Western force?

In 1999 under the guidance of Bob Mason, Skywest was achieving a 7.5 per cent net profit but he ran foul of Ansett management when he wanted to take the regional airline into jet operations using Fokker F-28s to tap the fly-in/fly-out market that was being developed by National Jet Systems.

After the collapse of Ansett, a marriage made in heaven appeared to emerge when former Skywest Airlines CEO Bill Meeke was lured to join with a group of local businessmen who could arrange millions in hours to buy the airline off the administrator Mentha Korda.

But just five months later the marriage, which turned out to be a shotgun wedding, became a nightmare and a public relations disaster.

What then ensured was a very public and bitter struggle for control of Skywest which lasted several years resulting in current chairman Jeff Chatfield’s company Singapore-based Captive Vision Capital finally taking control in January 2005.

At that point Chatfield made sweeping changes to the board and management and put the airline on a more stable footing.

In the 2005 annual report, Chatfield referenced the impact the upheavals had on management’s time and focus when he told shareholders:
“The first half was impacted financially and in terms of management time and attention by a takeover offer. After initially soliciting a takeover bid by major shareholder CaptiveVision Capital Limited the then Skywest Board decided to engage in a vigorous takeover defence. After the takeover had run its course, with a new Board in place, Skywest management was once again focussed on the core business of providing airline passenger services to the public. The Board tasked the management of the Company to focus their attention on the periodic development of new routes, especially jet serviced routes, the delivery of profit yield rather than load factor and the overall management of costs.”

Nonetheless sales climbed from $50.6 million in 2004 to $73 million in 2005 with profit edging up from $687,000 to $1.03 million.

In October 2006 Skywest was delisted from the Australian Stock Exchange after a compulsory takeover by major shareholder Advent Air, a Singapore company, and was listed on London’s Alternative Investment Market. By June 2006 sales had reached $98 million with a profit of $4.7 million.

Davin

In 2007 Chatfield was able to lure Hugh Davin, then head of National Jet Systems WA and NT operations, back into the Skywest fold.

Forgotten by most, Davin spent 23 years with Skywest before leaving in 1993 over concerns related to retaining the Coastwatch contract and the development of the resource market. In 1994 he set up NJS in Western Australia with just two BAe 146s and over the next 12 years built the fleet up to 18 jets based in WA. During Davin’s tenure at NJS, the airline secured jet contracts with most of Australia’s blue chip mining companies and it also won the contract to operate Boeing 717s for QantasLink.

When Davin arrived at Skywest as Managing Director his brief was to sell off one of three Fokker 100s and focus on more usage for the five Fokker 50s.

However within a few months mining contracts flowed and the airline announced it was acquiring three more Fokker 100s and two more Fokker 50s.

Shortly after Davin’s appointment, former Jetstar Asia executive Paul Daff was appointed CEO. The Davin/Daff team was a dynamic combination and Skywest swept all before it. Not surprisingly the new team delivered results and quickly!

For the year ending June 30, 2007 revenue was up 33 per cent to S$130 million and Skywest Airlines, booked a net profit of S$7.96 million up from S$3.9 million the previous year.

The 2008 year ending June 30 was even better with revenue up to S$184 million with profit at S$10.4 million.

Like all airlines, Skywest went through turbulence during the GFC and in the first half of 2008-09 took losses of S$3.38 million on unrealised foreign exchange losses which wiped out its operating profit of S$1.12 million.

The result was a one-off S$2.7 million loss despite a 31 per cent lift in revenue to $97.3 million.

Skywest managing director Hugh Davin commented at the time to The West Australian that the loss also included one-off $5 million charge for start-up costs related to a new charter contract for Rio Tinto for 20 flights a week, though revenue from that work did not flow through until January.

Also Skywest, like most airlines, suffered because of the 28 per cent fall in the Australian dollar against the US dollar.

