10-Q 1 skyw-20220331x10q.htm 10-Q
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission file number 0-14719

SKYWEST, INC.

Incorporated under the laws of Utah

87-0292166

(I.R.S. Employer ID No.)

444 South River Road

St. George, Utah 84790

(435) 634-3000

(Address of principal executive offices and telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on which Registered

Common Stock, No Par Value

SKYW

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class

Outstanding at April 29, 2022

Common stock, no par value

50,521,792

SKYWEST, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION:

Item 1.

Financial Statements

3

Consolidated Balance Sheets

3

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Stockholders Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II

OTHER INFORMATION:

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 6.

Exhibits

31

Signature

32

Exhibit 31.1

Certification of Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer

Exhibit 32.1

Certification of Chief Executive Officer

Exhibit 32.2

Certification of Chief Financial Officer

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

ASSETS

March 31,

    

December 31,

    

2022

    

2021

(unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$

246,001

$

258,421

Marketable securities

 

610,450

 

601,989

Receivables, net

 

68,039

 

65,348

Inventories, net

 

110,041

 

104,093

Other current assets

 

37,438

 

38,742

Total current assets

 

1,071,969

 

1,068,593

PROPERTY AND EQUIPMENT:

Aircraft and rotable spares

 

7,960,911

 

7,848,100

Deposits on aircraft

 

129,514

 

124,964

Buildings and ground equipment

 

263,999

 

256,595

Total property and equipment, gross

 

8,354,424

 

8,229,659

Less-accumulated depreciation and amortization

 

(2,825,603)

 

(2,731,060)

Total property and equipment, net

 

5,528,821

 

5,498,599

OTHER ASSETS:

Operating lease right-of-use assets

223,856

238,516

Long-term receivables and other assets

 

324,312

 

320,239

Total other assets

 

548,168

 

558,755

Total assets

$

7,148,958

$

7,125,947

See accompanying notes to condensed consolidated financial statements.

3

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

March 31,

    

December 31,

2022

    

2021

(unaudited)

CURRENT LIABILITIES:

Current maturities of long-term debt

$

410,124

$

391,798

Accounts payable

 

412,757

 

496,333

Accrued salaries, wages and benefits

 

157,211

 

150,583

Current maturities of operating lease liabilities

 

78,930

 

78,886

Taxes other than income taxes

 

26,669

 

28,869

Other current liabilities

 

56,597

 

48,152

Total current liabilities

 

1,142,288

 

1,194,621

LONG-TERM DEBT, net of current maturities

 

2,791,274

 

2,717,420

DEFERRED INCOME TAXES PAYABLE

 

669,026

 

663,236

NONCURRENT OPERATING LEASE LIABILITIES

 

147,994

 

158,274

OTHER LONG-TERM LIABILITIES

 

108,661

 

124,882

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS’ EQUITY:

Preferred stock, 5,000,000 shares authorized; none issued

 

 

Common stock, no par value, 120,000,000 shares authorized; 82,514,936 and 82,335,970 shares issued as of March 31, 2022, and December 31, 2021, respectively

 

727,900

 

722,310

Retained earnings

 

2,181,650

 

2,163,916

Treasury stock, at cost, 31,993,144 and 31,956,047 shares as of March 31, 2022, and December 31, 2021, respectively

 

(619,835)

 

(618,712)

Total stockholders’ equity

 

2,289,715

 

2,267,514

Total liabilities and stockholders’ equity

$

7,148,958

$

7,125,947

See accompanying notes to condensed consolidated financial statements.

4

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(Dollars and Shares in Thousands, Except per Share Amounts)

Three months ended

March 31,

    

2022

    

2021

OPERATING REVENUES:

Flying agreements

$

708,063

$

511,191

Lease, airport services and other

 

27,089

 

23,364

Total operating revenues

 

735,152

 

534,555

OPERATING EXPENSES:

Salaries, wages and benefits

 

300,058

 

219,842

Aircraft maintenance, materials and repairs

 

148,413

 

203,827

Depreciation and amortization

 

102,745

 

109,597

Aircraft fuel

 

25,090

 

19,194

Airport-related expenses

 

19,205

 

24,448

Aircraft rentals

 

15,996

 

15,490

Payroll support grant

(193,173)

Other operating expenses

 

71,597

 

54,488

Total operating expenses

 

683,104

 

453,713

OPERATING INCOME

 

52,048

 

80,842

OTHER INCOME (EXPENSE):

Interest income

 

425

 

284

Interest expense

 

(28,592)

 

(31,354)

Other income, net

 

880

 

216

Total other expense, net

 

(27,287)

 

(30,854)

INCOME BEFORE INCOME TAXES

 

24,761

 

49,988

PROVISION FOR INCOME TAXES

 

7,027

 

14,088

NET INCOME

$

17,734

$

35,900

BASIC EARNINGS PER SHARE

$

0.35

$

0.71

DILUTED EARNINGS PER SHARE

$

0.35

$

0.71

Weighted average common shares:

