Skies Are Clear for SkyWest

06/12/2007 12:00 am EST

Focus:

David Fried

Editor, The Buyback Letter

David Fried, editor of the Buyback Letter, likes SkyWest, the nation’s largest independent regional airline, because he says it is a well-run airline with strong, steady growth.

Based in St. George, Utah, SkyWest (NASDAQ: SKYW) is the nation's largest independently owned regional airline and is a contract carrier for United Airlines, Delta Air Lines, and, most recently, Midwest Airlines.

SkyWest serves 241 cities in the US, Canada, Mexico, and the Caribbean, with some 2,549 daily departures.

No doubt you have flown a SkyWest plane, but just didn’t know it. That’s because SkyWest planes sport the names of the large carrier they contract for—United Express and Delta Connection, for example.

The short story on SkyWest is it is nimbler than the big legacy carriers and not burdened by their bloated labor costs. It has a steady earnings stream, good cash flow, and an attractive P/E of 11x. Its reputation as an efficient, low-cost operator and as the best-managed regional airline in the business was earned simply by doing it right.

A decade ago, SkyWest had operated three types of aircraft. The company has gradually phased out the smallest planes and increased the number of available seats. It now flies a fleet consisting of 30-passenger turboprop Brasilia EMB 120 aircraft, and Bombardier-manufactured 50- and 70-passenger Canadair Regional Jets (CRJ200, CRJ700, and CRJ900).

In August 2005, Delta announced that it was selling Atlantic Southeast Airlines SkyWest, Inc. for $425 million in cash, removing ASA from a weaker legacy carrier and placing it in much stronger hands. A month later, SkyWest announced that the acquisition had been completed, making SkyWest a player on the national stage. Now, through SkyWest Airlines and ASA, the company operates the largest regional airline in the United States.

Comparing a few salient numbers over the years is another way of telling the story of SkyWest.

2003: Revenue, $888 million; net earnings, $66.8 million; 4.2 billion revenue passenger miles flown; 10.7 million passengers flown.

2004: Revenue, $1.2 billion; net earnings, $82 million.

2006: Net income, $145.8 million; 19.5 million passengers carried.

SkyWest has grown from a company with annual revenue of under $1 million to a publicly held company with annual revenue of more than $1 billion [and] almost 15,000 employees. SkyWest is set for continued long-term growth: Its annual growth rate from 1996-2006 was 36%, according to Forbes .

It’s been a favorite of mine for the past decade. With a solid history of repurchasing its shares (which, as we know, boosts earnings per share and signals management’s belief that the stock is undervalued), in March SkyWest’s board authorized a buyback of five million shares, 7.8% of all shares outstanding. (The stock closed at around $27.50 Monday—Editor.)

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