There’s a good chance you missed it, but in SkyWest’s earnings release this week, the airline announced it bought a 25 percent stake in Contour. This is a shrewd move.
I haven’t spent much time covering Contour, but it is the little airline that could. Contour is an airline that successfully uses the Part 380/Part 135 loophole that I wrote about in August to do what Skywest has so far only been able to dream about. In short, Contour Airlines operates flights chartered from its parent company, Contour Aviation. Because of this arrangement, it can operate those airplanes with 30 seats and still fly under Part 135 rules which make it much easier to find pilots.
Unlike JSX which uses this model to provide a premium experience, Contour uses regular terminals and is just trying to serve smaller cities in an economical way where it can actually source enough pilots to do the work. And it generally has worked for the airline. Contour’s network is focused on Essential Air Service (EAS) markets. This can shift a fair bit over time — it just lost the Crescent City business in California — but here’s the July route map as of today.
If you look closely enough, you’ll see a pattern. With the exception of a handful of flights in Nashville, ever single flight Contour runs is to and from an American hub. It’s no surprise since Contour has an interline agreement with American, and it can feed people to the world.
According to Airfleets, it has about 20 Embraer 135/145s today but it has also started acquiring CRJ-100/200s as well with six in the fleet. Half of those came from Elite, and all but one were acquired post-pandemic. All of this combines to create an interesting opportunity for SkyWest.
SkyWest used to be an enormous EAS operator, but with the pilot shortage it had to scale back. In fact, some of its old routes have been handed over to Contour.
One of SkyWest’s initiatives has been the creation of SkyWest Charter (SWC) which was meant to operate the exact same way that Contour has been operating — with 30 seats on a CRJ-100/200 under Part 135 rules. SWC is up and running doing actual charters, flying sports teams around, etc. But its application to be given commuter authority to run flights like Contour has been held up as the feds debate how to handle this loophole. SkyWest is a pawn, and this might be a very long game of chess.
By acquiring 25 percent of Contour, SkyWest positions itself to do a few good things.
First is the most obvious benefit. Contour will take some of SkyWest’s CRJs and put them to use, presumably replacing Embraers over time and/or providing growth.
On the earnings call, SkyWest said it has about 150 CRJ-100/200s and about 50 to 60 that aren’t doing anything. These airplanes are owned outright by SkyWest, and they can’t really be sold for all that much, so the best financial option is to get them flying. That is exactly the plan.
The Contour arrangement also includes an asset provisioning agreement under which SkyWest will provide CRJ airframes, engines and rotable parts to Contour.
This is helped by the fact that SWC may or may not get approved someday to fly EAS routes. If I were SkyWest, I wouldn’t be thinking of this as a competitive situation. SkyWest is much better off having CRJs flying and generating money for Contour than it is having them wait around hoping that SWC will eventually be able to bid against Contour for those routes. Besides, SkyWest is so much bigger than Contour as an entity, even if SWC is approved you could imagine a world where SkyWest just buys Contour or sells off its SWC operation to merge them into a separate company.
The last benefit here is in regards to the pilots, though admittedly the information is scant on what that means. What we do know is that SkyWest says flight schools are full now, so they can’t pump out enough to provide what SkyWest needs. That leads us to this quote from SkyWest President and CEO Chip Childs from the earnings call.
So, we fundamentally think that over the next decade or so, we need to build a model that’s resilient relative to captains and first officers both…. I’d back up and just say, we have positive captain production today, but it’s still going to take at the rate we’re going today several years to get back to the 2019 levels.
Now, the most important part that we probably would tag on to that is we’re working very diligently with partners in creative ways in which we can produce captains faster than what we are producing today. That’s the Contour investment, that’s the pilot program investment with United.
In other words, pilots flying Part 135 for Contour will have some sort of path to move into SkyWest where they can do Part 121 flying before moving on to the legacies.
Add all this up and you have a pretty compelling reason to take a stake in Contour, even if it doesn’t amount to all that much.