Basic

 

50,480

 

50,286

Diluted

 

50,708

 

50,727

COMPREHENSIVE INCOME:

Net income

$

17,734

$

35,900

TOTAL COMPREHENSIVE INCOME

$

17,734

$

35,900

See accompanying notes to condensed consolidated financial statements

5

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(UNAUDITED)

(In Thousands)

Common Stock

Retained

Treasury Stock

Shares

Amount

Earnings

Shares

Amount

Total

Balance at December 31, 2021

 

82,336

$

722,310

$

2,163,916

 

(31,956)

$

(618,712)

$

2,267,514

Net income

 

 

 

17,734

 

 

 

17,734

Exercise of common stock options and vested employee stock awards

 

139

27

 

 

 

 

27

Employee income tax paid on vested equity awards

(37)

(1,123)

(1,123)

Sale of common stock under employee stock purchase plan

 

40

1,487

 

 

 

 

1,487

Stock based compensation expense

4,076

4,076

Balance at March 31, 2022

 

82,515

$

727,900

$

2,181,650

 

(31,993)

$

(619,835)

$

2,289,715

Common Stock

Retained

Treasury Stock

Shares

Amount

Earnings

Shares

Amount

Total

Balance at December 31, 2020

 

82,095

$

704,675

$

2,052,006

 

(31,914)

$

(617,136)

$

2,139,545

Net income

 

 

 

35,900

 

 

 

35,900

Exercise of common stock options and vested employee stock awards

 

177

606

 

 

 

 

606

Employee income tax paid on vested equity awards

(42)

(1,573)

(1,573)

Sale of common stock under employee stock purchase plan

 

30

1,139

 

 

 

 

1,139

Stock based compensation expense

2,613

2,613

Warrants issued to U.S. Treasury

 

 

3,291

 

 

 

 

3,291

Balance at March 31, 2021

 

82,302

$

712,324

$

2,087,906

 

(31,956)

$

(618,709)

$

2,181,521

See accompanying notes to condensed consolidated financial statements.

6

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

Three months ended

March 31,

    

2022

    

2021

NET CASH PROVIDED BY OPERATING ACTIVITIES

$

20,508

$

231,593

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of marketable securities

 

(595,325)

 

(332,865)

Sales of marketable securities

 

586,864

 

337,612

Acquisition of property and equipment:

Aircraft and rotable spare parts

 

(111,782)

 

(51,904)

Buildings and ground equipment

 

(2,236)

 

(4,224)

Proceeds from the sale of property and equipment

 

2,749

 

2,150

Deposits on aircraft

(28,031)

(5,000)

Aircraft deposits applied towards acquired aircraft

23,481

Increase in other assets

 

(387)

 

(67,176)

NET CASH USED IN INVESTING ACTIVITIES

 

(124,667)

 

(121,407)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

 

185,740

 

39,931

Principal payments on long-term debt

 

(93,979)

 

(135,007)

Net proceeds from issuance of common stock

 

1,514

 

1,745

Employee income tax paid on vested equity awards

(1,123)

(1,573)

Payment of debt issuance cost

(413)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

91,739

 

(94,904)

Increase (decrease) in cash and cash equivalents

 

(12,420)

 

15,282

Cash and cash equivalents at beginning of period

 

258,421

 

215,723

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

246,001

$

231,005

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Non-cash investing and financing activities:

Acquisition of property and equipment

$

13,567

$

1,380

Warrants issued to U.S. Treasury

$

$

3,291

Cash paid during the period for:

Interest, net of capitalized amounts

$

29,840

$

31,646

Income taxes

$

116

$

157

See accompanying notes to condensed consolidated financial statements.

7

SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Condensed Consolidated Financial Statements

Basis of Presentation

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”) and its leasing subsidiary SkyWest Leasing, Inc. (“SkyWest Leasing”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Due in part to the uncertain rate of recovery from the global COVID-19 pandemic and workforce shortages, in addition to other factors, the results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.

(2) Flying Agreements Revenue and Lease, Airport Services and Other Revenues

The Company recognizes flying agreements revenue and lease, airport services and other revenues when the service is provided under the applicable agreement. Under the Company’s fixed-fee arrangements (referred to as “capacity purchase agreements”) with United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”), the major airline partner generally pays the Company a fixed-fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly pays for or reimburses the Company for certain direct expenses incurred under the capacity purchase agreement, such as fuel, airport landing fees and airport rents. Under the capacity purchase agreements, the Company’s performance obligation is met when each flight is completed, measured in completed block hours, and is reflected in flying agreements revenue. The transaction price for the capacity purchase agreements is determined from the fixed-fee consideration, incentive consideration and directly reimbursed expenses earned as flights are completed over the agreement term. For the three months ended March 31, 2022 and 2021, capacity purchase agreements represented approximately 88.8% and 86.6% of the Company’s flying agreements revenue, respectively.

