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Regional airlines are considered to be their own segment, apart from legacy carriers because they do not offer 'long-haul' flights to international or intercontinental destinations. In many cases, regional airlines also sell all or most of their flights to larger legacy carriers such as US Airways, United, and Delta, which offer long-haul and shorthaul flights. There are primarily two ways for a regional airline to do business: 1. As a feeder airline, contracting with a major airline, operating under their brand name, filling two roles: 1. Deliver passengers to the major airlines hubs from surrounding communities, this is known as regional feed or regional traffic 2. Increase frequency of service in mainline markets during times of day of the week when demand does not call for use of large aircraft. The major airlines would pay the regional airlines a contracted fee per departure. This means that the revenues of the regional airlines are not directly related to ticket sales. An example of a regional airline company that serves mostly as a feeder airline is SkyWest Inc. SkyWest does not have to directly pay operating costs and is paid for the flights that it operates. Still, it is dependent upon its partner airlines to pay its operating costs and the per-hour payments that it is guaranteed through its contracts. 2. Operating under their own brand, providing service to small and isolated communities, for whom the airline is the only reasonable link to a larger town. In this role, the term commuter airline is generally used. Regional carriers carry fewer passengers than the large, legacy carriers, but over the last decade they have proven to be much more profitable businesses. [pic] [pic] US Regional airlines enjoyed robust growth and financial returns over the past several years when mainline partners reduced capacity and outsourced flying. Below you can see the changes in the regional airline industry in terms of number of passengers and the length of their flights. [pic] [pic] 1.2 WHAT IS THE RELATIONSHIP OF THE INDUSTRY TO THE NATIONAL AND GLOBAL AIRLINES? As said before, most of the revenues of the regional airline companies come from their contracts as a feeder airline for the major companies. They rely on each other in order to do business. The regional airlines that have partnerships with the major national companies also have an advantage since they gain access to large established internet bases. In the cooperation between the regional airlines and the big carriers, it is mostly the regional airline companies that control the power in this relationship. This is because the major airlines that have international flights dont have the possibility to transport passengers from small isolated communities to the big mane airports themselves. The

reason for this could be that they benefit financially by outsourcing this part of the business. The major airlines rely on the regional airlines to make their hubs work efficiently. In order to get passengers at all, they have to have an efficient way of transporting the passengers from small communities to larger airports. This is why the small regional airline companies can demand money for every aspect of what they do for the major companies. They can also charge a higher price from their passengers since they depend on getting to the larger hauls. The passengers are willing to pay more for the flight because they depend on their seat. In the 3rd quarter of 2006, four of the worst time records were regional, and they had six out of seven worst carriers for cancelled flights. Some of their problems were caused by their partners: - Their partners controlled their scheduling, not allowing enough time to load and unload passengers and luggage. - The regional companies were limited geographically to one region that was more affected by bad weather. This often affected their entire operations. 2. PORTERS FIVE FORCES ANALYSIS Porters five forces analysis is a key analytical tool for diagnosing the competitive environment. SkyWest partnered with United and Delta to take over popular routes as the major carriers were exposed to economic failure( Outsourcing (both Delta and United filed for Chapter 11 later, and left great growth opportunities to SkyWest, who already had an insight in their customer basis) Later on SkyWest also partnered with Midwest. 1. Rivalry among competing sellers (has the greatest impact on competition) HIGH 2. Threat of new entries LOW 3. Threat of substitutes MEDIUM 4. Bargaining power of suppliers HIGH 5. Bargaining power of buyers LOW 2.1 RIVALRY AMONG COMPETING SELLERS (HAS THE GREATEST IMPACT ON COMPETITION) Rivalry is high when competitors are equal in size (when market is fragmented): This is true. In the case there are 10 companies listed as equally competitive. R is high if demand is slow: In this case we are discussing a stagnating market, where demand is decreasing due to the 9-11 attacks, and also because of increasing fuel prices. R is high if industry conditions tempt companies to cut prices: Yes, this is where the low cost providers take ground and it becomes harder and harder for the airlines to get an

