This arrangement with Delta and United could have caused the value of SkyWest to increase dramatically due to several reasons, even though it limited the amount of profit SkyWest could earn.
1. Reduced risk and volatility: The arrangement with Delta and United reduced the risk and volatility in the earnings of SkyWest since the two major airlines covered most of its operational costs, such as fuel costs. This made the financial performance of SkyWest more stable and predictable, which in turn could have increased its attractiveness to investors, leading to higher market valuation.
2. Increased load factor: As per the arrangement, Delta and United were responsible for managing ticket prices, which led to an increased load factor for SkyWest. This means that a higher percentage of seats on SkyWest planes were occupied, leading to better utilization of its resources and higher overall revenue, which could have positively impacted its market valuation.
3. Brand association and credibility: By providing services for two major airlines and painting its jets with their colors, SkyWest gained association with the strong and credible brands of Delta and United. This brand association likely made the company more visible in the market, which could have attracted more investors, resulting in a higher market valuation.
4. Access to a larger market: The arrangement with Delta and United allowed SkyWest to access a larger market and customer base, as it was flying routes specified by the two major airlines. This increased the scale of SkyWest's operations, enabling it to reach more potential customers and earn more revenue, which would contribute to its market valuation.
5. Long term growth potential: While the arrangement did limit SkyWest's profit margin with Delta and United, it provided the company with access to their large networks and customer bases. This increased exposure could have allowed SkyWest to expand its services and reach more potential customers in the long run, leading to higher market valuation as investors anticipate future growth.
Overall, though the arrangement limited the profit margin for SkyWest, it provided various benefits such as reduced risk and volatility, increased load factor, brand association, access to a larger market, and long term growth potential. These factors collectively contributed to the dramatic increase in SkyWest's market valuation.
Fortune magazine reported that SkyWest, an independent regional airline, negotiated a financial arrangement with Delta and United to provide regional jet service for the two major airlines. For its part of the deal, SkyWest agreed to paint its jets the colors of Delta Connection and United Express and to fly routes specified by the two airlines. In return, Delta and United agreed to pay SkyWest a predetermined profit margin and to cover most of the regional airline's costs. Fortune explained that while the deal limited volatility in earnings since Delta and United covered SkyWest's fuel costs, increased its load factor (the percentage of seats occupied), and managed its ticket prices.
Fortune suggested that Wall Street liked the deal because SkyWest's market valuation instead from $143 million to $1.1 billion after it began its service with the two major airlines. Explain carefully how this arrangement with Delta and United could have caused the value of SkyWest to increase dramatically even though it limited the amount of profit SkyWest could earn.
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