Under the Company’s prorate arrangements (also referred to as a “prorate” or “revenue-sharing” agreement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner. Under the Company’s prorate flying agreements, the performance obligation is met, and revenue is recognized when each flight is completed based upon the portion of the prorate passenger fare the Company anticipates that it will receive for each completed flight. The transaction price for the prorate agreements is determined from the proration formula derived from each passenger ticket amount on each completed flight over the agreement term. For the three months ended March 31, 2022 and 2021, prorate flying agreements represented approximately 11.2% and 13.4% of the Company’s flying agreements revenue, respectively.

8

The following table represents the Company’s flying agreements revenue by type for the three months ended March 31, 2022 and 2021 (in thousands):

For the three months ended March 31,

2022

    

2021

Capacity purchase agreements revenue: flight operations

$

348,474

$

211,052

Capacity purchase agreements revenue: aircraft lease and fixed revenue

 

280,419

 

231,491

Prorate agreements revenue

 

79,170

 

68,648

Flying agreements revenue

$

708,063

$

511,191

A portion of the Company’s compensation under its capacity purchase agreements is designed to reimburse the Company for certain aircraft ownership costs. The consideration for aircraft ownership costs varies by agreement but is intended to cover either the Company’s aircraft principal and interest debt service costs, its aircraft depreciation and interest expense or its aircraft lease expense costs while the aircraft is under contract. The consideration received for the use of the aircraft under the Company’s capacity purchase agreements is reflected as lease revenue, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The lease revenue associated with the Company’s capacity purchase agreements is accounted for as an operating lease and is reflected as flying agreements revenue on the Company’s consolidated statements of comprehensive income. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income since the use of the aircraft is not a separate activity of the total service provided.

Under the Company’s capacity purchase agreements, the Company is paid a fixed amount per month per aircraft over the contract term. The Company recognizes revenue attributed to the fixed monthly payments proportionate to the number of block hours completed during each reporting period, relative to the estimated number of block hours the Company anticipates completing over the remaining contract term. Due to the lower number of block hours completed during the COVID-19 pandemic compared to historical levels, the amount of cash collected for the fixed amount per aircraft exceeded the revenue recognized based on block hours completed. Accordingly, the Company deferred recognizing revenue on fixed monthly cash payments the Company received under its capacity purchase agreements beginning in 2020. Based on the number of completed block hours during the three months ended March 31, 2022, the Company recognized $7.5 million of previously deferred revenue and $3.6 million of unbilled revenue, compared to deferring revenue of $21.2 million during the three months ended March 31, 2021. The Company’s deferred revenue balance was $96.4 million as of March 31, 2022, including $33.0 million in other current liabilities and $63.4 million in other long-term liabilities. The Company’s deferred revenue balance was $103.9 million as of December 31, 2021, including $24.5 million in other current liabilities and $79.4 million in other long-term liabilities. The Company’s unbilled revenue balance was $12.0 million as of March 31, 2022, and $8.4 million as of December 31, 2021, and was included in other long-term assets. The Company’s deferred revenue and unbilled revenue balance will be recognized based on the number of block hours completed during each period relative to the estimated number of block hours the Company anticipates completing over the remaining contract term.

The Company’s capacity purchase and prorate agreements include weekly provisional cash payments from the respective major airline partner based on a projected level of flying each month. The Company and each major airline partner subsequently reconcile these payments to the actual completed flight activity on a monthly or quarterly basis.

As of March 31, 2022, the Company had 513 aircraft in scheduled service or under contract under code-share agreements. The following table summarizes the significant provisions of each code-share agreement SkyWest Airlines has with each major airline partner:

9

United Express Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

United Express Agreements

(Capacity purchase agreement)

E175

CRJ 700

CRJ 200

90

19

70

Individual aircraft have scheduled removal dates from 2024 to 2029

United Express Prorate Agreement

(Prorate agreement)

CRJ 200

41

Terminable with 120-day notice

Total under United Express Agreements

220

Delta Connection Agreements

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

Delta Connection Agreement

(Capacity purchase agreement)

E175

CRJ 900

CRJ 700

CRJ 200

71

44

5

9

Individual aircraft have scheduled removal dates from 2022 to 2031

Delta Connection Prorate Agreement

(Prorate agreement)

CRJ 200

20

Terminable with 30-day notice

Total under Delta Connection Agreements

149

American Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

American Agreement

(Capacity purchase agreement)

E175

CRJ 700

18

90

Individual aircraft have scheduled removal dates from 2024 to 2032

Total under American Agreements

108

Alaska Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

Alaska Agreement

(Capacity purchase agreement)

E175

36

Individual aircraft have scheduled removal dates from 2030 to 2034

In addition to the contractual arrangements described above, as of March 31, 2022, SkyWest Airlines has a capacity purchase agreement with American to place two Embraer E175 dual-class regional jet aircraft (“E175”) into service. The delivery dates for the two new E175 aircraft are currently scheduled for the third quarter of 2022. SkyWest Airlines also has an agreement with American to place 11 used Canadair CRJ700 regional jet aircraft (“CRJ700”) under a multi-year capacity purchase agreement in 2023.