adequate demand for 1st class tickets. Even business travelers that used to be strong buyers have also switched demand to low-cost providing aircrafts. R is high when cost of switching brands is low: This is partially true. To purchase tickets from a new airline your switching costs are flexible. You have several choices all the time, but truth is there are no fidelity costs. R is high when cost of exit is higher than entry: Well basically it would cost more to acquire an aircraft, employ staff and launch a site than getting rid of all that. R is high when we have acquisitions and mergers, 1+1=3: This is one of the main issues/or competing forces of the industry. Regional airlines merge with greater ones to scavenge on their customer basis, while the majors get access to more routes. HIGH 2.2 THREAT OF NEW ENTRIES Barriers to entry: To enter with a new airline is seemingly difficult, considering the high capital requirements and costs of purchasing airlines, hangars and so on and so forth. In addition, governmental and legal barriers are the mostly effective barriers to entry: indeed, there is new policy adopted by federal aviation administration, that put caps on the number of aircraft a new airline can operate based upon carrier's financial and managerial resources. This because according to a governmental accounting office study made many years ago, start-up airlines' accident rate was higher than the major airlines' rate. LOW 2.3 THREAT OF SUBSTITUTES Train: In the United States there is, unfortunately, no expanded railway system. It is also very expensive. Maybe this will be possible in the future with a fortified infrastructure. Car: Its very exhausting to drive through the States, as are gas prices increasing. Regional coaches (buses): Might be a solution if you have the time. For business travelers none of these solutions is an option since they are under constant time pressure. Major airlines: The major airlines are launching low-cost branches such as Uniteds Ted, and Deltas Song that have been competing on several routes of the regional airlines. However the regional airlines target a different segment, and the people living in smaller cities have access only to maybe one or to airlines to travel nationwide. MEDIUM 2.4 BARGAINING POWER OF SUPPLIERS Depends on significance on item supplied: Fuel and aircrafts. Standard commodity or not: SkyWest are not purchasing standard commodities, closest is purchasing fuel. Turboprop or regional jet by Empresa Brasileira de Aeronautiva SA,

Bomardier. The industrys capacity for backward integration: Basically the different airlines have their own aircrafts, but they do not usually construct them, but buy them from Bombardier (regional jets, could be compared with majors) and Brasilia (turboprops for shorter routes). They do have the power to do agreements with these two There are not many different suppliers (according to the case) HIGH 2.5 BARGAINING POWER OF BUYERS Power is high when the buyers are small in numbers and large in market share: Due to changes in demand from high price consumers such as companies. They go for price. Power is high when the buyers purchase frequently and the value of the item is high: The value of a regional airfare is not a high value-item Power is high when the buyer can integrate backwards: A plausible customer interested in a regional flight will not be interested in an own plane (most of the times). Power is high when the buyer is well informed about sellers (SkyWests) -Products: Client is very well informed about what he/she is buying -Prices: As it nowadays is very easy to compare price on flight tickets on the Internet, either on comparable sites, or on the sellers different homepages -Costs: the client has little insight to costs of flight attendants, captains etc. but are enlightened concerning augmentation of oil prices, but conclusively the clients have little knowledge of sellers margin Power is high when the buyer has a discretion in whether they purchase the product (or not) ( Elasticity of demand! Determinants are existence of affordable substitutes Demand is elastic: A price change leads to a logical reaction in demand (Price up. Demand down). However the demand is elastic, because it is not an oligopolistic market. LOW Conclusively: The Regional Airline Industry is competitive, but note very competitive. This is mainly because the Rivalry among competing sellers is high and that there are no adequate substitutes whatsoever. Also the buyers do not have a say, but are very price sensitive, even the business travelers. KEY SUCCESS FACTORS SkyWest is the largest regional carrier in the US by passengers carried. This success can be described because of their efficiency in four general areas: 1) Attracting customers 2) Managing its fleet 3) Managing its people, and 4) Managing its finances These are the key success factors in the airline industry:

Profitability 3.1 YIELD

= Yield

x Load factor - Unit Cost

Strength of competition on routes. Having a range of routes at all time is important to stay relevant in the airline business. The SkyWest airline serves as a feeder airline, operating under contract with various major carriers. Combined with Atlantic Southeast Airlines, the two make up the eighthlargest airline in terms of number of planes, operating 440 regional aircraft. SkyWest has a market share of 21 percent in the American regional airline industry. This makes them the leader. American Eagle and ExpressJet remain SkyWest's biggest competitors for business in terms of passengers carried. Responsiveness to changing market conditions Its crucial to adapt to the changing market to maintain the position in the market. Higher costs, increasing fuel cost and higher competition are some of many threats that challenge the airline industry. Business travelers. The demand is switching. Many business travelers are changing behaviour and are now choosing low-cost tickets even more than before. The business tickets are more expensive because of the flexibility. The business travellers have tended to be more profitable because they fly more often and tend to purchase premium services. The business travelers are often forced to pay premium prices because they frequently purchase in a short time frame at the last minute. Achieving differentiation advantage To differ from the other airlines each carrier need to specify their advantage they want to be associated with by the customers. SkyWest focus on offering qualities as reliability, safety, on- time performance, growth management, IT staff productivity and cost control. 3.2 LOAD FACTORS Price competitiveness. SkyWest and other regional airlines can charge a higher price from their passengers since the passengers are depending on the different airlines to get them to the larger hauls. The passengers are willing to pay more for the flight because they do not have many other great options for substitutes. However due to changes in demand it is now more important to compete in price to continue to attract and obtain old customers. Efficiency of route planning. The major airlines relied on the regional airlines to make their hubs work efficiently. However, the regional carriers were among the worst on-time records and worst carriers of handling baggage. In addition to this: six out of seven worst carriers for cancelling flights were regional. These problems were more directly caused by the major airlines

that made it impossible for the regional carriers to deliver good service because of how they controlled the scheduling. They did not give the regional airlines enough time to unload passengers and luggage. Also bad weather could affect the schedule. Strategic alliances The Company's success lies in contractual relationships with major airline partners that have a competitive cost structure. SkyWest Airlines' close ties to both Delta and United airlines have been a key to its success. The major airlines would pay the regional airlines a contracted fee per departure. At the same time the regional airlines gain access to an established customer base and a steady revenue stream. Customer loyalty In order to have satisfied customers, the airline will have to deliver good customer service and meet with the expectation of the customer. SkyWest Airlines and ASA have developed industry reputations for providing quality, low-cost regional airline service. They also have a good reputation for on-time arrivals. Meeting customer requirements. The regional airlines are meeting a customer requirement. People living in small communities neither have facilities nor the frequency of passenger travelling to have a large airport and therefore they are not offered 'long-haul' flights to international or intercontinental destinations, of those reasons they are dependent on regional carriers to bring them from the small cities to the larger airports. 3.3 UNIT COSTS Wage rates In order to have efficient employees the employees must be satisfied with their work agreements such as salaries, rapid promotion of pilots and retirement plan. Generous benefit will discourage unionization of the workforce. Fuel efficiency of planes Many airlines, including SkyWest Inc had financial troubles because of the increasing price of jet fuel. The major airlines also put a huge pressure on the regional airlines when they expected lower fees at the same time. The importance of efficiency in the operations of airlines became now even more important to keep cost below revenues. Employee productivity Fast handling of Luggage, ensure minimum check in lines and that the airplanes goes on time is important to obtain productivity. Load factors To ensure pleased passengers it is important to have an efficient loading system. In this case: Their partners controlled their scheduling, not allowing enough time to load and unload passengers and luggage. Administrative overhead. SkyWest Inc has been union free for 30 years, with great success.

