10-Q 1 skyw-20220930x10q.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 September 30, 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 October 28, 2022

Common stock, no par value

50,598,413

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

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

PART II

OTHER INFORMATION:

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 6.

Exhibits

40

Signature

41

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

September 30,

    

December 31,

    

2022

    

2021

(unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$

38,850

$

258,421

Marketable securities

 

965,347

 

601,989

Receivables, net

 

72,836

 

65,348

Inventories, net

 

118,728

 

104,093

Other current assets

 

66,428

 

38,742

Total current assets

 

1,262,189

 

1,068,593

PROPERTY AND EQUIPMENT:

Aircraft and rotable spares

 

8,262,736

 

7,848,100

Deposits on aircraft

 

47,229

 

124,964

Buildings and ground equipment

 

262,466

 

256,595

Total property and equipment, gross

 

8,572,431

 

8,229,659

Less-accumulated depreciation and amortization

 

(2,933,660)

 

(2,731,060)

Total property and equipment, net

 

5,638,771

 

5,498,599

OTHER ASSETS:

Operating lease right-of-use assets

192,709

238,516

Long-term receivables and other assets

 

360,535

 

320,239

Total other assets

 

553,244

 

558,755

Total assets

$

7,454,204

$

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

September 30,

    

December 31,

2022

    

2021

(unaudited)

CURRENT LIABILITIES:

Current maturities of long-term debt

$

429,425

$

391,798

Accounts payable

 

381,400

 

496,333

Accrued salaries, wages and benefits

 

195,082

 

150,583

Current maturities of operating lease liabilities

 

74,141

 

78,886

Taxes other than income taxes

 

36,213

 

28,869

Other current liabilities

 

43,634

 

48,152

Total current liabilities

 

1,159,895

 

1,194,621

LONG-TERM DEBT, net of current maturities

 

2,982,034

 

2,717,420

DEFERRED INCOME TAXES PAYABLE

 

683,828

 

663,236

NONCURRENT OPERATING LEASE LIABILITIES

 

117,823

 

158,274

OTHER LONG-TERM LIABILITIES

 

114,676

 

124,882

COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS’ EQUITY:

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

 

 

Common stock, no par value, 120,000,000 shares authorized; 82,591,558 and 82,335,970 shares issued as of September 30, 2022, and December 31, 2021, respectively

 

736,406

 

722,310

Retained earnings

 

2,283,973

 

2,163,916

Treasury stock, at cost, 31,994,416 and 31,956,047 shares as of September 30, 2022, and December 31, 2021, respectively

 

(619,862)

 

(618,712)

Accumulated other comprehensive loss

(4,569)

Total stockholders’ equity

 

2,395,948

 

2,267,514

Total liabilities and stockholders’ equity

$

7,454,204

$

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

Nine months ended

September 30,

September 30,

    

2022

    

2021

    

2022

    

2021

 

OPERATING REVENUES:

Flying agreements

$

763,514

$

719,084

$

2,245,351

$

1,863,242

Lease, airport services and other

 

25,929

 

25,699

 

78,329

 

73,086

Total operating revenues

 

789,443

 

744,783

 

2,323,680

 

1,936,328

OPERATING EXPENSES:

Salaries, wages and benefits

 

307,727

 

265,603

 

896,347

 

718,868

Aircraft maintenance, materials and repairs

 

183,182

 

209,795

 

506,478

 

604,501

Depreciation and amortization

 

97,433

 

109,597

 

297,427

 

329,089

Aircraft fuel

 

28,179

 

32,561

 

85,089

 

77,622

Airport-related expenses

 

17,501

 

25,992

 

54,196

 

72,478

Aircraft rentals

 

16,089

 

16,098

 

48,109

 

47,311

Special items - impairment charges

84,592

84,592

Payroll support grant

(115,352)

(422,669)

Other operating expenses

 

63,756

 

68,847

 

219,808

 

181,621

Total operating expenses

 

713,867

 

697,733

 

2,107,454

 

1,693,413

OPERATING INCOME

 