But on the upside Davin hailed the late surge in traffic at the close of 2008 after the airline had experienced a 2.3 per cent slump in regular passenger traffic on its scheduled services to destinations such as Albany, Esperance, Exmouth and Geraldton.

“It appears that people in WA are turning to holidaying in their State, rather than overseas options,” Davin told media.

Skywest added a Geraldton-Carnarvon-Karratha flight and a Broome-Kununurra-Darwin service.

The airline reported that it had doubled revenue from charters for the resources industry over the previous six months and expanded its fleet of F100 jets to eight.

Davin was bullish on the spread of charter business telling media that its resource business was spread across oil, gold, iron ore and other mining.
For the full year to June 2009 the airline was able to report a respectable S$181.3 in revenue and a S$5.14 million profit.

However Skywest Airlines CEO Paul Daff has stepped down to take up a position as head of JetConnect, Qantas’ then New Zealand-based airline.
Daff was replaced with Chatfield’s long time Mark Shelton who brought with him extensive financial experience.

What GFC?

As 2009 unfolded it became clear that the GFC was only going to visit Western Australian briefly and while the rest of the world suffered pneumonia, the resource rich state barely had a sniffle.

Once that realisation set in, the scramble to acquire planes to meet the upswing in air travel demand from the resource industry heated up.

Skywest announced the rollout of its first 162-seat Airbus A320, for July, while competitor Alliance Airlines said it would acquire eight more 100-seat Fokker 100 jets from May to support resources-related contracts in WA and Queensland.

With the addition of the A320, Skywest’s seat capacity had quadrupled in the past three years.

Since early 2007 when Davin arrived, the airline had acquired six Fokker 100s and three 46-seat Fokker 50s, giving it a total of 18 aircraft.

At the time Davin told Australian Aviation that the A320 would be used on a mix of routes.

Sources also told Australian Aviation that the airline would acquire another two at least within 18 months.

Since its rebirth in 2002 Skywest had morphed from a turbo-prop regional player into major operator on the western side of Australia.

The Fokker100 jet has first enabled it to tap into the resources FIFO market and later into head-to-head competition with Qantas on prime jet routes to Broome and Karratha.

The A320 acquisition brought a new dimension to the airline’s capabilities enabling it to operate non-stop from the Eastern States to the Pilbara and also launch Perth-Bali flights, although none of those two options have been explored yet.

But Skywest’s archrival Alliance was also expanding and with the purchase of the eight Fokker 100s from a European operator, Alliance Airlines’ fleet reached 19 jet aircraft.

“Investment in additional Fokker 100 jets is a major vote of confidence,” Alliance Airlines managing director Scott McMillan said at the time.
“The Fokker 100 has proved to be reliable, robust and extremely popular.”

Late in 2009 Skywest, made a return to the Australian share market in a bid to increase its liquidity and attract more Australian investment but retained its listing on the London’s Alternative Investment market.

For the 2010 year Skywest was able to report a 190 per cent increase in net profit to $S9.2 million based on a 19 per cent increase in revenue to $S215.2 million.

Skywest described the result as “satisfactory” given the “extremely volatile operating environment” during the 12 months to June 30.

Storm clouds

But some storm clouds were brewing.

Skywest’s government contract for air routes to the south and north of Perth to typically tourist towns was under threat.

The Coastal Contract as it became known was put in place to try and deliver reliable services to towns that in some cases would not justify services.
These towns were linked with larger centres such as Geraldton to give the airline profitable service to offset the loss makers.

However the residents of Exmouth and Geraldton saw this as cross subsidisation and called for deregulation of air routes so they could take full advantage of the resources boom and spin-off tourism.

Residents in Albany to the south also called for deregulation.

Complicating matters the government department and the State Transport Minister Simon O’Brien were at loggerheads over the best course of action with the department calling for total deregulation or a route-by-route tender which would have resulted in a disjointed network.

What resulted was a compromise of sorts with some centres to be deregulated while the major contract was to be split up into several licenses.