SkyWest Airlines has a capacity purchase agreement with Alaska to place an additional seven E175 aircraft into service. The delivery dates for the seven new E175 aircraft are currently scheduled for 2022 and the first half of 2023.

SkyWest Airlines has a capacity purchase agreement with Delta to place 16 E175 aircraft into service. The delivery dates for the 16 new E175 aircraft are currently scheduled for 2022.

Final delivery and in-service dates for aircraft to be placed under contract may be adjusted based on various factors.

When an aircraft is scheduled to be removed from a capacity purchase arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the aircraft with another major airline partner, return the aircraft to the lessor if the aircraft is leased and the lease is expiring, place owned aircraft for sale, or pursue other uses for the aircraft. Other uses for the aircraft may include placing the aircraft in a prorate agreement, leasing the aircraft to a third party or parting out the aircraft to use the engines and parts as spare inventory or to lease the engines to a third party.

10

Lease, airport services and other revenues primarily consists of revenue generated from aircraft and spare engines leased to third parties and airport customer services, such as gate and ramp agent services at applicable airports where the Company has agreements with third parties. The following table represents the Company’s lease, airport services and other revenues for the three months ended March 31, 2022 and 2021 (in thousands):

For the three months ended March 31,

    

2022

    

2021

Operating lease revenue

$

16,555

$

14,950

Airport customer service and other revenue

10,534

8,414

Lease, airport services and other

$

27,089

$

23,364

The following table summarizes future minimum rental income under operating leases primarily related to leased aircraft and engines that had remaining non-cancelable lease terms as of March 31, 2022 (in thousands):

April 2022 through December 2022

    

$

34,054

2023

 

44,677

2024

 

42,593

2025

 

39,145

2026

 

34,516

Thereafter

 

120,636

$

315,621

Of the Company’s $5.5 billion of property and equipment, net as of March 31, 2022, $246.9 million of regional jet aircraft and spare engines was leased to third parties under operating leases. The Company mitigates the residual asset risks of these assets by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases typically have specified lease return condition requirements paid by the lessee to the Company and the Company typically maintains inspection rights under the leases.

The transaction price for airport customer service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled by the Company over the agreement term.

The Company’s operating revenues could be impacted by several factors, including changes to the Company’s code-share agreements with its major airline partners, changes in flight schedules, contract modifications resulting from contract renegotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major airline partners.

Other ancillary revenues commonly associated with airlines, such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits, are retained by the Company’s major airline partners on flights that the Company operates under its code-share agreements.

Allowance for credit losses

The Company monitors publicly available credit ratings for entities for which the Company has a significant receivable balance. As of March 31, 2022, the Company had gross receivables of $89.4 million in current assets and gross receivables of $232.1 million in other long-term assets. The Company has established credit loss reserves based on publicly available historic default rates issued by a third party for companies with similar credit ratings, factoring in the term of the respective accounts receivable or notes receivable. During the three months ended March 31, 2022, there were no significant changes in the outstanding accounts receivable or notes receivable or the credit ratings of the entities. The Company’s credit loss reserve was $42.1 million at March 31, 2022, compared to $42.0 million at December 31, 2021. The $0.1 million increase in the credit loss reserve for the three months ended March 31, 2022, was reflected as an increase to the credit loss expense.

11

(3) Share-Based Compensation

During the three months ended March 31, 2022, the Company granted 66,680 restricted stock units and 221,942 performance shares to certain employees of the Company under the SkyWest, Inc. 2019 Long-Term Incentive Plan. Both the restricted stock units and performance shares have a three-year vesting period, during which the recipient must remain employed with the Company. The number of performance shares awardable from the 2022 grants can range from 0% to 250% of the original amount granted depending on the Company’s performance over three one-year measurement periods against the pre-established targets. Upon vesting, each restricted stock unit and performance share will be replaced with one share of common stock. The fair value of these restricted stock units and performance shares on their date of grant was $32.86 per share. During the three months ended March 31, 2022, the Company did not grant any options to purchase shares of common stock to employees. Additionally, during the three months ended March 31, 2022, the Company granted 24,423 fully vested shares of common stock to the Company’s directors at a grant date fair value of $32.86.

The Company accounts for forfeitures of restricted stock units and performance shares when forfeitures occur. The estimated fair value of the restricted stock units and performance shares is amortized over the applicable vesting periods. Share-based compensation expense for the performance shares is based on the Company’s anticipated outcome of achieving the performance metrics. During the three months ended March 31, 2022 and 2021, the Company recorded pre-tax share-based compensation expense of $4.1 million and $2.6 million, respectively.

(4) Net Income Per Common Share

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. During the three months ended March 31, 2022, 361,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of March 31, 2022. During the three months ended March 31, 2021, 295,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of March 31, 2021. During the three months ended March 31, 2022, warrants to purchase 125,000 and 78,000 shares of common stock at $40.41 and $57.47 per share, respectively, were excluded from the computation of Diluted EPS since the warrants' exercise prices were greater than the average market price of the common shares during the quarter ended March 31, 2022.

