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In an arrangement that should pave the way for its future growth, Utah's SkyWest Inc. has agreed to loan partner United Airlines $80 million and will defer collecting up to $49 million in weekly fees from United over the next 10 years.
St. George-based SkyWest is the parent of SkyWest Airlines, which operates 40 regional jets for its partner under the United Express name.
Brad Rich, SkyWest's chief financial officer, said that under the financing agreement United will extend existing contracts that allow the Utah carrier to operate jets for United Express for a fee that is paid weekly.
It addition, Rich said SkyWest's other airline subsidiary, Atlantic Southeast Airlines, will begin to serve as a United Express carrier in the first quarter of next year. The agreement between United and ASA, which to date has served as a feeder airline for former owner Delta Air Lines, has a five-year term.
"This is an opportunity to utilize the strengths of both SkyWest and United to create value for both of us," Rich said.
Robert McAdoo, a senior research analyst covering the airline industry at Avondale Partners in suburban Kansas City, said SkyWest's loan agreement with United was a "reasonable deal" that will benefit the Utah company.
"This isn't a new kind of transaction," McAdoo said. "Think back to 2005 when Delta needed cash and its told SkyWest it should buy ASA for $400 million, and it [Delta] would help SkyWest with its long-term
In its own way, the SkyWest-United accord is just a miniature version of that 2005 transaction, he added.
McAdoo pointed out that SkyWest is sitting on around $700 million in idle cash. "They're putting the money out to United for 11 percent, which is a lot better than the 1.5 percent they could get in a money-market fund."
And United's promise to help SkyWest grow its business is particularly valuable, coming at a time when most of the major air carriers are cutting back on flights instead of expanding, McAdoo said.
The SkyWest-United deal is part of a major push by many of the nation's bigger airlines to increase their liquidity in the face of years of industry losses and the continuing recession.
UAL Corp., the parent of United Airlines, on Tuesday reported its third-quarter loss narrowed to $57 million, or 39 cents a share, from $792 million, or $6.22, a year earlier.
UAL benefited from shrinking its capacity to match demand, as traffic fell 5.4 percent in the recession and sales tumbled 20 percent, to $4.4 billion. United pared its workforce, flew fewer planes and burned less fuel.
"It's across-the-board squeezing wherever they can," Philip Baggaley, a Standard & Poor's managing director in New York, said of United's cost reductions. "It's a process that's been under way since they first exited bankruptcy."
Seating capacity on United's main jet operations will be trimmed as much as 7 percent this quarter, bringing 2009's reduction to as much as 10 percent. Capacity will fall in a range of 0.5 percent to 1.5 percent in 2010. Cash at the end of last quarter was $2.8 billion, and financing completed this quarter totals almost $1.3 billion, UAL said.
"Probably the most important thing they've done recently is substantially increase their liquidity," S&P's Baggaley said. After posting a $403 million profit in 2007, UAL reported a loss of $5.35 billion last year. The company left Chapter 11 in February 2006.
Bloomberg News contributed to this story