75,576

 

47,050

 

216,226

 

242,915

OTHER INCOME (EXPENSE):

Interest income

 

6,348

 

238

 

9,332

 

732

Interest expense

 

(33,283)

 

(28,980)

 

(92,308)

 

(94,274)

Other income (expense), net

 

8,112

 

(4,098)

 

21,011

 

(3,802)

Total other expense, net

 

(18,823)

 

(32,840)

 

(61,965)

 

(97,344)

INCOME BEFORE INCOME TAXES

 

56,753

 

14,210

 

154,261

 

145,571

PROVISION FOR INCOME TAXES

 

8,381

 

4,526

 

34,204

 

37,993

NET INCOME

$

48,372

$

9,684

$

120,057

$

107,578

BASIC EARNINGS PER SHARE

$

0.96

$

0.19

$

2.38

$

2.14

DILUTED EARNINGS PER SHARE

$

0.96

$

0.19

$

2.37

$

2.12

Weighted average common shares:

Basic

 

50,593

 

50,380

 

50,531

 

50,337

Diluted

 

50,636

 

50,725

 

50,636

 

50,726

COMPREHENSIVE INCOME:

Net income

$

48,372

$

9,684

$

120,057

$

107,578

Net unrealized depreciation on marketable securities, net of taxes

 

(2,624)

 

 

(4,569)

 

TOTAL COMPREHENSIVE INCOME

$

45,748

$

9,684

$

115,488

$

107,578

See accompanying notes to condensed consolidated financial statements

5

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(UNAUDITED)

(In Thousands)

Accumulated

Other

Common Stock

Retained

Treasury Stock

Comprehensive

Shares

Amount

Earnings

Shares

Amount

Loss

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

Net income

 

 

 

53,951

 

 

 

53,951

Stock based compensation expense

 

 

3,310

 

 

 

 

3,310

Net unrealized depreciation on marketable securities, net of tax of $628

(1,945)

(1,945)

Balance at June 30, 2022

 

82,515

$

731,210

$

2,235,601

 

(31,993)

$

(619,835)

$

(1,945)

$

2,345,031

Net income

 

 

 

48,372

 

 

 

48,372

Exercise of common stock options and vested employee stock awards

 

11

115

 

 

 

 

 

115

Employee income tax paid on vested equity awards

(1)

(27)

(27)

Sale of common stock under employee stock purchase plan

 

66

1,329

 

 

 

 

 

1,329

Stock based compensation expense

 

 

3,752

 

 

 

 

3,752

Net unrealized depreciation on marketable securities, net of tax of $843

(2,624)

(2,624)

Balance at September 30, 2022

 

82,592

$

736,406

$

2,283,973

 

(31,994)

$

(619,862)

$

(4,569)

$

2,395,948

See accompanying notes to condensed consolidated financial statements.

6

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, 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

Net income

 

 

 

61,994

 

 

61,994

Stock based compensation expense

 

 

2,877

 

 

 

2,877

Warrants issued to U.S. Treasury

 

 

2,513

 

 

 

 

2,513

Balance at June 30, 2021

 

82,302

$

717,714

$

2,149,900

 

(31,956)

$

(618,709)

$

2,248,905

Net income

 

 

 

9,684

 

 

9,684

Sale of common stock under employee stock purchase plan

 

34

1,401

 

 

 

 

1,401

Stock based compensation expense

 

 

1,817

 

 

 

1,817

Balance at September 30, 2021

 

82,336

$

720,932

$

2,159,584

 

(31,956)

$

(618,709)

$

2,261,807

See accompanying notes to condensed consolidated financial statements.