The calculation of the weighted average number of shares of common stock outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:

Three Months Ended

March 31,

2022

2021

Numerator:

    

    

    

    

Net income

$

17,734

$

35,900

Denominator:

Basic earnings per share weighted average shares

 

50,480

 

50,286

Dilution due to stock options and restricted stock units

 

228

 

441

Diluted earnings per share weighted average shares

 

50,708

 

50,727

Basic earnings per share

$

0.35

$

0.71

Diluted earnings per share

$

0.35

$

0.71

12

(5) Segment Reporting

The Company’s two reporting segments consist of the operations of SkyWest Airlines and SkyWest Leasing activities.

The Company’s chief operating decision maker analyzes the profitability of operating new aircraft financed through the issuance of debt, including the Company’s E175 fleet, separately from the profitability of the Company’s capital deployed for ownership and financing of such aircraft. The SkyWest Airlines segment includes revenue earned under the applicable capacity purchase agreements attributed to operating such aircraft and the respective operating costs. The SkyWest Leasing segment includes applicable revenue earned under the applicable capacity purchase agreements attributed to the ownership of new aircraft acquired through the issuance of debt and the respective depreciation and interest expense of such aircraft. The SkyWest Leasing segment also includes the activity of leasing regional jet aircraft and spare engines to third parties. The SkyWest Leasing segment’s total assets and capital expenditures include new aircraft acquired through the issuance of debt and assets leased to third parties.

The following represents the Company’s segment data for the three-month periods ended March 31, 2022 and 2021 (in thousands):

Three months ended March 31, 2022

SkyWest

SkyWest

    

Airlines

    

Leasing

    

Consolidated

Operating revenues (1)

$

603,048

$

132,104

$

735,152

Operating expense

 

621,028

 

62,076

 

683,104

Depreciation and amortization expense

 

47,694

 

55,051

 

102,745

Interest expense

 

1,789

 

26,803

 

28,592

Segment profit (loss) (2)

 

(19,769)

 

43,225

 

23,456

Total assets (as of March 31, 2022)

 

2,953,902

 

4,195,056

 

7,148,958

Capital expenditures (including non-cash)

 

32,696

 

94,889

 

127,585

Three months ended March 31, 2021

SkyWest

SkyWest

    

Airlines

    

Leasing

    

Consolidated

Operating revenues (1)

$

406,450

$

128,105

$

534,555

Operating expense

 

387,870

 

65,843

 

453,713

Depreciation and amortization expense

 

50,326

 

59,271

 

109,597

Interest expense

 

3,129

 

28,225

 

31,354

Segment profit (2)

 

15,451

 

34,037

 

49,488

Total assets (as of March 31, 2021)

 

2,924,598

 

3,970,087

 

6,894,685

Capital expenditures (including non-cash)

 

35,206

 

22,302

 

57,508

(1)Prorate revenue and airport customer service revenue are primarily reflected in the SkyWest Airlines segment.
(2)Segment profit (loss) is equal to operating income less interest expense.

(6) — Leases, Commitments and Contingencies

The Company leases property and equipment under operating leases. For leases with durations longer than 12 months, the Company recorded the related operating lease right-of-use asset and operating lease liability at the present value of lease payments over the term. The Company used its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

Aircraft

As of March 31, 2022, excluding aircraft financed by the Company’s major airline partners that the Company operates for them under contract, the Company had 43 aircraft under long-term lease agreements with remaining terms ranging from two years to eight years.

13

Airport facilities

The Company has operating leases for facility space including airport terminals, office space, cargo warehouses and maintenance facilities. The Company generally leases this space from government agencies that control the use of the various airports. The remaining lease terms for facility space vary from one month to 34 years. The Company’s operating leases with lease rates that are variable based on airport operating costs, use of the facilities or other variable factors are excluded from the Company’s right-of-use assets and operating lease liabilities in accordance with accounting guidance.

Leases

As of March 31, 2022, the Company’s right-of-use assets were $223.9 million, the Company’s current maturities of operating lease liabilities were $78.9 million, and the Company’s noncurrent lease liabilities were $148.0 million. During the three months ended March 31, 2022, the Company paid $14.7 million in operating leases reflected as a reduction from operating cash flows.

The table below presents lease related terms and discount rates as of March 31, 2022.

