Regional airlines, including ExpressJet and SkyWest, Airlines, typically operate smaller aircraft on shorter distance routes than major and low‑costlow-cost carriers. Several regional airlines, including Endeavor, Envoy, Horizon, Piedmont and PSA, are wholly‑ownedwholly-owned subsidiaries of major airlines.
Regional airlines generally do not try to establish an independent route system to compete with the major airlines. Rather, regional airlines typically enter into relationships with one or more major airlines, pursuant to which the regional airline agrees to use its smaller, lower‑costlower-cost aircraft to carry passengers booked and ticketed by the major airline between a hub of the major airline and a smaller outlying city. In exchange for such services, the major airline pays the regional airline either a fixed flight fee, termed “contract” or “fixed‑fee”“fixed-fee” flights, or the regional airline receives a percentage of applicable passenger ticket revenues, termed “prorate” or “revenue‑sharing”“revenue-sharing” flights, as described in more detail below.
Code‑ShareCode-Share Agreements
Regional airlines generally enter into code‑sharecode-share agreements with major airlines, pursuant to which the regional airline is authorized to use the major airline’s two‑lettertwo-letter flight designator codes to identify the regional airline’s flights and fares in the central reservation systems, to paint its aircraft with the colors and/or logos of the major airline and to
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market and advertise its status as a carrier for the major airline. Code‑shareCode-share agreements also generally obligate the major airline to provide services such as reservations, ticketing, ground support and gate access to the regional airline, and the major airline often coordinates marketing, advertising and other promotional efforts. In exchange, the regional airline provides a designated number of low‑capacitylow-capacity (usually between 50 and 76 seats) flights between larger airports served by the major airline and surrounding cities, usually in lower‑volumelower-volume markets. The financial arrangements between the regional airlines and their code‑sharecode-share partners usually involve either fixed‑feefixed-fee arrangements or revenue‑sharingrevenue-sharing arrangements as explained below:
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SkyWest Airlines has code‑shareWe have code-share agreements with Delta, United, Delta, American and Alaska. ExpressJet has code‑share agreements with United, Delta and American.
During the year ended December 31, 2017,2019, approximately 87.8%82.0% of our passenger revenuesflying agreements revenue related to fixed‑feefixed-fee contract flights, where Delta, United, American and Alaska controlled scheduling, ticketing, pricing and seat inventories. The remainder of our passenger revenuesflying agreements revenue during the year ended December 31, 20172019 related to prorate
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flights for Delta, United or American, where we controlled scheduling, pricing and seat inventories, and shared passenger fares with Delta, United or American according to prorate formulas. The routes placed under our prorate arrangements typically include flight service between one of our partners’ hub cities and a city not served under our fixed-fee arrangements.
Under our fixed-fee arrangements, our major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement but is intended to cover either our aircraft principal and interest debt service costs, our aircraft depreciation and interest expense or our aircraft lease expense costs while the aircraft is under contract. Under our ExpressJet United Express ERJ Agreement, a portion of the aircraft operating under our SkyWest Airlines Delta Connection Agreement and a portion of our aircraft operating under our ExpressJet Delta Connection Agreement, the major airline partner provides the aircraft to us for a nominal amount. The number of aircraft under our fixed‑feefixed-fee arrangements and our prorate arrangements as of December 31, 20172019 is reflected in the summary below. The following summaries of our code-share agreements with our major airline partners do not purport to be complete and are qualified in their entirety by reference to the applicable agreement.
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Delta Connection Agreements
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Delta Connection Agreement (fixed-fee arrangement) | | ● CRJ 200 ● CRJ 700 ● CRJ 900 ● E175 | |
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| ● Individual aircraft have scheduled removal dates from 2020 to 2029 ●The average remaining term of the aircraft under contract is 4.1 years |
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Delta Connection Prorate Agreement (revenue-sharing arrangement) | | ● CRJ 200 | | 29 | | ● Terminable with 30-day notice | | ||
United Express Agreements
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United Express Agreements
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| ● CRJ 200 ● CRJ 700 ● E175 | | 68 19 | 65 |
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| ● CRJ 200 | | 31 | | ● Terminable with 120-day notice | |
American Agreements
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Alaska Capacity Purchase Agreement
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Alaska Agreement (fixed-fee arrangement) | | ● E175 |
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In addition to the contractual arrangements described above, SkyWest Airlines has entered into fixed-fee agreements with AlaskaDelta and DeltaAmerican to place additional E175 aircraft (which are typically configured with 76 seats) or E175 SC dual-class regional jet aircraft (which are typically configured with 70 seats) (“E175 SC”) into service for those major airline partners.service. As of December 31, 2017, we anticipate placing an additional 122019, SkyWest Airlines is scheduled to take delivery of six new E175 aircraft in connection with Alaskaits agreement with Delta and 3020 new E175 SC aircraft in connection with Delta.its agreement with American. The delivery dates for the new E175/E175 SC aircraft are expectedcurrently scheduled to take place by the end of 2018 or early 2019.2021. Final delivery dates may be adjusted based on various factors. Additionally, SkyWest Airlines is scheduled to add an additional six used E175 aircraft under the Delta fixed-fee agreement during 2020.
SkyWest Airlines also has an agreement with Delta to place one CRJ900 regional jet aircraft (“CRJ900”) in 2020 under a nine-year fixed-fee agreement. We anticipate Delta will finance the aircraft.
SkyWest Airlines also has an agreement with American to place ten used CRJ700 regional aircraft (“CRJ700”) under a multi-year contract. As of December 31, 2019, SkyWest Airlines had placed two of these CRJ700 aircraft into service with American. We anticipate acquiring five CRJ700 aircraft from a third party and ExpressJet internally sourcing three CRJ700s through other contract expirations.
Delta Connection Agreements
ExpressJet
We and Delta are parties to a Delta Connection Agreement (the “ExpressJet Delta Connection Agreement”). During 2017, ExpressJet and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. As of December 31, 2017, ExpressJet operated 33 Canadair CRJ700 regional jet aircraft (“CRJ700”) and 16 Canadair CRJ900 regional jet aircraft (“CRJ900”) under the ExpressJet Delta Connection Agreement. Of the 49 aircraft, ExpressJet anticipates returning the 19 leased aircraft financed by Delta to Delta, including all CRJ900s, and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta. ExpressJet expects to transition all 30 CRJ700 aircraft to other major airline partners throughout 2018.
SkyWest Airlines and Delta are parties to a Delta Connection Agreement (the "SkyWest Airlines Delta"Delta Connection Agreement"), pursuant to which SkyWest Airlines provideswe provide contract flight services for Delta.
The SkyWest Airlines Delta Connection Agreement contains multi‑year rate reset provisions applicable to the CRJ aircraft that became operative in 2010.has a latest scheduled termination date of 2029. The SkyWest Airlines Delta Connection Agreement multi-year rate reset provision does not include the E175/E175 SC aircraft. SkyWest Airlines agreed with Delta on contractual rates that are effective through December 31, 2018.
The SkyWest Airlines Delta Connection Agreement is subject to early termination in various circumstances, including:
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SkyWest Airlines United Express Agreements
SkyWest AirlinesWe and United are parties to two United Express agreements: a United Express agreement to operate certain CRJ200s regional aircraft (“CRJ200”) and CRJ700s, and a United Express agreement to operate E175 aircraft (collectively, the “SkyWest Airlines United“United Express Agreements”).
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The SkyWest Airlines United Express Agreements have a latest scheduled termination date in 2027.2029. The SkyWest Airlines United Express Agreements are subject to early termination in various circumstances including:
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| subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party and certain specified conditions are not satisfied. |
ExpressJet United Express ERJAmerican Agreement
ExpressJetWe and UnitedAmerican are parties to an Amended and Restated Capacity Purchaseagreement (the “American Agreement”) for the operation of CRJ700 aircraft. The American Agreement (the "ExpressJet United Express ERJ Agreement") to operate Embraer ERJ145 regional jets (“ERJ145s”) and Embraer ERJ135 regional jets (“ERJ135s”). During 2017, ExpressJet secured a five-year extension of the ExpressJet United Express ERJ Agreement, effective January 1, 2018.
The ExpressJet United Express ERJ Agreementfor CRJ700 aircraft is scheduled to terminate in December 20222025 and is subject to early termination in various circumstances including:
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Under the terms of the ExpressJet United Express ERJ Agreement, ExpressJet operates 109 ERJ145s and three ERJ135s in the United flight system. All of such ERJ145s and ERJ135s are leased to ExpressJet by United pursuant to sublease or lease agreements. Upon the expiration of the ExpressJet United Express ERJ Agreement, ExpressJet is obligated to return the subleased or leased aircraft to United.
SkyWest Airlines American Agreement
SkyWest Airlines and American are parties to an agreement (the "SkyWest Airlines American Agreement") for the operation of CRJ200 and CRJ700 aircraft. The SkyWest Airlines American Agreement for CRJ200 aircraft and CRJ700 aircraft is scheduled to terminate in 2018 and 2020, respectively, and is subject to early termination in various circumstances including:
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ExpressJet AmericanAlaska Agreement
ExpressJetWe and AmericanAlaska are parties to an agreementa Capacity Purchase Agreement (the "ExpressJet American Agreement"“Alaska Agreement”) for the operation of CRJ700E175 aircraft. The ExpressJet Americanagreement has a 12-year term for each of the aircraft subject to the agreement. The Alaska Agreement for CRJ700 is scheduled to terminate in 2019 and is subject to early termination in various circumstances including:
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| subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party and certain specified conditions are not satisfied. |
SkyWest Airlines Alaska Agreement
SkyWest Airlines and Alaska are parties to a Capacity Purchase Agreement (the "SkyWest Airlines Alaska Agreement") for the operation of E175 aircraft. The agreement has a 12‑year term for each of the aircraft subject to the agreement. The SkyWest Airlines Alaska Agreement is subject to early termination in various circumstances including:
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Segment Financial Information
See Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Item 7 of this Report, and Note 2 to our Consolidated Financial Statements included in Item 8 of this Report, for financial information regarding our business segments.
Training and Aircraft Maintenance
SkyWest Airlines and ExpressJet provideprovides substantially all training to theirour crew members and maintenance personnel at their respectiveour training facilities. SkyWest Airlines and ExpressJetOur employees perform routine airframe and
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engine maintenance along with periodic inspections of equipment at their respectiveour maintenance facilities. SkyWest Airlines and ExpressJetWe also use third‑partythird-party vendors for certain airframe and engine maintenance work.
Fuel
Our fixed‑feefixed-fee agreements with Delta, United, American and Alaska require the respective major airline partner to either directly pay for or reimburse us for the fuel costs we incur under those agreements, thereby reducing our exposure to fuel price fluctuations. Under our prorate agreements with Delta, United and American, we are responsible for the costs to operate the flight,flights, including fuel costs, and therefore we are exposed to fuel price fluctuations for flights operated under our prorate agreements. During the year ended December 31, 2017,2019, United and Delta purchased the majority of the fuel for our aircraft flying under their respective fixed-fee agreements directly from their fuel vendors. Historically, we have not experienced problems with the availability of fuel, and believe we will be able to obtain fuel in quantities sufficient to meet our existing and anticipated future requirements at competitive prices. Standard industry fuel
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purchase contracts generally do not provide protection against fuel price increases, nor do they ensure availability of supply. We typically purchase fuel from third-party suppliers for our prorate agreements. A substantial increase in the price of jet fuel for flights we operate under our prorate agreements, or the lack of adequate fuel supplies in the future, could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Employee Matters
Railway Labor Act
Our relations with labor unions in the United States are governed by the Railway Labor Act (the “RLA”). Under the RLA, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (the “NMB”) an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMB’s usual rules, a labor union will be certified as the representative of the employees in a craft or class only if more than 50% of those employees vote for union representation. A certified labor union then enters into negotiations toward a collective bargaining agreement with the employer.
Under the RLA, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request that the NMB appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30‑day “cooling off” period begins. At the end of this 30‑day period, the parties may engage in “self help,” unless the U.S. President appoints a Presidential Emergency Board (“PEB”) to investigate and report on the dispute. The appointment of a PEB maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self help.” “Self help” includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. The U.S. Congress and the President have the authority to prevent “self help” by enacting legislation that, among other things, imposes a settlement on the parties.
Collective Bargaining
As of December 31, 2017, we had2019, SkyWest and SkyWest Airlines collectively employed approximately 16,300 full‑13,700 full-time equivalent employees.employees, consisting of 5,239 pilots, 4,126 flight attendants, 1,435 airport operations personnel, 1,284 mechanics, 888 other maintenance personnel, 178 dispatchers and 550 operational support and administrative personnel. Approximately 22.0%88.4% of these employees were represented by unions, as set forth in the table below. Effective December 31, 2011, our subsidiary ExpressJet Airlines, Inc. was merged into our subsidiary Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the “ExpressJet Combination”). Notwithstanding the completiona labor group. Most of the ExpressJet Combination, ExpressJet’s employee groups primarily continue to bethese employees are represented by those unions who provided representation prior to the ExpressJet Combination. Accordingly, the following table refers to ExpressJet’sin-house labor associations that have entered into collective bargaining agreements regarding employee groups based upon their union affiliations prior to the ExpressJet Combination.
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In January 2018, the ExpressJet Delaware Mechanics ratified a one-year contract extension to their labor agreement. Delays or expenses or other challenges associated with executing an acceptable agreement with each labor workgroup with a currently amendable contract could impact our financial performance.
As of December 31, 2017, SkyWestcompensation and SkyWest Airlines collectively employed 11,965 full‑time equivalent employees, consisting of 4,495 pilots, 3,380 flight attendants, 1,541 customer service personnel, 1,099 mechanics, 825 other maintenance personnel, 166 dispatchers and 459 operational support and administrative personnel.work rules. None of these employees are currently represented by aan outside union. Collective bargaining group organizationOutside union organizing efforts among SkyWest Airlines’our employees do occur from time to time and may continue in the future. If unionization efforts are successful, we may be subjected to increased risks of work interruption or stoppage and/or incur additional expenses associated with increased uniona change in labor representation of our employees. Neither SkyWest nor SkyWest Airlines has ever experienced a work stoppage due to a strike or other labor dispute, and we consider SkyWest Airlines’our relationships with itsour employees to be good.
Our relations with labor are governed by the Railway Labor Act (the “RLA”), the federal law governing labor relations between air carriers and their employees. Under the RLA, a collective bargaining agreement between an airline and a labor representative does not expire, but instead becomes amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in “self-help.” “Self-help” includes, among other things, a strike by the representative or the imposition of proposed changes to the collective bargaining agreement by the airline. The U.S. Congress and the President have the authority to prevent “self-help” by enacting legislation that, among other things, imposes a settlement on the parties. SkyWest Airlines respects all employees’ legal rights, including the rights to free association and collective bargaining. This includes the right to decide whether to be represented by a union. Our employees are covered by the RLA. Under the RLA, employees have the right to decide whether they wish to be represented by a union. They also have the right to reject union representation.
Government Regulation
All interstate air carriers, including SkyWest, Airlines and ExpressJet, are subject to regulation by the U.S. Department of Transportation (the “DOT”), the U.S. Federal Aviation Administration (the “FAA”) and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operating activities; record‑keepingrecord-keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. Generally, governmental agencies enforce their regulations through, among other methods, certifications, which are necessary for the continued operations of SkyWest, Airlines and ExpressJet, and proceedings, which can result in civil or criminal penalties or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, grounding of
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aircraft, inspection of aircraft, installation of new safety‑relatedsafety-related items and the mandatory removal and replacement of aircraft parts.
We believe SkyWest Airlines and ExpressJet areis in compliance in all material respects with FAA regulations and holdholds all operating and airworthiness certificates and licenses which are necessary to conduct their respectiveour operations. We incur substantial costs in maintaining current certifications and otherwise complying with the laws, rules and regulations to which SkyWest Airlines and ExpressJetwe are subject. SkyWest Airlines’ and ExpressJet’sOur flight operations, maintenance programs, record keepingrecordkeeping and training programs are conducted under FAA approved procedures. All air carriers operating in the United States are required to comply with federal laws and regulations
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pertaining to noise abatement and engine emissions. All such air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. SkyWest Airlines and ExpressJet areis also subject to certain federal and state laws relating to protection of the environment, labor relations and equal employment opportunity. We believe SkyWest Airlines and ExpressJet areis in compliance in all material respects with these laws and regulations.
Environmental Matters
SkyWest, SkyWest Airlines and ExpressJetWe are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
As the largest regional airline in the United States, we remain committed to lowering our environmental footprint while continuing to offer the best service to our customers and the communities we serve. Through the use of software and training, we heavily monitor and manage our fuel trends and fuel consumption which leads to better fuel conservation and reductions in emissions. When possible, we try to mitigate the use of fuel, including by taxiing with the use of a single engine, taking steps to improve the efficiency of aircraft routing and using ground power when the plane is parked at the gate. We participate with our major airline partners in recycling programs, and we have implemented recycling initiatives in our facilities to reduce the amount of paper, plastic and other recyclables going to landfills. We have worked aggressively to reduce our reliance on paper manuals and have converted, or are in the process of converting, our manuals and our maintenance logs into electronic form, further eliminating unnecessary waste while increasing efficiencies.
Safety and Security
We are committed to the safety and security of our passengers and employees. SkyWest Airlines and ExpressJetWe have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of theirour operations. Some of the safety and security measures we have taken with our major airline partners include: aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security requirements.
Insurance
SkyWest, SkyWest Airlines and ExpressJetWe maintain insurance policies we believe are of types customary in the industry and in amounts we believe are adequate to protect against material loss. These policies principally provide coverage for public liability, passenger liability, baggage and cargo liability, property damage, including coverage for loss or damage to our flight equipment, and workers’ compensation insurance.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year, in part because the airline industry is subject to seasonal fluctuations and changes in general economic conditions. Our operations are somewhat favorably affected by pleasure travel on our prorate routes, historically contributing to increased travel in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which can result in cancelled flights, principally during the winter months. Additionally, a significant portion of our fixed‑feefixed-fee arrangements is based on completing flights and we typically have more scheduled flights during the summer months. We generally experience a significantly higher number of weather cancellations during the winter months, which negatively impacts our revenue during such months.
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In addition to factors discussed elsewhere in this Report, the following are important risks which could adversely affect our future results. Additional risks and uncertainties not presently known to us or that we currently do not deem material may also impair our business operations. If any of the risks we describe below occur, or if any unforeseen risk develops, our operating results may suffer, our financial condition may deteriorate, the trading price of our common stock may decline and investors could lose all or part of their investment in us.
Risks Related to Our Operations
We may experience a shortage of pilots which may negatively affect our operations and financial condition.
On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increase the required training time for new commercial pilots. With these changes, the supply of qualified pilot candidates eligible for hiring by the airline industry has been dramatically reduced. Additionally, major airlines may significantly increase the number of pilots hired from regional carriers due to the number of pilots at the major airlines reaching the statutory mandatory retirement age of 65 years. These factors may cause our pilot attrition rates to be higher than our ability to hire and retain replacement pilots. If we are unable to maintain a sufficient number of eligible pilots to operate our scheduled flights, we may need to request a reduced flight schedule with our major airline partners, which may result in operational performance penalties under the code-share agreements with those partners and our operations and financial results could be materially and adversely affected.
Additionally, our projected number of available pilots and attrition rates may impact our fleet planning decisions. If actual pilot availability or our actual pilot attrition rates are materially different than our projections, our operations and financial results could be materially and adversely affected. A shortage of qualified pilots to conduct our operations may cause us to underutilize our aircraft and would negatively impact our operations and financial condition.
Our labor costs, including pilot compensation, may continue to increase.
Labor costs are a significant component of our total expenses. Currently, we believe our labor costs are competitive relative to other regional airlines. However, we cannot provide assurance that our labor costs going forward will remain competitive because of changes in supply and demand for labor in the regional industry. We compete against other airlines and businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, sustain employee engagement in our strategic vision, or if we are unsuccessful at implementing succession plans for our key staff, we may be unable to grow or sustain our business. Attrition beyond normal levels could negatively impact our operating results, increase our training and labor costs and our business prospects could be harmed.
The Airline Safety and Pilot Training Improvement Act of 2009 may continue to negatively affect our operations and financial condition.
The Airline Safety and Pilot Training Improvement Act of 2009 (the “Improvement Act”) became effective in August 2013. The Improvement Act added new certification requirements for entry‑level commercial pilots, requires additional emergency training for airline personnel, improves availability of pilot records and mandates stricter rules to minimize pilot fatigue.
The Improvement Act also:
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The Improvement Act (and associated regulations) has increased our compliance and FAA reporting obligations, has had a negative effect on pilot scheduling, work hours and the number of pilots required to be employed for our operations or other aspects of our operations, and may continue to negatively impact our operations and financial condition.
We have aircraft lease and debt commitments that extend beyond our existing fixed‑fee contractual term on certain aircraft.
Under our fixed‑fee arrangements with multiple major airline partners we have a total of 36 CRJ700/CRJ900s with flying contract expirations in 2018 and 2019. Our underlying lease or debt financing obligations associated with each of these aircraft are scheduled to terminate in 2023 and 2024 on an aircraft‑by‑aircraft basis. We may not be successful in extending the flying contract term on these aircraft with our major airline partner at acceptable economic terms. In the event we are unsuccessful in extending the flying contract terms on these aircraft, we intend to pursue alternative uses for the aircraft over the remaining aircraft financing term including, but not limited to, operating the aircraft with another major carrier under a negotiated code‑share agreement, subleasing the aircraft to another operator, and/or marketing the debt financed aircraft for sale. Additionally, we may negotiate an early lease return agreement with the aircraft lessor. In the event we are unable to extend the flying contract terms for these aircraft at each respective contract’s expiration, we may incur cash and non-cash early lease termination costs that would negatively impact our operations and financial condition. Additionally, in the event we are unable to extend a flying contract with an existing major airline partner, but reach an agreement to place the aircraft into service with a different major airline partner, we likely will incur inefficiencies and incremental costs, such as changing the aircraft livery, which would negatively impact our financial results.
Our business model is dependent on code-share agreements with four major airline partners.
Our business model depends on major airlines electing to contract with us instead of operating their own regional jets. Some regional airlines are owned by a major airline. We have no guarantee that in the future our major airline partners will choose to enter into contracts with us instead of operating their own regional jets. Our major airline partners are not prohibited from doing so under our code‑sharecode-share agreements. A decision by any of our major airline partners to phase out code‑sharecode-share relationships and instead acquire and operate their own regional jets could have a material adverse effect on our financial results.
As of December 31, 2017, 5412019, 382 out of our total 595483 aircraft available for scheduled service were operating under a fixed‑feefixed-fee arrangement or a revenue‑sharingrevenue-sharing agreement with either Delta or United. If our code‑sharecode-share relationship with Delta or United were terminated, we would be significantly impacted and likely would not have an immediate source of revenue or earnings to offset such loss. A termination of either of these relationships would likely have a material adverse effect on our financial condition, operating revenues and net income unless we are able to enter into satisfactory substitute arrangements for the utilization of the affected aircraft by other code‑sharecode-share partners, or, alternatively, obtain the airport facilities and gates and make the other arrangements necessary to fly as an independent airline. We may not be able to enter into substitute code‑sharecode-share arrangements, and any such arrangements we might secure may not be as favorable to us as our current agreements. Operating an airline independent from major airline partners would be a significant departure from our business plan and would likely require significant time and resources, which may not be a viable alternative.
Additionally, each of our agreements with our major airline partners is subject to certain early termination provisions. For example, Delta’s termination rights include the right to terminate the agreements upon the occurrence of certain force majeure events (including certain labor‑relatedlabor-related events) that prevent SkyWest Airlinesus from performance
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performing for certain periods and the right to terminate the agreements if SkyWest Airlines fails to maintain competitive base rate costs, subject to certain rights of SkyWest Airlines to take corrective action to reimburse Delta for lost revenues.periods. United may terminate the SkyWest Airlines and ExpressJet United Express Agreements due to anour uncured breach by SkyWest Airlines or ExpressJet of certain operational or performance provisions, including measures and standards related to flight completions, baggage handling and on‑timeon-time arrivals. We currently use the systems, facilities and services of Delta and United to support a significant portion of our operations, including airport and terminal facilities and operations, information technology support, ticketing and reservations, scheduling, dispatching, fuel purchasing and ground handling services. If Delta or United were to cease to maintain any of these systems, close any of these facilities or no longer provide these services to us, due to termination of one of our code‑sharecode-share agreements, a strike or other labor interruption by Delta or United personnel or for any other reason, we may not be able to obtain alternative systems, facilities or services on terms and conditions as favorable as those we currently receive, or at all. Since our revenues and operating profits are dependent on our level of flight operations, we could then be forced to significantly reduce our operations. Furthermore, upon certain terminations of our code‑sharecode-share agreements, Delta and United could require us to sell or assign to them facilities and assets, including maintenancecertain airport related facilities, we use in connection with the code‑sharecode-share services we provide. As a result, in order to offer airline service after termination of any of our code‑sharecode-share agreements, we may have to replace these facilities, assets and services.facilities. We may be unable to arrange such replacements on satisfactory terms, or at all.
ThereWe are long‑term risks related to supplyreliant on two aircraft manufacturers and demandone engine manufacturer.
We operate aircraft manufactured by Bombardier and Embraer. The issuance of regionalFAA or manufacturer directives restricting or prohibiting the use of any Bombardier or Embraer aircraft associated withtypes we operate could negatively impact our regional airline services strategy.
Our major airline partners have indicated that their committed supply of regional airline capacity is larger than they desire given current market conditions. Specifically, they have identified a general oversupply of 50‑seat regional jets under contractual commitments with regional airlines. Delta in particular has reduced both the number of 50‑seat regional jets within its network and the number of regional airlines with which it contracts. In addition to reducing the number of 50‑seat jets under contract, major airlines have reduced the utilization of regional aircraft, thereby reducing the revenue paid to regional airlines under capacity purchase agreements. This decrease has had, and may continue to have, a negative impact on our regional airline services revenuebusiness and financial results. We are also dependent upon General Electric as the sole manufacturer of engines used on the aircraft we operate. Our operations could be materially and adversely affected by the failure or
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inability of Bombardier, Embraer or General Electric to provide sufficient parts or related maintenance and support services to us on a timely manner. Additionally, timing of aircraft deliveries could be delayed beyond our control.
Our growth may be limited with our major airline partners' flight systems.