7

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

Nine months ended

September 30,

    

2022

    

2021

NET CASH PROVIDED BY OPERATING ACTIVITIES

$

343,535

$

686,955

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of marketable securities

 

(1,758,125)

 

(1,071,637)

Sales of marketable securities

 

1,390,198

 

1,041,149

Acquisition of property and equipment:

Aircraft and rotable spare parts

 

(522,683)

 

(223,605)

Buildings and ground equipment

 

(11,365)

 

(10,473)

Proceeds from the sale of property and equipment

 

8,494

 

7,104

Deposits on aircraft

(37,100)

(100,105)

Aircraft deposits applied towards acquired aircraft

115,085

10,987

Increase in other assets

 

(49,073)

 

(50,205)

NET CASH USED IN INVESTING ACTIVITIES

 

(864,569)

 

(396,785)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

 

601,389

 

213,326

Principal payments on long-term debt

 

(299,785)

 

(448,466)

Net proceeds from issuance of common stock

 

2,958

 

3,146

Employee income tax paid on vested equity awards

(1,150)

(1,573)

Payment of debt issuance cost

(1,949)

(495)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

301,463

 

(234,062)

Increase (decrease) in cash and cash equivalents

 

(219,571)

 

56,108

Cash and cash equivalents at beginning of period

 

258,421

 

215,723

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

38,850

$

271,831

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Non-cash investing and financing activities:

Acquisition of property and equipment

$

15,801

$

13,168

Warrants issued to U.S. Treasury

$

$

5,804

Cash paid during the period for:

Interest, net of capitalized amounts

$

92,230

$

96,397

Income taxes

$

356

$

6,374

See accompanying notes to condensed consolidated financial statements.

8

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 and nine months ended September 30, 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 nine months ended September 30, 2022 and 2021, capacity purchase agreements represented approximately 88.0% and 83.9% 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 nine months ended September 30, 2022 and 2021, prorate flying agreements represented approximately 12.0% and 16.1% of the Company’s flying agreements revenue, respectively.

9

The following table represents the Company’s flying agreements revenue by type for the three and nine months ended September 30, 2022 and 2021 (in thousands):

For the three months ended September 30,

For the nine months ended September 30,

    

2022

    

2021

2022

    

2021

Capacity purchase agreements revenue: flight operations

$

376,596

$

308,273

$

1,112,526

$

792,501

Capacity purchase agreements revenue: aircraft lease and fixed revenue

 

292,174

 

282,498

 

864,178

 

770,548

Prorate agreements revenue

 

94,744

 

128,313

 

268,647

 

300,193

Flying agreements revenue

$

763,514

$

719,084

$

2,245,351

$

1,863,242

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 nine months ended September 30, 2022, the Company recognized $25.8 million of previously deferred revenue and $14.4 million of unbilled revenue, compared to deferring revenue of $7.7 million during the nine months ended September 30, 2021. The Company’s deferred revenue balance was $78.1 million as of September 30, 2022, including $1.7 million in other current liabilities and $76.4 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 $22.8 million as of September 30, 2022, including $13.2 million in other current assets and $9.6 million in other long-term assets. The Company’s unbilled revenue balance was $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 September 30, 2022, the Company had 530 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:

10

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

80

44

5

9

Individual aircraft have scheduled removal dates from 2022 to 2032

Delta Connection Prorate Agreement

(Prorate agreement)

CRJ 200

20

Terminable with 30-day notice

Total under Delta Connection Agreements

158

American Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

American Agreement

(Capacity purchase agreement)

E175

CRJ 700

20

90

Individual aircraft have scheduled removal dates from 2022 to 2032

Total under American Agreement

110

Alaska Capacity Purchase Agreement

Agreement

    

Aircraft type

    

Number of
Aircraft

    

Term / Termination Dates

Alaska Agreement

(Capacity purchase agreement)

E175

42

Individual aircraft have scheduled removal dates from 2030 to 2034

In addition to the contractual arrangements described above, as of September 30, 2022, SkyWest Airlines has a capacity purchase agreement with Delta to place seven additional Embraer E175 regional jet aircraft (“E175”) into service, with delivery dates currently scheduled for the fourth quarter of 2022 through 2024. SkyWest Airlines has a capacity purchase agreement with Alaska to place one additional E175 aircraft into service, with a delivery date currently scheduled for 2025. 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.

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.