At the end of last year the government finally, after over a year of negotiations, announced the biggest shake-up of WA’s turbulent airline industry.
The Perth-Geraldton route was totally deregulated while Qantas and Skywest won contracts to serve Exmouth.

Carnarvon, Kalbarri and Monkey Mia which were linked with Geraldton and Exmouth previously were left out in the cold with no airlines tendering to serve them.

Skywest then entered discussion with the government on a subsidy but was outmanoeuvred by Skippers Aviation which won the rights with a zero dollar bid.

Skippers itself retained what is called the Inland Contract to serve Meekatharra, Wiluna, Laverton, Leinster, Leonora and Mt Magnet.

Skywest however kept the contract to operate to Albany and Esperance after Qantas demanded that it be a sole operator route.

Skywest’s agreement to link Busselton into some Perth-Albany services and Ravensthorpe to the Perth-Esperance route helped the airline retain the contract.

However the loss of the exclusivity for Geraldton and Exmouth and the total loss of Monkey Mia, Kalbarri and Carnarvon will affect Skywest’s fleet makeup and render some of the airline’s eight Fokker 50s surplus unless new work can be found for them.

Qantas has already entered the Exmouth route with three Boeing 717 services a week but is yet to play its Geraldton hand.

Currently Skywest operates 42 return services a week between Perth and Geraldton with Fokker 50s and Qantas will either use 717s or more likely Q300/400s.

As investors and staff were digesting the full impact of these developments, the airline announced that the introduction of the first A320 would have a greater one-off impact to the bottom line.

Speaking during the airline’s annual meeting in Singapore in early November, Chatfield said one-off costs related to adding the Airbus A320-200 to its fleet, recruiting more pilots and completing the associated training and safety compliance estimated to have totalled $6 million.

The airline had previously estimated costs associated with integrating the A320, which it bought in April 2010, at $3.2 million.

The dual-listed company’s Australian Securities Exchange-traded stock slumped 4¢, or 10 per cent, to 35¢ as investors baulked at the downgrade.

Virgin connection

However in January a wide ranging 10-year deal was struck with the Virgin Blue Group to service regional Australia with Skywest operating up to 18 new Virgin Blue branded turbo prop aircraft, later to be named as ATR72, to a number of existing and new destinations.

The deal also saw an expansion of existing code-share arrangements with Virgin Blue and Skywest customers able to earn and burn frequent flyer points on each other’s networks.

When the deal was announced, Virgin CEO and MD John Borghetti said: “By partnering with the preeminent regional airline in Australia, Virgin Blue is investing in building a substantial network in regional Australia and strengthening its domestic network. This alliance will significantly benefit regional Australia as well as being a win-win for Skywest and Virgin Blue.

“The combined strength of our networks, along with the additional capacity we will deliver with new aircraft, will provide travellers with more frequent flights, better schedules and competitive fares. The partnership will see Virgin Blue expand its reach throughout regional Australia and will allow us to access untapped opportunities in regional Australian markets, in particular the booming fly-in fly-out resource sector market.”

Skywest’s Chatfield said that in addition to providing Skywest with access to Virgin Blue’s network, the strategic initiative provided the company with the opportunity to significantly grow the corporate travel offer for resource sector and charter clients across Australia and internationally.

“The leasing arrangement means that Skywest will not be exposed to the capital investment of owning the aircraft and will be a service provider and code-share partner,” Chatfield said in a statement.

The ATRs will be leased from specialist leasing company Aviation PLC, which is financially related to Chatfield’s companies, with an initial term of ten years.

It is expected that the ATRs will replace Skywest’s F50s in time.

The first four ATR72 will be -500 models and will arrive by mid-year and be delivered by December.

Commenting to The West Australian Chatfield said: “Skywest flies about 18 planes now, but this means we basically double in size . . . and it takes us national,” while Borghetti, said the deal was a “win-win” for both carriers.

