Adding 16 New E175s By 2026 Will Expand Fleet And Reach Underserved Communities

Key Takeaways

• Fleet expansion and restored underserved services are set to boost revenue and earnings by exploiting new markets and existing resources.
  
• Strategic contracts and share repurchase efforts enhance revenue stability, earnings visibility, and elevate EPS, showcasing confidence in future growth.
  
• SkyWest faces operational and profitability pressures from regulatory scrutiny, maintenance costs, policy risks, MRO challenges, and high capital expenditures amid debt obligations.

Catalysts

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

• SkyWest is deploying a fleet growth strategy, with plans for increased utilization of existing aircraft and the addition of 16 new E175s by 2026, which is likely to boost revenue and overall earnings.
  
• The company is actively restoring service to underserved communities, which is expected to enhance revenue growth by tapping into previously unserved markets.
  
• SkyWest's significant investment in pilot staffing and training ensures stable operations and positions the company to meet growing demand, potentially improving net margins through increased operational efficiency.
  
• The extension of contracts with major clients such as American Airlines, United, and Delta provides a stable revenue stream and improves earnings visibility over the next several years.
  
• The ongoing share repurchase program reduces outstanding shares, which can increase earnings per share (EPS) and reflect management's confidence in future growth prospects.

SkyWest Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SkyWest's revenue will grow by 8.0% annually over the next 3 years.
• Analysts are assuming SkyWest's profit margins will remain the same at 9.2% over the next 3 years.
• Analysts expect earnings to reach $409.3 million (and earnings per share of $10.0) by about March 2028, up from $323.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 10.8x today. This future PE is greater than the current PE for the US Airlines industry at 10.8x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

SkyWest Future Earnings Per Share Growth

Risks

• The recent military aircraft collision with an American Eagle aircraft emphasizes the inherent risks and potential for increased regulatory scrutiny, which could impact SkyWest's operational revenue and margins if new safety measures lead to higher operational costs.
  
• The company's increased maintenance expenses, averaging $200 million per quarter in 2025, could pressure net margins and profitability as production levels increase and fleet utilization is restored.
  
• The potential impact of Essential Air Service policy changes under different administrations presents a risk to SkyWest's growth in underserved communities, potentially affecting revenue if subsidies or routes are altered.
  
• Challenges in third-party MRO (maintenance, repair, and overhaul) networks, including labor and parts shortages, may delay aircraft availability and affect revenue growth if aircraft cannot be returned to service as planned.
  
• High capital expenditures and debt repayment commitments could pressure free cash flow and impact shareholder returns if expected block hour growth and revenue increases do not materialize as anticipated.

Valuation

• The analysts have a consensus price target of $128.8 for SkyWest based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $150.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $409.3 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 8.3%.
• Given the current share price of $86.81, the analyst price target of $128.8 is 32.6% 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.