The Legacy Airlines have a huge disadvantage compared to non-union airlines like SkyWest. The non-union carriers have a much greater range of options available to them, making it possible to keep their companies on a more efficient path and be able to continue expanding, in profitable way. The proof of this is that SkyWest has the strongest balance sheet in the Regional airline industry,' according to RJ&A. Its long-term debt to capitalization ratio was 61% at Sept. 30, 2004, compared to an industry average of 92% among its peers. Acquisitions can also pay of financially for an airline because of synergy. SkyWest reduced its cost per seat mile from $0.103 to $0.095 (7.8 percent of reduction) in 2005 thanks to this acquisition of ASA (Atlantic Southeast Airlines) 4. DRIVERS OF CHANGE FOR THE REGIONAL AIRLINE INDUSTRY Before 2006, the global airline industry consisted of companies mainly offering domestic air transportation of passengers and/or cargo over regular routes on regular schedules. Airlines operated flights even when not fully loaded. Those, whose main business was in providing air transportation of mail on a contract basis, were included in the industry. The U.S airline industry consisted of three types of domestic airline carriers: 1) network, 2) low-cost and 3) regional carriers. Network carriers being the major airlines such as United, Northwest, American, Continental and Delta (2007), made up for 82 percent of the total, generated by the 10 largest companies in the U.S in 2005. The low-cost carriers were known for having point-to-point flights and the largest companies in this segment were Southwest and JetBlue airlines. Many of the network carriers responded to these by starting up their own low-cost airlines. Regional carriers flew between small cities, using regional jets, to support network carriers. The main consumer segments for the airline industry were business and leisure travelers. Out of these two, business travelers stood for a bigger part of the profit. Regional airlines were able to service both of the segments thanks to their partnerships with the majors but their main audience was the business travelers who used the regional airlines instead of cars. The majors also reached out to the entire market but were now starting to feel threatened by the low-cost carriers that the business travelers had begun to travel with and as a precaution to stay in the game, they started up their own low-cost services. This could have a negative effect on the regional airline services. Then there were the seasonal changes that led to cancellations and delays. Furthermore, the airline industry was highly sensitive to economic changes and the recession in the early 2000s led to an overall decrease in demand regarding airline services. Moreover, the overexpansion of major airlines, the increasing fuel costs, the immense flight schedules and increased competitive pressure, and the fear of flying since 9/11 led to enormous losses for the network airlines. Even though the fear of flying wasnt a direct threat to the regional airlines but more of a fall back for the major airlines, especially in difficult economic times, it effected them as well since most of their revenues came from contracts with the networks. Also, people saw the smaller airplanes as less safe compared

to the bigger ones. The 9/11 attacks had also led to more government intervention and higher security through increased regulations (oxygen masks), which meant additional cost for the airlines. Rising fuel costs were another threat to the regional airlines as their major airline partners were pressuring them to keep to lower the fees. The two combined made it harder for the companies to be profitable. Meanwhile, with the market growth and partnerships with the major airlines, regional airlines began to grow their profits and started to expand, covering larger areas. Due to the partnerships, the revenues for the regional airlines werent directly related to tickets sales. Instead, the major airlines paid them a contracted fee per departure. The fluctuations in the economy created problems for the major airlines, therefore also a threat to the regional partner airlines but at the same time opportunities. With the majors taking a step back, the regional airlines had the chance to expand, taking over routes from the majors. This meant more competition, since they now were to compete with the lowcost airlines. The majors experiencing difficulties needed to cut costs and put pressure on the regional airlines for lower fees. The ones filing for bankruptcy, created a pressure on the regional airlines to expand their base of partnership contracts, leading to an increased competition amongst the regional airlines. Major airlines joining forces also made it harder for regional airlines to grow stronger. The mergers also meant that the majors would shut down some of their hubs in smaller cities, cutting of the regional airlines. 5. SKY WEST STRATEGY 5.1 FUNDAMENTAL ASPECTS OF SKY WESTS STRATEGY: GROWTH STRATEGY SkyWest Inc. consolidated revenues were $3,114 million at the end of the year 2006, up from $1,964 million the year before. Diversifying is the key strategy in increasing the profits. This increase points out the internal and the external growth of the firm. SkyWest has realized an internal growth through the expansion of its partnerships, geographic growth and the pursuit of new partnerships. SkyWest made strategic alliances with two legacy carriers Delta Connection and United Express that had both been in bankruptcy protection. These partnerships created growth opportunities for SkyWest, since the companies had to outsource more of their routes during restructuring, due to their financial troubles. So, it expanded its geographic area of flights by taking over several additional routes from Delta and United. By these partnership contracts, SkyWest could achieve and maintain its high safety standard and on-time arrival record and also, it offered the highest quality service possible by improving fleet and safety equipment. In 2006, SkyWest had an airline services agreement with Midwest Airlines in order to

