SkyWest: Despite The Surge, This Top Performer Remains A Bargain (NASDAQ:SKYW)

The airline industry is a crowded place. Finding winners in this space is easier said than done. Southwest Airlines (LUV) has been one of my favorites in this space for many years, but unfortunately, my investment in LUV has not gone according to plans, so far. While analyzing the prospects for the airline sector, I recently came across SkyWest, Inc. (NASDAQ:SKYW), a regional airline operator that draws little attention from both investors and consumers.

SKYW stock, up more than 108% in the past 12 months, is one of the best-performing airline stocks in the market. In fact, SkyWest stock has outperformed all of the major airline stocks during this period.

Exhibit 1: One-year performance of airline stocks

Although not a lot of investors have paid attention to SkyWest, it’s possible that many of them have at one point flown with this company. Since its founding in 1972, SkyWest has become one of the largest regional airlines in the U.S., headquartered in St. George, Utah. SkyWest boasts a diverse fleet and prides itself on its operational efficiency, supporting over 230 destinations spread across the United States, Canada, Mexico, and the Bahamas.

The Business

SkyWest conducts business in three segments:

1. SkyWest Airlines
2. SkyWest Charter
3. SkyWest Leasing

SkyWest Airlines is the primary business of the company. SkyWest Airlines operates a fleet of regional jets and uses these planes to move passengers and goods within the U.S. as well as to destinations in Canada and Mexico. SkyWest has partnered with leading airlines such as United Airlines (UAL), Delta Air Lines (DAL), American Airlines (AAL), and Alaska Airlines through capacity purchase agreements.

Exhibit 1: SkyWest’s route map

The partnership business model helps SkyWest take advantage of the existing networks of these large companies while concentrating on its main specialization—regional air transport. These alliances are crucial for SkyWest since they guarantee a consistent income stream as well as help mitigate risks in unpredictable markets.

A key strength of SkyWest is its impressive operating efficiency, which has been a big factor in successfully securing partnerships with major airlines. SkyWest, historically, has been among the most punctual regional airlines in the U.S. as well.

Exhibit 2: Most punctual regional airlines in the U.S. in 2023

SkyWest Charter provides charter flights for both individuals and businesses. Public charter services targeting underserved markets are delivered by this division, thus extending SkyWest’s boundaries and making operations more flexible.

Through SkyWest leasing, the company provides aircraft leasing services. Additional income comes from leasing regional jet aircraft and spare engines to other airlines.

SkyWest Enjoys Competitive Advantages

SkyWest is competing with other regional airlines and large carriers that are operating via regional routes in the highly competitive regional airline industry. I believe the company enjoys certain competitive advantages stemming from a few factors. Other regional airlines operating under similar CPAs with mainline carriers are SkyWest’s primary competitors. In this sector, Republic Airways, Mesa Airlines, and Envoy Air offer regional services to large U.S. airlines including United, Delta, American Airlines, and Alaska Airlines.

I believe SkyWest is well-positioned to remain competitive in the regional market – or even see market share gains – because of three main reasons:

1. The operational efficiency of SkyWest.
2. The massive geographic reach.
3. The financial stability of the company, which supports aggressive investments.

SkyWest’s modern fleet gives the company a competitive advantage over others. The company operates various types of aircraft, including Embraer E175s and Bombardier CRJs, that make it possible to meet the different requirements of its partners quickly and effectively. Competitors with older or less efficient fleets may face difficulties competing against SkyWest on an operational capabilities and cost-effectiveness basis.

Exhibit 3: SkyWest’s aircraft fleet as of December 31, 2023

With coverage to more than 250 destinations throughout North America, SkyWest is one of the leading players in the regional airline industry. Many of SkyWest’s rivals lack a comparable degree of market penetration or are less effective at linking smaller towns to major transport hubs. Thus, this geographical reach gives the company a competitive edge in attracting and maintaining alliances with larger carriers.

The company’s robust financial position ensures that it remains ahead by investing in the modernization of its fleet, technology, and infrastructure. Also, the company has made strategic investments in its fleet and technology to ensure consistent cash flows from operations, long-term sustainability of earnings, and market competitiveness. SkyWest ended the first quarter with $821 million in cash and short-term investments, and the company has been operating cash flow positive in each of the last 10 quarters.

Growth Catalysts

SkyWest’s projected growth is driven by several key catalysts that are expected to enhance its market position and financial performance in the coming years.

Partnerships are key to SkyWest’s growth, and the company continues to secure partnerships with major airlines to drive growth and improve operating capabilities. For instance, SkyWest reached an agreement with United to place 20 partner-financed E175 aircraft under a four-year contract last March. This came soon after a separate agreement in which the two companies agreed to place 19 SkyWest-owned aircraft with United.

Exhibit 4: Projected future deliveries of SkyWest’s E175 aircraft

SkyWest is investing in new aircraft consuming less fuel in order to meet environmental regulations as well as maintain operational efficiency. These investments will reduce overhead costs associated with operations by retiring old models. These investments will act as a catalyst in securing more long-term contracts with airline partners in the future.

SkyWest’s investments in technology will promote operational efficiency as well, through improved customer satisfaction and compliance with regulations.

Another growth area will be exploring emerging markets, as well as increasing service frequency in high-demand areas. As part of this strategy, SkyWest will expand its charter operations through SkyWest Charter into unserved communities using CRJ200 aircraft that have been configured to have 30 seats per aircraft. Consequently, this move will help SkyWest tap more market segments as well as bring in additional revenue streams.

SkyWest’s recent efforts to address labor market challenges will also help drive revenue growth. The labor market in the regional airline sector presents considerable challenges, particularly when recruiting qualified pilots and maintenance technicians. Expanding into the charter business, which requires relatively low flight hours for pilots compared to the commercial business, is one way SkyWest has mitigated the negative impact resulting from pilot shortages. In addition to this, acquiring a 25% stake in Contour Airlines to use its CRJ aircraft, boosting the pay package for pilots, and adjusting the service schedule to optimize available resources are some of the other initiatives taken by SkyWest to address labor shortages.

Takeaway

SkyWest enjoys competitive advantages in the regional market and the company is well-positioned to grow, aided by some of its recent initiatives to tackle macro challenges. At a time when the regional airline sector is expected to consolidate, investing in market leader SkyWest at a forward P/E of 13 seems a rational choice for investors looking to get exposure to airline stocks.