Additional growth opportunities within our major airline partners’ flight systems are limited by various factors, including a limited number of regional aircraft each such major airline partner can operate in its regional network due to its own labor agreements. Except as contemplated by our existing code‑sharecode-share agreements, we cannot be sure that our major airline partners will contract with us to fly any additional aircraft. We may not receive additional growth opportunities, or may agree to modifications to our code‑sharecode-share agreements that reduce certain benefits to us in order to obtain additional aircraft, or for other reasons. Given the competitive nature of the airline industry, we believe limited growth opportunities may result in competitors accepting reduced margins and less favorable contract terms in order to secure new or additional code‑sharecode-share operations. Even if we are offered growth opportunities by our major airline partners, those opportunities may involve economic terms or financing commitments that are unacceptable to us. Additionally, our major airline partners may reduce the number of regional jets in their system by not renewing or extending existing flying arrangements with regional operators. Any one or more of these factors may reduce or eliminate our ability to expand our flight operations with our existing major airline partners.
Increases in labor costs, including pilot costs, maintenance costs and overhead costs may result in lower operating margins under our fixed-fee contracts.
UnderLabor costs are a significant component of our total expenses. Currently, we believe our labor costs are competitive relative to other regional airlines. However, we cannot provide assurance that our labor costs going forward will remain competitive because of changes in supply and demand for labor in the regional industry. We compete against other airlines and businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, sustain employee engagement in our strategic vision, or if we are unsuccessful at implementing succession plans for our key staff, we may be unable to grow or sustain our business. Attrition beyond normal levels could negatively impact our operating results, increase our training and labor costs and our business prospects could be harmed.
Additionally, under our fixed-fee contracts with Delta, United, American and Alaska, a portion of our compensation is based upon pre‑pre-determined rates typically applied to production statistics (such as departures, block hours, flight hours and number of aircraft in service each month). The primary operating costs intended to be compensated by the pre-determined rates include labor costs, including crew training costs, certain aircraft maintenance expenses, and overhead costs. During the year ended December 31, 2017,2019, approximately 85.9%90.4% of our code‑sharecode-share operating costs were reimbursable at pre‑determinedpre-determined rates and 14.1%9.6% of our code‑sharecode-share operating costs were pass‑throughpass-through costs. Additionally, our aircraft maintenance costs may increase annually as our fleet ages at a higher rate than our pre-
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determinedpre-determined rates allow. Also, on an individual aircraft basis, various in-depth maintenance procedures are typically scheduled to occur at multi-year intervals, which can result in maintenance expense fluctuations year-to-year. If our operating costs for labor, aircraft maintenance and overhead costs exceed the compensation earned from our pre‑determinedpre-determined rates under our fixed‑feefixed-fee arrangements, our financial position and operating results will be negatively affected.
Anticipated fleet reductions with DeltaWe may experience difficulty recruiting and retaining qualified pilots and maintenance technicians.
Our operations rely on qualified personnel, including pilots and maintenance technicians. Our pilots, flight attendants and maintenance technicians may seek employment at ExpressJet may result in operating inefficiencies in 2018.
Asmainline airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines are financially able to offer. Should the turnover of December 31, 2017, ExpressJet operated 49 aircraft under the ExpressJet Delta Connection Agreement out of a total of 173 aircraft operated under all of ExpressJet’s code-share agreements. During 2017, ExpressJetemployees, particularly pilots and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. Of the 49 aircraft, ExpressJet anticipates returning 19 leased aircraft to Delta and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta. Wemaintenance technicians, sharply increase, we may not be successfulable to hire sufficient pilots and maintenance technicians to replace those leaving. Additionally, FAA regulations regarding personnel certification and qualifications, and potential future changes in placingFAA regulations, could limit the remaining 22 aircraft with other major airline partners on acceptable economic terms, or at all.number of qualified new entrants that we could hire. In the event we are unsuccessful in negotiating flying contracts for these aircraft, we intendunable to pursue alternative uses for the aircraft over their remaining financing termshire and retain qualified personnel, including but not limited to, subleasing the aircraft to another operator, and/or marketing the debt financed aircraft for sale. Although ExpressJet’s anticipated fleet reduction in 2018 is consistent with our long-term fleet plans to improve our long-term profitabilitypilots and reduce fleet risk, we may experience operating inefficiencies and cash and/or non-cash expenses in 2018 in connection with the aircraft reductions. These inefficiencies and expenses may include, but are not limited to, under-utilized facilities and other assets, infrastructure reductions, employee relocation costs or other operational disruptions. We may also experience inefficiencies while aircraft are temporarily removed from service during a transition period. Fleet transition expenses and potential operating inefficiencies may negatively impact our financial results.
We are reliant on two aircraft manufacturers and two engine manufacturers.
We operate aircraft manufactured by Bombardier and Embraer. The issuance of FAA or manufacturer directives restricting or prohibiting the use of any Bombardier or Embraer aircraft types we operate could negatively impactmechanics, our business and financial results. We are also dependent upon General Electric and Rolls Royce as the sole manufacturers of engines used on the aircraft we operate. Our operationscondition could be materially and adversely affected by the failure or inabilityaffected.
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We may experience disruption in service with key third-party service providers.
We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting, telecommunication systems and information technology infrastructure and services.
Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.
Information technology security breaches, hardware or software failures, or other information technology disruptions may negatively impact our operations or reputation.
The performance and reliability of our technology are critical to our ability to compete effectively. Any internal technological error or failure or large‑scalelarge-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our internal network. Any individual, sustained or repeated failure of technology could impact our ability to conduct our business and result in increased costs. Our technological systems and related data may be vulnerable to a variety of sources of interruption due to events beyond our control,
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including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our passengers and employees and information of our business partners. Our information systems are subject to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving, and may be difficult to anticipate or to detect for long periods of time. We may not be able to prevent all data security breaches or misuse of data. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers’, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business and financial condition.
We may experience disruption in service with key third-party service providers.
We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting, telecommunication systems and information technology infrastructure and services.
Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.
We have aircraft lease and debt commitments that extend beyond our existing fixed-fee contractual term on certain aircraft.
Under our fixed-fee arrangements with multiple major airline partners we have a total of 19 CRJ700s with flying contract expirations in 2020. Our underlying lease or debt financing obligations associated with each of these aircraft are scheduled to terminate in 2024 and 2025 on an aircraft-by-aircraft basis. We may not be successful in extending the flying contract term on these aircraft with our major airline partner at acceptable economic terms. In the event we are unsuccessful in extending the flying contract terms on these aircraft, we intend to pursue alternative uses for the aircraft over the remaining aircraft financing term including, but not limited to, operating the aircraft with another major carrier under a negotiated code-share agreement or subleasing the aircraft to another operator. Additionally, we may negotiate an early lease return agreement with the aircraft lessor. In the event we are unable to extend the flying contract terms for these aircraft at each respective contract’s expiration, we may incur cash and non-cash early lease termination costs that would negatively impact our operations and financial condition. Additionally, in the event we are unable to extend a flying contract with an existing major airline partner, but reach an agreement to place the aircraft into service with a different major airline partner, we likely will incur inefficiencies and incremental costs, such as changing the aircraft livery, which would negatively impact our financial results.
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There are long-term risks related to supply and demand of regional aircraft associated with our regional airline services strategy.
Various factors could change our major airline partners’ long-term strategy in using regional aircraft to support their network objectives. Such changes could result in a reduction in the number of regional aircraft our major airline partners operate in the future. If our major airline partners’ future strategies include a material reduction in regional aircraft generally or for specific aircraft types, such as 50-seat regional aircraft, the resulting decrease in demand in the aircraft we operate could have a material negative impact on our business and financial condition.
The residual value of our owned aircraft may be less than estimated in our depreciation policies.
As of December 31, 2017,2019, we had approximately $4.2 $5.4 billion of property and equipment and related assets, net of accumulated depreciation. In accounting for these long‑livedlong-lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long‑livedlong-lived assets, a significant change in the condition of the long‑livedlong-lived assets and operating cash flow losses associated with the use of the long‑livedlong-lived assets. In the event the estimated residual value of any of our aircraft types is determined to be lower than the residual value assumptions used in our depreciation policies, the applicable aircraft type in our fleet may be impaired and may result in a material reduction in the book value of applicable aircraft types we operate or we may need to prospectively modify our depreciation policies. For example, during 2016 we recorded an impairment of $465.6 million attributable to certain long-lived assets associated with our 50-seat aircraft primarily resulting from changes to our short-term and long-term fleet plans with our 50-seat aircraft. An impairment on any of our aircraft types we operate or an increased level of depreciation expense resulting from a change to our depreciation policies could result in a material negative impact to our financial results.
Interruptions or disruptions in service at one of our hub airports, due to weather, system malfunctions or for any other reason, could have a material adverse impact on our operations.
We currently operate primarily through hubs across the United States. Nearly all of our flights either originate from or fly into one of these hubs. Our revenues depend primarily on our completion of flights and secondarily on service factors such as timeliness of departure and arrival. Any interruptions or disruptions could, therefore, severely and adversely affect us. Extreme weather such as hurricanes or tornados can cause flight disruptions, and, during periods of storms or adverse weather, our flights may be canceled or significantly delayed. We operate a significant number of flights to and from airports with particular weather difficulties, including Atlanta, Salt Lake City, Chicago, San Francisco Newark and Denver. A significant interruption or disruption in service at one of our hubs, due to adverse weather, system malfunctions, security closures or otherwise, could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe adverse impact on our operations and financial performance.
Negative economic or industry conditions may result in reductions to our flight schedules, which could materially and adversely affect our operations and financial condition.
Our operations and financial condition are affected by many changing economic and other conditions beyond our control, including, among others:
| disruptions in the credit markets, which may impact availability of financing; |
| actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks or political instability; |
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| changes in consumer preferences, perceptions, spending patterns or demographic trends; |
| changes in the competitive environment due to industry consolidation, new airlines entering the market, our major airline partners operating smaller sized aircraft that may reduce the demand for regional aircraft and other factors; |
| actual or potential disruptions to U.S. air traffic control systems; |
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| price of jet fuel and oil; |
| outbreaks of diseases that affect travel |
| weather and natural disasters. |
The effect of any, or some combination, of the foregoing economic and industry conditions on our operations or financial condition is virtually impossible to forecast; however, the occurrence of any or all of such conditions in a significant manner could materially and adversely affect our operations and financial condition and could cause our major airline partners to reduce the utilization levels of our aircraft under our code-share agreements.
The majority of our code‑sharecode-share agreements set forth minimum levels of flight operations which our major airline partners are required to schedule for our operations and we are required to provide. These minimum flight operating levels are intended to provide a baseline level of expected utilization of aircraft, labor, maintenance facilities and related flight operations support. Historically, our major airline partners have utilized our flight operations at levels which exceed the minimum levels set forth in our code‑sharecode-share agreements, however, the occurrence of any or all of the foregoing economic and industry conditions may cause our major airline partners to reduce our utilization levels. If our major airline partners schedule the utilization of our aircraft below historical levels (including taking into account the route distances and frequency of our scheduled flights), we may not be able to maintain operating efficiencies previously obtained, which would negatively impact our operating results and financial condition. Additionally, our major airline partners may change routes and frequencies of flights, which can negatively impact our operating efficiencies. Changes in schedules may increase our flight costs, which could exceed the reimbursed rates paid by our major airline partners. Continued reduced utilization levels of our aircraft or other changes to our schedules under our code‑sharecode-share agreements would adversely impact our financial results.
We may experience an increase in fuel prices in our prorate operations.
Dependence on foreign imports of crude oil, limited refining capacity and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel. If there are additional outbreaks of hostilities or other conflicts in oil‑producingoil-producing areas or elsewhere, or a reduction in refining capacity (due to weather events, for example), or governmental limits on the production or sale of jet fuel, there could be a reduction in the supply of jet fuel and significant increases in the cost of jet fuel. Additionally, our operations may experience disruptions from temporary fuel shortages by our fuel vendors resulting from fuel quality issues, refueling disruption, or other challenges. Major reductions in the availability of jet fuel or significant increases in its cost, or a continuation of high fuel prices for a significant period of time, would have a material adverse impact on us.
Pursuant to our fixed‑feefixed-fee arrangements, our major airline partners have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. However, we bear the economic risk of fuel price fluctuations on our prorate operations. As of December 31, 2017,2019, we operated 2431 CRJ200s under a prorate agreement with United, 2429 CRJ200s under a prorate agreement with Delta, and sixseven CRJ200s under a prorate agreement with American. Our operating and financial results with respect to these prorate arrangements can be negatively affected by the price of jet fuel in the event we are unable to increase our passenger fares. Additionally in the event of prolonged low fuel prices, our competitors may lower their passenger ticket prices on routes that compete with our prorate markets, which could negatively impact our passenger load factors.
Certain flyingOur prorate arrangements with our major airline partners are terminable upon notice of 120 days or less.
Certain of ourOur prorate flying agreements with our major airline partners permit the major airline partner to terminate the agreement in its discretion by giving us notice of 120 days or less. If one of our major airline partners elects to terminate
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a flying agreement with notice of 120 days or less, our ability to use the aircraft under an alternative agreement with similar economics may be limited, which could negatively impact our financial results. Additionally, even if we can subsequently place the aircraft into service with a different major airline partner, of which there can be no assurance, we likely would incur inefficiencies and incremental costs, such as changing the aircraft livery, during the transition period, which would negatively impact our financial results.
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We have a significant amount of contractual obligations.
As of December 31, 2017,2019, we had a total of approximately $2.7$3.0 billion in total long‑termlong-term debt obligations. Substantially all of this long‑termlong-term debt was incurred in connection with the acquisition of aircraft and engines. We also have significant long‑termlong-term lease obligations primarily relating to our aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in our consolidated balance sheets. At December 31, 2017,2019, we had 31994 aircraft under lease, with remaining terms ranging up to nineten years. Future minimum lease payments due under all long‑termlong-term operating leases were approximately $716.8$443.7 million at December 31, 2017.2019. At a 5.0%6.4% discount factor, which is the average rate used to approximate the implicit rates within the applicable aircraft leases, the present value of these lease obligations was equal to approximately $594.3$354.0 million at December 31, 2017.2019. Our high level of fixed obligations could impact our ability to obtain additional financing to support additional expansion plans or divert cash flows from operations and expansion plans to service the fixed obligations.
Our anticipated fleet replacement would require a significant increase in our leverage and the related cash requirements.
We currently have 195214 CRJ200s with an average life of 15.2 years and 109 ERJ145s with an average life of 15.317.3 years. Over the next several years, we may continue to replace the CRJ200s and ERJ145s with larger regional jets. If we continue to add new aircraft to our fleet, we anticipate using significant amounts of capital to acquire these larger regional jets.
There can be no assurance that our operations will generate sufficient cash flow or liquidity to enable us to obtain the necessary aircraft acquisition financing to replace our current fleet, or to make required debt service payments related to our existing or anticipated future obligations. Even if we meet all required debt, lease and purchase obligations, the size of these long‑termlong-term obligations could negatively affect our financial condition, results of operations and the price of our common stock in many ways, including:
| increasing the cost, or limiting the availability of, additional financing for working capital, acquisitions or other purposes; |
| limiting the ways in which we can use our cash flow, much of which may have to be used to satisfy debt and lease obligations; and |
| adversely affecting our ability to respond to changing business or economic conditions or continue our growth strategy. |
If we need additional capital and cannot obtain such capital on acceptable terms, or at all, we may be unable to realize our fleet replacement plans or take advantage of unanticipated opportunities.
Our business could be harmed if we lose the services of our key personnel.
Our business depends upon the efforts of our chief executive officer, Russell A. Childs, and our other key management and operating personnel. We may have difficulty replacing management or other key personnel who cease to be employed by us and, therefore, the loss of the services of any of these individuals could harm our business. We do not maintain key‑personkey-person insurance on any of our executive officers.
We may decrease our dividends and/or reduce the amount of stock repurchases in the future.
Historically, we have paid dividends and repurchased shares of our common stock in varying amounts. The future payment and amount of cash dividends and our future repurchases of shares of common stock, if any, and the number of shares of common stock we may repurchase will depend upon our financial condition and results of
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operations and other factors deemed relevant by our board of directors. There can be no assurance that we will continue our practice of paying dividends on our common stock or that we will have the financial resources to pay such dividends. There also can be no assurance that we will continue our practice of repurchasing shares of common stock or that we will have the financial resources to repurchase shares of common stock in the future.
In addition, repurchases of our common stock pursuant to our share repurchase program and any future dividends could affect our stock price and increase its volatility. The existence of a share repurchase program and any future dividends could cause our stock price to be higher than it would otherwise be and could potentially reduce the
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market liquidity for our stock. Additionally, our share repurchase program and any future dividends may reduce our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Further, our share repurchase program may fluctuate such that our cash flow may be insufficient to fully cover our share repurchases. Although our share repurchase program is intended to enhance long-term shareholder value, there is no assurance that it will do so because the market price of our common stock may decline below the levels at which we repurchased shares of stock and short-term stock price fluctuations could reduce the program’s effectiveness.
Disagreements regarding the interpretation of our code‑sharecode-share agreements with our major airline partners could have an adverse effect on our operating results and financial condition.
Long‑termLong-term contractual agreements, such as our code‑sharecode-share agreements, are subject to interpretation and disputes may arise under such agreements if the parties to an agreement apply different interpretations to that agreement. Those disputes may divert management time and resources from the core operation of the business, and may result in litigation, arbitration or other forms of dispute resolution.
In recent years we have experienced disagreements with our major airline partners regarding the interpretation of various provisions of our code‑sharecode-share agreements. Some of those disagreements have resulted in litigation, and we may be subject to additional disputes and litigation in the future. Those disagreements have also required a significant amount of management time, financial resources and settlement negotiations of disputed matters.
To the extent that we experience disagreements regarding the interpretation of our code‑sharecode-share or other agreements, we will likely expend valuable management time and financial resources in our efforts to resolve those disagreements. Those disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. Furthermore, there can be no assurance that any or all of those proceedings, if commenced, would be resolved in our favor. An unfavorable result in any such proceeding could have adverse financial consequences or require us to modify our operations. Such disagreements and their consequences could have an adverse effect on our operating results and financial condition.
We lease aircraft and engines to third parties and the lessee may default under the lease terms, which could negatively affect our financial condition, cash flow and results of operations.
Lessee defaults may result in additional costs to us, including legal and other expenses necessary to repossess the aircraft or engines, particularly if the lessee is contesting the proceedings or is in bankruptcy. We could also incur substantial maintenance, refurbishment or repair costs if a defaulting lessee fails to pay such costs and where such maintenance, refurbishment or repairs are necessary to put the aircraft or engines in suitable condition for remarketing or sale. We may also incur storage costs associated with any aircraft or engine that we repossess and are unable to place immediately with another lessee. Even if we are able to immediately place a repossessed aircraft or engine into service ourselves, or place the aircraft and engines under another lessee, we may not be able to do so at a similar or favorable lease rate. A lessee default under one of our lease agreements could negatively affect our financial condition, cash flow and results of operations.
We have entered into a strategic engine leasing joint venture that operates under joint control with a third party that involves significant risk.
We have entered into a strategic engine joint venture with a third party to lease engines to other parties. This strategic venture involves significant risks, including:
| ● | we may not realize a satisfactory return on our investment; |
| ● | the joint venture may divert management’s attention from our core business; |
| ● | our joint venture partner could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments; and |
| ● | our joint venture partner might fail to fund their share of required capital contributions or fail to fulfill their other obligations. |
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Although we currently participate in the management of our engine joint venture, our joint venture agreement requires unanimous approval over all significant actions. In addition, if we were unable to resolve a dispute with our joint venture partner that retains material managerial veto rights, we might reach an impasse that could require us to dissolve the joint venture at a time and in a manner that could negatively affect our financial results.
We may be a party to litigation in the normal course of business or otherwise, which could affect our financial condition and results of operations.
We may become party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, arising in the ordinary course of our business or otherwise, including those related to tort, environmental, employment and commercial legal issues. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. Although we will vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain. If a legal proceeding is resolved against us, it could result in significant compensatory damages or injunctive relief that could materially adversely affect our financial condition, results of operations and cash flows.
Provisions of our charter documents and code‑sharecode-share agreements may limit the ability or desire of others to gain control of our company.
Our ability to issue shares of preferred and common stock without shareholder approval may have the effect of delaying or preventing a change in control and may adversely affect the voting and other rights of the holders of our common stock, even in circumstances where such a change in control would be viewed as desirable by most investors. The provisions of the Utah Control Shares Acquisitions Act may also discourage the acquisition of a significant interest in or control of our company. Additionally, our code‑sharecode-share agreements contain termination and extension trigger provisions related to change in control type transactions that may have the effect of deterring a change in control of our company.
Recent U.S.The adoption of new tax legislation may materiallyor changes to existing tax laws and regulations could adversely affect our financial condition or results of operationsoperations.
The airline industry is one of the most heavily taxed industries in the United States. We are subject to tax laws and cash flows.
Recently enacted U.S. tax legislation has significantly changedregulations of the U.S. federal, income taxation of U.S. corporations,state and local governments as well as various non-U.S. jurisdictions. Potential changes in existing tax laws, including by reducing the U.S. corporate incomefuture regulatory guidance, may impact our effective tax rate and revisingtax payments. There can be no assurance that changes in tax laws or regulations, both within the rules governing net operating lossesUnited States and foreignthe other jurisdictions in which we operate, will not materially and adversely affect our effective tax credits. Manyrate, tax payments, financial condition and results of theseoperations. Similarly, changes in tax laws and regulations that impact our major airline partners, customers or the economy generally may also impact our financial condition and results of operations.
In addition, tax laws and regulations are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respectscomplex and could be subject to potential amendments and technical corrections, as well asvarying interpretations, and implementingany significant failure to comply with applicable tax laws and regulations byin all relevant jurisdictions could give rise to substantial penalties and liabilities. Any changes in enacted tax laws, rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any jurisdiction; or any change in the Treasurypronouncements relating to accounting for income taxes could materially and Internal Revenue
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Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While our analysis and interpretation of this legislation is ongoing, based on reasonable estimates of our current evaluation, we have included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with this legislation. This amount may be subject to further adjustment in subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact on us of the recent tax legislation. We urge our investors to consult with their legal and tax advisors with respect to such legislation.operations.
Risks Related to the Airline Industry
The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.
An accident or incident involving one of our aircraft could result in significant potential claims of injured passengers and others, as well as repair or replacement of a damaged aircraft and its consequential temporary or
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permanent loss from service. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses from the accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that our operations are less safe or reliable than other airlines.
Various factors may negatively impact demand for air travel in the United States.
As is the case for other airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.Factors that might negatively impact our operations include:
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Increased labor costs, strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business and reduce our profitability.
Our business is labor intensive, requiring large numbers of pilots, flight attendants, mechanics and other personnel. Labor costs constitute a significant percentage of our total operating costs. For example, during the year ended December 31, 2017,2019, our salary, wage and benefit costs constituted approximately 42.5%40.7% of our total operating costs.
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Increases in our labor costs could result in a material reduction in our earnings. Any new collective bargaining agreements entered into by other regional carriers with their work forces may also result in higher industry wages and increased pressure on us to increase the wages and benefits of our employees. Future agreements with unionized and non‑unionizedrepresented employees may be on terms that are not as attractive as our current agreements or comparable to agreements entered into by our competitors.
Approximately 22.0% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct business. Relations between air carriers and labor unions in the United States are governed by the RLA, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. The RLA generally prohibits strikes or other types of self‑help action both before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining processes required by the RLA have been exhausted.
SkyWest Airlines’SkyWest’s employees are not currently represented by any union;in-house associations; however, unionizationorganizing efforts to join national unions among those employees occur from time to time. Such efforts will likely continue in the future and may ultimately result in some or all of SkyWest Airlines’our employees being represented by one or more national unions. Moreover, one or more unions representing ExpressJet employees may seek a single carrier determination by the National Mediation Board, which could require SkyWest Airlines to recognize such union or unions as the certified bargaining representative of SkyWest Airlines’ employees. One or more unions representing ExpressJet employees may also assert that SkyWest Airlines’ employees should be subject to ExpressJet’s collective bargaining agreements. If SkyWest Airlines’our employees were to unionize or be deemed to be represented by one or more national unions, negotiations with these unions representing SkyWest Airlines’ employees could divert management attention and disrupt operations, which may result in increased operating expenses and may negatively impact our financial results. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results.
We are subject to significant governmental regulation and potential regulatory changes.
All interstate air carriers, including SkyWest, Airlines and ExpressJet, are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operation activities; record keepingrecordkeeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on our operations. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. A decision by the FAA to ground, or require time‑consumingtime-consuming inspections of or maintenance on, all or any of our aircraft for any reason may have a material adverse effect on our operations. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations. From time to time, various airports throughout the country have considered limiting the use of smaller aircraft, such as our aircraft, at such airports. The imposition of any limits on the use of our aircraft at any airport at which we operate could have a material adverse effect on our operations.
We cannot predict the impact, of potential regulatory changes that may affect our business or the airline industry as whole including the potential impact of tariffs on aircraft deliveries. However, it is possible that these changes could adversely affect our business. Our business may be subject to additional costs or loss of government subsidies as a result of potential regulatory changes, which could have an adverse effect on our operations and financial results.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential code‑sharecode-share partners.
The airline industry is highly competitive. We not only compete with other regional airlines, some of which are owned by or operated as code‑sharecode-share partners of major airlines, but we also face competition from low‑costlow-cost carriers and major airlines on many of our routes. Low‑costLow-cost carriers such as Southwest, Allegiant, Spirit and JetBlue among others, operate at many of our hubs, resulting in significant price competition. Additionally, a large number of other carriers
20
operate at our hubs, creating intense competition. Certain of our competitors are larger and have significantly greater
24
financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. Increased fare competition could adversely affect our operations and the price of our common stock. The airline industry has undergone substantial consolidation, including the mergers between Alaska and Virgin America Inc. in 2016, American and US Airways Group Inc. in 2013, Southwest Airlines Co. and AirTran Holdings, Inc. in 2011, United and Continental Airlines, Inc. in 2010 and Delta and Northwest Airlines, Inc. in 2008. Any additional consolidation or significant alliance activity within the airline industry could limit the number of potential partners with whom we could enter into code‑sharecode-share relationships and could have a material adverse effect on our relationships with our major airline partners.
Due, in part, to the dynamic nature of the airline industry, major airlines may also make other strategic changes such as changing or consolidating hub locations. If our major airline partners were to make changes such as these in their strategy and operations, our operations and financial results could be adversely impacted.