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 and nine months ended September 30, 2022 and 2021 (in thousands):

11

For the three months ended September 30,

For the nine months ended September 30,

    

2022

    

2021

2022

    

2021

Operating lease revenue

$

15,928

$

17,746

$

48,933

$

49,154

Airport customer service and other revenue

10,001

7,953

29,396

23,932

Lease, airport services and other

$

25,929

$

25,699

$

78,329

$

73,086

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 September 30, 2022 (in thousands):

October 2022 through December 2022

    

$

11,918

2023

 

47,303

2024

 

45,279

2025

 

40,317

2026

 

34,758

Thereafter

 

121,524

$

301,099

Of the Company’s $5.6 billion of property and equipment, net, as of September 30, 2022, $234.7 million of regional jet aircraft and spare engines was leased to third parties under operating leases. The Company’s mitigation strategy for the residual asset risks of these assets includes 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 September 30, 2022, the Company had gross receivables of $94.2 million in current assets and gross receivables of $227.6 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 nine months ended September 30, 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 $38.0 million at September 30, 2022, compared to $42.0 million at December 31, 2021. The $4.0 million decrease in the credit loss reserve for the nine months ended September 30, 2022, was reflected as a decrease to the credit loss expense.

(3) Stock-Based Compensation

During the nine months ended September 30, 2022, the Company granted 66,680 restricted stock units and 225,345 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

12

will be replaced with one share of common stock. The weighted average fair value of these restricted stock units and performance shares on their date of grant was $32.76 per share. During the nine months ended September 30, 2022, the Company did not grant any options to purchase shares of common stock to employees. Additionally, during the nine months ended September 30, 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. Stock-based compensation expense for the performance shares is based on the Company’s anticipated outcome of achieving the performance metrics. During the nine months ended September 30, 2022 and 2021, the Company recorded pre-tax stock-based compensation expense of $11.1 million and $7.3 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. Securities that could potentially dilute Basic EPS in the future, and which were excluded from the calculation of Diluted EPS because inclusion of such share would be anti-dilutive, are as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,

2022

2021

 

2022

2021

PSP1 and Treasury Loan Warrants (1)

582

388

PSP2 Warrants (2)

125

125

PSP3 Warrants (3)

78

78

78

78

Employee Stock Awards

308

124

Total antidilutive securities

 

1,093

 

78

 

715

 

78

(1)Pursuant to the payroll support program established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (“PSP1”) and Loan and Guarantee Agreement with the U.S. Department of the Treasury (“U.S. Treasury”), SkyWest issued to Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $28.38 per share.
(2)Pursuant to the payroll support program established under the Consolidated Appropriations Act, 2021 (the “2021 Appropriations Act”) (“PSP2”), SkyWest issued to U.S. Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $40.41 per share.
(3)Pursuant to the payroll support program established under the American Rescue Plan Act of 2021 (the “American Rescue Plan Act”) (“PSP3”), SkyWest issued to U.S. Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $57.47 per share.

Additionally, during the nine months ended September 30, 2022, 334,000 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 September 30, 2022. During the nine months ended September 30, 2021, 230,000 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 September 30, 2021.

13

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

Nine Months Ended

September 30,

September 30,

2022

2021

 

2022

2021

Numerator:

    

    

    

    

    

    

    

Net income

$

48,372

$

9,684

$

120,057

$

107,578

Denominator:

Basic earnings per share weighted average shares

 

50,593

 

50,380

 

50,531

 

50,337

Dilutive effect of employee stock awards and warrants

 

43

 

345

 

105

 

389

Diluted earnings per share weighted average shares

 

50,636

 

50,725

 

50,636

 

50,726

Basic earnings per share

$

0.96

$

0.19

$

2.38

$

2.14

Diluted earnings per share

$

0.96

$

0.19

$

2.37

$

2.12

(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 and other activities. 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 September 30, 2022 and 2021 (in thousands):

Three months ended September 30, 2022

SkyWest

SkyWest

    

Airlines

    

Leasing

    

Consolidated

Operating revenues (1)

$