Value of skywest to increase so dramatically even if limited

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Reference no: EM13182280

SkyWest, a regional airline, negotiated a financial arrangement with Delta and United Airlines to provide regional jet service. 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. While the deal limited the amount of profit SkyWest could earn, it also insulated the smaller airline from volatility in earnings since the major airlines covered SkyWest's fuel costs, increased its percentage of seats occupied and managed its ticket prices.

Wall Street responded by increasing SkyWest's market valuation from $143 million to $1.1 billion after the arrangement was made. Explain, in economic terms, how this arrangement with Delta and United could have caused the value of SkyWest to increase so dramatically even though it limited the amount of profit the company could earn.

Reference no: EM13182280

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