Terrorist activities or warnings have dramatically impacted the airline industry, and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general, including our operations. The primary effects experienced by the airline industry include a substantial loss of passenger traffic and revenue. If additional terrorist attacks are launched against the airline industry, there will be lasting consequences of the attacks, which may include loss of life, property damage, increased security and insurance costs, increased concerns about future terrorist attacks, increased government regulation and airport delays due to heightened security. Additional terrorist attacks and the fear of such attacks could negatively impact the airline industry, and result in further decreased passenger traffic and yields, increased flight delays or cancellations associated with new government mandates, as well as increased security, fuel and other costs. We cannot provide any assurance that these events will not harm the airline industry generally or our operations or financial condition in particular.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Flight Equipment
As of December 31, 2017,2019, our fleet available for scheduled service consisted of the following types of owned and leased aircraft:
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Aircraft Type |
| Aircraft |
| Aircraft |
| Capacity |
| Range (miles) |
| Speed (mph) |
| Age (years) |
| | Aircraft | | Aircraft | | Capacity | | Range (miles) | | Speed (mph) | | Age (years) |
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CRJ900s |
| 11 |
| 41 |
| 76 |
| 1,500 |
| 530 |
| 10.4 |
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| 19 | | 24 |
| 76 |
| 1,500 |
| 530 |
| 9.2 | |
CRJ700s |
| 69 |
| 60 |
| 65-70 |
| 1,600 |
| 530 |
| 12.4 |
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| 67 | | 27 |
| 65-70 |
| 1,600 |
| 530 |
| 13.6 | |
CRJ200s |
| 105 |
| 90 |
| 50 |
| 1,500 |
| 530 |
| 15.2 |
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| 153 | | 37 |
| 50 |
| 1,500 |
| 530 |
| 17.3 | |
E175s |
| 107 |
| — |
| 70-76 |
| 2,100 |
| 530 |
| 1.9 |
|
| 156 | | — |
| 70-76 |
| 2,100 |
| 530 |
| 3.1 | |
ERJ145s |
| — |
| 109 |
| 50 |
| 1,500 |
| 530 |
| 15.3 |
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ERJ135s |
| — |
| 3 |
| 37 |
| 1,500 |
| 530 |
| 16.0 |
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Several factors may impact our fleet size throughout 20182020 and thereafter, including contract expirations, lease expirations, growth opportunities and opportunities to transition to an alternative major airline partner. Below is our 20182020 outlook on our fleet by aircraft type. Our actual future fleet size and/or mix of aircraft types will likely vary, and may vary materially, from our current fleet size.
| CRJ900s/CRJ700s – |
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| ● | CRJ200s –We currently anticipate a slight reduction in |
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Ground Facilities
SkyWest, SkyWest AirlinesWe lease many of the buildings and ExpressJetassociated land that we occupy. Most of these leases are with government agencies that control the use of the airport. We lease maintenance, training and office facilities in Salt Lake City, Utah, and we lease additional maintenance facilities in Boise, Idaho; Fresno, California; Tucson, Arizona; Chicago, Illinois; Detroit, Michigan; Nashville, Tennessee; South Bend, Indiana; Fort Wayne, Indiana; Minneapolis, Minnesota; and San Luis Obispo, California. We also lease ticket counters, passenger hold rooms, operating areas and other terminal space in many of the airports that we serve.
We own or lease the following principal properties:our corporate headquarters facilities located in St. George, Utah and a maintenance accessory shop facility in Salt Lake City, Utah. We also own maintenance facilities that we have land leases on in Milwaukee, Wisconsin; Oklahoma City, Oklahoma; Colorado Springs, Colorado; and Palm Springs, California.
SkyWest Facilities
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SkyWest Airlines Facilities
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ExpressJet Facilities
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Our management deems the current facilities of SkyWest, SkyWest Airlines and ExpressJet as being suitable to support existing operations and believes these facilities will be adequate for the foreseeable future.
We are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2017,2019, our 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 our financial position, liquidity or results of operations.
27
ITEM 4. MINE SAFETY DISCLOSURES
The disclosure required by this item is not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price for Our Common StockInformation
Our common stock is traded on The Nasdaq Global Select Market under the symbol “SKYW.” As of February 16, 2018,12, 2020, there were approximately 768730 stockholders of record of our common stock. Securities held of record do not include shares held in securities position listings. The following table sets forth the range of high and low closing sales prices for our common stock, during the periods indicated.
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| 2016 |
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Quarter |
| High |
| Low |
| High |
| Low |
| ||||
First |
| $ | 37.45 |
| $ | 32.75 |
| $ | 20.08 |
| $ | 14.19 |
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Second |
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| 37.50 |
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| 30.40 |
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| 26.46 |
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| 18.77 |
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Third |
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| 44.40 |
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| 32.05 |
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| 29.78 |
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| 25.36 |
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Fourth |
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| 54.55 |
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| 43.20 |
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| 39.30 |
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| 27.70 |
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The transfer agent for our common stock is Zions First National Bank, Salt Lake City, Utah.
Dividends
During 2017,2019, our Board of Directors declared regular quarterly dividends of $0.08$0.12 per share. OurDuring 2018, our Board of Directors declared regular quarterly dividends of $0.04$0.10 per share for the first quarter of 2016 and $0.05 per share for the second, third and fourth quarters of 2016.share. We intend to continue to pay quarterly dividends subject to liquidity, capital availability and quarterly determinations that cash dividends are in the best interests of our shareholders.
Issuer Purchases of Equity Securities
22
Our Board of Directors has adopted a stock repurchase program which authorizes us to repurchase shares of our common stock in the public market or in private transactions, from time to time, at prevailing prices. Our stock repurchase program currently authorizes the repurchase of up to $100.0$250.0 million of our common stock. The following table summarizes our purchasesthe repurchases under our stock repurchase program during the three months ended December 31, 2017:2019:
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| Total Number of |
| Average Price |
| Total Number of Shares |
| Maximum Dollar Value of | ||
October 1, 2019 – October 31, 2019 | | 87,632 | | $ | 57.05 | | 87,632 | | $ | 164,590 |
December 1, 2019 - December 31, 2019 | | 79,749 | | | 62.07 | | 79,749 | | | 159,590 |
Total | | 167,381 | | $ | 59.74 | | 167,381 | | $ | 159,590 |
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| Total Number of |
| Average Price |
| Total Number of Shares |
| Maximum Dollar Value of | ||
November 1, 2017 - November 31, 2017 |
| 110,497 |
| $ | 46.90 |
| 110,497 |
| $ | 84,807 |
December 1, 2017 - December 31, 2017 |
| 92,258 |
|
| 52.18 |
| 92,258 |
|
| 79,992 |
Total |
| 202,755 |
| $ | 49.30 |
| 202,755 |
| $ | 79,992 |
(1) |
|
28
Stock Performance Graph
The following Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock over the five‑yearfive-year period ended December 31, 2017,2019, with the cumulative total return during such period of the Nasdaq Stock Market (U.S. Companies) and the Nasdaq Stock Market Transportation Index. The following graph assumes an initial investment of $100.00 with dividends reinvested. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
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| INDEXED RETURNS |
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Company Name / Index |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
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SkyWest, Inc. |
| 100 |
| 120.38 |
| 109.71 |
| 158.69 |
| 306.30 |
| 448.91 |
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NASDAQ Composite |
| 100 |
| 140.12 |
| 160.78 |
| 171.97 |
| 187.22 |
| 242.71 |
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NASDAQ Transportation Index |
| 100 |
| 141.60 |
| 171.91 |
| 132.47 |
| 171.17 |
| 218.34 |
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23
| | | | | | | | | | | | | |
| | INDEXED RETURNS |
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| | Base | | | | | | | | | | |
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| | Period | | Years Ending |
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Company Name / Index | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
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SkyWest, Inc. |
| 100 |
| 144.65 | | 279.19 | | 409.17 | | 345.75 |
| 506.23 | |
NASDAQ Composite |
| 100 |
| 106.96 | | 116.45 | | 150.96 | | 146.67 |
| 200.49 | |
NASDAQ Transportation Index | | 100 | | 77.05 | | 99.57 | | 127.01 | | 115.52 | | 145.48 | |
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this Report.
29
Selected Consolidated Financial Data (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | |
| | Year ended December 31, |
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| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
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Operating revenues |
| $ | 2,971,963 |
| $ | 3,221,679 |
| $ | 3,122,592 |
| $ | 3,063,702 |
| $ | 3,095,563 | |
Operating income (loss)(1) | |
| 512,258 | |
| 474,280 | |
| 388,199 | |
| (172,684) | |
| 234,515 | |
Net income (loss)(2) | |
| 340,099 | |
| 280,372 | |
| 428,907 | |
| (161,586) | |
| 117,817 | |
Net income (loss) per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 6.68 | | $ | 5.40 | | $ | 8.28 | | $ | (3.14) | | $ | 2.31 | |
Diluted | | $ | 6.62 | | $ | 5.30 | | $ | 8.08 | | $ | (3.14) | | $ | 2.27 | |
Weighted average shares: | | | | | | | | | | | | | | | | |
Basic | |
| 50,932 | |
| 51,914 | |
| 51,804 | |
| 51,505 | |
| 51,077 | |
Diluted | |
| 51,375 | |
| 52,871 | |
| 53,100 | |
| 51,505 | |
| 51,825 | |
Total assets(3) | | $ | 6,657,129 | | $ | 6,313,212 | | $ | 5,474,400 | | $ | 5,007,966 | | $ | 4,781,984 | |
Current assets(3) | |
| 760,346 | |
| 1,020,794 | |
| 995,133 | |
| 917,792 | |
| 1,017,570 | |
Current liabilities | |
| 924,676 | |
| 924,826 | |
| 820,825 | |
| 747,265 | |
| 748,026 | |
Long-term debt, net of current maturities | |
| 2,628,989 | |
| 2,809,768 | |
| 2,377,346 | |
| 2,240,051 | |
| 1,659,234 | |
Stockholders’ equity | |
| 2,175,014 | |
| 1,964,281 | |
| 1,754,322 | |
| 1,350,943 | |
| 1,506,435 | |
Return (loss) on average equity(4) | |
| 16.4 | % |
| 15.1 | % |
| 27.6 | % |
| (12.0) | % |
| 7.8 | % |
Cash dividends declared per common share | | $ | 0.48 | | $ | 0.40 | | $ | 0.32 | | $ | 0.19 | | $ | 0.16 | |
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| Year ended December 31, |
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| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| |||||
Operating revenues |
| $ | 3,204,268 |
| $ | 3,121,206 |
| $ | 3,095,563 |
| $ | 3,237,447 |
| $ | 3,297,725 |
|
Operating income (loss)(1) |
|
| 388,199 |
|
| (172,684) |
|
| 234,515 |
|
| 24,848 |
|
| 153,111 |
|
Net income (loss)(2) |
|
| 428,907 |
|
| (161,586) |
|
| 117,817 |
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| (24,154) |
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| 58,956 |
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Net income (loss) per common share: |
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Basic |
| $ | 8.28 |
| $ | (3.14) |
| $ | 2.31 |
| $ | (0.47) |
| $ | 1.14 |
|
Diluted |
| $ | 8.08 |
| $ | (3.14) |
| $ | 2.27 |
| $ | (0.47) |
| $ | 1.12 |
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Weighted average shares: |
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Basic |
|
| 51,804 |
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| 51,505 |
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| 51,077 |
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| 51,237 |
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| 51,688 |
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Diluted |
|
| 53,100 |
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| 51,505 |
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| 51,825 |
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| 51,237 |
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| 52,422 |
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Total assets(3) |
| $ | 5,458,279 |
| $ | 5,007,966 |
| $ | 4,781,984 |
| $ | 4,388,818 |
| $ | 4,214,582 |
|
Current assets(3) |
|
| 995,133 |
|
| 917,792 |
|
| 1,017,570 |
|
| 1,089,501 |
|
| 1,287,568 |
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Current liabilities |
|
| 820,825 |
|
| 747,265 |
|
| 748,026 |
|
| 691,065 |
|
| 625,910 |
|
Long-term debt, net of current maturities |
|
| 2,377,346 |
|
| 2,240,051 |
|
| 1,659,234 |
|
| 1,548,390 |
|
| 1,306,370 |
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Stockholders’ equity |
|
| 1,754,322 |
|
| 1,350,943 |
|
| 1,506,435 |
|
| 1,400,346 |
|
| 1,434,939 |
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Return (loss) on average equity(4) |
|
| 27.6 | % |
| (12.0) | % |
| 7.8 | % |
| (1.7) | % |
| 4.2 | % |
Cash dividends declared per common share |
| $ | 0.32 |
| $ | 0.19 |
| $ | 0.16 |
| $ | 0.16 |
| $ | 0.16 |
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(1) | Our 2019 operating income included a special charge of $21.9 million, primarily consisting of a non-cash write-off of aircraft manufacturer part credits that SkyWest Airlines forfeited to settle future lease return obligations. Our operating loss for 2016 included a special charge of $465.6 million related to an impairment on our 50-seat aircraft and related assets. |
| (2) | Our |
| ExpressJet. Our net income for 2017 included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with the Tax Cuts and Jobs Act of 2017 that was enacted into law in December 2017. |
(3) | Certain reclassifications were made to |
(4) | Calculated by dividing net income (loss) by the average of beginning and ending stockholders’ equity for the year. |
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Selected Operating Data
| | | | | | | | | | | |
| | Year ended December 31, |
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| | 2019 (1) | | 2018 | | 2017 | | 2016 | | 2015 |
|
Block hours |
| 1,464,405 |
| 1,757,047 |
| 1,839,779 |
| 1,938,492 |
| 2,074,804 | |
Departures |
| 842,098 |
| 1,010,053 |
| 1,087,052 |
| 1,153,480 |
| 1,226,897 | |
Passengers carried |
| 43,660,766 |
| 48,350,470 |
| 51,483,552 |
| 53,539,438 |
| 56,228,593 | |
Average passenger trip length |
| 500 | | 523 | | 512 |
| 523 |
| 528 | |
Number of operating aircraft at end of year(2) |
| 483 |
| 596 |
| 595 |
| 652 |
| 660 | |
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| Year ended December 31, |
| ||||||||
|
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
|
Block hours |
| 1,839,779 |
| 1,938,492 |
| 2,074,804 |
| 2,275,562 |
| 2,380,118 |
|
Departures |
| 1,087,052 |
| 1,153,480 |
| 1,226,897 |
| 1,357,454 |
| 1,453,601 |
|
Passengers carried |
| 51,483,552 |
| 53,539,438 |
| 56,228,593 |
| 58,962,010 |
| 60,581,948 |
|
Average passenger trip length |
| 512 |
| 523 |
| 528 |
| 534 |
| 525 |
|
Number of operating aircraft at end of year(1) |
| 595 |
| 652 |
| 660 |
| 717 |
| 755 |
|
(1) | Excludes ExpressJet operating data since ExpressJet was sold during January 2019. |
(2) | Excludes aircraft leased to |
30
ITEM 7. 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 our results of operations during the years ended December 31, 2017, 20162019, 2018 and 2015.2017. Also discussed is our financial position as of December 31, 20172019 and 2016.2018. You should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report or incorporated herein by reference. This discussion and analysis contains forward‑lookingforward-looking statements. Please refer to the sections of this Report entitled “Cautionary Statement Concerning Forward‑lookingForward-Looking Statements” and “Item 1A. Risk Factors” for discussion of some of the uncertainties, risks and assumptions associated with these statements.
OverviewThis section of this Annual Report on Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Through SkyWest Airlines and ExpressJet, we
Overview
We have the largest regional airline operationsoperation in the United States. As of December 31, 2017, SkyWest Airlines and ExpressJet2019, we offered scheduled passenger and air freight service with approximately 2,9802,300 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of December 31, 2017,2019, we had 595483 aircraft available for scheduled service consisting of the following:
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| CRJ200 |
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| CRJ900 |
| ERJ135 |
| ERJ145 |
| E175 |
| Total |
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| CRJ200 |
| CRJ700 |
| CRJ900 |
| E175 |
| Total |
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Delta |
| 84 | | 13 | | 43 | | 59 | | 199 | | |||||||||||||||
United |
| 81 |
| 20 |
| — |
| 3 |
| 109 |
| 65 |
| 278 |
|
| 99 | | 19 | | — | | 65 | | 183 | |
Delta |
| 94 |
| 60 |
| 52 |
| — |
| — |
| 19 |
| 225 |
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American |
| 16 |
| 49 |
| — |
| — |
| — |
| — |
| 65 |
|
| 7 | | 62 | | — | | — | | 69 | |
Alaska |
| 4 |
| — |
| — |
| — |
| — |
| 23 |
| 27 |
|
| — | | — | | — | | 32 | | 32 | |
Aircraft in scheduled service |
| 195 |
| 129 |
| 52 |
| 3 |
| 109 |
| 107 |
| 595 |
| | 190 | | 94 | | 43 | | 156 | | 483 | |
Subleased to an un-affiliated entity |
| 4 |
| — |
| — |
| — |
| — |
| — |
| 4 |
|
| 4 | | 10 | | 5 | | — | | 19 | |
Other* |
| 9 |
| 7 |
| — |
| — |
| 8 |
| — |
| 24 |
|
| 20 | | 22 | | — | | — | | 42 | |
Total Fleet |
| 208 |
| 136 |
| 52 |
| 3 |
| 117 |
| 107 |
| 623 |
|
| 214 | | 126 | | 48 | | 156 | | 544 | |
*As of December 31, 2017,2019, these aircraft have been removed from service and are in the process of being returnedplaced under the applicablea leasing arrangement orwith a third party, are aircraft transitioning between code-share agreements with our major airline partners. Duringpartners and being used as a supplemental spare aircraft, or are in the year ended December 31, 2017, we sold eleven owned EMB120 30-seat turboprop aircraft at net book value.process of being parted out.
Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements between airlines that, among other things, allow one airline to use another airline’s flight
25
designator codes on its flights) with our major airline partners. Our success is principally centered on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics. Over the last several years, our business has evolved as we have added 21ten new E175 aircraft and seven new CRJ900 aircraft to our fleet since December 31, 2016,2018, and removed 47 50-seat100 unprofitable ERJ145 aircraft and 18 50 seatthrough the sale of ExpressJet in January 2019, ten CRJ200 aircraft, that were operating under less profitable or unprofitable flying agreements.15 CRJ700 aircraft and five CRJ900 aircraft.
We anticipate our fleet will continue to evolve, in 2018 as we are scheduled to add 4226 new E175 aircraft, six used E175 aircraft and one new CRJ900 aircraft to existing fixed-fee agreements by the end of 2018 or early 2019.2021. We also anticipate certain fleet reductions, primarily due toseven of these new aircraft will be replacing older CRJ900 and CRJ700 aircraft currently operating under fixed-fee agreements, with the wind down of the ExpressJet Delta Connection Agreement.remaining coming from new flying opportunities. Our primary objective in the fleet changes is to improve our profitability by adding new aircraft to fixed-fee agreements at improved economics, including the E175 aircraft, whileextending contract terms at improved economics, and potentially removing older, less profitable aircraft from our fleet.
On January 22, 2019, we completed the sale of ExpressJet. In conjunction with the sale of ExpressJet, we retained ownership of the 16 CRJ200 aircraft and the 10 CRJ700 aircraft operated by ExpressJet as of December 31, 2018. ExpressJet retained operation of the 100 ERJ145 aircraft that were operating under less profitable or unprofitable arrangements.ExpressJet leased from United.
For the year ended December 31, 2017,2019, approximately 46.7%41.2% of our aircraft in scheduled service were operated for United,Delta, approximately 37.8%37.9% were operated for Delta,United, approximately 10.9%14.3% were operated for American and approximately 4.6%6.6% 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‑feefixed-fee arrangements and our prorate flying arrangements. For the year ended December 31, 2017,2019, contract flying revenue and prorate revenue represented approximately 88%82.0% and 12%18.0%, respectively, of our total passenger revenues.flying agreements revenue. On contract routes, the major
31
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 and other operating measures.
Our financial and operating results for the years ended December 31, 2017, 2018 and 2019, and our financial position as of December 31, 2018 contained in this Report, include the financial results and position of ExpressJet through January 22, 2019 for those respective periods.
Financial Highlights
We had total operating revenues of $3.0 billion for the year ended December 31, 2019, a 7.8% decrease compared to total operating revenues of $3.2 billion for the year ended December 31, 2017, a 2.5% increase, compared to total operating revenues of $3.1 billion for the year ended December 31, 2016.2018. We had a net income of $428.9$340.1 million, or $8.08$6.62 per diluted share, for the year ended December 31, 2017,2019, compared to a net lossincome of $161.6$280.4 million, or $(3.14)$5.30 per diluted share, for the year ended December 31, 2016. Our results for 2017 included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with the Tax Cuts and Jobs Act that was enacted into law in December 2017. Our results for 2016 included a non-cash impairment charge of $465.6 million (pre-tax) primarily attributable to assets associated with our 50-seat aircraft. 2018.
The significant items affecting our financial performance during the year ended December 31, 20172019 are outlined below:
Revenue
The number of aircraft we have in scheduled service and the number of block hours we generate on our flights are primary drivers to our passenger revenuesflying agreements revenue under our fixed-fee arrangements. The number of flights we operate and the corresponding number of passengers we carry are the primary drivers to our revenue under our prorate flying agreements.During 2017,the year ended December 31, 2019, we had a net reductiondecrease in the number of aircraft operating under fixed-fee agreements.agreements, primarily related to the sale of ExpressJet during January 2019. As summarized under the Fleet Activity section below, from December 31, 20162018 to December 31, 2017,2019, we removed 78130 aircraft from service that were operating under less profitable flying contracts and added 2117 aircraft to new or existing fixed-fee arrangements at improved economics.primarily through the sale of ExpressJet. The number of aircraft available for scheduled service decreased from 652596 aircraft at December 31, 20162018 to 595483 at December 31, 2017, or by 8.7%.2019. Our completed block hours decreased 5.1%15.7% over the same period primarily due to the reduced fleet size during 2017.sale of ExpressJet and the corresponding decrease in block hours generated by ExpressJet.
26
DespiteOur total revenues decreased $249.7 million for the net reduction in our fleet size and block hour production since 2016, our total passenger revenue increased 2.5% from 2016year ended December 31, 2019 compared to 2017the year ended December 31, 2018, primarily due to higher compensation we earned on aircraft, including new aircraft added in 2017, partially offset by athe sale of ExpressJet and the corresponding decrease in revenue associated with ExpressJet flying contracts. ExpressJet revenue decreased from $564.2 million for the aircraft removedyear ended December 31, 2018 to $24.1 million for the year ended December 31, 2019. Revenue from our fleet. Additionally, SkyWest Airlines took deliveryand our leasing subsidiary SkyWest Leasing increased from $2.7 billion for the year ended December 31, 2018 to $2.9 billion for the year ended December 31, 2019. The increase in revenue excluding the impact from the sale of 19ExpressJet was primarily related to additional revenue generated from 10 new E175 aircraft duringand seven new CRJ900 aircraft added under fixed-fee contracts since December 31, 2018.
Operating Expenses
Our total operating expenses decreased $287.7 million for the fourth quarter of 2016, which had only a partial quarter impact on 2016 revenue for comparability purposesyear ended December 31, 2019 compared to the 2017 year.
year ended December 31, 2018. This decrease was primarily due to the sale of ExpressJet and the corresponding reduction in ExpressJet operating expenses, partially offset by additional operating expenses at SkyWest Airlines and SkyWest Leasing that resulted from new, additional aircraft we placed into service since December 31, 2018. ExpressJet operating expenses decreased from $577.6 million for the year ended December 31, 2018 to $28.7 million for the year ended December 31, 2019. Operating Expenses
The decreaseexpenses from SkyWest Airlines and SkyWest Leasing increased from $2.2 billion for the year ended December 31, 2018 to $2.4 billion for the year ended December 31, 2019. Additional details regarding the increase in our operating expense from 2016 to 2017expenses are described in the section of $477.8 million, or 14.5%, was related primarily to a non-cash impairmentthis Report entitled “Results of $465.6 million recorded in 2016 primarily attributable to the write-down of certain long-lived assets associated with our 50-seat aircraft. We did not have an impairment in 2017. The remaining decrease in our direct operating costs was primarily associated with the reduction to our fleet size of 8.7% from 2016 to 2017.Operations.”
Fleet Activity
The following table summarizes our fleet activity for 2017:2019:
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|
|
|
|
|
|
|
| | | | | | ||||
Aircraft in Service |
| December 31, 2016 |
| Additions |
| Removals |
| December 31, 2017 |
| | December 31, 2018 | | Additions | | Removals | | December 31, 2019 | |
E175s | | 146 | | 10 | | — | | 156 | | |||||||||
CRJ900s | | 41 | | 7 | | (5) | | 43 | | |||||||||
CRJ700s | | 109 | | — | | (15) | | 94 | | |||||||||
CRJ200s |
| 213 |
| — |
| (18) |
| 195 |
| | 200 | | 6 | | (16) | | 190 | |
CRJ700s |
| 130 |
| — |
| (1) |
| 129 |
| |||||||||
CRJ900s |
| 64 |
| — |
| (12) |
| 52 |
| |||||||||
ERJ145/135s |
| 159 |
| — |
| (47) |
| 112 |
| |||||||||
E175s |
| 86 |
| 21 |
| — |
| 107 |
| |||||||||
ERJ145s | | 100 | | — | | (100) | | — | | |||||||||
Total |
| 652 |
| 21 |
| (78) |
| 595 |
| | 596 | | 23 | | (136) | | 483 | |
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The additional 21ten new E175 aircraft wereand seven new CRJ900 aircraft we acquired and placed the aircraft into service under fixed-fee contracts during 2017. The 18 CRJ200s, 47 ERJ145s, twelve CRJ900s and oneflying agreements. We removed five CRJ900 aircraft from service that we are leasing to a third party. We also removed 15 CRJ700 were aircraft removed from scheduled service during 2017 and were either leased aircraft2019 that were returnedwe are leasing to lessors (ora third party or in the process of being returnedtransitioning to lessors) or owned aircraft that were sold to third parties.
Fleet Developments
As of December 31, 2017, we had 107 E175 aircraft in service. We have agreements with multipleanother major airline partners to place 42 new E175/E175 SC aircraft into fixed-fee contracts bypartner. We removed 100 ERJ145s resulting from the endsale of 2018 or early 2019.ExpressJet.
During 2017, ExpressJet and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. As of December 31, 2017, ExpressJet operated 49 CRJ700s/900s under the ExpressJet Delta Connection Agreement. Of the 49 aircraft, ExpressJet anticipates returning 19 leased aircraft to Delta and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta.
Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to our Consolidated Financial Statements included in Item 8 of this Report. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements 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, aircraft maintenance, aircraft leases, impairment of long‑livedlong-lived assets, stock‑based compensation expenseself-insurance and fair valueincome tax as discussed below. 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 could differ materially, from such estimates.
