
scheduling and has earned a solid reputation for safe aircraft. Another strength of SkyWest is
their great level of employee satisfaction and that there is no need for a union. SkyWest offers
competitive salaries, promotions, retirement plan, and employee stock purchase plan that is hard to
beat. With a nonunion workforce, it gives SkyWest more flexibility in making decisions
(Lohman, pg. 210). A lot of the weaknesses that SkyWest has to deal with are external factors.
One issue was that fuel costs were rising. Another issue deals with the “scope clauses” in labor
contracts that limits the size of aircraft they can use, which then limits their expansion of routes.
Some other deficiencies that they have are flight cancellations and bad luggage handling. These
deficiencies are not particularly SkyWest’s entire fault. This is because of the contracts with the
major airlines and the major airlines have different procedures on how they deal with these issues.
For example the major airlines will have one of their flights land at a strip before the regional
airline plane. Their opportunities are to expand routes outside the United States. If SkyWest can
get by the “scope clause”, they will be able to expand their aircraft and therefore expand their
routes. Like I said before, SkyWest’s external threats are the external factors like the economy
and fuel costs.
7.)
After reviewing SkyWest financial statements, it shows that for the most part that they are
performing well. The decrease in net income from 2007 to 2008 was due to the unsuccessful
acquisition of ExpressJet. SkyWest also experienced reduced revenues in the first five months of
2009 due to the economy. But, the future remains bright due to their revenue passenger mile
increasing by 4.9% in June 2009 and its load factor improvement from 80% to 82.3% (Lohman,
pg. 211). With improved revenues for the second quarter, it could be an indication that the airline
industry might turn around. Besides the year 2007 to 2008, the net income has continued to rise
from 2004 through 2007, which shows great progress.
8.)
My recommendation would be for SkyWest to continue pursuing partnerships with other
major airlines. I do caution though that they must be careful who they pursue. With still an
unstable economy, it is unsure what airlines will survive and which ones will go bankrupt. So
with that said, SkyWest should continue to seek expansion, but in mind that they need to diversify
their risk.