expand its service markets and diversify its operations. Furthermore, SkyWest needed to reduce the risk, which occurred because of its complete reliance on Delta and United for its customers and revenues. As the regional airline industry grew, SkyWest had to partner with major airlines in order to increase its profits and geographic reach. SkyWest has achieved an external growth through the acquisition of Atlantic Southeast Airlines in 2005, which was before owned by Delta Airlines. The acquisition diversified SkyWest geographically across the country. It made SkyWest the largest Delta Connection provider. The purchase of ASA provides a unique opportunity to renew and improve partnership contracts. Although SkyWest and ASA were separately operated, they had combined many performance activities as well as firm order to acquire aircraft, so that they could facilitate the expansion. By that way, the new aircraft were more cost- efficient to operate. SkyWest has gained the power by not being dependent on a single major partner and by operating with multiple partners, with contracts that provide reliable streams of income and balance out geographic or seasonal cycles. 5.2 GENERIC STRATEGY SkyWest Inc is a low-cost provider in the regional airline industry. Its priorities are reliability, safety (which are crucial for the passengers), on- time performance, growth management, IT- staff productivity and cost control (these are crucial for the company). So the key to profitability is cost control and, even with less generous contracts from the majors, the ingrained way of life of the regionals remains one of cost control and cost cutting, says Jerry Atkin, chairman of SkyWest. By partnerships and acquisitions, it seeks for reducing the operational cost and labor costs (pilots and crew), but at the same time improving its quality (customer service, on-time performance, aircraft, safety etc.) After the acquisition of ASA (Atlantic Southeast Airlines), they combined activities in finance, treasury, information technology and administrative services so that they can reduce the cost and achieve economies of scale. Besides; airframe and engine maintenance, periodic inspection of equipment, training of pilots and personnel were the performances for both companies. The two companies were known for their low-cost operations. SkyWest could reduce its cost per seat mile from $0.103 to $0.095 (7.8 percent of reduction) in 2005 thanks to this acquisition. Within the alliances with SkyWest, the airlines were operating as lowest cost providers of regional service for Delta and United as well. 6. SWOT ANALYSIS 6.1 STRENGTHS

Reputation SkyWest has a good reputation for on-time arrivals and low cancellations. A regional airline must have these qualities in order to acquire a contract from a major airline. Financial stability In last four years they had a stable growth in operating revenues and operating income. Minimizing costs SkyWest have orders of aircraft that would be more cost-efficient. Benefits for employees SkyWest offers generous benefits for its employees, which includes retirement plans and a stock purchase plan. This helps to attract the highest quality workers. Distinctive competence SkyWest is the lowest-cost provider of regional air service for Delta and United. Important because cost pressures in airline industry are strong Safety SkyWest maintained a high safety standard through new technology upgrades such as implementing a mobile data collection and reporting software that Ensured that SkyWest met or exceeded its safety standards 6.2 WEAKNESSES United and Delta SkyWest relies on United and Delta. The thing that these major carriers run similar business models and were both in bankruptcy makes it a big weakness. Low customer service SkyWest was ranked very low for overall customer service, specifically lost baggage and customer complaints. Developing and maintaining high levels of customer service is essential. ASA SkyWest acquired a company (ASA) that had one of the worst customer service records in the industry and also had a unionized workforce. Vision They need to define their goals better. Their current mission is not clear. 6.3 OPPORTUNITIES Changing market