Revenue Recognition
PassengerFlying agreements and ground handlingairport customer service and other revenues are recognized when service is provided. Under our fixed-fee and prorate flying agreements with our major airline partners, revenue is considered earned when each flight is completed. OurA portion of our compensation under our fixed-fee flying agreements with our major airline partners contain certain provisions pursuantis designed to whichreimburse us for the parties could terminate the respective agreement, subject to certain rightsuse of the other party, if certain performance criteria are not maintained.aircraft we provide under such agreements. This compensation is deemed to be lease revenue, inasmuch as the agreements identify the “right of use” or a specific type and number of aircraft over the agreement term.
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The amount of compensation deemed to be lease revenue is determined from the agreed upon rates for the use of the aircraft included in each fixed-fee agreement, which we believe approximates fair value for the aircraft leases. Under our airport customer service agreements, revenue is considered earned when each flight we provide customer service for departs. Our revenues could be impacted by a number of factors, including changes to the applicable code‑sharecode-share agreements, contract modifications resulting from contract renegotiations and our ability to earn incentive payments contemplated under applicable agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement date, we record that period’s revenues based on the lower of the prior period’s approved rates or our estimate of rates that will be implemented upon completion of negotiations. Also, in the event we have a reimbursement dispute with a major airline partner at a quarterly or annual financial statement date, we evaluate the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are required to exercise judgment and use assumptions in the application of our revenue recognition policy. See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that we anticipate is likely to have an impact on our revenue accounting beginning in 2018.
Maintenance
We use the direct‑expense method of accounting for our regional jet aircraft engine overhaul costs. Under this method, the maintenance liability is not recorded until the maintenance services are performed. With respect to engines on a portion of our fleet, a third‑party vendor provides our long‑term engine services covering the scheduled and unscheduled repairs for enginesOur rates were finalized under our Fixed‑Rate Engine Contracts. Under the termscode-share agreements as of the vendor agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third‑party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the third‑party vendor agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement.December 31, 2019.
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Aircraft Leases
OurAs of December 31, 2019, our fleet of aircraft in scheduled service includes 319included 94 aircraft under lease. All of ExpressJet’s ERJ145 aircraft flying for United are leased from United for nominal amounts. In order to determine the proper classification of our leased aircraft as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Under the majority of our operating leases, we are required to meet half-time lease return conditions with the aircraft, which presumes at least 50 percent of the eligible flight time for certain components since the last overhaul remains when the aircraft is returned to the lessor. A liability for probable lease return costs is recorded after the aircraft has completed its last maintenance cycle prior to being returned. Several factors can impact the estimated liability for lease return costs including, but not limited to, timing of scheduled maintenance events and anticipated condition of the aircraft at the end of the lease term. We believe it is unlikely that materially different estimates for lease return obligations would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made. Additionally, operating leases are not reflected inwe adopted Financial Accounting Standards Board issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”) on January 1, 2019. Under Topic 842, we were required to estimate our consolidated balance sheet and accordingly, neither a lease asset nor an obligation for futureincremental borrowing rate to discount the lease payments is reflected in our consolidated balance sheets.See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that is likely to have an impactbased on our aircraftinformation available at lease accounting beginning in 2019.commencement.
Impairment of Long‑Lived
Long-Lived Assets
As of December 31, 2017,2019, we had approximately $4.2$5.4 billion of property and equipment and related assets net of accumulated depreciation. Additionally, as of December 31, 2017, we had approximately $4.9 million in intangible assets. In accounting for these long‑lived and intangible assets,long-lived, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long‑livedlong-lived assets, a significant change in the condition of the long‑livedlong-lived assets and operating cash flow losses associated with the use of the long‑livedlong-lived assets. When considering whether or not impairment of long‑livedlong-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet type or contract level. In 2016, we recorded an impairment on certain of our long-lived assets, which included CRJ200 aircraft. In 2016, the market lease rate was less than the contractual lease rate on our CRJ200 leased aircraft. Prior to the adoption of Topic 842 these lease rate differences were not allowed to be recognized for impairment. With the adoption of Topic 842 we recorded an impairment of $13.1 million (net of tax) as an adjustment to our January 1, 2019 retained earnings related to the previously unrecognized impairment of these leased CRJ200s.
Self-Insurance
We diduse a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks, including workers’ compensation, healthcare benefits, general liability, product liability, property insurance and directors’ and officers’ liability insurance. Liabilities associated with risks retained by us are not discounted and are
28
estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Our workers’ compensation liability includes estimated outstanding losses of unpaid claims and allocated loss adjustment expenses (“ALAE”), which includes case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by us. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses. We believe that the liability recorded at December 31, 2019 is adequate to cover all workers' compensation claims incurred through December 31, 2019. If the actual costs of such claims and related expenses exceed the amount estimated, additional reserves may be required which could have any impairment charges duringa material negative effect on our operating results. Holding other factors constant, a 10 percent increase in our estimated workers compensation liability as of December 31, 2019, would have resulted in additional expense of approximately $2.4 million for the year ended December 31, 2017.2019.
Stock‑Based Compensation Expense
Restricted stock units (“RSUs”) are awardedThe liability related to eligible employeesour self-insured group medical insurance plans includes an estimate for claims incurred but not paid. This estimate is created using general actuarial principles and entitle the grantee to receive sharesour historical claims experience. The cost of common stock at the endgeneral liability, product liability and commercial auto liability is accrued based on estimates of the vest period. Performance Share Units (“PSUs”)aggregate liability claims incurred using certain actuarial assumptions and historical claims experience.
Income Tax
Deferred income taxes are awarded to certain employees to receive shares of common stock if specific performance targets are achieved. At the end of each performance period, the number of shares awarded can range from 0% to 200% of the original 2017 grant amount for performance share units and can range from 0% to 150% of the original 2015 and 2016 grant amounts for performance shares, depending on the performance against the pre-established targets. The fair value of the RSUs and PSUs are based on the trailing 20-day average stock price as of the date of grant and “cliff vest” after three years. Expense is recognized over the three year vesting period.
Fair value
We hold certain assets that are required to be measured at fair value in accordance with U.S. Generally Accepted Accounting Principles. We determined fair value of these assets based on the following three levelstemporary differences between the financial reporting and tax bases of inputs:
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We utilize several valuation techniques in order to assess the fair value of our financial assets and liabilities. Our cashliabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We make certain estimates and cash equivalents primarily utilize quoted pricesjudgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in active marketsthe timing of recognition of revenue or expense for identicaltax and financial statement purposes. Changes to these estimates may result in significant changes to our tax provision in future periods. Each fiscal quarter we re-evaluate our tax provision and reconsider our estimates and assumptions related to specific tax assets or liabilities.and liabilities, making adjustments as circumstances change.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements included in Item 8 of this Report for a description of recent accounting pronouncements.
Other Accounting Items
Under our fixed‑fee arrangements, three components may have a significant impact on comparability of revenue and operating expense for the periods presented in this Report. The first item is the reimbursement of fuel expense, which is a directly‑reimbursed expense under all of our fixed‑fee arrangements. If we purchase fuel directly from vendors, our major airline partners reimburse us for fuel expense incurred under each respective fixed‑fee contract, and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed‑fee arrangements during a particular period will impact our fuel expense and our passenger revenue during the period equally, with no impact on our operating income. Over the past few years, some of our major airline partners have purchased an increased volume of fuel directly from vendors on flights we operated under our fixed‑fee contracts, which has decreased both revenue and operating expenses compared to previous periods presented in this Report.
The second item is the reimbursement of landing fees and station rents, which is a directly‑reimbursed expense under all of our fixed‑fee arrangements. Our major airline partners reimburse us for landing fees and station rent expense incurred under each respective fixed‑fee contract, and we record such reimbursement as passenger revenue. Over the past few years, some of our major airline partners have paid an increased volume of landing fees and station rents directly to our vendors on flights we operated under our flying contracts, which has also decreased both revenue and operating expenses compared to previous periods presented in this Report.
The third item is the compensation we receive for engine maintenance under our fixed‑fee arrangements. Under certain of our fixed-fee contracts, a portion of our compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to cover our engine maintenance costs (“Fixed‑Rate Engine Contracts”). Under the remainder of our fixed-fee contracts, our major airline partner directly reimburses us for engine maintenance expense when the expense is incurred as a pass‑through cost (“Directly‑Reimbursed Engine Contracts”).
Because we recognize revenue using the applicable fixed hourly rates under our Fixed‑Rate Engine Contracts, the number of engine maintenance events and related expense we incur may vary between reporting periods under such contracts, which may impact the comparability of our operating income for the presented reporting periods.
Because we recognize revenue and engine overhaul expense in the same amount and in the same period when we incur engine maintenance expense on engines operating under our Directly‑Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on our operating income for the presented reporting periods.
We use the direct‑expense method of accounting for our regional jet aircraft engine overhaul costs and, accordingly, we recognize engine maintenance expense on our engines on an as‑incurred basis. Under the direct‑expense method, the maintenance liability is recorded when the maintenance services are performed (“Engine Overhaul Expense”).
We have an agreement with a third‑party vendor to provide long‑term engine maintenance covering scheduled and unscheduled repairs for engines on certain of our CRJs and E175s operating under our Fixed‑Rate Engine Contracts (a “Power-by-the-Hour Agreement”). Under the terms of the Power-by-the-Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power-by-the-Hour Agreement, we
35
expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. The table below summarizes how we are compensated by our major airline partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.
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Results of Operations
20172019 Compared to 20162018
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages of change for the periods identified below. The decrease in block hours, departures and passengers carried during the year ended December 31, 2017,2019, compared to the year ended December 31, 2016,2018, was primarily due to a net reductionthe sale of ExpressJet in our operating fleet from 652 aircraft to 595 aircraft.January 2019.
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|
| For the year ended December 31, |
| ||||
|
| 2017 |
| 2016 |
| % Change |
|
Block hours |
| 1,839,779 |
| 1,938,492 |
| (5.1) | % |
Departures |
| 1,087,052 |
| 1,153,480 |
| (5.8) | % |
Passengers carried |
| 51,483,552 |
| 53,539,438 |
| (3.8) | % |
Passenger load factor |
| 80.4 | % | 82.1 | % | (1.7) | pts |
Average passenger trip length (miles) |
| 512 |
| 523 |
| (2.1) | % |
29
Revenues. Total operating revenues increased $83.1 million, or 2.7%, during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to higher compensation earned on aircraft added to our fleet and improved economics on flying contract renewals, partially offset by a reduction in revenue from aircraft removed from unprofitable or less profitable flying contracts since 2016, as further explained in the “Passenger revenues” section below. Under certainTable of our fixed-fee contracts, certain expenses are subject to direct reimbursement from our major airline partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Contents
| |||||||
| | For the year ended December 31, |
| ||||
|
| 2019 |
| 2018 |
| % Change |
|
SkyWest Airlines block hours |
| 1,464,405 | | 1,380,420 | | 6.1 | % |
ExpressJet block hours |
| 16,904 | | 376,627 | | (95.5) | % |
Total block hours | | 1,481,309 | | 1,757,047 | | (15.7) | % |
|
| | | | | | |
SkyWest Airlines departures |
| 842,098 | | 790,485 | | 6.5 | % |
ExpressJet departures |
| 9,390 | | 219,568 | | (95.7) | % |
Total departures | | 851,488 | | 1,010,053 | | (15.7) | % |
| | | | | | | |
SkyWest Airlines passengers |
| 43,660,766 | | 40,302,301 | | 8.3 | % |
ExpressJet passengers |
| 379,252 | | 8,048,439 | | (95.3) | % |
Total passengers | | 44,040,018 | | 48,350,470 | | (8.9) | % |
| | | | | | | |
Passenger load factor |
| 82.3 | % | 80.5 | % | 1.8 | pts |
Average passenger trip length (miles) |
| 500 | | 523 | | (4.4) | % |
Operating Revenues
The following table summarizes our passenger revenues and the amount of fuel, landing fees, station rents, and engine maintenance incurred under our fixed-fee agreements. The direct reimbursement was included in our passenger revenuesoperating revenue for the periods indicated (dollar amounts in thousands).
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| For the year ended December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
Passenger revenues |
| $ | 3,126,708 |
| $ | 3,051,414 |
| $ | 75,294 |
| 2.5 | % |
Less: directly-reimbursed fuel from airline partners |
|
| 77,517 |
|
| 51,583 |
|
| 25,934 |
| 50.3 | % |
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 13,002 |
|
| 18,739 |
|
| (5,737) |
| (30.6) | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 68,531 |
|
| 62,782 |
|
| 5,749 |
| 9.2 | % |
Passenger revenue excluding directly-reimbursed fuel, landing fee, station rent and engine maintenance |
| $ | 2,967,658 |
| $ | 2,918,310 |
| $ | 49,348 |
| 1.7 | % |
:
| | | | | | | | | | | | |
| | For the year ended December 31, |
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|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
Flying agreements |
| $ | 2,889,265 |
| $ | 3,169,520 |
| $ | (280,255) |
| (8.8) | % |
Airport customer service and other | |
| 82,698 | |
| 52,159 | |
| 30,539 |
| 58.5 | % |
Total operating revenues |
| $ | 2,971,963 |
| $ | 3,221,679 |
| $ | (249,716) |
| (7.8) | % |
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revenue earned on flights we operate under our capacity purchase agreements and prorate agreements with our major airline partners. Airport customer service and other revenues primarily consist of revenue earned from providing airport counter, gate and ramp services and lease revenue from leasing aircraft and spare engines to third parties separate from our capacity purchase agreements. Changes in our flying agreements revenue are summarized below (dollar amounts in thousands).
Passenger revenues.
| | | | | | | | | | | | |
| | For the year ended December 31, | | |||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
Capacity purchase agreements revenue: flight operations | | $ | 1,538,062 | | $ | 1,856,253 | | $ | (318,191) | | (17.1) | % |
Capacity purchase agreements revenue: aircraft lease | |
| 830,247 | |
| 814,518 | |
| 15,729 | | 1.9 | % |
Prorate agreements revenue | |
| 520,956 | |
| 498,749 | |
| 22,207 | | 4.5 | % |
Flying agreements revenue | | $ | 2,889,265 | | $ | 3,169,520 | | $ | (280,255) |
| (8.8) | % |
The $75.3decrease in “Capacity purchase agreements revenue: flight operations” of $318.2 million, or 2.5%17.1%, was primarily due to the sale of ExpressJet and the corresponding decrease in revenue, partially offset by the incremental revenue generated from ten new E175 aircraft and seven new CRJ900 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since December 31, 2018. The increase in passenger revenues during“Capacity purchase agreement revenue: aircraft lease” of $15.7 million, or 1.9%, was primarily due to the year endedten new E175 aircraft added subsequent to December 31, 2017, compared to the year ended December 31, 2016,2018. The increase in prorate agreements revenue of $22.2 million, or 4.5%, was partially attributedprimarily due to an increase in the amountnumber of directly-reimbursed fuel expenses incurred under our fixed-fee contracts of $25.9 million in the year ended December 31, 2017,prorate flights operated during 2019 compared to the year ended December 31, 2016. 2018.
The $30.5 million, or 58.5%, increase in directly-reimbursed fuel expense was primarily due to higher average fuel cost per gallon in 2017 compared to 2016 and an increase in the volume of gallons that we purchased. Our fuel expense, landing fees, station rents and directly‑reimbursed engine expense increased by $25.9 million during the year ended December 31, 2017, compared to the year ended December 31, 2016.
Passenger revenue excluding directly-reimbursed fuel, landing fees, station rents and engine maintenance increased $49.3 million, or 1.7%, in the year ended December 31, 2017, compared to the year ended December 31, 2016, due to higher compensation we earned on aircraft, including new aircraft added in 2017, partially offset by a decrease in revenue associated with the aircraft removed from our fleet. Additionally, SkyWest Airlines took delivery of 19 E175 aircraft during the fourth quarter of 2016, which had only a partial quarter impact on 2016 revenue for comparability purposes to the 2017 year.
Ground handling and other. Total ground handlingairport customer service and other revenues increased $7.8 million, or 11.1%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. Ground handling and other revenue primarily consists of ground handling services we provide to third‑party airlines and government subsidies we receive for operating certain routes under our prorate agreements. Revenues associated with ground handling services we provide for our aircraft are recorded as passenger revenues. The increase was primarily related to an increase in ground handling operations providedrevenue from leasing aircraft and spare engines to third-party airlines on a short-term contract basis.third parties.
Operating Expenses
30
Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| For the year ended December 31, |
| ||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
|
| |||||||||||||||||
|
| Amount |
| Amount |
| Amount |
| Percent |
|
| |||||||||||||||||
| | | | | | | | | | | | | | ||||||||||||||
| | For the year ended December 31, | | ||||||||||||||||||||||||
| | 2019 | | 2018 | | $ Change | | % Change | |
| |||||||||||||||||
|
| Amount |
| Amount |
| Amount |
| Percent |
|
| |||||||||||||||||
Salaries, wages and benefits |
| $ | 1,196,227 |
| $ | 1,211,380 |
| $ | (15,153) |
| (1.3) | % |
| | $ | 1,001,746 | | $ | 1,201,518 | | $ | (199,772) | | (16.6) | % | | |
Aircraft maintenance, materials and repairs |
|
| 579,463 |
|
| 569,306 |
|
| 10,157 |
| 1.8 | % |
| |
| 514,313 | |
| 556,259 | |
| (41,946) |
| (7.5) | % | | |
Depreciation and amortization |
|
| 292,768 |
|
| 284,969 |
|
| 7,799 |
| 2.7 | % |
| |
| 368,098 | |
| 334,589 | |
| 33,509 |
| 10.0 | % | | |
Aircraft fuel | |
| 119,115 | |
| 117,657 | |
| 1,458 |
| 1.2 | % | | ||||||||||||||
Airport-related expenses | |
| 118,837 | |
| 109,605 | |
| 9,232 |
| 8.4 | % | | ||||||||||||||
Aircraft rentals |
|
| 215,807 |
|
| 262,602 |
|
| (46,795) |
| (17.8) | % |
| |
| 71,998 | |
| 154,945 | |
| (82,947) |
| (53.5) | % | | |
Aircraft fuel |
|
| 162,653 |
|
| 122,284 |
|
| 40,369 |
| 33.0 | % |
| ||||||||||||||
Ground handling services |
|
| 69,848 |
|
| 72,659 |
|
| (2,811) |
| (3.9) | % |
| ||||||||||||||
Special items |
|
| — |
|
| 465,649 |
|
| (465,649) |
| NM |
|
| |
| 21,869 | |
| — | |
| 21,869 |
| NM | | | |
Other operating expenses |
|
| 299,303 |
|
| 305,041 |
|
| (5,738) |
| (1.9) | % |
| |
| 243,729 | |
| 272,826 | |
| (29,097) |
| (10.7) | % | | |
Total operating expenses |
| $ | 2,816,069 |
| $ | 3,293,890 |
| $ | (477,821) |
| (14.5) | % |
| | $ | 2,459,705 | | $ | 2,747,399 | | $ | (287,694) |
| (10.5) | % | | |
Interest expense |
|
| 104,925 |
|
| 78,177 |
|
| 26,748 |
| 34.2 | % |
| |
| 127,755 | |
| 120,409 | |
| 7,346 |
| 6.1 | % | | |
Total airline expenses |
| $ | 2,920,994 |
| $ | 3,372,067 |
| $ | (451,073) |
| (13.4) | % |
| | $ | 2,587,460 | | $ | 2,867,808 | | $ | (280,348) |
| (9.8) | % | | |
Salaries, Wageswages and Employee Benefits.benefits. The $15.2$199.8 million, or 1.3%16.6%, decrease in salaries, wages and employee benefits during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to a decrease in direct labor costs resulting from the sale of ExpressJet, partially offset by increased labor costs and employee benefit costs for certain work groups, including flight crews at SkyWest Airlines.
Aircraft maintenance, materials and repairs. The $41.9 million, or 7.5%, decrease in aircraft maintenance expense was primarily due to a net reductiondecrease in direct maintenance costs corresponding with our fleet size and related levelsale of departures and block hours, whichExpressJet. This decrease in aircraft maintenance expense was partially offset by higher crew compensation costs resulting from labor agreements executed since 2016.
Aircraft maintenance, materials and repairs. The following table summarizes the effect of directly-reimbursed enginean increase in direct maintenance costs under our fixed-fee arrangements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
Aircraft maintenance, materials and repairs |
| $ | 579,463 |
| $ | 569,306 |
| $ | 10,157 |
| 1.8 | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 68,531 |
|
| 62,782 |
|
| 5,749 |
| 9.2 | % |
Other aircraft maintenance, materials and repairs |
| $ | 510,932 |
| $ | 506,524 |
| $ | 4,408 |
| 0.9 | % |
The $4.4 million, or 0.9%, increase in aircraft maintenance expense (excluding directly-reimbursed engine overhaul costs) during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due toSkyWest Airlines’ CRJ200 fleet and an increase in the percentage of our fleet that is under long-term Power-by-the-HourPower-By-The-Hour engine maintenance agreements at SkyWest Airlines, including the additional 21ten E175 aircraft added since December 31, 2016, which was partially offset by a decrease in direct maintenance costs that corresponds with our net decrease in fleet size and block hour reduction of 5.1%. The increase in directly-reimbursed engine overhaul costs was primarily due to an increase in the number of overhaul events on aircraft operating under the applicable fixed-fee flying contracts.
Depreciation and amortization. The $7.8 million, or 2.7%, increase in depreciation and amortization expense during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to the purchase of 21 additional E175 aircraft and related long-lived aircraft parts in 2017. Additionally, we acquired 19 E175 aircraft in the fourth quarter of 2016 that only had a partial year of depreciation in 2016.
Aircraft rentals. The $46.8 million, or 17.8%, decrease in aircraft rentals during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to a decrease in leased aircraft from 415 leased aircraft for the year endedsubsequent to December 31, 2016,2018 and increased costs to 319 leased aircraft for the year ended December 31, 2017.perform airframe inspections in 2019.
Aircraft fuel.
Depreciation and amortization.The $40.4$33.5 million, or 33.0%10.0%, increase in fuel cost during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to an increase in the average fuel cost per gallon in 2017 compared to 2016 and an increase in the volume of gallons that we purchased. The following table summarizes our aircraft fuel expenses and directly-reimbursed fuel expense under our fixed-fee arrangements, for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
Aircraft fuel expenses |
| $ | 162,653 |
| $ | 122,284 |
| $ | 40,369 |
| 33.0 | % |
Less: directly-reimbursed fuel from airline partners |
|
| 77,517 |
|
| 51,583 |
|
| 25,934 |
| 50.3 | % |
Aircraft fuel less directly-reimbursed fuel from airline partners |
| $ | 85,136 |
| $ | 70,701 |
| $ | 14,435 |
| 20.4 | % |
The average fuel cost per gallon was $2.01 and $1.70 for the years ended December 31, 2017 and 2016, respectively. Under the majority of our fixed-fee agreements, our major airline partner will purchase the fuel directly from a third-party provider for flights operated under the fixed-fee agreement. We do not record the fuel expense when the major partner purchases the fuel directly from third parties. The following table summarizes the gallons of fuel we purchased directly and our fuel expense, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, | |||||||
(in thousands) |
| 2017 |
| 2016 |
| % Change |
| ||
Fuel gallons purchased |
|
| 80,767 |
|
| 72,011 |
| 12.2 | % |
Fuel expense |
| $ | 162,653 |
| $ | 122,284 |
| 33.0 | % |
Ground handling service. Ground handling service expense includes airport-related customer service costs (our employee customer service labor costs are reflected in salaries, wages and benefits) such as outsourced airport gate and ramp agent services, airport security fees and passenger interruption costs. The $2.8 million, or 3.9%, decrease in ground handling service expense during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to a reduction in passenger interruption related costs during the year ended December 31, 2017.
Special items. Special items for the year ended December 31, 2016 included impairment charges and inventory valuation charges related to our 50-seat aircraft and related assets. We did not have any similar special items in 2017.
38
Other operating expenses. Other operating expenses, primarily consist of property taxes, hull and liability insurance, landing fees, station rents, simulator costs, crew per diem, and crew hotel costs. Under our fixed-fee arrangements, landing fee and station rental expense are directly-reimbursed expenses. The following table summarizes our other operating expenses (less directly-reimbursed landing fees and station rents under our fixed-fee arrangements) for the periods indicated (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
| For the year ended December 31, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| ||||||||
Other operating expenses |
| $ | 299,303 |
| $ | 305,041 |
| $ | (5,738) |
| (1.9) | % | |||||
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 13,002 |
|
| 18,739 |
|
| (5,737) |
| (30.6) | % | |||||
Other operating expenses less landing fee and station rent reimbursements from airline partners |
| $ | 286,301 |
| $ | 286,302 |
| $ | (1) |
| (0.0) | % | |||||
Other operating expenses (less directly-reimbursed landing fees and station rents) was impacted by the decrease in our fleet size and in other operating costs that resulted from the reduction in block hour production of 5.1%, partially offset by additional training costs associated with E175 aircraft deliveries, including the use of simulators and hotels.
Interest Expense. The $26.7 million, or 34.2%, increase in interest expense during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to the purchase of 21 additional E175 aircraft in 2017 financed through debt and an annualized impact of 41 E175 aircraft added throughout 2016 financed through debt.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) decreased $451.1 million, or 13.4%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. Under our contract flying arrangements, we are reimbursed by our major airline partners for our actual fuel costs, contract related station rents, landing fees and engine overhaul costs under our Directly‑Reimbursed Engine Contracts. We record such reimbursements as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| ||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| ||
Total airline expense |
| $ | 2,920,994 |
| $ | 3,372,067 |
| (451,073) |
| (13.4) | % |
Less: directly-reimbursed fuel from airline partners |
|
| 77,517 |
|
| 51,583 |
| 25,934 |
| 50.3 | % |
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 13,002 |
|
| 18,739 |
| (5,737) |
| (30.6) | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 68,531 |
|
| 62,782 |
| 5,749 |
| 9.2 | % |
Total airline expense excluding directly-reimbursed fuel, landing fee, station rent and engine maintenance |
| $ | 2,761,944 |
| $ | 3,238,963 |
| (477,019) |
| (14.7) | % |
The $477.2 million, or 14.7%, decrease in total airline expenses, excluding directly-reimbursed fuel, station rents, landing fees and engine overhauls, during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to the special items of $465.6 million relating to the 50-seat aircraft for the year ended December 31, 2016, and the reduction in fleet size and related block hour production of 5.1% during the year ended December 31, 2017, compared to the year ended December 31, 2016.