As of March 31, 2022

Weighted-average remaining lease term for operating leases

6.2 years

Weighted-average discount rate for operating leases

6.0%

The Company’s lease costs for the three months ended March 31, 2022 and 2021 included the following components (in thousands):

For the three months ended March 31,

    

2022

    

2021

Operating lease cost

$

21,841

$

22,127

Variable and short-term lease cost

 

1,018

 

1,224

Sublease income

(1,803)

(1,335)

Total lease cost

$

21,056

$

22,016

As of March 31, 2022, the Company leased aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases, which are generally on a long-term, triple-net lease basis pursuant to which the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The Company expects that, in the normal course of business, such operating leases that expire may be renewed or replaced by other leases, or the property may be purchased rather than leased. The following table summarizes future minimum rental payments primarily related to leased aircraft required under operating leases that had initial or remaining non-cancelable lease terms as of March 31, 2022 (in thousands):

April 2022 through December 2022

    

$

66,742

2023

 

76,049

2024

 

32,144

2025

 

17,568

2026

 

15,491

Thereafter

 

72,827

$

280,821

As of March 31, 2022, the Company had a firm purchase commitment for 25 E175 aircraft from Embraer, S.A. (“Embraer”) with anticipated delivery dates through the first half of 2023.

14

The following table summarizes the Company’s commitments and obligations as noted for each of the next five years and thereafter (in thousands):

    

Total

    

Apr - Dec 2022

    

2023

    

2024

    

2025

    

2026

    

Thereafter

Operating lease payments for aircraft and facility obligations

$

280,821

$

66,742

$

76,049

$

32,144

$

17,568

$

15,491

$

72,827

Firm aircraft and spare engine commitments

 

679,789

653,270

26,519

Interest commitments (1)

 

485,584

87,784

103,072

86,121

68,249

51,641

88,717

Principal maturities on long-term debt

 

3,232,430

315,901

422,380

418,088

485,348

429,621

1,161,092

Total commitments and obligations

$

4,678,624

$

1,123,697

$

628,020

$

536,353

$

571,165

$

496,753

$

1,322,636

(1)At March 31, 2022, the Company’s long-term debt had fixed interest rates.

(7) — Fair Value Measurements

The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company determined the fair value of these assets based on the following three levels of inputs:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

As of March 31, 2022, and December 31, 2021, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):

Fair Value Measurements as of March 31, 2022

    

Total

    

Level 1

    

Level 2

    

Level 3

Marketable Securities

Bonds and bond funds

$

170,918

$

$

170,918

$

Commercial paper

 

439,532

 

 

439,532

 

$

610,450

$

$

610,450

$

Cash and Cash Equivalents

246,001

246,001

Total Assets Measured at Fair Value

$

856,451

$

246,001

$

610,450

$

15

Fair Value Measurements as of December 31, 2021

Total

Level 1

Level 2

Level 3

Marketable Securities

    

    

    

    

    

    

    

    

Bonds and bond funds

$

54,673

$

$

54,673

$

Commercial paper

 

547,316

 

 

547,316

 

$

601,989

$

$

601,989

$

Cash and Cash Equivalents

258,421

258,421

Total Assets Measured at Fair Value

$

860,410

$

258,421

$

601,989

$

The Company’s “marketable securities” classified as Level 2 securities primarily utilize broker quotes in a non-active market for valuation of these securities.

The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the three months ended March 31, 2022. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

As of March 31, 2022, and December 31, 2021, the Company classified $610.5 million and $602.0 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. As of March 31, 2022, and December 31, 2021, the cost of the Company’s total cash and cash equivalents and marketable securities was $856.4 million and $860.4 million, respectively.

The fair value of the Company’s long-term debt classified as Level 2 debt was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be $3.2 billion as of March 31, 2022, and $3.2 billion as of December 31, 2021, as compared to the carrying amount of $3.2 billion as of March 31, 2022, and $3.1 billion as of December 31, 2021.

(8) Long-term Debt

Long-term debt consisted of the following as of March 31, 2022, and December 31, 2021 (in thousands):

March 31, 2022

December 31, 2021

Current portion of long-term debt

$

413,703

$

395,371

Current portion of unamortized debt issue cost, net

(3,579)

(3,573)

Current portion of long-term debt, net of debt issue costs

$

410,124

$

391,798

Long-term debt, net of current maturities

$

2,818,727

$

2,745,567

Long-term portion of unamortized debt issue cost, net

(27,453)

(28,147)

Long-term debt, net of current maturities and debt issue costs

$

2,791,274

$

2,717,420

Total long-term debt (including current portion)

$

3,232,430

$

3,140,938

Total unamortized debt issue cost, net

(31,032)

(31,720)

Total long-term debt, net of debt issue costs

$

3,201,398

$

3,109,218

During the three months ended March 31, 2022, the Company took delivery of four new E175 aircraft that the Company financed through $82.8 million of long-term debt. The debt associated with the E175 aircraft has 5-year to 10-year terms, is due in monthly installments, and is secured by the E175 aircraft.

During the three months ended March 31, 2022, the Company executed a promissory note for $102.9 million. The promissory note has a three-year term, is due in monthly installments with a fixed annual interest rate of 3.6% and is secured by spare engines.

16

As of both March 31, 2022, and December 31, 2021, the Company had $61.4 million in letters of credit and surety bonds outstanding with various banks and surety institutions.

