Skywest Airlines ‘returns to normal’

Jeff Chatfield, entrepreneurial executive chairman of West Australian airline operator Skywest Airlines, is in an expansionist mood these days.

The AIM-quoted company, which is incorporated in Singapore because of that country’s 10 per cent level of corporation tax, flies staff and others in and out of the multibillion-dollar mining and resource projects now under way in the mineral-rich state of Western Australia. Chatfield declares  that Skywest intends to increase annual turnover from the S$180.9 million (£82.3 million) achieved in the year to last June to S$500 million (£230 million) in two or three years.

‘We are returning to normal after the global financial crisis,’ argues Chatfield. He boasts that Skywest, which operates 17 100-seat jet planes, eight owned and nine leased, is restricted in its growth prospects only by the availability of planes.

The company is shortly taking delivery of an A320 jet formerly operated by Thomas Cook. ‘We’ll make more money out of it than they did,’ predicts Chatfield.

This may seem somewhat ambitious for a company that reported losses of more than £1 million in the first half of 2008-09, though second-half profits took it £2.2 million into the black for the full year. Chatfield maintains that the previous interim deficit merely reflected ‘unrealised foreign exchange losses’, while the company made operating profits even in the dire economic and commercial conditions then prevailing.

Increased usage and new, longer routes are part of the growth picture he now paints. Skywest has reinstated one former route, from the mining town of Kalgoorlie to Melbourne in south-east Australia, and routes under consideration include the Pilbara iron region in the north of Western Australia to the east coast, Pilbara to Singapore and mineral shipping town Port Headland to Bali in Indonesia.

Skywest made S$10.1 million (£4.4 million) pre-tax in the six months to last December on turnover up 10 per cent to £46 million. House broker WH Ireland expects £10 million pre-tax for the year to June, with £15.5 million pre-tax on the cards for 2010-11.

Chatfield sees the outlook remaining favourable for some time to come, as the mega-projects go on and skilled workers on the mines, now earning at least £75,000 a year and increasingly hard to come by, need to be flown in from ever further afield. From its operational headquarters in the Western Australian capital of Perth, Skywest, whose holding company was formerly called Advent Air, has operated a conventional airline in Western Australia for 46 years, once Australia’s second-largest airborne carrier and now number four.

The company also operates a coastal network in the state, which is bigger than India but whose population is small and sparsely distributed. Skywest has a monopoly franchise on several of these routes.

Most importantly, some 60 per cent of revenues come from Skywest’s scheduled charter services for major mining groups, including BHP Billiton and Rio Tinto. Skywest tends to have three-year contracts with its corporate clients and, says Chatfield, ‘we are the biggest on our turf’.

Analysts point out that the key to profitability for the company’s scheduled regional services is load factor. In the six months to December, this rose from 52.9 to 55.7 per cent, against a break-even level of around 48 per cent. Though fuel costs, along with currencies, have been a problem in the past, he contends that in current conditions the company can pass on most of any increases to its clients – ‘we have hedged 25 per cent of our requirements, the bit they don’t take,’ he explains.

Skywest obtains its leased planes through Avation, a PLUS-quoted company that it set up. Chatfield says the planes have an economic life of 20 to 40 years and the company’s present fleet has a written-down value of nearly £50 million, but a replacement value closer to £170 million.

He insists that the present momentum ‘will last for several years’. The shares, which have surged nearly eightfold from a bombed-out 12-month low of 2.75p to 15.75p, are telling the same story, but still trade at only five times what City analysts expect Skywest to earn this financial year.

There is clearly some risk and potential volatility in the prospects both of the company and its shares. But they could well repay a medium- to long-term punt.