Summary of provision for income taxes:
Provision for income taxes. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law, which reduced the statutory federal income tax rate from 35% to 21% effective January 1, 2018. We recorded a $246.8 million benefit during 2017 related to the revaluation of our net federal, state and other deferred tax liabilities based on our reasonable estimate of the effects of the Tax Act. We also recorded a $5.4 million benefit in 2017 relating to ASU 2016-09 which requires, beginning in 2017, excess tax benefits and deficiencies to be recognized in the income
39
tax provision during the period stock options are vested/exercised. We currently estimate our 2018 effective tax rate will generally range between 24% and 25% before discrete tax items.
Net Income (loss). Primarily due to the factors described above, we generated net income of $428.9 million, or $8.08 per diluted share, for the year ended December 31, 2017, compared to a net loss of $(161.6) million, or $(3.14) per diluted share, for the year ended December 31, 2016.
2016 Compared to 2015
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages of change for the periods identified below.
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| ||||
|
| 2016 |
| 2015 |
| % Change |
|
Block hours |
| 1,938,492 |
| 2,074,804 |
| (6.6) | % |
Departures |
| 1,153,480 |
| 1,226,897 |
| (6.0) | % |
Passengers carried |
| 53,539,438 |
| 56,228,593 |
| (4.8) | % |
Passenger load factor |
| 82.1 | % | 82.6 | % | (0.5) | pt |
Average passenger trip length (miles) |
| 523 |
| 528 |
| (0.9) | % |
Revenues. Total operating revenues increased $25.6 million, or 0.8%, during the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to higher compensation earned on aircraft and the addition of 41 aircraft to our fleet, as further explained in the “Passenger revenues” section below. Under certain of our fixed-fee contracts, certain expenses are subject to direct reimbursement from our major airline partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. The following table summarizes our passenger revenues and the amount of fuel, landing fees, station rents, and engine maintenance incurred under our fixed-fee agreements. The direct reimbursement was included in our passenger revenues for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Passenger revenues |
| $ | 3,051,414 |
| $ | 3,030,023 |
| $ | 21,391 |
| 0.7 | % |
Less: directly-reimbursed fuel from airline partners |
|
| 51,583 |
|
| 41,567 |
|
| 10,016 |
| 24.1 | % |
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 18,739 |
|
| 22,171 |
|
| (3,432) |
| (15.5) | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 62,782 |
|
| 94,142 |
|
| (31,360) |
| (33.3) | % |
Passenger revenue excluding directly-reimbursed fuel, landing fee, station rent and engine maintenance |
| $ | 2,918,310 |
| $ | 2,872,143 |
| $ | 46,167 |
| 1.6 | % |
Passenger revenues. Passenger revenues increased $21.4 million, or 0.7%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. Our passenger revenues, excluding fuel, landing fees, station rents and engine overhaul reimbursements from major airline partners, increased $46.2 million, or 1.6%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in passenger revenues, excluding fuel, landing fees, station rents and engine overhaul reimbursements, was primarily due to higher compensation we earned on aircraft placed into service during 2016, improvements in the terms of certain of our flying contracts since 2015 and an $11.5 million favorable resolution of a flying agreement matter with one of our major airline partners in contrast to a reduction to revenue of $7.9 million in 2015 from a resolution of a contract matter with a major airline partner. This increase was partially offset by the 1.2% net reduction to our aircraft in scheduled service from 660 aircraft at December 31, 2015 to 652 aircraft at December 31, 2016. Our fuel expense, landing fees, station rents and directly‑reimbursed engine expense decreased by $24.7 million during the year ended December 31, 2016, as compared to the year ended December 31, 2015, due primarily to our major airline partners paying for landing fees and station rents directly to vendors on flights we operated under our fixed-fee arrangements and a reduction in the number of engine maintenance events.
40
Ground handling and other. Total ground handling and other revenues increased $4.3 million, or 6.5%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. Ground handling and other revenue primarily consists of ground handling services we provide to third‑party airlines and government subsidies we receive for operating certain routes under our prorate agreements. Revenues associated with ground handling services we provide for our aircraft are recorded as passenger revenues. The increase in ground handling and other revenue was primarily due to an increased volume of departures during 2016 on routes subject to government subsidies, which was partially offset by a reduction in the number of locations for which SkyWest Airlines provided ground handling services to third-party airlines during 2016.
Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
|
| |||
|
| Amount |
| Amount |
| Amount |
| Percent |
|
| |||
Salaries, wages and benefits |
| $ | 1,211,380 |
| $ | 1,203,312 |
| $ | 8,068 |
| 0.7 | % |
|
Aircraft maintenance, materials and repairs |
|
| 569,306 |
|
| 604,863 |
|
| (35,557) |
| (5.9) | % |
|
Depreciation and amortization |
|
| 284,969 |
|
| 264,507 |
|
| 20,462 |
| 7.7 | % |
|
Aircraft rentals |
|
| 262,602 |
|
| 273,696 |
|
| (11,094) |
| (4.1) | % |
|
Aircraft fuel |
|
| 122,284 |
|
| 118,124 |
|
| 4,160 |
| 3.5 | % |
|
Ground handling services |
|
| 72,659 |
|
| 82,694 |
|
| (10,035) |
| (12.1) | % |
|
Special items |
|
| 465,649 |
|
| — |
|
| 465,649 |
| NM |
|
|
Other operating expenses |
|
| 305,041 |
|
| 313,852 |
|
| (8,811) |
| (2.8) | % |
|
Total operating expenses |
|
| 3,293,890 |
|
| 2,861,048 |
|
| 432,842 |
| 15.1 | % |
|
Interest expense |
|
| 78,177 |
|
| 75,850 |
|
| 2,327 |
| 3.1 | % |
|
Total airline expenses |
| $ | 3,372,067 |
| $ | 2,936,898 |
| $ | 435,169 |
| 14.8 | % |
|
Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits increased $8.1 million, or 0.7%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in salaries, wages and employee benefits was primarily due to new pilot training costs associated with the 41 new E175 aircraft delivered in 2016 and an increase in employee healthcare costs, partially offset by the decrease in our fleet size and related decrease in the number of departures and block hours compared to the year ended December 31, 2015.
Aircraft maintenance, materials and repairs. Aircraft maintenance expense decreased $35.6 million, or 5.9%, during the year ended December 31, 2016, compared to the year ended December 31 2015. The following table summarizes the effect of directly-reimbursed engine maintenance costs under our fixed-fee arrangements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Aircraft maintenance, materials and repairs |
| $ | 569,306 |
| $ | 604,863 |
| $ | (35,557) |
| (5.9) | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 62,782 |
|
| 94,142 |
|
| (31,360) |
| (33.3) | % |
Other aircraft maintenance, materials and repairs |
| $ | 506,524 |
| $ | 510,721 |
| $ | (4,197) |
| (0.8) | % |
Other aircraft maintenance, materials and repairs, excluding our directly-reimbursed engine overhaul costs, decreased $4.2 million, or 0.8%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The decrease in aircraft maintenance expense (excluding directly-reimbursed engine overhaul costs) was primarily due to a reduction in direct maintenance costs resulting from a reduced fleet size, partially offset by an increase in Power-by-the-Hour maintenance costs associated with the additional E175 aircraft added to our fleet since 2015 along with maintenance costs of $19.0 million associated with EMB120, CRJ200 and CRJ700 aircraft lease returns.
The decrease in our engine overhaul costs incurred under our Directly‑Reimbursed Engine Contracts was primarily due to a reduced number of engine overhaul events in 2016 compared to 2015.
41
Depreciation and amortization. Depreciation and amortization expense increased $20.5 million, or 7.7%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in depreciation and amortization expense was primarily due to the purchase of 41 additionalten E175 aircraft and related long-lived aircraft parts in 2016.spare engines subsequent to December 31, 2018.
Aircraft rentals. Aircraft rentals decreased $11.1fuel.The $1.5 million, or 4.1%1.2%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The decrease was primarily related to eight CRJ700 aircraft removed from service and 15 CRJ200s leases that expired in 2016.
Fuel. Fuel costs increased $4.2 million, or 3.5%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in fuel cost was primarily due to an increase in the volumenumber of prorate flights we operated and corresponding increase in gallons thatof fuel we purchased, under our fixed-fee contracts, partially offset by thea decrease in theour average fuel cost per gallon in 2016 comparedfrom $2.60 for 2018 to 2015. The following table summarizes$2.51 for 2019. We purchase and incur expense for all fuel on flights operated under our aircraftprorate agreements. All fuel expenses and directly-reimbursed fuel expensecosts incurred under our fixed-fee arrangements, for the periods indicated (dollar amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Aircraft fuel expenses |
| $ | 122,284 |
| $ | 118,124 |
| $ | 4,160 |
| 3.5 | % |
Less: directly-reimbursed fuel from airline partners |
|
| 51,583 |
|
| 41,567 |
|
| 10,016 |
| 24.1 | % |
Aircraft fuel less directly-reimbursed fuel from airline partners |
| $ | 70,701 |
| $ | 76,557 |
| $ | (5,856) |
| (7.6) | % |
The average fuel cost per gallon was $1.70 and $2.09 for the years ended December 31, 2016 and 2015, respectively. Under the majority of our fixed-fee agreements,contracts are either purchased directly by our major airline partner, will purchase the fuel directly from a third-party provider for flights operated under the fixed-fee agreement. We do notor if purchased by us, we record the direct reimbursement as a reduction to our fuel expense when the major partner purchases the fuel directly from third parties.expense. The following table summarizes the gallons of fuel we purchased directly andunder our fuel expense,prorate agreements, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, | |||||||
(in thousands) |
| 2016 |
| 2015 |
| % Change |
| ||
Fuel gallons purchased |
|
| 72,011 |
|
| 56,389 |
| 27.7 | % |
Fuel expense |
| $ | 122,284 |
| $ | 118,124 |
| 3.5 | % |
Ground handling service. Ground handling
| | | | | | | | | |
| | For the year ended December 31, | |||||||
(in thousands) |
| 2019 |
| 2018 |
| % Change |
| ||
Fuel gallons purchased | | | 47,535 | | | 45,299 | | 4.9 | % |
Fuel expense | | $ | 119,115 | | $ | 117,657 |
| 1.2 | % |
Airport-related expenses.Airport-related expenses include airport-related customer service expense decreased $10.0costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents (our employee customer service labor costs are reflected in salaries, wages and benefits). The $9.2 million, or 12.1%8.4%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The decreaseincrease in ground handling service expenseairport-related expenses was primarily due to an increase in airport terminal rents, subcontract airport services and deicing events related to our prorate operations during 2019.
Aircraft rentals. During 2019, we acquired 56 CRJ aircraft under an early lease buyout arrangement. The $82.9 million, or 53.5%, decrease in aircraft rentals was primarily due to the acquisition of these 56 CRJ aircraft and a reduction in passenger liability insurance costs along withof leased aircraft as a decrease in the numberresult of locations for which SkyWest Airlines provides ground handling servicesscheduled lease expirations subsequent to December 31, 2015.2018.
31
Special items. SpecialItems. The $21.9 million special items expense for 2019 related to a non-cash write-off of $18.5 million in aircraft manufacturer part credits that we forfeited to settle future lease return obligations with the year ended December 31, 2016aircraft manufacturer. The $18.5 million of expense was included impairment charges and inventory valuation charges comprisedin the SkyWest Airlines segment. The special items expense also included $3.4 million of expense associated with a cash payout of certain ExpressJet employees’ stock equity grants as part of the following: $374.1 million impairment for CRJ200 aircraft, $61.5 million impairment for CRJ and ERJ fixed asset spare aircraft parts and engines, a net $6.2 million impairment for CRJ long-term prepaid aircraft rents and other considerations and $23.8 million inventory write-down for excess CRJ and ERJ inventory parts. These charges are netsale of $90 millionExpressJet, which was reflected in cash proceeds and other considerations from the Bombardier termination agreement. ExpressJet segment.
42
Other operating expenses. Other operating expenses primarily consist of property taxes, hull and liability insurance, landing fees, station rents, simulator costs, crew per diem, and crew hotel costs. Under our fixed-fee arrangements, landing fee and station rental expense are directly-reimbursed expenses. The following table summarizes our other operating expenses (less directly-reimbursed landing fees and station rents under our fixed-fee arrangements) for the periods indicated (dollar amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Other operating expenses |
| $ | 305,041 |
| $ | 313,852 |
| $ | (8,811) |
| (2.8) | % |
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 18,739 |
|
| 22,171 |
|
| (3,432) |
| (15.5) | % |
Other operating expenses less landing fee and station rent reimbursements from airline partners |
| $ | 286,302 |
| $ | 291,681 |
| $ | (5,379) |
| (1.8) | % |
The $5.4$29.1 million, or 1.8%10.7%, decrease in other operating expense (less directly-reimbursed landing fees and station rents) for the year ended December 31, 2016, compared to the year ended December 31, 2015,expenses was primarily related to a reductionthe sale of ExpressJet and the related decrease in crew costs.
Interest Expense.The $7.3 million, or 6.1%, increase in interest expense was primarily related to the additional interest expense associated with the ten E175 aircraft added to our fleet sizesince December 31, 2018, which were debt financed.
Total airline expenses.The $280.3 million, or 9.8%, decrease in total airline expenses was primarily related to the sale of ExpressJet and a change in locations served in 2016the related expenses associated with lower landing fee and airport rent charges in our prorate agreements,ExpressJet’s prior operations, partially offset by additional training costs associated with E175 deliveries, including the use of simulatorsoperating expenses at SkyWest Airlines and hotels.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) increased $435.2 million, or 14.8%, during the year endedSkyWest Leasing that resulted from new, additional aircraft we placed into service since December 31, 2016, compared to the year ended December 31, 2015. Under our contract flying arrangements, we are reimbursed by our major airline partners for our actual fuel costs, contract related station rents, landing fees and engine overhaul costs under our Directly‑Reimbursed Engine Contracts. We record such reimbursements as revenue. The following table summarizes the amount2018.
Summary of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).
|
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|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| ||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| ||
Total airline expense |
| $ | 3,372,067 |
| $ | 2,936,898 |
| 435,169 |
| 14.8 | % |
Less: directly-reimbursed fuel from airline partners |
|
| 51,583 |
|
| 41,567 |
| 10,016 |
| 24.1 | % |
Less: directly-reimbursed landing fee and station rent from airline partners |
|
| 18,739 |
|
| 22,171 |
| (3,432) |
| (15.5) | % |
Less: directly-reimbursed engine maintenance from airline partners |
|
| 62,782 |
|
| 94,142 |
| (31,360) |
| (33.3) | % |
Total airline expense excluding directly-reimbursed fuel, landing fee, station rent and engine maintenance |
| $ | 3,238,963 |
| $ | 2,779,018 |
| 459,945 |
| 16.6 | % |
Excluding directly-reimbursed costs by our major airline partners for fuel, station rents, landing fees and engine overhaul costs, our total airline expenses increased $459.9 million, or 16.6%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in total airline expenses, excluding directly-reimbursed fuel, station rents, landing fees and engine overhauls, was primarily due to the special items of $465.6 million relating to the 50-seat aircraft for the year ended December 31, 2016, partially offset by the reduction in fleet size and related block hour production of 6.6% during the year ended December 31, 2016, compared to the year ended December 31, 2015.
Summary ofinterest income, other income (expense) items and provision for income taxes:
Interest income. Interest income increased $5.3 million, or 60.2%, during 2019, compared to 2018. The increase in interest income was primarily related to an increase in interest rates subsequent to December 31, 2018, and an increase in interest earned from loans to third parties executed subsequent to December 31, 2018.
Other Incomeincome (expense), net. Other During 2019, we had other income, (expense) for 2016net of $(0.1)$47.7 million was primarily duerelated to the gain on sale of ExpressJet. During 2018, we had other income, net of $3.6 million primarily related to a write-offmark-to-market gain on trading securities and excess rotable spare parts sold during 2018.
Summary of a non-refundable maintenance deposit and other assets associated with the four CRJ900 aircraft that were subleased to Air Mekong, partially offset by a gain resulting from the early payoff of debt. Otherprovision for income (expense) for 2015 of $33.7 million was primarily due to a gain resulting from the early payoff of debt.taxes:
Provision for income taxes. The For the years ended December 31, 2019 and December 31, 2018, we recorded income tax provisions of 23.8% and 23.5%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes. We recorded a $3.5 million and $4.5 million benefit from share-based compensation in 2019 and 2018, respectively, relating to ASU 2016-09 which requires excess tax benefits and deficiencies to be recognized in the income tax provision for 2016 included an increase of valuation allowance of $0.8 million for previously generated state net operating loss benefits specific to ExpressJet that we expect to expire. The
43
increase ofduring the valuation allowance was based on changes in state tax laws and our income tax projections, which increased the amount of deferred tax assets thatperiod stock options are expected to expire before the deferred tax assets may be utilized. vested/exercised.
The income tax provision for 2015 included a release of valuation allowance of $0.9 million for previously generated state net operating loss benefits primarily for ExpressJet that we previously anticipated would expire. The release of the valuation allowance was based on the gain related to early retirement of certain long-term debt which reduced the amount of deferred tax assets that we anticipate will expire before the deferred tax assets may be utilized.
Net Income (loss).Income. Primarily due to the $465.6 million in special itemsfactors described above, we generated a net lossincome of $(161.6)$340.1 million, or $(3.14)$6.62 per diluted share, for the year ended December 31, 2016,2019, compared to a net income of $117.8$280.4 million, or $2.27$5.30 per diluted share, for the year ended December 31, 2015.2018.
Our Business Segments 20172019 compared to 20162018:
For 2019 and 2018 prior to the year ended December 31, 2017,sale of ExpressJet in January 2019, we had three reportable segments, which arewere the basis of our internal financial reporting. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by our chief operating decision maker. Our operating segments arereporting: SkyWest Airlines, ExpressJet and SkyWest Leasing. Following the sale of ExpressJet, we have two reportable segments: SkyWest Airlines and SkyWest Leasing.
Corporate overhead expense isexpenses, primarily administrative labor costs, were allocated to the operating expenses of SkyWest Airlines, ExpressJet and ExpressJet.SkyWest Leasing.
The segment information presented for ExpressJet for 2019 reflects ExpressJet’s results prior to the sale of ExpressJet on January 22, 2019, when ExpressJet was operating as our subsidiary.
32
The following table sets forth our segment data for the years ended December 31, 20172019 and 20162018 (in thousands):
| | | | | | | | | | | | |
| | For the year ended December 31, | | |||||||||
| | (dollar amounts in thousands) | | |||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
| | Amount | | Amount | | Amount | | Percent |
| |||
Operating Revenues: | | | | | | | | | | | | |
SkyWest Airlines operating revenue | | $ | 2,478,681 | | $ | 2,346,251 | | $ | 132,430 |
| 5.6 | % |
ExpressJet operating revenues | |
| 24,050 | |
| 564,202 | |
| (540,152) |
| (95.7) | % |
SkyWest Leasing operating revenues | |
| 469,232 | |
| 311,226 | |
| 158,006 |
| 50.8 | % |
Total Operating Revenues | | $ | 2,971,963 | | $ | 3,221,679 | | $ | (249,716) |
| (7.8) | % |
Airline Expenses: | | | | | | | | | | | | |
SkyWest Airlines airline expense | | $ | 2,228,157 | | $ | 2,039,581 | | $ | 188,576 |
| 9.2 | % |
ExpressJet airline expense | |
| 28,690 | |
| 579,948 | |
| (551,258) |
| (95.1) | % |
SkyWest Leasing segment expense | |
| 330,613 | |
| 248,279 | |
| 82,334 |
| 33.2 | % |
Total Airline Expense(1) | | $ | 2,587,460 | | $ | 2,867,808 | | $ | (280,348) |
| (9.8) | % |
Segment profit (loss): | | | | | | | | | | | | |
SkyWest Airlines segment profit | | $ | 250,524 | | $ | 306,670 | | $ | (56,146) |
| (18.3) | % |
ExpressJet segment loss | |
| (4,640) | |
| (15,746) | |
| 11,106 |
| (70.5) | % |
SkyWest Leasing segment profit | |
| 138,619 | |
| 62,947 | |
| 75,672 |
| 120.2 | % |
Total Segment Profit (loss) | | $ | 384,503 | | $ | 353,871 | | $ | 30,632 |
| 8.7 | % |
Interest Income | |
| 14,131 | |
| 8,823 | |
| 5,308 |
| 60.2 | % |
Other Income, net | |
| 47,671 | |
| 3,620 | |
| 44,051 |
| 1,216.9 | % |
Consolidated Income Before Taxes | | $ | 446,305 | | $ | 366,314 | | $ | 79,991 |
| 21.8 | % |
|
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|
|
| For the year ended December 31, |
| |||||||||
|
| (dollar amounts in thousands) |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
|
| Amount |
| Amount |
| Amount |
| Percent |
| |||
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines operating revenue |
| $ | 2,173,384 |
| $ | 1,935,378 |
| $ | 238,006 |
| 12.3 | % |
ExpressJet operating revenues |
|
| 790,942 |
|
| 1,044,828 |
|
| (253,886) |
| (24.3) | % |
SkyWest Leasing operating revenues |
|
| 239,942 |
|
| 141,000 |
|
| 98,942 |
| 70.2 | % |
Total Operating Revenues |
| $ | 3,204,268 |
| $ | 3,121,206 |
| $ | 83,062 |
| 2.7 | % |
Airline Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines airline expense |
| $ | 1,910,100 |
| $ | 1,912,384 |
| $ | (2,284) |
| (0.1) | % |
ExpressJet airline expense |
|
| 823,470 |
|
| 1,346,342 |
|
| (522,872) |
| (38.8) | % |
SkyWest Leasing segment expense |
|
| 187,424 |
|
| 113,341 |
|
| 74,083 |
| 65.4 | % |
Total Airline Expense(1) |
| $ | 2,920,994 |
| $ | 3,372,067 |
| $ | (451,073) |
| (13.4) | % |
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines segment profit |
| $ | 263,284 |
| $ | 22,994 |
| $ | 240,290 |
| 1,045.0 | % |
ExpressJet segment loss |
|
| (32,528) |
|
| (301,514) |
|
| 268,986 |
| (89.2) | % |
SkyWest Leasing segment profit |
|
| 52,518 |
|
| 27,659 |
|
| 24,859 |
| 89.9 | % |
Total Segment Profit (loss) |
| $ | 283,274 |
| $ | (250,861) |
| $ | 534,135 |
| (212.9) | % |
Interest Income |
|
| 4,509 |
|
| 2,143 |
|
| 2,366 |
| 110.4 | % |
Other Income (Expense), net |
|
| 400 |
|
| (94) |
|
| 494 |
| (525.5) | % |
Consolidated Income (loss) Before Taxes |
| $ | 288,183 |
| $ | (248,812) |
| $ | 536,995 |
| (215.8) | % |
| (1) |
| Total Airline Expense includes operating expense and interest expense |
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $240.3decreased $56.1 million, or 1,045.0%18.3%, during the year ended December 31, 2017,2019, compared to the year ended December 31, 2016. The SkyWest Airlines 2016 segment included $184.3 million of special item expenses associated with the impairment charge of CRJ200 aircraft and related assets. SkyWest Airlines segment profit was also partially impacted by additional profitability from adding 21 E175 aircraft during 2017 and 19 E175 aircraft during the fourth quarter of 2016, which only contributed for a partial year to the 2016 results. SkyWest Airlines also had various flying contract extensions at favorable economics in 2017 compared to 2016.2018.
44
SkyWest Airlines block hour production increased to 1,237,547,1,464,405, or 12.0%6.1%, for 20172019 from 1,105,0311,380,420 for 20162018, primarily due to the additional block hour production from the new E175 and CRJ900 aircraft added subsequent to December 31, 2016.2018. Significant items contributing to the SkyWest Airlines segment profit are set forth below.
The $238.0$132.4 million, or 12.3%5.6%, increase to SkyWest Airlines operating revenue during 2017,2019, compared to 2016,2018, was primarily due to 21ten E175 aircraft and seven CRJ900 aircraft placed into service in 20172019 and 19 E175additional aircraft added during the fourth quarter of 2016, which only had a partial year impact in 2016 results. operating under prorate agreements since 2018.
The $2.3$188.6 million, or 0.1%9.2%, decreaseincrease in the SkyWest Airlines airline expense during 2017,2019, compared to 2016,2018, was primarily due to the following factors:
| SkyWest Airlines’ salaries, wages and benefits expense increased by |
| SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by |
| SkyWest |
|
|
| ● | SkyWest Airlines’ aircraft rental expenses decreased $77.0 million, or 52.9%, primarily due to the acquisition of |
33
| reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to December 31, 2018. |
● | SkyWest Airlines operating expenses included special items related to a non-cash write-off of $18.5 million in aircraft manufacturer part credits that we forfeited to settle future lease return obligations with the aircraft manufacturer. |
| ● | SkyWest Airlines other operating expense increased |
|
|
ExpressJet Segment Loss. ExpressJet segment loss decreased $269.0 million, or 89.2%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. The ExpressJet 2016 segment included $281.4 million of special item expenses associated with the CRJ200 and ERJ145 aircraft and write‑down of certain assets.
ExpressJet’s block hour production decreased to 602,232, or 27.7%, for the year ended December 31, 2016 from 833,461 for the year ended December 31, 2016, primarily due to the removal of CRJ200, CRJ900 and ERJ145 aircraft from operations. Significant items contributing to the ExpressJet segment loss are set forth below:
The $253.9 million decrease in ExpressJet Operating Revenues during 2017, compared to 2016, was primarily due to a 27.7% reduction in block hour production due to a reduced fleet size since 2016.
The $522.9 million decrease in ExpressJet Airline Expense during 2017, compared to 2016, was primarily due to the following factors:
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45
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|
|
|
|
|
SkyWest Leasing Segment Profit. SkyWest Leasing profit increased $52.5 million during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to the additional E175 aircraft revenue attributed to the ownership costs of the E175 aircraft earned under the applicable fixed-fee contract and profitability offset by the E175 aircraft depreciation and interest expense.
Our Business Segments 2016 compared to 2015:
For the year ended December 31, 2016, we had three reportable segments which are the basis of our internal financial reporting. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by our chief operating decision maker. Our operating segments are SkyWest Airlines, ExpressJet and SkyWest Leasing. Corporate overhead expense is allocated to the operating expenses of SkyWest Airlines and ExpressJet.