As of March 31, 2022, SkyWest Airlines had a $100 million line of credit with an expiration date of March 25, 2025. The line of credit includes minimum liquidity and profitability covenants and is secured by certain assets. As of March 31, 2022, SkyWest Airlines had no amount outstanding under the facility. However, at March 31, 2022, SkyWest Airlines had $31.4 million in letters of credit issued under the facility, which reduced the amount available under the facility to $68.6 million.

(9) — Investment in Other Companies

During 2019, the Company created a joint venture with Regional One, Inc. (“Regional One”) by investing $22.3 million for a 75% ownership interest in Aero Engines, LLC. (“Aero Engines”). The Company invested an additional $1.0 million into Aero Engines in 2020 and $3.3 million during the first quarter of 2022 and retained a 75% ownership interest. The primary purpose of Aero Engines is to lease engines to third parties. Aero Engines requires unanimous approval from the Company and Regional One for its engine purchases, dispositions, lease agreements with third parties and all other material transactions. The Company determined Aero Engines is a variable interest entity as the Company has a 75% ownership interest in Aero Engines and all material decisions require unanimous approval from the Company and Regional One, resulting in disproportionate ownership rights relative to voting rights. As unanimous approval is required for all Aero Engines’ material activities. Aero Engines has no primary beneficiary. The Company accounts for its investment in Aero Engines under the equity method. The Company’s exposure in its investment in Aero Engines primarily consists of the Company’s portion of income or loss from Aero Engines’ engine lease agreements with third parties and the Company’s ownership percentage in Aero Engines’ engines book value. Aero Engines had no debt outstanding as of March 31, 2022. As of March 31, 2022, the Company’s investment balance in Aero Engines was $23.9 million. The Company’s investment in Aero Engines has been recorded in “Other Assets” on the Company’s consolidated balance sheet. The Company’s portion of earnings generated by Aero Engines for the three months ended March 31, 2022, was $0.4 million, which is recorded in “Other Income (Expense)” on the Company’s consolidated statements of comprehensive income.

In 2021, the Company entered into a strategic partnership with Eve UAM, LLC (“Eve”), to develop a network of deployment for Eve’s electric vertical takeoff and landing (“eVTOL”) aircraft. The Company signed a non-binding letter of intent to purchase 100 eVTOL aircraft. As part of the partnership, the Company anticipates it will acquire an equity interest in Eve in May 2022, upon completion of certain events by Eve.

(10) Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2022 was 28.4%. The Company’s effective tax rate for the three months ended March 31, 2022 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes, the impact of non-deductible expenses, and a discrete tax expense on employee equity transactions that occurred during the three months ended March 31, 2022.

The Company’s effective tax rate for the three months ended March 31, 2021 was 28.2%. The Company’s effective tax rate for the three months ended March 31, 2021 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible expenses.

(11) Legal Matters

The Company is subject to certain legal actions which it considers routine to its business activities. As of March 31, 2022, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity, or results of operations.

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ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three-month periods ended March 31, 2022 and 2021. Also discussed is our financial condition as of March 31, 2022, and December 31, 2021. You should read this discussion in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2022, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of uncertainties, risks and assumptions associated with these statements.

Cautionary Statement Concerning Forward-Looking Statements

Certain of the statements contained in this Report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. Readers should keep in mind that all forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the uncertainty of the duration, scope and impact of COVID-19; a further spread or worsening of COVID-19 or other potential future outbreaks of infectious diseases or other health concerns; the consequences of the COVID-19 pandemic to global economic conditions, the travel industry and our major airline partners in general and our financial condition and results of operations in particular; the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel, including as a result of the COVID-19 pandemic; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on our operations; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest conducts flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; realization of manufacturer residual value guarantees on applicable SkyWest aircraft; residual aircraft values and related impairment charges; the impact of global instability, including the ongoing military conflict between Russia and the Ukraine; labor relations and costs; potential fluctuations in fuel costs and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; and the ability to attract and retain qualified pilots, as well as the other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors.

There may be other factors that may affect matters discussed in forward-looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.

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Overview

We have the largest regional airline operation in the United States through our operating subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”). As of March 31, 2022, we offered scheduled passenger service with approximately 1,960 total daily departures to destinations in the United States, Canada, and Mexico. Our fleet of Embraer E175 regional jet aircraft (“E175”), Canadair CRJ900 regional jet aircraft (“CRJ900”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) have a multiple-class seat configuration, whereas our CRJ200 aircraft have a single-class seat configuration. As of March 31, 2022, we had 633 total aircraft in our fleet, including 513 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:

    

E175

    

CRJ900

    

CRJ700

    

CRJ200

    

Total

United

 

90

19

111

220

Delta

71

44

5

29

149

American

 

18

90

108

Alaska

 

36

36

Aircraft in scheduled service or under contract

215

44

114

140

513

Leased to third parties

 

5

34

39

Other*

 

19

62

81

Total Fleet

 

215

49

167

202

633

* As of March 31, 2022, other aircraft included: supplemental spare aircraft supporting our code-share agreements which may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, or aircraft that are scheduled to be disassembled for use as spare parts.

Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements, typically in the form of capacity purchase agreements or prorate agreements, between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners. Our success is principally dependent on our ability to meet the needs of our major airline partners by providing a reliable and safe operation at attractive economics. From March 31, 2021, to March 31, 2022, we made several changes to our fleet count under our flying agreements, primarily consisting of the addition of 22 new E175 aircraft and 16 used CRJ700 aircraft.

We anticipate our fleet will continue to evolve, as we are scheduled to add two new E175 aircraft with American in the third quarter of 2022, seven new E175 aircraft with Alaska by the first half of 2023 and 16 new E175 aircraft with Delta by the end of 2022. We also anticipate adding 11 used CRJ700 aircraft with American by the end of 2023. Anticipated delivery and in-service dates may be subject to change as we are coordinating timing with our major airline partners. Our primary objective in the fleet changes is to improve our profitability by adding new E175 aircraft and used CRJ aircraft to capacity purchase agreements, and potentially removing older aircraft from service that typically require higher maintenance costs.

As of March 31, 2022, approximately 42.9% of our aircraft in scheduled service or under contract were operated for United, approximately 29.0% were operated for Delta, approximately 21.1% were operated for American and approximately 7.0% were operated for Alaska.

Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee arrangements (referred to as “capacity purchase agreements”) and revenue-sharing arrangements (referred to as “prorate” agreements). For the three months ended March 31, 2022, capacity purchase revenue and prorate revenue represented approximately 88.8% and 11.2%, respectively, of our total flying agreements revenue. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures, the number of aircraft under contract and other operating measures. On prorate routes, we have more control over scheduling, pricing and seat inventories, and we share passenger fares with our major airline partners according to prorate formulas. Our prorate revenue and profitability may fluctuate based on ticket prices and passenger loads, and we are responsible for the operating costs of the prorate flights, including fuel and airport costs.

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First Quarter Summary

We had total operating revenues of $735.2 million for the three months ended March 31, 2022, a 37.5% increase compared to total operating revenues of $534.6 million for the three months ended March 31, 2021. We had net income of $17.7 million, or $0.35 per diluted share, for the three months ended March 31, 2022, compared to net income of $35.9 million, or $0.71 per diluted share, for the three months ended March 31, 2021. The significant items affecting our revenue and operating expenses during the three months ended March 31, 2022, are outlined below:

Revenue

The number of aircraft we have in scheduled service and the number of block hours we incur on our flights are primary drivers of our flying agreements revenue under our capacity purchase agreements. The number of flights we operate and the corresponding number of passengers we carry are the primary drivers of our revenue under our prorate flying agreements. As a result of higher passenger demand, the number of aircraft we operated increased from 468 as of March 31, 2021, to 513 as of March 31, 2022; the number of block hours increased from 276,182 for the three months ended March 31, 2021, to 310,993 for the three months ended March 31, 2022, or by 12.6%; and the number of passengers we carried increased from 5.7 million for the three months ended March 31, 2021, to 8.8 million for the three months ended March 31, 2022, or by 53.9%.

As a result of increased flight schedules and additional aircraft operating under our capacity purchase agreements for the three months ended March 31, 2022, as compared to three months ended March 31, 2021, our capacity purchase revenue increased $186.4 million, or 42.1%. Additionally, we provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended March 31, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021. We did not provide our major airline partners temporary rate reductions during the three months ended March 31, 2022. As a result of increased passengers carried on our prorate routes, our prorate revenue increased $10.5 million, or 15.3%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

Operating Expenses

Our total operating expenses increased $229.4 million, or 50.6%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase in operating expenses was primarily due to $193.2 million in payroll support program grants received from U.S. Treasury reflected as an offset to operating expenses for the three months ended March 31, 2021, and an increase in the number of flights we operated for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Departures increased from 154,894 for the three months ended March 31, 2021, to 176,211 for the three months ended March 31, 2022, or by 13.8%. Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”

Fleet Activity

The following table summarizes our fleet scheduled for service or under contract as of:

Aircraft in Service or Under Contract

    

March 31, 2022

    

December 31, 2021

    

March 31, 2021

E175s

 

215

 

211

 

193

CRJ900s

 

44

 

44

 

40

CRJ700s

 

114

 

114

 

98

CRJ200s

 

140

 

140

 

137

Total

 

513

 

509

 

468

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2021 and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are presented in our Annual Report on Form 10-K for the year ended December 31, 2021. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements

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and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, long-lived assets, and income tax. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2022.

Results of Operations

Three Months Ended March 31, 2022 and 2021

Operational Statistics

The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below. The increase in block hours, departures and passengers carried during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to demand recovery from reduced flight schedules in 2021 resulting from the COVID-19 pandemic.

For the three months ended March 31,

Block hours by aircraft type:

    

2022

    

2021

    

% Change

E175s

 

146,177

128,498

13.8

%

CRJ900s

25,855

24,006

7.7

%

CRJ700s

67,878

63,095

7.6

%

CRJ200s

 

71,083