The financial troubles of the major airlines forced these airlines to outsource more flights to regional carriers. SkyWest can now compete for more business. Expected growth in industry The International Air Transport Association predicted that worldwide passenger revenues would rise by 5%, an indication that more people plan on travelling via plane in the future. Business travelers More business travelers are now travelling on low-cost airlines. Business travelers are valued due to the frequency in which they fly. Large, network carriers have traditionally served most of this market. Partnership SkyWest does not have any partnerships with low-cost airlines such as Southwest. These low-cost airlines can cooperate to eat as much customers as possible from the network carriers. 6.4 THREATS High competition in the overall airline industry and the regional airline industry. The airline industry is very price sensitive to macroeconomics factors. The recent recovery of the airline industry increased demand of fuel and that will push the cost of fuel higher than the current level. Increased government regulations could lead to $500 million in additional costs for the airline industry. As the airline industry returns to profitability, labor unions within the industry will seek for higher wages for employees. More major carriers may start their own low-cost models that would decrease demand for regional industry. 7. RECOMMENDATIONS SkyWest has grown through its partnerships but it is relying on its partners too much. Since Delta and United both have financial troubles, it is risky that SkyWests profits and customers are directly related to its partners. To reduce this risk, it should explore other ventures, such as acquiring low-cost carriers, other regional carriers or adding an additional code share partner to their operations. Diversify to spread risk basically. SkyWest should also seek the opportunity to take over longer routes now that they have a chance when the majors are filing for ch 11.

SkyWest has to improve its customer service in order to have a good brand image and make its customers loyal. The company should improve the customer service of ASA as well. In a time of financial crisis it is good to have a loyal clientele, so SkyWest should really work on putting a smile on the faces of their employees, since the personnel has the biggest impact if their clients return or not (especially leisure travelers). As they are ranked fourth on the on-time table, and their baggage handling is suffering due to pressed time clutches, they should re-negotiate with the majors for time leases, and focus on these key features. SkyWest, which has a non-unionized workforce, is worried about the possible changes after the acquisition of ASA, which has a unionized workforce. If SkyWests workforce unionizes, then it will be less flexible in decision-making; its salaries will be higher. In that case, it will be more efficient for them to run two companies separately; including separate operating certificates, managements, workforces, etc ASA workforce can continue to be represented by unions. Make partnerships/agreements with more on ground companies that fly shorter routes with high frequency Implement a green approach. Let customers compromise for the environmental impact theyre doing since it takes ten times as much energy to use the plane than to use the train.

SkyWest SWOT

SWOT Analysis Strengths: Strategic partnerships with well known legacy airlines 84.5% of flights arrived on time which is 4th best of reporting airlines Diverse line of airline carriers Implementation of Stetson Quality Suite Participation in the Aviation Safety Action Program Weaknesses Lost baggage: 9.53 reports per 1000, double the industry average High number of customer complaints Airline quality rating study found SkyWest near the bottom of 16 airlines for customer service Opportunities Increasing number of business travelers traveling on low-cost carriers Larger capacity for hiring Potential for increasing destinations to a larger geographical scope. Chapter 11 filings of United and Delta

Increased travel during summer months Threats Terroristic threats put a damper on the airline industry; people have fear of flying after 9/11 Increasing price of jet fuel Consumer vacation air travel is tightly linked to the current economic status Losing travelers due to out pricing by larger competition Conclusion: SkyWest has many external opportunities that will help them to capitalize on the internal strengths. SkyWest should continue to develop partnerships with other airline carriers this will help cut cost because they will become shared with the partner. As the industry continues to stay in economic turmoil SkyWest should capitalize on their strengths and opportunities the industry is providing. Many of the internal weaknesses of SkyWest are due to customer service and human resources. Sky west can take advantage of other companies claiming chapter 11 and hire workers from those companies that have the skills lacking in SkyWest. SkyWest should hire employees that are knowledgeable about baggage and employees that perform exceptional customer service since SkyWest ranks near or at the bottom in both of those categories. Overall, SkyWest should try to capitalize on the opportunities presented by the industry. SkyWest should try to develop its strengths which would help in decreasing the weaknesses. Partnering with other airlines is the catalyst to help SkyWest succeed in the current setting of the industry. SkyWest should also create a promotional campaign to promote the current and new partnerships and inform the target market how these partnerships are going to improve the company. Overall, SkyWest can continue success with advertisement of partnerships and displays of the growing commitment to the customer.