The following table sets forth our segment data for the years ended December 31, 2016 and 2015 (in thousands):
|
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|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| (dollar amounts in thousands) |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
|
| Amount |
| Amount |
| Amount |
| Percent |
| |||
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines operating revenue |
| $ | 1,935,378 |
| $ | 1,848,363 |
| $ | 87,015 |
| 4.7 | % |
ExpressJet operating revenues |
|
| 1,044,828 |
|
| 1,169,923 |
|
| (125,095) |
| (10.7) | % |
SkyWest Leasing operating revenues |
|
| 141,000 |
|
| 77,277 |
|
| 63,723 |
| 82.5 | % |
Total Operating Revenues |
| $ | 3,121,206 |
| $ | 3,095,563 |
| $ | 25,643 |
| 0.8 | % |
Airline Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines airline expense |
| $ | 1,912,384 |
| $ | 1,666,341 |
| $ | 246,043 |
| 14.8 | % |
ExpressJet airline expense |
|
| 1,346,342 |
|
| 1,204,161 |
|
| 142,181 |
| 11.8 | % |
SkyWest Leasing segment expense |
|
| 113,341 |
|
| 66,396 |
|
| 46,945 |
| 70.7 | % |
Total Airline Expense(1) |
| $ | 3,372,067 |
| $ | 2,936,898 |
| $ | 435,169 |
| 14.8 | % |
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
SkyWest Airlines segment profit |
| $ | 22,994 |
| $ | 182,022 |
| $ | (159,028) |
| (87.4) | % |
ExpressJet segment loss |
|
| (301,514) |
|
| (34,238) |
|
| (267,276) |
| 780.6 | % |
SkyWest Leasing segment profit |
|
| 27,659 |
|
| 10,881 |
|
| 16,778 |
| 154.2 | % |
Total Segment Profit (loss) |
| $ | (250,861) |
| $ | 158,665 |
| $ | (409,526) |
| (258.1) | % |
Interest Income |
|
| 2,143 |
|
| 1,997 |
|
| 146 |
| 7.3 | % |
Other Income (Expense), net |
|
| (94) |
|
| 33,660 |
|
| (33,754) |
| (100.3) | % |
Consolidated Income (loss) Before Taxes |
| $ | (248,812) |
| $ | 194,322 |
| $ | (443,134) |
| (228.0) | % |
|
|
46
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit decreased $159.0 million, or 87.4%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The SkyWest Airlines 2016 segment included $184.3 million of special item expenses associated with the impairment charge of CRJ200 aircraft and related assets and $9.3 million in early lease return costs associated with certain CRJ700 aircraft. Excluding the impact of these items, SkyWest Airlines segment profitability improved by $34.6 million. SkyWest Airlines segment profit was also partially impacted by additional profitability from adding 41 E175 aircraft.
SkyWest Airlines block hour production increased to 1,105,031, or 2.8%, for 2016 from 1,074,809 for 2015 primarily due to the additional block hour production from the new E175 aircraft added subsequent to December 31, 2015. Significant items contributing to the SkyWest Airlines segment profit are set forth below.
SkyWest Airlines operating revenue increased by $87.0 million, or 4.7%, for 2016 compared to 2015. The increase was primarily due to additional E175 operations along with improved contract rates with certain major airline partners.
SkyWest Airlines airline expense increased by $246.0 million, or 14.8%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in the SkyWest Airlines airline expense was primarily due to the following factors:
|
|
|
|
| The remaining increase in SkyWest Airlines |
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|
|
|
|
|
|
|
47
ExpressJet Segment Loss. ExpressJet ExpressJet’s segment loss increased $267.3decreased $11.1 million, or 780.6%70.5%, during the year ended December 31, 2016,2019, compared to the year ended December 31, 2015. The ExpressJet 2016 segment included $281.4 million of special item expenses associated with the CRJ200 and ERJ145 aircraft and write‑down of certain assets and $6.8 million associated with certain leased CRJ700 aircraft that were removed from service. Excluding the impact of the special item expenses, ExpressJet’s segment profitability improved by $20.9 million. This special charge was partially offset by the removal of aircraft operating under unprofitable fixed-fee contracts and rate improvements in certain fixed-fee contracts compared to 2015.
ExpressJet’s block hour production decreased to 833,461, or 16.7%, for the year ended December 31, 2016 from 999,995 for the year ended December 31, 2015,2018, primarily due to the removalsale of ERJ145 aircraft previously operated under its United fixed-fee agreement. Significant items contributing to the ExpressJet segment loss are set forth below:in January 2019.
ExpressJet’s operating revenue decreased by $125.1 million, or 10.7%, for 2016 compared to 2015. The decrease was primarily due to a 16.7% reduction in block hours resulting from fewer ERJ145s operating under its United fixed-fee arrangement, which was partially offset by rate improvements in certain fixed-fee contracts compared to 2015.
ExpressJet’s airline expense increased $142.2 million, or 11.8%, during the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in the ExpressJet airline expense was primarily due to the following factors:
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SkyWest Leasing Segment Profit. SkyWest Leasing profit increased $16.8$75.7 million, or 120.2%, during the year ended December 31, 2016,2019, compared to the year ended December 31, 2015,2018, primarily due to the additionalten E175 aircraft added to our fleet subsequent to December 31, 2018 and additional revenue attributedfrom leasing aircraft and spare engines to the ownership costs of the E175 aircraft earned under the applicable fixed-fee contract and profitability offset by the E175 aircraft depreciation and interest expense.third parties.
48
Liquidity and Capital Resources
Sources and Uses of Cash—20172019 Compared to 20162018
Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the years ended December 31, 20172019 and 2016,2018, and our total cash and marketable securities position as of December 31, 20172019 and December 31, 20162018 (in thousands).
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|
|
| For the year ended December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
Net cash provided by operating activities |
| $ | 684,124 |
| $ | 506,665 |
| $ | 177,459 |
| 35.0 | % |
Net cash used in investing activities |
|
| (751,337) |
|
| (1,177,078) |
|
| 425,741 |
| (36.2) | % |
Net cash provided by financing activities |
|
| 102,239 |
|
| 614,144 |
|
| (511,905) |
| (83.4) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
|
|
|
|
|
| ||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| |||
Cash and cash equivalents |
| $ | 181,792 |
| $ | 146,766 |
| $ | 35,026 |
| 23.9 | % |
Restricted cash |
|
| — |
|
| 8,243 |
|
| (8,243) |
| (100.0) | % |
Marketable securities |
|
| 503,503 |
|
| 409,898 |
|
| 93,605 |
| 22.8 | % |
Total |
| $ | 685,295 |
| $ | 564,907 |
| $ | 120,388 |
| 21.3 | % |
| | | | | | | | | | | | |
| | For the year ended December 31, | | |||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| |||
Net cash provided by operating activities | | $ | 721,030 | | $ | 802,534 | | $ | (81,504) | | (10.2) | % |
Net cash used in investing activities | |
| (657,034) | |
| (983,404) | |
| 326,370 |
| (33.2) | % |
Net cash provided by (used in) financing activities | |
| (305,174) | |
| 327,462 | |
| (632,636) |
| (193.2) | % |
| | | | | | | | | | | | |
|
| December 31, |
| December 31, |
| | |
| |
| ||
| | 2019 | | 2018 | | $ Change | | % Change |
| |||
Cash and cash equivalents | | $ | 87,206 | | $ | 328,384 | | $ | (241,178) |
| (73.4) | % |
Marketable securities | |
| 432,966 | |
| 360,945 | |
| 72,021 |
| 20.0 | % |
Total | | $ | 520,172 | | $ | 689,329 | | $ | (169,157) |
| (24.5) | % |
Cash Flows from Operating Activities. NetThe $81.5 million, or 10.2%, decrease in net cash provided by operating activities increased $177.5 million, or 35.0%, during 2017, compared to 2016,was primarily due to an increase in pre-tax income from 2017 to 2016 and changes in our working capital accounts. Our pre-tax income was $288.2 million in 2017. Our pre-tax loss was $248.8 million in 2016, however our 2016 pre-tax loss included $465.6 million of special charges.
Cash Flows from Investing Activities. Net cash used in investing activities decreased $425.7 million, or 36.2%,accounts during 2017,2019 compared to 2016, primarily due to the acquisition of 21 E175 aircraft and the related spare aircraft assets during 2017, compared to 41 E175 aircraft and the related spare aircraft assets purchased during 2016, partially offset by the proceeds from the sale of 15 CRJ200 aircraft, eleven EMB120 aircraft, one CRJ700 aircraft and related spare aircraft assets during 2017.
Cash Flows from Financing Activities. Net cash provided by financing activities decreased $511.9 million, or 83.4%, during 2017, compared to 2016, primarily related to proceeds from the issuance of long-term debt associated with 21 E175 aircraft acquired during 2017, compared to proceeds from the issuance of debt associated with 41 E175 aircraft acquired during 2016.2018. This decrease in cash provided by financingoperating activities was partially offset by $20.0 million and $5.1 million usedan increase in 2017 to purchase treasury shares and towards the net settlement ofincome before income taxes on employee equity awards, respectively.
Sources and Uses of Cash—2016 Compared to 2015
Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the years ended December 31, 2016 and 2015, and our total cash and marketable securities position as of December 31, 2016 and December 31, 2015 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended December 31, |
| |||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Net cash provided by operating activities |
| $ | 506,665 |
| $ | 417,325 |
| $ | 89,340 |
| 21.4 | % |
Net cash used in investing activities |
|
| (1,177,078) |
|
| (569,716) |
|
| (607,362) |
| 106.6 | % |
Net cash provided by financing activities |
|
| 614,144 |
|
| 223,151 |
|
| 390,993 |
| 175.2 | % |
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
|
|
|
|
|
| ||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| |||
Cash and cash equivalents |
| $ | 146,766 |
| $ | 203,035 |
| $ | (56,269) |
| (27.7) | % |
Restricted cash |
|
| 8,243 |
|
| 8,216 |
|
| 27 |
| 0.3 | % |
Marketable securities |
|
| 409,898 |
|
| 286,668 |
|
| 123,230 |
| 43.0 | % |
Total |
| $ | 564,907 |
| $ | 497,919 |
| $ | 66,988 |
| 13.5 | % |
Cash Flows from Operating Activities. Net cash provided from operating activities increased $89.3$80.0 million or 21.4%, during 2016,in 2019 compared to 2015. Our pre-tax income was $194.3 million in 2015. Our pre-tax loss in 2016 was $148.8 million, which included a non-cash special charge of $465.6 million. Excluding the impact of the 2016 non-cash special charge, our pre-tax income increased by $22.5 million. The remaining increase in our cash from operations included positive cash changes in our working capital accounts and 2015 cash flows included a $33.7 million non-cash gain from an early extinguishment of debt.2018.
Cash Flows from Investing Activities. Net cash used in investing activities increased $607.4 The $326.4 million, or 106.6%33.2%, during 2016, compared to 2015. The increasedecrease in cash used in investing activities was primarily due to the net purchasesreduction of marketable securities which increased $251.9 millionnew E175 aircraft acquired from 201539 during 2018, compared to 2016, andten for 2019. This reduction was partially offset by the acquisition of 41 E17585 used CRJ aircraft andduring 2019 including the related spare56 used CRJ aircraft assetspurchased under an early lease buyout during the first half of 2019. These changes represented a $481.1 million decrease in 2016, compared to 25 E175 aircraft and the related spare aircraft assets purchased in 2015, which in total represented an increase of $428.1 million. These uses of cash werepurchases. Additionally, during 2019, we sold ExpressJet for $79.6 million partially offset by proceeds receiveda note receivable issued to the buyer of $26.4 million, resulting in net cash from the Bombardier termination agreementsale of $90.0ExpressJet of $53.2 million.
34
Cash Flows from Financing Activities. NetThe $632.6 million, or 193.2%, increase in cash provided byused in financing activities increased $391.0 million, or 175.2%, during 2016, compared to 2015. The increase was primarily duerelated to the decrease in proceeds from the issuance of long‑termlong-term debt of $926.1$200.0 million associated with 41ten E175 aircraft and two previously leased aircraft acquired during 2019, compared to proceeds from the issuance of debt of $784.7 million associated with 39 E175 aircraft acquired during 2016, compared2018. Additionally, during 2019, we used an additional $35.9 million to the issuance of long‑term debt of $591.9 million associated with 25 E175 aircraft acquired during 2015. Additionally, the principalpurchase treasury shares and common stock, and for income tax payments of long-term debt decreased $52.1 million during 2016, compared to 2015, as a result of the early pay off of $145.4 million in debt during 2015.towards vested employee equity awards.
Liquidity and Capital Resources as of December 31, 20172019 and 20162018
We believe that in the absence of unusual circumstances, the working capital currently available to us, together with our projected cash flows from operations, will be sufficient to meet our present financial requirements, including anticipated expansion, planned capital expenditures, and scheduled lease payments and debt service obligations for at least the next 12 months.
At December 31, 2017,2019, our total capital mix was 42.5%45.3% equity and 57.5% long‑term54.7% long-term debt, compared to 37.6%41.1% equity and 62.4% long‑term58.9% long-term debt at December 31, 2016.2018.
At December 31, 2017,2019, we had $14.8$8.8 million in letters of credit issued under our line of credit facility, which reduced the amount available under the facility to $60.2$66.2 million. The facility expires on JuneSeptember 1, 20182021 and has a variable interest rate of LIBOR plus 2.5% (4.1% at December 31, 2017).2019.
As of December 31, 20172019 and 2016,2018, we had $87.4$61.7 million and $87.7$78.7 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.
As of December 31, 2017,2019 and 2018, we had no restricted cash related to our workers' compensation policies. As of December 31, 2016, we classified $8.2 million as restricted cash related to our workers' compensation policies. cash.
50
Significant Commitments and Obligations
General
The following table summarizes our commitments and obligations as noted for each of the next five years and thereafter (in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
|
| Total |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| |||||||
Operating lease payments for aircraft and facility obligations | | $ | 443,660 | | $ | 94,806 | | $ | 84,285 | | $ | 73,960 | | $ | 68,581 | | $ | 27,282 | | $ | 94,746 |
|
Firm aircraft and spare engine commitments |
| | 779,410 |
| | 489,796 |
| | 284,114 |
| | 5,500 |
| | — |
| | — |
| | — | |
Interest commitments(A) |
| | 574,577 |
| | 120,005 |
| | 104,678 |
| | 90,251 |
| | 73,946 |
| | 59,373 |
| | 126,324 | |
Principal maturities on long-term debt |
| | 3,017,523 |
| | 367,954 |
| | 352,005 |
| | 365,907 |
| | 374,906 |
| | 327,630 |
| | 1,229,121 | |
Total commitments and obligations | | $ | 4,815,170 | | $ | 1,072,561 | | $ | 825,082 | | $ | 535,618 | | $ | 517,433 | | $ | 414,285 | | $ | 1,450,191 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| Thereafter |
| |||||||
Operating lease payments for aircraft and facility obligations |
| $ | 716,832 |
| $ | 142,157 |
| $ | 104,297 |
| $ | 121,119 |
| $ | 112,657 |
| $ | 75,981 |
| $ | 160,621 |
|
Firm aircraft and spare engine commitments |
|
| 1,097,926 |
|
| 1,066,126 |
|
| 21,200 |
|
| 10,600 |
|
| — |
|
| — |
|
| — |
|
Interest commitments(A) |
|
| 530,938 |
|
| 103,522 |
|
| 90,705 |
|
| 78,171 |
|
| 66,757 |
|
| 56,038 |
|
| 135,745 |
|
Principal maturities on long-term debt |
|
| 2,712,350 |
|
| 313,243 |
|
| 315,753 |
|
| 284,998 |
|
| 272,470 |
|
| 280,360 |
|
| 1,245,526 |
|
Total commitments and obligations |
| $ | 5,058,046 |
| $ | 1,625,048 |
| $ | 531,955 |
| $ | 494,888 |
| $ | 451,884 |
| $ | 412,379 |
| $ | 1,541,892 |
|
| (A) |
| At December 31, |
Purchase Commitments and Options
As of December 31, 2017,2019, we had a firm purchase commitment for 42 E175/26 E175 SC aircraft from Embraer S.A. with scheduled delivery dates through the end of 2018 or early 2019.2021.
We have not historically funded a substantial portion of our aircraft acquisitions with working capital. Rather, we have generally funded our aircraft acquisitions through a combination of operating leases and long-term debt financing. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition. At present, we intend to fund our acquisition of any additional aircraft through cash on hand and debt financing. Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed
35
acquisitions, as well as additional aircraft. We intend to finance the firm purchase commitment for 42 E175/26 E175 SC aircraft with approximately 85% debt and the remaining balance with cash.
Aircraft Lease and Facility Obligations
We also have significant long‑termlong-term lease obligations, primarily relating to our aircraft fleet. At December 31, 2017,2019, we had 31994 aircraft under lease with remaining terms ranging from less than one to nineten years. Future minimum lease payments due under all long‑termlong-term operating leases were approximately $716.8$443.6 million at December 31, 2017.2019. Assuming a 5.0%6.4% discount rate, which is the average incremental borrowing rate usedwe anticipate we would have incurred on debt obtained over a similar term to approximate the implicit rates within the applicable aircraft leases,acquire these assets, the present value of these lease obligations would have been equal to approximately $594.3$354.0 million at December 31, 2017.2019.
Long‑termLong-term Debt Obligations
As of December 31, 2017,2019, we had $2.7$3.0 billion of long‑termlong-term debt obligations related to the acquisition of aircraft and certain spare engines. The average effective interest rate on those long‑termlong-term debt obligations was approximately 3.9%4.2% at December 31, 2017.2019.
Under our fixed-fee arrangements, the major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement, but is intended to cover either our aircraft principal and interest debt service costs, our aircraft depreciation and interest expense or our aircraft lease expense costs while the aircraft is under contract.
Guarantees
We have guaranteed the obligations of SkyWest Airlines under the SkyWest Airlines Delta Connection Agreement and the SkyWest Airlines United Express Agreement for the E175 aircraft. WeIn addition, we have also guaranteed the
51
certain other obligations of ExpressJet under the ExpressJet Delta Connection Agreementaircraft financing and the ExpressJet United Express ERJ Agreement.leasing agreements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aircraft Fuel
In the past, we have not experienced difficulties with fuel availability and we currently expect to be able to obtain fuel at prevailing prices in quantities sufficient to meet our future needs. Pursuant to our contract flying arrangements, Delta, United, Delta, American and Alaska have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. We bear the economic risk of fuel price fluctuations on our prorate operations. For each of the years ended December 31, 2019, 2018 and 2017, 2016approximately 18%, 16% and 2015, approximately 12%, 13% and 12%14% of our total passengerflying agreements revenue was derived from prorate arrangements. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the average price per gallon of aircraft fuel was $2.01, $1.70$2.51, $2.60 and $2.09,$2.06, respectively. For illustrative purposes only, we have estimated the impact of the market risk of fuel on our prorate operations using a hypothetical increase of 25% in the price per gallon we purchase. Based on this hypothetical assumption, we would have incurred an additional $21.3$29.8 million, $17.6$29.4 million and $19.1$21.3 million in fuel expense for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
Interest Rates
Our earnings are affected by changes inAs of December 31, 2019, all of our interest rates due to the amount of variable rateon our long-term debt held. The interest rates applicable to variable rate notes may rise and increase the amount of interest expense. At December 31, 2017, 2016 and 2015, we had variable rate notes representing 2.5%, 5.1% and 12.1% of our total long‑term debt, respectively. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for variable rate long-term debt. Based on this hypothetical assumption, we would have incurred an additional $0.9 million in interest expense for the year ended December 31, 2017; we would have incurred an additional $2.0 million in interest expense for the year ended December 31, 2016; and we would have incurred an additional $3.5 million in interest expense for the year ended December 31, 2015. However, under our contractual arrangements with our major airline partners, the majority of the increase in interest expense would be passed through and recorded as passenger revenue in our consolidated statements of operations and comprehensive income (loss). If interest rates were to decline, our major airline partners would receive the principal benefit of the decline, since interest expense is generally passed through to our major airline partners, resulting in a reduction to passenger revenue in our consolidated statement of operations and comprehensive income (loss).
fixed rates. We currently intend to finance the acquisition of aircraft through manufacturer financing third-party leases or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire thesefuture aircraft. To the extent we place thesenew aircraft in service under our code-share agreements with Delta, United, American, Alaska or other carriers, our code-share agreements currently provide that reimbursement rates will be adjusted higher or lower to reflect changes in ourthe interest rates effective at the closing of the respective aircraft financing interest rates.financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere herein.
5236
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of SkyWest, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SkyWest, Inc. and subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of comprehensive income, (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 201818, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ended December 31, 2019 due to the adoption of ASU No. 2016-02, “Leases (Topic 842).”
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
37
| |
Valuation of workers’ compensation liability | |
Description of the Matter | At December 31, 2019, the Company’s workers’ compensation liability balance totaled $23.9 million, presented as a component of other current liabilities and other long-term liabilities on the balance sheet. The Company discusses the estimate related to the workers’ compensation within Note 5, Commitments and Contingencies. Auditing the estimated ultimate losses associated with the workers’ compensation liability is complex and highly judgmental due to the significant estimation required in determining the ultimate aggregate liabilities for claims incurred. In particular, the estimate was sensitive to significant assumptions such as the estimation of loss payment and loss reporting development patterns. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s workers’ compensation liability process. As part of our testing, we also considered controls over management’s review of the significant assumptions noted above. We also tested controls performed by management to review the historical estimates of the workers’ compensation liability for accuracy. To test the estimate of the Company’s workers’ compensation liability, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions used in estimating the worker’s compensation liability and the underlying data used by the Company in its analysis. We utilized the assistance of our actuarial specialists in assessing the reasonableness of the methodologies used and significant assumptions applied, including the estimation of loss payment and loss reporting development patterns, as well as developing an independent projection of the Company’s unpaid claims obligations. We also assessed the historical accuracy of management’s estimates. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Salt Lake City, Utah
February 26, 201818, 2020
5338
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
| ||
|
|
| 2017 |
| 2016 |
| ||
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| $ | 181,792 |
| $ | 146,766 |
|
Marketable securities |
|
|
| 503,503 |
|
| 409,898 |
|
Restricted cash |
|
|
| — |
|
| 8,243 |
|
Income tax receivable |
|
|
| 5,316 |
|
| 6,989 |
|
Receivables, net |
|
|
| 42,731 |
|
| 46,916 |
|
Inventories, net |
|
|
| 119,755 |
|
| 118,509 |
|
Prepaid aircraft rents |
|
|
| 115,098 |
|
| 162,360 |
|
Other current assets |
|
|
| 26,938 |
|
| 18,111 |
|
Total current assets |
|
|
| 995,133 |
|
| 917,792 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT: |
|
|
|
|
|
|
|
|
Aircraft and rotable spares |
|
|
| 5,335,870 |
|
| 4,839,501 |
|
Deposits on aircraft |
|
|
| 49,000 |
|
| 38,800 |
|
Buildings and ground equipment |
|
|
| 265,608 |
|
| 261,704 |
|
|
|
|
| 5,650,478 |
|
| 5,140,005 |
|
Less-accumulated depreciation and amortization |
|
|
| (1,467,475) |
|
| (1,318,308) |
|
Total property and equipment, net |
|
|
| 4,183,003 |
|
| 3,821,697 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
|
|
|
|
|
Long-term prepaid assets |
|
|
| 230,923 |
|
| 218,505 |
|
Other long-term assets |
|
|
| 49,220 |
|
| 49,972 |
|
Total other assets |
|
|
| 280,143 |
|
| 268,477 |
|
Total assets |
|
| $ | 5,458,279 |
| $ | 5,007,966 |
|
| | | | | | | | |
| | | December 31, |
| December 31, |
| ||
|
| | 2019 | | 2018 |
| ||
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | | $ | 87,206 | | $ | 328,384 | |
Marketable securities | | |
| 432,966 | |
| 360,945 | |
Income tax receivable | | |
| 11,141 | |
| 25,936 | |
Receivables, net | | |
| 82,977 | |
| 64,194 | |
Inventories, net | | |
| 110,503 | |
| 127,690 | |
Prepaid aircraft rents | | |
| — | |
| 87,031 | |
Other current assets | | |
| 35,553 | |
| 26,614 | |
Total current assets | | |
| 760,346 | |
| 1,020,794 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT: | | | | | | | | |
Aircraft and rotable spares | | |
| 7,078,801 | |
| 6,433,916 | |
Deposits on aircraft | | |
| 48,858 | |
| 42,012 | |
Buildings and ground equipment | | |
| 265,398 | |
| 291,544 | |
| | |
| 7,393,057 | |
| 6,767,472 | |
Less-accumulated depreciation and amortization | | |
| (1,998,376) | |
| (1,761,728) | |
Total property and equipment, net | | |
| 5,394,681 | |
| 5,005,744 | |
| | | | | | | | |
OTHER ASSETS | | | | | | | | |
Operating lease right-of-use assets | | | | 336,009 | | | — | |
Long-term prepaid assets | | | | — | | | 181,830 | |
Other long-term assets | | |
| 166,093 | |
| 104,844 | |
Total other assets | | |
| 502,102 | |
| 286,674 | |
Total assets | | | $ | 6,657,129 | | $ | 6,313,212 | |
See accompanying notes to consolidated financial statements.
