SkyWest's Underperformance: Operational and Strategic Challenges in Regional Aviation

SkyWest Inc. (SKYW), a dominant player in U.S. regional aviation, has demonstrated robust financial performance in 2025 despite navigating significant operational challenges. For Q1 and Q2 2025, the company reported 18% and 19% year-over-year revenue growth, respectively, driven by expanded block hour production and strategic partnerships with Delta, United, and Alaska Airlines, according to the SwotAnalysis strategic plan. Net income surged by 60% in the first half of 2025, reaching $221 million, while operating income grew by 40% to $139.4 million, as detailed in the SkyWest Q2 2025 release. These figures outpace the regional airline industry's average operating margin of 7.82% for Q2 2025, per the industry operating margins data.

However, SkyWest's stock performance has lagged behind the S&P 500, delivering a 14% return over the past 12 months compared to the index's 16% growth, based on an SKYW vs S&P 500 comparison. In recent trading, SKYW fell 1.1%, outpacing the S&P 500's 0.38% decline, as noted in a Zacks note. This underperformance reflects persistent operational and strategic vulnerabilities in the regional aviation sector.

Operational Challenges: Pilot Shortages and Rising Costs

SkyWest's reliance on capacity purchase agreements (CPAs)-accounting for 95% of its revenue-exposes it to systemic risks in the regional aviation industry. A critical challenge is pilot attrition, with high turnover rates straining operations and inflating labor costs. According to SwotAnalysis, SkyWest aims to reduce first-officer attrition by 15% in 2025 through expanded cadet programs. However, industry-wide pilot shortages have driven up salaries, with regional airlines collectively spending 27% more on pilot compensation in 2025 compared to 2023, per an AeroGuard comparison.

Maintenance and fuel costs further erode margins. SkyWest's operating expenses rose 36% year-to-date in 2025, partly due to fleet modernization efforts, including the retirement of older CRJ-200 aircraft and the adoption of E175 and CRJ550 models, as reported in the BusinessWire release. While these upgrades aim to improve fuel efficiency, the transition period has increased short-term costs.

Strategic Initiatives: Diversification and Efficiency Gains

To mitigate these risks, SkyWest has prioritized diversification through SkyWest Charter, a new division targeting corporate and leisure travel markets (outlined in the SwotAnalysis plan). This initiative seeks to reduce dependence on CPAs, which remain a double-edged sword: while they provide stable revenue, they limit pricing flexibility and expose SkyWest to partner airline demand fluctuations.

The company has also focused on optimizing fleet utilization. By increasing daily E175 aircraft usage by 7% through schedule optimization and reducing maintenance-related cancellations by 20% via predictive analytics, SkyWest aims to boost revenue per block hour (per the SwotAnalysis strategic plan). Additionally, a 3% reduction in non-fuel cost per available seat mile (CASM) through cost controls is projected to enhance profitability, according to a Panabee report.

Stock Performance and Valuation: A Tale of Two Metrics

Despite these efforts, SkyWest's stock has underperformed broader market indices. While the company's 130.4% year-over-year return outpaced its regional airline peers' 44.5% growth, as covered by Yahoo Finance coverage, its 16.7% 30-day decline as of October 2025 highlights investor skepticism about its ability to sustain margins amid rising costs, per a Simply Wall St analysis. A discounted cash flow (DCF) analysis suggests the stock is undervalued at $207.27 per share, a 51.7% discount to its intrinsic value, according to the Simply Wall St analysis. However, its price-to-earnings (PE) ratio of 9.9x, below the peer average of 20.6x, indicates mixed sentiment (noted in the Simply Wall St analysis).

Historical data from 2022 to 2025 reveals a pattern of underperformance following earnings releases. Over 107 events, SKYW delivered a cumulative return of –2.5% over 30 days, compared to the benchmark's +4.9%. While the first 15 days showed flat or slightly positive drift, statistically significant underperformance emerged after day 17 and persisted through the 30-day window. This suggests that recent volatility, including the 16.7% 30-day decline, may reflect a recurring trend of post-earnings weakness.

Future Outlook: Navigating a Competitive Landscape

SkyWest's strategic partnerships with major airlines and its focus on fleet modernization position it to capitalize on long-term growth in regional aviation. The Delta-led E175 expansion and potential contracts with other carriers could drive further revenue gains. However, the company's success hinges on executing its pilot recruitment goals and managing maintenance costs during the fleet transition.

For investors, SkyWest represents a high-conviction opportunity in a sector marked by both resilience and volatility. While its operational efficiency and diversification efforts are promising, the risks of pilot shortages, economic uncertainty, and CPA dependency cannot be overlooked.