Interestingly the deal came a month after Qantas swallowed rival FIFO-focused operator and WA’s third-biggest regional carrier, Network Aviation, in a deal worth a reported $30 million.

For the first half of 2011 Skywest posted a net profit of S$9.8 million on sales of S$125 million.

Blue skies?

The dynamics going forward are as fascinating as they are conflicting as Skywest attempts to secure its future in the ever increasing shadow of the flying kangaroo.

On one hand Skywest has linked its future to the Virgin Group with an extensive alliance but that also gives Virgin greater access and exposure to its hard-won clients.

One Skywest executive confided in Australian Aviation: “I wonder if we have done a deal with the devil?”

The airline has also linked its future to that of Virgin in its battle with Qantas for a greater share of the domestic corporate market, which will be more of a slug match with very challenging odds.

Corporate clients demand frequency and realistically it will be at least two years before Virgin is able to offer enough aircraft configured with business class product to win clients over.

Qantas is touting 90 per cent of its flights on the Perth-Melbourne and Perth-Sydney routes are wide-body with a number being internationally configured 747-400s and A330s.

The airline offers up to nine flights a day on both routes.

On the regional front Skywest has lost over half its exclusive contracts with the government, and the new Minister for Transport Troy Buswell flagged to Australian Aviation that he would review the services to Albany in three years and it would “likely be deregulated.”

The conundrum for the airline is that if it builds up passenger numbers with heavy discounting and capacity, the route will be deregulated risking wiping out its viability.

Currently Skywest has eight Fokker 50s with sources suggesting that half that fleet could be surplus once the full impact of the changes in the government exclusive contacts are realised.

Skywest also has an extensive RPT jet network into the north-west with both direct flights from Perth and some interesting milk-run combinations up the northwest coast.

Skywest links the tourist destinations of Exmouth, Broome, Kununurra with Darwin and it also links Port Hedland with Broome.

These services are “doing well” suggests Davin and momentum is building.

As well as code-sharing with Virgin Blue on some routes, the airline also competes on key routes such as Perth-Broome and Perth-Karratha.

The airline has also recommenced its once-weekly Kalgoorlie-Melbourne service which is proving popular.

Analysts and insiders suggest that the airline may more aggressively develop niche routes particularly on weekends when its FIFO fleet is idle to “tap the weekend away market.”

Some combinations could involve Adelaide, while services to Bali from more northwest centres could be attractive.

Australian Aviation understands that services from Singapore to the northwest are also on the radar.

However only Port Hedland has customs and quarantine facilities and it will require Federal Government commitment to bring international services to other centres.

On the FIFO work, which is under the direct control of Davin, the airline however is moving from strength to strength with two more Fokker 100s and another A320 to join the fleet this year lifting the fleet strength to 11 F100s and 2 A320s.

But that is just the start with Davin forecasting up to a staggering “50 per cent increase in FIFO business in the next five years.”

“There is so much business in the pipeline,” he said.

But while business is booming, there are weaknesses.

As more and more resource companies upgrade their runways to A320/737NG capability it also opens up more opportunities for Qantas and even Skywest’s alliance partner Virgin to tap their vast 737 capability.

There is also a significant push to bring FIFO workers direct from the Eastern States to the Pilbara.

Last year Qantas launched flights from Melbourne to Port Hedland to add to its Sydney/Melbourne-Karratha and Brisbane-Karratha services.

Davin highlights that those longer runways mean that airlines may launch services from the Eastern States direct to centres such as Paraburdoo.

Capacity constraints

One of the dynamics is the capability of Perth Airport to meet the capacity requirements of the resources companies that have particular and restrictive rostering needs.

From Tuesday to Thursday between 5.30am and 7am Perth Airport is at peak capacity with virtually no takeoff or landing slots available, as FIFO flights uplift an army of resource workers.

On those days the movements at Perth Airport are close to 450 a day or – 164,000 movements a year – with air-traffic controllers striving to get aircraft off the ground as quickly as technically possible.