5439
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
| December 31, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
CURRENT LIABILITIES: |
|
|
|
|
|
|
Current maturities of long-term debt |
| $ | 309,678 |
| $ | 305,460 |
Accounts payable |
|
| 288,904 |
|
| 241,215 |
Accrued salaries, wages and benefits |
|
| 154,367 |
|
| 139,885 |
Taxes other than income taxes |
|
| 19,228 |
|
| 15,618 |
Other current liabilities |
|
| 48,648 |
|
| 45,087 |
Total current liabilities |
|
| 820,825 |
|
| 747,265 |
|
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES |
|
| 42,541 |
|
| 50,844 |
|
|
|
|
|
|
|
LONG-TERM DEBT, net of current maturities |
|
| 2,377,346 |
|
| 2,240,051 |
|
|
|
|
|
|
|
DEFERRED INCOME TAXES PAYABLE |
|
| 419,020 |
|
| 565,404 |
|
|
|
|
|
|
|
DEFERRED AIRCRAFT CREDITS |
|
| 44,225 |
|
| 53,459 |
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 5) |
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY: |
|
|
|
|
|
|
Preferred stock, 5,000,000 shares authorized; none issued |
|
| — |
|
| — |
Common stock, no par value, 120,000,000 shares authorized; 80,398,104 and 79,781,305 shares issued, respectively |
|
| 672,593 |
|
| 657,353 |
Retained earnings |
|
| 1,516,957 |
|
| 1,103,751 |
Treasury stock, at cost, 28,643,535 and 28,015,386 shares, respectively |
|
| (435,178) |
|
| (410,090) |
Accumulated other comprehensive loss |
|
| (50) |
|
| (71) |
Total stockholders’ equity |
|
| 1,754,322 |
|
| 1,350,943 |
Total liabilities and stockholders’ equity |
| $ | 5,458,279 |
| $ | 5,007,966 |
| | | | | | |
|
| December 31, |
| December 31, | ||
| | 2019 | | 2018 | ||
CURRENT LIABILITIES: | | | | | | |
Current maturities of long-term debt | | $ | 364,126 | | $ | 350,206 |
Accounts payable | |
| 284,473 | |
| 331,982 |
Accrued salaries, wages and benefits | |
| 133,856 | |
| 161,606 |
Current maturities of operating lease liabilities | |
| 94,806 | |
| |
Taxes other than income taxes | |
| 15,004 | |
| 16,024 |
Other current liabilities | |
| 32,411 | |
| 65,008 |
Total current liabilities | |
| 924,676 | |
| 924,826 |
| | | | | | |
LONG-TERM DEBT, net of current maturities | |
| 2,628,989 | |
| 2,809,768 |
| | | | | | |
DEFERRED INCOME TAXES PAYABLE | |
| 623,580 | |
| 518,159 |
| | | | | | |
DEFERRED AIRCRAFT CREDITS | |
| — | |
| 29,308 |
| | | | | | |
NONCURRENT OPERATING LEASE LIABILITIES | |
| 259,237 | |
| — |
| | | | | | |
OTHER LONG-TERM LIABILITIES | |
| 45,633 | |
| 66,870 |
| | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 5) | | | | | | |
| | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | |
Preferred stock, 5,000,000 shares authorized; NaN issued | |
| — | |
| — |
Common stock, 0 par value, 120,000,000 shares authorized; 81,742,937 and 81,239,289 shares issued, respectively | |
| 686,806 | |
| 690,910 |
Retained earnings | |
| 2,079,179 | |
| 1,776,585 |
Treasury stock, at cost, 31,420,179 and 29,850,999 shares, respectively | |
| (590,971) | |
| (503,182) |
Accumulated other comprehensive loss | |
| — | |
| (32) |
Total stockholders’ equity | |
| 2,175,014 | |
| 1,964,281 |
Total liabilities and stockholders’ equity | | $ | 6,657,129 | | $ | 6,313,212 |
See accompanying notes to consolidated financial statements.
5540
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
| | | | | | | | | | | |
| | | Year Ended December 31, | ||||||||
|
|
| 2019 | | 2018 | | 2017 (a) |
| |||
OPERATING REVENUES: | | | |
|
| |
|
| |
| |
Flying agreements | | | $ | 2,889,265 | | $ | 3,169,520 | | $ | 3,078,297 | |
Airport customer service and other | | |
| 82,698 | |
| 52,159 | |
| 44,295 | |
Total operating revenues | | |
| 2,971,963 | |
| 3,221,679 | |
| 3,122,592 | |
OPERATING EXPENSES: | | | | | | | | | | | |
Salaries, wages and benefits | | |
| 1,001,746 | |
| 1,201,518 | |
| 1,192,067 | |
Aircraft maintenance, materials and repairs | | |
| 514,313 | |
| 556,259 | |
| 579,463 | |
Depreciation and amortization | | |
| 368,098 | |
| 334,589 | |
| 292,768 | |
Aircraft fuel | | |
| 119,115 | |
| 117,657 | |
| 85,136 | |
Airport-related expenses | | |
| 118,837 | |
| 109,605 | |
| 118,374 | |
Aircraft rentals | | |
| 71,998 | |
| 154,945 | |
| 215,807 | |
Special items | | |
| 21,869 | |
| — | |
| — | |
Other operating expenses | | |
| 243,729 | |
| 272,826 | |
| 250,778 | |
Total operating expenses | | |
| 2,459,705 | |
| 2,747,399 | |
| 2,734,393 | |
OPERATING INCOME | | |
| 512,258 | |
| 474,280 | |
| 388,199 | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | |
Interest income | | |
| 14,131 | |
| 8,823 | |
| 4,509 | |
Interest expense | | |
| (127,755) | |
| (120,409) | |
| (104,925) | |
Other, net | | |
| 47,671 | |
| 3,620 | |
| 400 | |
Total other expense, net | | |
| (65,953) | |
| (107,966) | |
| (100,016) | |
INCOME BEFORE INCOME TAXES | | |
| 446,305 | |
| 366,314 | |
| 288,183 | |
PROVISION (BENEFIT) FOR INCOME TAXES | | |
| 106,206 | |
| 85,942 | |
| (140,724) | |
NET INCOME | | | $ | 340,099 | | $ | 280,372 | | $ | 428,907 | |
| | | | | | | | | | | |
BASIC EARNINGS PER SHARE | | | $ | 6.68 | | $ | 5.40 | | $ | 8.28 | |
DILUTED EARNINGS PER SHARE | | | $ | 6.62 | | $ | 5.30 | | $ | 8.08 | |
Weighted average common shares: | | | | | | | | | | | |
Basic | | |
| 50,932 | |
| 51,914 | |
| 51,804 | |
Diluted | | |
| 51,375 | |
| 52,871 | |
| 53,100 | |
| | | | | | | | | | | |
COMPREHENSIVE INCOME: | | | | | | | | | | | |
Net income | | | $ | 340,099 | | $ | 280,372 | | $ | 428,907 | |
Net unrealized appreciation on marketable securities, net of taxes | | |
| 32 | |
| 18 | |
| 21 | |
TOTAL COMPREHENSIVE INCOME | | | $ | 340,131 | | $ | 280,390 | | $ | 428,928 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | ||||||||
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
OPERATING REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
Passenger |
|
| $ | 3,126,708 |
| $ | 3,051,414 |
| $ | 3,030,023 |
|
Ground handling and other |
|
|
| 77,560 |
|
| 69,792 |
|
| 65,540 |
|
Total operating revenues |
|
|
| 3,204,268 |
|
| 3,121,206 |
|
| 3,095,563 |
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
|
| 1,196,227 |
|
| 1,211,380 |
|
| 1,203,312 |
|
Aircraft maintenance, materials and repairs |
|
|
| 579,463 |
|
| 569,306 |
|
| 604,863 |
|
Depreciation and amortization |
|
|
| 292,768 |
|
| 284,969 |
|
| 264,507 |
|
Aircraft rentals |
|
|
| 215,807 |
|
| 262,602 |
|
| 273,696 |
|
Aircraft fuel |
|
|
| 162,653 |
|
| 122,284 |
|
| 118,124 |
|
Ground handling services |
|
|
| 69,848 |
|
| 72,659 |
|
| 82,694 |
|
Special items |
|
|
| — |
|
| 465,649 |
|
| — |
|
Other operating expenses |
|
|
| 299,303 |
|
| 305,041 |
|
| 313,852 |
|
Total operating expenses |
|
|
| 2,816,069 |
|
| 3,293,890 |
|
| 2,861,048 |
|
OPERATING INCOME (LOSS) |
|
|
| 388,199 |
|
| (172,684) |
|
| 234,515 |
|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
| 4,509 |
|
| 2,143 |
|
| 1,997 |
|
Interest expense |
|
|
| (104,925) |
|
| (78,177) |
|
| (75,850) |
|
Other, net |
|
|
| 400 |
|
| (94) |
|
| 33,660 |
|
Total other expense, net |
|
|
| (100,016) |
|
| (76,128) |
|
| (40,193) |
|
INCOME (LOSS) BEFORE INCOME TAXES |
|
|
| 288,183 |
|
| (248,812) |
|
| 194,322 |
|
PROVISION (BENEFIT) FOR INCOME TAXES |
|
|
| (140,724) |
|
| (87,226) |
|
| 76,505 |
|
NET INCOME (LOSS) |
|
| $ | 428,907 |
| $ | (161,586) |
| $ | 117,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE |
|
| $ | 8.28 |
| $ | (3.14) |
| $ | 2.31 |
|
DILUTED EARNINGS (LOSS) PER SHARE |
|
| $ | 8.08 |
| $ | (3.14) |
| $ | 2.27 |
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
| 51,804 |
|
| 51,505 |
|
| 51,077 |
|
Diluted |
|
|
| 53,100 |
|
| 51,505 |
|
| 51,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
| $ | 428,907 |
| $ | (161,586) |
| $ | 117,817 |
|
Net unrealized appreciation on marketable securities, net of taxes |
|
|
| 21 |
|
| 189 |
|
| 29 |
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
|
| $ | 428,928 |
| $ | (161,397) |
| $ | 117,846 |
|
| (a) | Amounts adjusted due to the adoption of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). See Note 1 to the financial statements of this report for additional information. |
See accompanying notes to consolidated financial statements.
5641
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
| |||||
|
| Common Stock |
| Retained |
| Treasury Stock |
| Comprehensive |
|
|
| ||||||||
|
| Shares |
| Amount |
| Earnings |
| Shares |
| Amount |
| Income (Loss) |
| Total | |||||
Balance at December 31, 2014 |
| 77,951 |
| $ | 626,521 |
| $ | 1,165,478 |
| (26,765) |
| $ | (391,364) |
| $ | (289) |
| $ | 1,400,346 |
Net income |
| — |
|
| — |
|
| 117,817 |
| — |
|
| — |
|
| — |
|
| 117,817 |
Net unrealized appreciation on marketable securities, net of tax of $18 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 29 |
|
| 29 |
Exercise of common stock options and vested restricted stock units |
| 815 |
|
| 8,490 |
|
| — |
| — |
|
| — |
|
| — |
|
| 8,490 |
Sale of common stock under employee stock purchase plan |
| 254 |
|
| 3,430 |
|
| — |
| — |
|
| — |
|
| — |
|
| 3,430 |
Stock based compensation expense related to the issuance of stock options and restricted stock units |
| — |
|
| 5,368 |
|
| — |
| — |
|
| — |
|
| — |
|
| 5,368 |
Tax deficiency from exercise of common stock options |
| — |
|
| (2,166) |
|
| — |
| — |
|
| — |
|
| — |
|
| (2,166) |
Treasury stock purchases |
| — |
|
| — |
|
| — |
| (1,250) |
|
| (18,726) |
|
| — |
|
| (18,726) |
Cash dividends declared ($0.16 per share) |
| — |
|
| — |
|
| (8,153) |
| — |
|
| — |
|
| — |
|
| (8,153) |
Balance at December 31, 2015 |
| 79,020 |
|
| 641,643 |
|
| 1,275,142 |
| (28,015) |
|
| (410,090) |
|
| (260) |
|
| 1,506,435 |
Net loss |
| — |
|
| — |
|
| (161,586) |
| — |
|
| — |
|
| — |
|
| (161,586) |
Net unrealized appreciation on marketable securities, net of tax of $98 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 189 |
|
| 189 |
Exercise of common stock options and vested restricted stock units |
| 609 |
|
| 4,979 |
|
| — |
| — |
|
| — |
|
| — |
|
| 4,979 |
Sale of common stock under employee stock purchase plan |
| 152 |
|
| 3,163 |
|
| — |
| — |
|
| — |
|
| — |
|
| 3,163 |
Stock based compensation expense related to the issuance of stock options and restricted stock units |
| — |
|
| 7,568 |
|
| — |
| — |
|
| — |
|
| — |
|
| 7,568 |
Cash dividends declared ($0.19 per share) |
| — |
|
| — |
|
| (9,805) |
| — |
|
| — |
|
| — |
|
| (9,805) |
Balance at December 31, 2016 |
| 79,781 |
|
| 657,353 |
|
| 1,103,751 |
| (28,015) |
|
| (410,090) |
|
| (71) |
|
| 1,350,943 |
Net income |
| — |
|
| — |
|
| 428,907 |
| — |
|
| — |
|
| — |
|
| 428,907 |
Net unrealized appreciation on marketable securities, net of tax of $7 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 21 |
|
| 21 |
Exercise of common stock options and vested restricted stock units |
| 529 |
|
| 1,658 |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,658 |
Treasury shares withheld for the payment of taxes |
| — |
| �� | — |
|
| — |
| (145) |
|
| (5,080) |
|
| — |
|
| (5,080) |
Sale of common stock under employee stock purchase plan |
| 88 |
|
| 3,002 |
|
| — |
| — |
|
| — |
|
| — |
|
| 3,002 |
Stock based compensation expense related to the issuance of stock options and restricted stock units |
| — |
|
| 10,580 |
|
| — |
| — |
|
| — |
|
| — |
|
| 10,580 |
Impact of adoption of Accounting Standards Update (ASU) 2016-09 (See Note 1) |
| — |
|
| — |
|
| 867 |
| — |
|
| — |
|
| — |
|
| 867 |
Treasury stock purchases |
| — |
|
| — |
|
| — |
| (484) |
|
| (20,008) |
|
| — |
|
| (20,008) |
Cash dividends declared ($0.32 per share) |
| — |
|
| — |
|
| (16,568) |
| — |
|
| — |
|
| — |
|
| (16,568) |
Balance at December 31, 2017 |
| 80,398 |
| $ | 672,593 |
| $ | 1,516,957 |
| (28,644) |
| $ | (435,178) |
| $ | (50) |
| $ | 1,754,322 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | |||||
| | | | | | | | | | | Other | | | | |||||
| | Common Stock | | Retained | | Treasury Stock | | Comprehensive | | | | ||||||||
| | Shares | | Amount | | Earnings | | Shares | | Amount | | Income (Loss) | | Total | |||||
Balance at December 31, 2016 |
| 79,781 | | $ | 657,353 | | $ | 1,103,751 |
| (28,015) | | $ | (410,090) | | $ | (71) | | $ | 1,350,943 |
Net income |
| — | |
| — | |
| 428,907 |
| — | |
| — | |
| — | |
| 428,907 |
Net unrealized appreciation on marketable securities, net of tax of $7 |
| — | |
| — | |
| — |
| — | |
| — | |
| 21 | |
| 21 |
Exercise of common stock options and vested restricted stock units |
| 529 | |
| 1,658 | |
| — |
| — | |
| — | |
| — | |
| 1,658 |
Treasury shares acquired from vested employee stock awards for income tax withholdings |
| — | | | — | | | — | | (145) | | | (5,080) | | | — | |
| (5,080) |
Sale of common stock under employee stock purchase plan |
| 88 | |
| 3,002 | |
| — |
| — | |
| — | |
| — | |
| 3,002 |
Stock based compensation expense related to the issuance of equity awards | | — | |
| 10,580 | |
| — |
| — | |
| — | |
| — | | | 10,580 |
Impact of adoption of ASU 2016-09 (See Note 1) |
| — | |
| — | |
| 867 |
| — | |
| — | |
| — | |
| 867 |
Treasury stock purchases |
| — | |
| — | |
| — |
| (484) | |
| (20,008) | |
| — | |
| (20,008) |
Cash dividends declared ($0.32 per share) |
| — | |
| — | |
| (16,568) |
| — | |
| — | |
| — | |
| (16,568) |
Balance at December 31, 2017 |
| 80,398 | |
| 672,593 | |
| 1,516,957 |
| (28,644) | |
| (435,178) | |
| (50) | |
| 1,754,322 |
Net income |
| — | |
| — | |
| 280,372 |
| — | |
| — | |
| — | |
| 280,372 |
Net unrealized appreciation on marketable securities, net of tax of $6 |
| — | |
| — | |
| — |
| — | |
| — | |
| 18 | |
| 18 |
Exercise of common stock options and vested restricted stock units |
| 780 | |
| 2,174 | |
| — |
| — | |
| — | |
| — | |
| 2,174 |
Treasury shares acquired from vested employee stock awards for income tax withholdings | | — | | | — | | | — | | (239) | | | (13,556) | | | — | | | (13,556) |
Sale of common stock under employee stock purchase plan |
| 61 | |
| 3,038 | |
| — |
| — | |
| — | |
| — | |
| 3,038 |
Stock based compensation expense related to the issuance of equity awards |
| — | |
| 13,105 | |
| — |
| — | |
| — | |
| — | |
| 13,105 |
Treasury stock purchases |
| — | |
| — | |
| — |
| (968) | |
| (54,448) | |
| — | |
| (54,448) |
Cash dividends declared ($0.40 per share) |
| — | |
| — | |
| (20,744) |
| — | |
| — | |
| — | |
| (20,744) |
Balance at December 31, 2018 |
| 81,239 | | | 690,910 | | | 1,776,585 |
| (29,851) | | | (503,182) | | | (32) | | | 1,964,281 |
Change in accounting principle and other (see Note 6) | | — | | | — | | | (13,141) | | — | | | — | | | — | | | (13,141) |
Balance at December 31, 2018, as adjusted | | 81,239 | | | 690,910 | | | 1,763,444 | | (29,851) | | | (503,182) | | | (32) | | | 1,951,140 |
Net income |
| — | |
| — | |
| 340,099 |
| — | |
| — | |
| — | |
| 340,099 |
Net unrealized appreciation on marketable securities, net of tax of $10 |
| — | |
| — | |
| — |
| — | |
| — | |
| 32 | |
| 32 |
Exercise of common stock options and vested restricted stock units |
| 707 | |
| 3,106 | |
| — |
| — | |
| — | |
| — | |
| 3,106 |
Treasury shares acquired from vested employee stock awards for income tax withholdings | | — | | | — | | | — | | (173) | | | (9,313) | | | — | | | (9,313) |
Sale of common stock under employee stock purchase plan |
| 65 | |
| 3,165 | |
| — |
| — | |
| — | |
| — | |
| 3,165 |
Stock based compensation expense related to the issuance of equity awards, net of forfeitures |
| — | |
| 5,770 | |
| — |
| — | |
| — | |
| — | |
| 5,770 |
Common stock purchased and cancelled |
| (268) | |
| (16,145) | |
| |
| — | |
| — | |
| — | |
| (16,145) |
Treasury stock purchases |
| — | |
| — | |
| — |
| (1,396) | |
| (78,476) | |
| — | |
| (78,476) |
Cash dividends declared ($0.48 per share) |
| — | |
| — | |
| (24,364) |
| — | |
| — | |
| — | |
| (24,364) |
Balance at December 31, 2019 |
| 81,743 | | $ | 686,806 | | $ | 2,079,179 |
| (31,420) | | $ | (590,971) | | $ | — | | $ | 2,175,014 |
See accompanying notes to consolidated financial statements.
5742
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, | ||||||||
|
|
| 2017 |
| 2016 |
| 2015 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
| $ | 428,907 |
| $ | (161,586) |
| $ | 117,817 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
| 292,768 |
|
| 284,969 |
|
| 264,507 |
|
Stock based compensation expense |
|
|
| 10,580 |
|
| 7,568 |
|
| 5,368 |
|
Gain from early extinguishment of debt |
|
|
| — |
|
| (1,279) |
|
| (33,660) |
|
Special items |
|
|
| — |
|
| 465,649 |
|
| — |
|
Net increase (decrease) in deferred income taxes |
|
|
| (145,517) |
|
| (83,441) |
|
| 73,844 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash |
|
|
| 8,243 |
|
| (27) |
|
| 3,366 |
|
Decrease in receivables |
|
|
| 4,201 |
|
| 15,260 |
|
| 21,076 |
|
Decrease (increase) in income tax receivable |
|
|
| 1,673 |
|
| (4,118) |
|
| (92) |
|
Increase in inventories |
|
|
| (1,246) |
|
| (1,986) |
|
| (2,860) |
|
Decrease (increase) in other current assets |
|
|
| 26,017 |
|
| 37,569 |
|
| (28,598) |
|
Decrease in deferred aircraft credits |
|
|
| (8,520) |
|
| (8,108) |
|
| (8,635) |
|
Increase (decrease) in accounts payable and accrued aircraft rents |
|
|
| 46,934 |
|
| (47,563) |
|
| 9,690 |
|
Increase (decrease) in other current liabilities |
|
|
| 20,084 |
|
| 3,758 |
|
| (4,498) |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
| 684,124 |
|
| 506,665 |
|
| 417,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
| (1,533,867) |
|
| (2,511,388) |
|
| (1,170,439) |
|
Sales of marketable securities |
|
|
| 1,440,283 |
|
| 2,388,168 |
|
| 1,299,069 |
|
Proceeds from the sale of aircraft, property and equipment |
|
|
| 51,994 |
|
| 3,008 |
|
| 10,308 |
|
Proceeds from settlement of residual value guarantee aircraft agreements |
|
|
| — |
|
| 90,000 |
|
| — |
|
Acquisition of property and equipment: |
|
|
|
|
|
|
|
|
|
|
|
Aircraft and rotable spare parts |
|
|
| (661,176) |
|
| (1,138,963) |
|
| (710,871) |
|
Deposits on aircraft |
|
|
| (46,733) |
|
| (650) |
|
| — |
|
Buildings and ground equipment |
|
|
| (27,467) |
|
| (14,350) |
|
| (10,405) |
|
Return of deposits applied towards acquired aircraft |
|
|
| 36,533 |
|
| — |
|
| 1,850 |
|
Decrease (increase) in other assets |
|
|
| (10,904) |
|
| 7,097 |
|
| 10,772 |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
| (751,337) |
|
| (1,177,078) |
|
| (569,716) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
| 471,677 |
|
| 926,069 |
|
| 591,881 |
|
Principal payments on long-term debt |
|
|
| (330,258) |
|
| (302,158) |
|
| (354,277) |
|
Proceeds from issuance of common stock |
|
|
| 4,660 |
|
| 8,142 |
|
| 9,754 |
|
Purchase of treasury stock |
|
|
| (20,008) |
|
| — |
|
| (18,726) |
|
Employee income tax paid on equity awards |
|
|
| (5,080) |
|
| — |
|
| — |
|
Decrease (increase) in debt issuance cost |
|
|
| (3,737) |
|
| (8,653) |
|
| 2,779 |
|
Payment of cash dividends |
|
|
| (15,015) |
|
| (9,256) |
|
| (8,260) |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
| 102,239 |
|
| 614,144 |
|
| 223,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
| 35,026 |
|
| (56,269) |
|
| 70,760 |
|
Cash and cash equivalents at beginning of period |
|
|
| 146,766 |
|
| 203,035 |
|
| 132,275 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
| $ | 181,792 |
| $ | 146,766 |
| $ | 203,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Acquisition of rotable spare parts |
|
| $ | 755 |
| $ | 5,688 |
| $ | — |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized amounts |
|
| $ | 105,639 |
| $ | 76,589 |
| $ | 80,657 |
|
Income taxes |
|
| $ | 5,010 |
| $ | 1,212 |
| $ | 5,104 |
|
| | | | | | | | | | | |
| | | Year Ended December 31, | ||||||||
|
|
| 2019 | | 2018 | | 2017 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
|
| |
|
| |
| |
Net income | | | $ | 340,099 | | $ | 280,372 | | $ | 428,907 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | |
Depreciation and amortization | | |
| 368,098 | |
| 334,589 | |
| 292,768 | |
Stock based compensation expense | | |
| 10,274 | |
| 13,105 | |
| 10,580 | |
Gain on sale of subsidiary | | | | (46,525) | | | — | | | — | |
Special items | | |
| 21,869 | |
| — | |
| — | |
Net increase (decrease) in deferred income taxes | | |
| 109,654 | |
| 99,139 | |
| (145,517) | |
Changes in operating assets and liabilities: | | | | | | | | | | | |
Decrease in restricted cash | | |
| — | |
| — | |
| 8,243 | |
Decrease (increase) in receivables | | |
| (40,700) | |
| (21,464) | |
| 4,201 | |
Decrease (increase) in income tax receivable | | |
| 14,795 | |
| (20,620) | |
| 1,673 | |
Increase in inventories | | |
| (4,303) | |
| (7,935) | |
| (1,246) | |
Decrease in other current assets | | |
| 2,707 | |
| 77,484 | |
| 26,017 | |
Increase in operating lease right-of-use asset | | | | (895) | | | — | | | — | |
Decrease in deferred aircraft credits | | |
| — | |
| (14,243) | |
| (8,520) | |
Increase (decrease) in accounts payable and other current liabilities | | |
| (54,043) | |
| 62,107 | |
| 67,018 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | |
| 721,030 | |
| 802,534 | |
| 684,124 | |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of marketable securities | | |
| (1,938,750) | |
| (2,308,768) | |
| (1,533,867) | |
Sales of marketable securities | | |
| 1,866,761 | |
| 2,451,344 | |
| 1,440,283 | |
Net cash received from sale of subsidiary | | |
| 53,200 | |
| — | |
| — | |
Acquisition of property and equipment: | | | | | | | | | | | |
Aircraft and rotable spare parts | | |
| (581,329) | |
| (1,062,380) | |
| (661,176) | |
Buildings and ground equipment | | |
| (80,586) | |
| (34,397) | |
| (27,467) | |
Proceeds from the sale of aircraft, property and equipment | | |
| 26,008 | |
| — | |
| 51,994 | |
Deposits on aircraft | | | | (52,817) | | | (41,937) | | | (46,733) | |
Return of deposits applied towards acquired aircraft | | | | 46,346 | | | 49,550 | | | 36,533 | |
Decrease (increase) in other assets | | |
| 4,133 | |
| (36,816) | |
| (10,904) | |
NET CASH USED IN INVESTING ACTIVITIES | | |
| (657,034) | |
| (983,404) | |
| (751,337) | |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Proceeds from issuance of long-term debt | | |
| 200,040 | |
| 784,665 | |
| 471,677 | |
Principal payments on long-term debt | | |
| (382,442) | |
| (370,775) | |
| (330,258) | |
Proceeds from issuance of common stock | | |
| 6,271 | |
| 5,212 | |
| 4,660 | |
Purchase of treasury stock | | |
| (78,476) | |
| (54,448) | |
| (20,008) | |
Purchase of common stock | | | | (16,145) | | | — | | | — | |
Employee income tax paid on vested equity awards | | | | (9,313) | | | (13,556) | | | (5,080) | |
Increase in debt issuance cost | | | | (1,642) | | | (3,892) | | | (3,737) | |
Payment of cash dividends | | |
| (23,467) | |
| (19,744) | |
| (15,015) | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | |
| (305,174) | |
| 327,462 | |
| 102,239 | |
| | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | |
| (241,178) | |
| 146,592 | |
| 35,026 | |
Cash and cash equivalents at beginning of period | | |
| 328,384 | |
| 181,792 | |
| 146,766 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | | | $ | 87,206 | | $ | 328,384 | | $ | 181,792 | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
5843
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
| | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | |
Non-cash investing activities: | | | | | | | | | | |
Acquisition of rotable spare parts | | | $ | 16,514 | | $ | 367 | | $ | 755 |
Debt assumed on aircraft acquired under operating leases | | | $ | 14,475 | | $ | 59,132 | | $ | — |
Engines contributed to joint venture | | | $ | 22,313 | | $ | — | | $ | — |
Non-cash assets used to acquire aircraft under operating leases | | | $ | 153,566 | | $ | — | | $ | — |
Lease liability arising from the recognition of right-of-use asset | | | $ | 456,472 | | $ | — | | $ | — |
Cash paid during the period for: | | | | | | | | | | |
Interest, net of capitalized amounts | | | $ | 131,733 | | $ | 118,268 | | $ | 105,639 |
Income taxes | | | $ | 2,490 | | $ | 2,661 | | $ | 5,010 |
| | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF SALE OF SUBSIDIARY: | | | | | | | | | | |
Decrease in carrying amount of assets | | | $ | (101,448) | | $ | — | | $ | — |
Decrease in carrying amount of liabilities | | | | 68,341 | | | — | | | — |
Cash received from buyers | | | | 79,632 | | | — | | | — |
Gain on sale of subsidiary | | | $ | 46,525 | | $ | — | | $ | — |
See accompanying notes to consolidated financial statements.
