Modern Fleet Upgrades Will Expand Future Regional Connectivity

Key Takeaways

• Strong demand in regional markets and fleet modernization are driving higher revenue growth, improved margins, and greater production efficiency.
  
• Diversified flying agreements and strategic flexibility support stable earnings, predictable revenue, and resilience against industry disruptions.
  
• SkyWest faces threats from pilot shortages, contract dependency, regulatory and supply risks, evolving travel patterns, and rising costs, all potentially pressuring profitability and stability.

Catalysts

Through its subsidiaries, engages in the operation of a regional airline in the United States.

• Persistent and exceptionally strong demand in small and mid-sized communities is fueling rapid recovery and expansion in block hours, supporting higher production levels and driving double-digit revenue growth; ongoing restoration and addition of service to underserved markets positions SkyWest to benefit from greater regionalization of air travel.
  
• Fleet modernization through significant orders of new, fuel-efficient E175 aircraft under long-term, flexible contracts is expected to improve cost structure, enhance asset utilization, and boost net margins as newer planes replace older, less efficient models and support new multiyear agreements with major carriers.
  
• SkyWest's strategic fleet flexibility and large backlog of delivery slots, combined with the ability to defer or redeploy existing aircraft, provides resilience against supply chain and tariff disruptions, ensuring continued growth opportunities and capital efficiency, thereby supporting free cash flow and earnings stability.
  
• Expansion of revenue streams through new flying agreements (including capacity purchase and prorate with major carriers, as well as potential enhanced charter services) decreases reliance on legacy CPAs, leading to a more diversified and predictable recurring revenue profile that could underpin long-term EPS growth.
  
• Long-term population migration into mid-sized and Sun Belt cities is expected to sustain elevated demand for regional connectivity, reinforcing a steady backdrop for network expansion, increased load factors, and higher recurring contract revenues going forward.

SkyWest Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SkyWest's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.6% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $456.9 million (and earnings per share of $10.7) by about July 2028, up from $407.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, up from 11.5x today. This future PE is greater than the current PE for the US Airlines industry at 11.5x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.86%, as per the Simply Wall St company report.

SkyWest Future Earnings Per Share Growth

Risks

• The acute and ongoing global pilot shortage, coupled with competition from major carriers, poses a persistent risk of higher labor costs (due to necessary wage and benefit increases) and could constrain SkyWest's ability to fully capitalize on demand, potentially compressing net margins and impacting profitability.
  
• Heavy reliance on capacity purchase agreements (CPAs) with major airlines exposes SkyWest to renegotiation risks or possible contract terminations; should major carriers consolidate or strengthen bargaining power, SkyWest's revenue and operating income stability could be negatively impacted.
  
• Regulatory risks, including the threat of significant tariffs on imported aircraft (such as the potential 50% tariff on Embraer E175s) and ongoing supply chain/MRO challenges, may delay fleet modernization or increase capital expenditures-placing upward pressure on costs and dampening free cash flow and earnings.
  
• Advancements in remote work, virtual communication, or secular declines in rural/small city populations could reduce long-term demand for regional air service-eroding SkyWest's core markets and pressuring both volume-driven revenue growth and load factors.
  
• Persistent increases in fuel prices and a global push for decarbonization may raise operating costs over the long term, especially if SkyWest's fleet modernization is delayed or lacks sufficient investment-potentially compressing net margins and undermining ROIC and earnings resilience.

Valuation

• The analysts have a consensus price target of $130.4 for SkyWest based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $456.9 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $116.63, the analyst price target of $130.4 is 10.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.