Skywest INC, Announces new flying with American

Skywest INC, announced yesterday a new Capacity Purchase Agreement with American that will start later this year. For those not familiar with CPA's they are basically a purchase buy the Mainline partner of Capacity provided by SkyWest INC, for a given set of years and with set conditions. Often these conditions involve some kind of maintenance, fuel, and lease reimbursement agreements. What all the specific details are, are not always public knowledge.

Since American purchases "Capacity" from Skywest, AMR retains all the revenues from ticketing, and Skywest gets a set rate of compensation no matter how full or empty the airplanes are. Over the last 15 years we've seen a dramatic move away from pro-rate structures to CPA's as it allows the mainline partner to take most of the risk while giving the regional partner a predictable income stream with these smaller gauge aircraft.

It benefits AA by providing feed into their larger system, on markets not previously sustainable with a larger airplanes, while at the same time guaranteeing AA a predictable cost for their feed. This is somewhat divergent from their previous strategy with Eagle. One possible reason this may be attractive could be due to the fact that if Skywest Costs rise as Eagles have during the CPA they are not passed on to AMR, unlike a wholly owned regional subsidiary. The downside is the lack of flexibility AMR will have once the contract is signed until it expires. Unfortunately, as can be seen with Comair the flexibility the mainline partner has with their wholly owned subsidiaries is not always beneficial for the subsidiary. This is a double edged sword as Pinnacle attest, one factor in their bankruptcy was due to poor management  they were unable to keep a streamlined model, and subsequently their CPA's no longer covered their costs.

As can be seen in the public reports the CPA is for 12 CRJ 200's coming off of Delta flying on the SkyWest side to be flown from LAX in the American system, and 11 CRJ 200's also coming off of Delta flying to be flown in DFW in the American System. The profiles for SkyWest and ExpressJet have both been updated and will see a bump in pilot needs for this year and next year, as the reduction in aircraft for their company will not be as large as previously forecasted. It will also provide some upgrade opportunity for these airlines, for those already their between 6-7 years of seniority.

The effect this will have on American Eagle is still unknown. As soon as something defined is made on Eagle it will be updated on the Eagle page.

Sources:

http://inc.skywest.com/invest/investor_releases/AA%20Announcement%20Sept2012.pdf

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