While the simple solution would be to spread the FIFO flights more evenly through the week, or the day, it is not that easy.

Mining executives explain that the Tuesday to Thursday rostering of workers is sacred.

Resource workers do not want to be flying on Mondays or Fridays because these are often public holidays or a rostered day off and they want that time – if on their week off – with their loved ones, who are typically in the Perth workforce.

“Time with their families is precious and the last thing they want is to be flying on a Monday holiday,” one mining executive tells Australian Aviation.
And from a rostering perspective, the resource companies want workers on site early in the morning.

For Perth Airport and the airlines, that demand peak creates major headaches.

A second parallel runway is not planned till at least 2029 and the cross runway is of no real benefit from a scheduling point of view.

While it is true that the average aircraft movements at Perth are not forecast to reach the tipping point for a second parallel runway for at least another 20 years, nothing about Perth Airport’s operations is average.

Perth Airport has committed to building high-speed taxiways off the airport’s main and secondary cross runways which will certainly help.

High-speed taxiways will certainly help increase the number of aircraft the airport can handle although that depends on a variety of factors.

But Skywest’s MD Hugh Davin says it is totally unreasonable for the resource industry to expect Perth Airport to build a second parallel runway.

“There is no question this is going to be major problem and the whole industry has to sit down and work solutions,” he warned.

“The government also has a major role to play,” Davin adds.

Davin is referencing to the road networks around the airport which are gridlocked at peak times and the total spend required is $700 million.

The resource industry’s demand is also an issue for airlines with aircraft often lying idle on off-peak days.

Network growth

Possibly of greatest concern for Skywest is the buy into niche player Network Aviation by Qantas with that airline’s stated plans of adding 10 Fokker 100s to the Network stable building its fleet to 12, with one spare for parts.

The question many ask is where Qantas is going to secure the F100s? One possibility is by acquiring Alliance Airlines which has been on the market.

One Perth airline executive commented to Australian Aviation: “We know the F100 very well and there are not 10 good machines out there.”

There is no doubt Qantas, while a late starter into FIFO, is a major threat to the long term viability of airlines such as Skywest, Alliance and Cobham.
History shows that more takeovers or mergers are a certainty.

And Qantas is yet to reel out its trump card – the enormous power of Qantas’s frequent flyer program.

The strength of the program in negotiations with resource companies cannot be understated with FIFO employee/family relationships critical.

As the battle for control of the FIFO market gathers momentum, Skywest may find value in rebranding as a Virgin Connect or Virgin Flyer.

Whereas once the Western Australian identity was a valuable marketing tool, the recent loss of government contracts perhaps flags a waning of the perceived parochial advantage.

Ansett ditched MacRoberston Miller Airlines branding although the aircraft carried the Ansett colours and rebranded its WA operations Airlines of WA with a special colour scheme before scrapping that for full Ansett colours with just WA added to the name.

The airline found that it needed a strong brand to counter firstly Australian Airlines and then Qantas after the merger of the then two government airlines.

The X factor

For all the infrastructure and marketing dynamics possibly one of the most important is the X factor.

And the X factor is the personal relationship which underpins so much of the FIFO business and that was put to the test in March during record breaking rains in the northwest.

Skywest’s key customer Fortescue Mining Group urgently needed uplift out of their Cloud Break operation and the airline was able to muster 8 flights in 12 hours to transport 1350 people to fix the problem.

Success in FIFO is all about understanding of needs, trust to deliver, and pure and simple friendship, say local mining executives.

And while Skywest has mastered this through Davin, other competitors such as Network, Alliance, Skippers Aviation and Cobham also have experienced management that is attuned to the needs of the resource industry.

It will be important for Qantas to understand that it should take counsel from Network’s management team as resource companies will not take kindly to dealing with bureaucracy in Sydney.

Possibly a quote from Douglas Adams sums up the X factor: “To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity.”