44
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20172019
(1) Nature of Operations and Summary of Significant Accounting Policies
SkyWest, Inc. (the “Company”), through its subsidiaries,subsidiary, SkyWest Airlines, Inc. (“SkyWest Airlines”) andoperates the largest regional airline in the United States. On January 22, 2019, the Company completed the sale of its former wholly owned subsidiary, ExpressJet Airlines, Inc. (“ExpressJet”), operates the largest regional airlines in the United States.. As of December 31, 2017,2019, SkyWest Airlines and ExpressJet offered scheduled passenger service under code-share agreements with Delta, United, Delta, American and Alaska with approximately 2,9802,300 total daily departures to different destinations in the United States, Canada, Mexico and the Caribbean. Additionally, the Company provides airport customer service and ground handling services for other airlines throughout its system. As of December 31, 2017,2019, the Company had 595483 aircraft in scheduled service out of a combined fleet of 623544 aircraft consisting of the following:
| | | | | | | | | | | |
|
| CRJ200 |
| CRJ700 |
| CRJ900 |
| E175 |
| Total |
|
Delta |
| 84 | | 13 | | 43 | | 59 | | 199 | |
United |
| 99 | | 19 | | — | | 65 | | 183 | |
American |
| 7 | | 62 | | — | | — | | 69 | |
Alaska |
| — | | — | | — | | 32 | | 32 | |
Aircraft in scheduled service | | 190 | | 94 | | 43 | | 156 | | 483 | |
Subleased to an un-affiliated entity |
| 4 | | 10 | | 5 | | — | | 19 | |
Other* |
| 20 | | 22 | | — | | — | | 42 | |
Total Fleet |
| 214 | | 126 | | 48 | | 156 | | 544 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CRJ200 |
| CRJ700 |
| CRJ900 |
| ERJ135 |
| ERJ145 |
| E175 |
| Total |
|
United |
| 81 |
| 20 |
| — |
| 3 |
| 109 |
| 65 |
| 278 |
|
Delta |
| 94 |
| 60 |
| 52 |
| — |
| — |
| 19 |
| 225 |
|
American |
| 16 |
| 49 |
| — |
| — |
| — |
| — |
| 65 |
|
Alaska |
| 4 |
| — |
| — |
| — |
| — |
| 23 |
| 27 |
|
Aircraft in scheduled service |
| 195 |
| 129 |
| 52 |
| 3 |
| 109 |
| 107 |
| 595 |
|
Subleased to an un-affiliated entity |
| 4 |
| — |
| — |
| — |
| — |
| — |
| 4 |
|
Other* |
| 9 |
| 7 |
| — |
| — |
| 8 |
| — |
| 24 |
|
Total Fleet |
| 208 |
| 136 |
| 52 |
| 3 |
| 117 |
| 107 |
| 623 |
|
*As of December 31, 2017,2019, these aircraft have been removed from service and are in the process of being returnedplaced under the applicablea leasing arrangement orwith a third party, are aircraft transitioning between code-share agreements with the Company’s major airline partners. Duringpartners and being used as a supplemental spare aircraft, or are in the year ended December 31, 2017, the Company sold eleven owned Embraer Brasilia EMB120 (“EMB120”) 30-seat turboprop aircraft at net book value.process of being parted out.
For the year ended December 31, 2017,2019, approximately 46.7%41.2% of the Company’s aircraft in scheduled service operated for United,Delta, approximately 37.8%37.9% was operated for Delta,United, approximately 10.9%14.3% was operated for American and approximately 4.6%6.6% was operated for Alaska.
SkyWest Airlines has been a code-share partner with Delta since 1987, United since 1997, Alaska since 2011 and American since 2012. As of December 31, 2017,2019, SkyWest Airlines operated as a Delta Connection carrier primarily in Salt Lake City and Minneapolis, a United Express carrier primarily in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an American carrier primarily in Chicago, Los Angeles and Phoenix and an Alaska carrier primarily in the Pacific Northwest.
As of December 31, 2017, ExpressJet operated as a Delta Connection carrier primarily in Atlanta and Detroit, a United Express carrier primarily in Chicago (O’Hare), Cleveland, Newark and Houston and an American carrier primarily in Dallas.
The Company’s subsidiaries operateSkyWest Airlines operates the following aircraft manufactured by Bombardier Aerospace (“Bombardier”): CRJ200s, CRJ700s and CRJ900s, and E175s manufactured by Embraer S.A. (“Embraer”): Bombardier. The CRJ200 regional jets (“CRJ200s”), Bombardieris a single-class 50-seat aircraft. The CRJ700, regional jets (“CRJ700s”), Bombardier CRJ900 regional jets (“CRJ900s”), Embraer ERJ145 Regional Jets (“ERJ145s”) and Embraer E175 aircraft have a dual-class regional jet aircraft (which areseat configuration typically configured with 65 to 76 seats) (“E175s”). Additionally, the Company has ordered 30 E175 aircraft from Embraer configured with 70 seats (“E175 SC”).
seats.
5945
Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company and the SkyWest Airlines, ExpressJet (for the periods owned by the Company) and SkyWest Leasing segments, with all inter‑companyinter-company transactions and balances having been eliminated.
In preparing the accompanying consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after December 31, 2017,2019, through the filing date of the Company’s annual report with the U.S. Securities and Exchange Commission. The Company reclassified certain prior period amounts to conform to the current period presentation (see Recent Accounting Pronouncements).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company classified $8.2 million of cash as restricted cash collateralizing letters of credit under the Company’s workers’ compensation insurance policy and classified it accordingly in the consolidated balance sheets as of December 31, 2016. The Company had no0 restricted cash as of December 31, 2017, as the Company satisfied the workers’ compensation insurance policy requirement with a letter of credit.2019 and 2018.
Marketable Securities
The Company’s investments in marketable debt and equity securities are deemed by management to beclassified as available-for-sale and are reported at fair market value with the net unrealized appreciation reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. At the time of sale, any realized appreciation or depreciation, calculated by the specific identification method, is recognized in other income and expense. At December 31, 2019, the fair market value of the available-for-sale securities was the amortized cost. The Company’s position in marketable securities as of December 31, 20172019 and 20162018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross unrealized |
| Gross unrealized |
|
|
|
| ||
At December 31, 2017 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| ||||
Total cash and cash equivalents |
| $ | 181,792 |
| $ | — |
| $ | — |
| $ | 181,792 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond and bond funds |
| $ | 344,479 |
| $ | — |
| $ | (228) |
| $ | 344,251 |
|
Commercial Paper |
|
| 159,252 |
|
| — |
|
| — |
|
| 159,252 |
|
Total marketable securities |
| $ | 503,731 |
| $ | — |
| $ | (228) |
| $ | 503,503 |
|
Total assets measured at fair value |
| $ | 685,523 |
| $ | — |
| $ | (228) |
| $ | 685,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
| Gross unrealized |
|
| Gross unrealized |
|
|
|
| ||||||||||||||
At December 31, 2016 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | | | Gross unrealized | | Gross unrealized | | | | | |||||||||||||||
At December 31, 2019 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| |||||||||||||||||
Total cash and cash equivalents |
| $ | 146,766 |
| $ | — |
| $ | — |
| $ | 146,766 |
| | $ | 87,206 | | $ | — | | $ | — | | $ | 87,206 | |
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Bond and bond funds |
| $ | 410,001 |
| $ | — |
| $ | (116) |
| $ | 409,885 |
| | $ | 267,243 | | $ | — | | $ | — | | $ | 267,243 | |
Commercial Paper |
|
| 13 |
|
| — |
|
| — |
|
| 13 |
| |
| 165,723 | |
| — | |
| — | |
| 165,723 | |
Total marketable securities |
| $ | 410,014 |
| $ | — |
| $ | (116) |
| $ | 409,898 |
| | $ | 432,966 | | $ | — | | $ | — | | $ | 432,966 | |
Total assets measured at fair value |
| $ | 556,780 |
| $ | — |
| $ | (116) |
| $ | 556,664 |
| | $ | 520,172 | | $ | — | | $ | — | | $ | 520,172 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | Gross unrealized | | Gross unrealized | | | | | ||
At December 31, 2018 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| ||||
Total cash and cash equivalents | | $ | 328,384 | | $ | — | | $ | — | | $ | 328,384 | |
Marketable securities: | | | | | | | | | | | | | �� |
Bond and bond funds | | $ | 229,825 | | $ | — | | $ | (42) | | $ | 229,783 | |
Commercial Paper | |
| 131,163 | |
| — | |
| (1) | |
| 131,162 | |
Total marketable securities | | $ | 360,988 | | $ | — | | $ | (43) | | $ | 360,945 | |
Total assets measured at fair value | | $ | 689,372 | | $ | — | | $ | (43) | | $ | 689,329 | |
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As of December 31, 20172019 and 2016,2018, the Company had classified $503.5$433.0 million and $409.9$360.9 million of marketable securities, respectively, as short‑termshort-term since it had the ability to redeem the securities within one year.
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Inventories
Inventories include expendable parts, fuel and supplies and are valued at cost (FIFO basis) less an allowance for obsolescence based on historical results, excess parts and management’s expectations of future operations. Expendable inventory parts are charged to expense as used. An obsolescence allowance for flight equipment expendable parts is accrued based on estimated lives of the corresponding fleet types and salvage values. The inventory allowance as of December 31, 20172019 and 20162018 was $17.1$15.9 million and $40.5$22.1 million, respectively. The inventory allowance decreased in 2017 due to the disposal of excess inventory that had a valuation allowance as of December 31, 2016. These allowances are based on management estimates.
Property and Equipment
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight‑line method. The Company changed the estimated useful lives and residual values for certain long-lived assets as of January 1, 2017straight-line method as follows:
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Buildings | | 20 - 39.5 years |
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The impact of this change increased depreciation expense by an additional $1.4 million for 2017.
Impairment of Long-Lived Assets
As of December 31, 2017,2019, the Company had approximately $4.2$5.4 billion of property and equipment and related assets. Additionally, as of December 31, 2017, the Company had approximately $4.9 million in intangible assets. In accounting for these long‑livedlong-lived and intangible assets, the Company makes estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. On September 7, 2005, the Company acquired all of the issued and outstanding capital stock of Atlantic Southeast and recorded an intangible asset for specifically identifiable contracts of approximately $33.7 million relating to the acquisition. The Company anticipates the intangible asset will be fully amortized by the end of 2018. As of December 31, 2017 and 2016, the Company had $28.9 million and $25.5 million in accumulated amortization expense, attributable to the acquisition, respectively. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long‑livedlong-lived assets, a significant change in the condition of the long‑livedlong-lived assets and operating cash flow losses associated with the use of the long‑livedlong-lived assets. On a periodic basis, the Company evaluates whether impairment indicators are present. When considering whether or not impairment of long‑long-lived assets exists, the Company groups similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet or contract level.
The Company did not0t recognize any impairment charges of long-lived assets during the yearyears ended December 31, 2019, 2018 and 2017.
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In 2016, the Company impaired certain long-lived assets relating to the CRJ200 aircraft and ERJ145 aircraft type specific assets. See Note 8, Special Items, for the impairment charges recorded during the year ended December 31, 2016.
Capitalized Interest
Interest is capitalized on aircraft purchase deposits as a portion of the cost of the asset and is depreciated over the estimated useful life of the asset. During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the Company capitalized interest costs of approximately $1.4$1.6 million, $1.5 million, and $2.2$1.4 million, respectively.
Maintenance
The Company operates under a U.S. Federal Aviation Administration approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its regional jet engine overhauls wherein the expense is recorded when the overhaul event occurs. The Company has engine services agreements with third-party vendors to provide long-term engine services covering the scheduled and unscheduled repairs for certainmost of its CRJ200 aircraft, CRJ700 aircraft, ERJ145 aircraft and E175 aircraft. Under the terms of the agreements, the Company pays a fixed dollar amount per engine hour flown on a monthly basis and the third-party vendors will assume the responsibility to repair the engines at no additional cost to the Company, subject to certain specified exclusions. Maintenance costs under these contracts are recognized when the engine hour is flown pursuant to the terms of each contract.
47
The costs of maintenance for airframe and avionics components, landing gear and other recurring maintenance are expensed as incurred.
PassengerFlying Agreements and Ground HandlingAirport Customer Service and Other Revenues
The Company recognizes passengerflying agreements revenue and ground handlingairport customer service and other revenues when the service is provided under its code-share agreements. Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee contracts” or “capacity purchase agreements”) with Delta Air Lines, Inc. (“Delta”), United Airlines, Inc. (“United”), 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 timehour (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 timeon-time performance. The major airline partner also directly pays for or reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as fuel, expenseairport landing fees and certain airport related expenses.rents. Under the fixed-fee arrangements, the Company’s performance obligation is met and revenue is earnedrecognized when each flight is completed. completed and is reflected in flying agreements revenue. The transaction price for the fixed-fee 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 year ended December 31, 2019, fixed-fee arrangements represented approximately 82.0% of the Company’s flying agreements revenue.
Under the Company’s fixed-fee agreements with Delta, United, American and Alaska, the compensation structure generally consists of a combination of agreed‑upon rates for operating flights and direct reimbursement for other certain costs associated with operating the aircraft. A portion of the Company’s contract flying compensation is designed to reimburse the Company for certain aircraft ownership costs. The aircraft compensation structure 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. Under the Company’s ExpressJet United Express ERJ Agreement and certain aircraft operating under fixed-fee contracts with Delta, the major airline partner provides the aircraft to the Company for a nominal amount. The Company has concluded that a component of its revenue under these agreements is rental income, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The amounts deemed to be rental income under the agreements for the years ended December 31, 2017, 2016 and 2015 were $572.7 million, $516.0 million and $504.9 million, respectively. These amounts are reflected as passenger revenues on the Company’s consolidated statements of comprehensive income (loss). The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income (loss) since the use of the aircraft is not a separate activity of the total service provided.
In the event that the contractual rates under the agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of prior period’s approved rates, as adjusted
62
to reflect any contract negotiations and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines. In the event the Company has a reimbursement dispute with a major airline partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute.
In several of the Company’s agreements, the Company is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are being measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period, the Company calculates the incentives achieved during that period and recognizes revenue accordingly.
The Company’s passenger revenues from fixed-fee agreements could be impacted by a number of factors, including changes to the Company’s code‑share agreements with Delta, United, Alaska or American, contract modifications resulting from contract re‑negotiations, 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.
Under a Revenue Sharing Arrangementrevenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), the major airline partner and regional airlinethe Company negotiate a passenger fare proration formula, pursuant to which the regional airlineCompany receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on the regionala Company airline and the other portion of their trip on the major airline. Revenue is recognized underairline 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 year ended December 31, 2019, prorate flying arrangements represented approximately 18.0% of the Company’s flying agreements revenue.
Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. 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. Additionally, airport customer service and other revenues includes revenue generated from aircraft and spare engines leased to third parties. Of the Company’s $5.4 billion of property and equipment, net as of December 31, 2019, $97.0 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. A portion of the Company’s leases to third parties contain variable payments from lessees based on departures where the Company pays for maintenance. 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 following table represents the Company’s airport customer service and other revenue for the years ended December 31, 2019, 2018 and 2017 (in thousands):
| | | | | | | | | |
| | For the year ended December 31, | |||||||
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| 2019 |
| 2018 |
| 2017 | |||
Airport customer service revenue | | $ | 45,538 | | $ | 48,236 | | $ | 41,002 |
Operating lease income relating to lease payments | |
| 27,552 | |
| 3,923 | |
| 3,293 |
Operating lease income relating to variable lease payments | |
| 9,608 | |
| — | |
| — |
Airport customer service and other | | $ | 82,698 | | $ | 52,159 | | $ | 44,295 |
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The following table summarizes future minimum rental income under operating leases primarily related to leased aircraft that had remaining non-cancelable lease terms as of December 31, 2019 (in thousands):
| | | | |
| | | | |
2020 |
| $ | 32,724 |
|
2021 | |
| 31,344 | |
2022 | |
| 24,786 | |
2023 | |
| 18,530 | |
2024 | |
| 18,222 | |
Thereafter | |
| 54,932 | |
| | $ | 180,538 | |
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.
The following table represents the Company’s flying agreements revenue by type for the years ended December 31, 2019, 2018 and 2017 (in thousands):
| | | | | | | | | |
| | For the year ended December 31, | |||||||
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| 2019 |
| 2018 |
| 2017 | |||
Capacity purchase agreements revenue: flight operations | | $ | 1,538,062 | | $ | 1,856,253 | | $ | 1,805,510 |
Capacity purchase agreements revenue: aircraft lease | |
| 830,247 | |
| 814,518 | |
| 834,366 |
Prorate agreements revenue | |
| 520,956 | |
| 498,749 | |
| 438,421 |
Flying agreements revenue | | $ | 2,889,265 | | $ | 3,169,520 | | $ | 3,078,297 |
A portion of the Company’s compensation under its fixed-fee 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 fixed-fee 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 fixed-fee 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.
The Company’s fixed-fee 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.
In the event a flying agreement includes a mid-term rate reset to adjust rates prospectively and the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company applies the variable constraint guidance under Topic 606, where the Company records revenue to the extent it believes that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly, subject to the variable constraint guidance under Topic 606.
The following summarizes the significant provisions of each code-share agreement the Company has with each major airline partner:partner through SkyWest Airlines:
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Delta Connection Agreements
Agreement | Aircraft type | | Number of Aircraft | Term / Termination Dates | |||
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Delta Connection Agreement (fixed-fee arrangement) | | ● CRJ 200 ● CRJ 700 ● CRJ 900 ● E175 | |
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| ● Individual aircraft have scheduled removal dates from 2020 to 2029 ●The average remaining term of the aircraft under contract is 4.1 years |
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Delta Connection Prorate Agreement (revenue-sharing arrangement) | | ● CRJ 200 | | 29 | | ● Terminable with 30-day notice | |
United Express Agreements
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United Express Agreements
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| ● CRJ 200 ● CRJ 700 ● E175 | | 68 19 | 65 |
| ● Individual aircraft have scheduled removal dates under the agreement between
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| ● CRJ 200 | | 31 | | ● Terminable with 120-day notice | |
American Agreements
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United Express Agreements
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Alaska Capacity Purchase Agreement
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Alaska Agreement (fixed-fee arrangement) | | ● E175 |
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In addition to the contractual arrangements described above, SkyWest Airlines has entered into fixed-fee agreements with AlaskaDelta and DeltaAmerican to place additional E175/E175 SC aircraft into service for those major airline partners.service. As of December 31, 2017,2019, the Company anticipated placing an additional 12was scheduled to take delivery of 6 new E175 aircraft in connection with Alaskaits agreement with Delta and 3020 new E175 SC aircraft in connection with Delta.its agreement with American. The delivery dates for the new E175/E175 SC aircraft are currently scheduled to take placebe completed by the end of 2018 or early 2019.2021. Final delivery dates may adjustbe adjusted based on various factors. Additionally, the Company is scheduled to add an additional six used E175 aircraft under the Delta agreement during 2020.
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ExpressJet initiated the wind down of its flyingSkyWest Airlines also entered into an agreement with Delta during 2017 and expected to be complete by the end of 2018.place 1 CRJ900 aircraft under a nine-year fixed-fee agreement in 2020.
SkyWest Airlines also entered into an agreement with American to place 10 used CRJ700s under a multi-year contract. As of December 31, 2017, ExpressJet operated 49 CRJ700s/900s under its Delta flying agreement. Of the 49 aircraft, ExpressJet anticipates returning 19 leased aircraft to Delta and removing 302019, SkyWest Airlines had placed 2 of these CRJ700 aircraft frominto service with Delta during 2018. ExpressJetAmerican.
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When an aircraft is pursuingscheduled to be removed from a fixed-fee arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the 30 CRJ700 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 arrangement, 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.
Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. The transaction price for airport service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled (measured by departures) by the Company over the agreement term.
The Company’s operating revenues could be impacted by a number of 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.
As of December 31, 2019, the Company had $83.0 million in accounts receivable of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta.
Deferred Aircraft Credits
The Company accounts for incentives provided by aircraft manufacturers as deferred credits. The deferred credits$58.8 million related to leased aircraft are amortized on a straight‑line basis as a reduction to rent expense overflying agreements. As of December 31, 2018, the lease term. CreditsCompany had $64.2 million in accounts receivable of which $52.7 million related to owned aircraft reduce the purchase price of the aircraft, which has the effect of amortizing the credits on a straight‑line basis as a reduction in depreciation expense over the life of the related aircraft. The incentives are credits that may be used to purchase spare parts and pay for training and other expenses. flying agreements.
Income Taxes
The Company recognizes a net liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that are expected to result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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‑dilutiveanti-dilutive effect on net income (loss) per common share. During the year ended December 31, 2019, 150,000 performance share units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2019. During the year ended December 31, 2018, 207,000 performance share units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2018. During the year ended December 31, 2017, 284,000 performance sharesshare units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2017. During the year ended December 31, 2016, 2,077,000 shares reserved for the issuance upon the exercise of outstanding options, performance shares and restricted stock units were excluded from the computation of Diluted EPS due to the net loss in 2016 and 505,000 shares reserved for outstanding options were excluded from the Diluted EPS calculation for the year ended December 31, 2015 as the respective exercise price exceeded the weighted average fair market value of the Company’s stock for 2015. The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS are as follows for the years ended December 31, 2017, 20162019, 2018 and 20152017 (in thousands):
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Numerator: |
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Net Income (Loss) |
| $ | 428,907 |
| $ | (161,586) |
| $ | 117,817 |
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Denominator: |
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Denominator for basic earnings per-share weighted average shares |
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| 51,804 |
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| 51,505 |
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| 51,077 |
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Dilution due to stock options and restricted stock units |
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| 1,296 |
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| — |
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| 748 |
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Denominator for diluted earnings per-share weighted average shares |
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| 53,100 |
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| 51,505 |
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| 51,825 |
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Basic earnings (loss) per-share |
| $ | 8.28 |
| $ | (3.14) |
| $ | 2.31 |
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| $ | 8.08 |
| $ | (3.14) |
| $ | 2.27 |
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| | 2019 | | 2018 | | 2017 |
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Net Income | | $ | 340,099 | | $ | 280,372 | | $ | 428,907 | |
Denominator: | | | | | | | | | | |
Basic earnings per share weighted average shares | |
| 50,932 | |
| 51,914 | |
| 51,804 | |
Dilution due to stock options and restricted stock units | |
| 443 | |
| 957 | |
| 1,296 | |
Diluted earnings per share weighted average shares | |
| 51,375 | |
| 52,871 | |
| 53,100 | |
Basic earnings per share | | $ | 6.68 | | $ | 5.40 | | $ | 8.28 | |
Diluted earnings per share | | $ | 6.62 | | $ | 5.30 | | $ | 8.08 | |
6551
Comprehensive Income (Loss)
Comprehensive income (loss) includes charges and credits to stockholders’ equity that are not the result of transactions with the Company’s shareholders, including changes in unrealized appreciation on marketable debt securities.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for receivables and accounts payable approximate fair values because of the immediate or short‑termshort-term maturity of these financial instruments. Marketable securities are reported at fair value based on market quoted prices in the consolidated balance sheets. If quoted prices in active markets are no longer available, the Company has estimated the fair values of these securities utilizing a discounted cash flow analysis as of December 31, 2017.analysis. These analyses consider, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. The fair value of the Company’s long‑termlong-term debt is estimated based on current rates offered to the Company for similar debt and was approximately $2,698.4$3,049.1 million as of December 31, 2017,2019, as compared to the carrying amount of $2,712.4$3,017.5 million as of December 31, 2017.2019. The Company’s fair value of long‑termlong-term debt as of December 31, 20162018 was $2,566.5$3,157.3 million as compared to the carrying amount of $2,570.9$3,185.4 million as of December 31, 2016.2018.
Segment Reporting
Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company’s chief operating decision maker when deciding how to allocate resources and in assessing performance. The Company’s three3 operating segments (prior to the sale of ExpressJet in January 2019) consist of the operations conducted by SkyWest Airlines, ExpressJet (for the periods owned by the Company) and SkyWest Leasing. Following the sale of ExpressJet, the Company has 2 reportable segments: SkyWest Airlines and SkyWest Leasing. Information pertaining to the Company’s reportable segments is presented in Note 2, Segment Reporting.
Recent Accounting Pronouncements
Standards Effective in Future Years and Not Yet Adopted
In May 2014,June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014‑09, “Revenue from Contracts with Customers”ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU No. 2014‑09”Topic 326”). Under ASU No. 2014‑09, revenue, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosure regarding significant estimates and judgments used in estimating credit losses. Topic 326 is recognized at the time a good or service is transferred to a customereffective for the amount of consideration received for that specific good or service. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations.Company beginning January 1, 2020. The Company will adopt Topic 326, on January 1, 2020. The Company’s primary financial assets as of December 31, 2019, include trade receivables from its flying agreements, notes and other receivables from third parties. The Company estimates it will record a credit loss amount between $7.0 million and $12.0 million in conjunction with the adoption. The Company anticipates that the initial credit loss recorded upon adoption of the standardTopic 326 will be reflected as ofa January 1, 2018, will be first presented in the first quarter of 2018, utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented. Under the new standard, the Company concluded that individual flights are distinct services and these flight services promised in a CPA agreement represent a series of services that should be accounted for as a single performance obligation, recognized over time as the flights are completed. The adoption of ASU No. 2014‑09 did not have a material impact on recorded amounts when applied to the opening2020 beginning balance sheet as of January 1, 2018 and is not expectedentry to impact the amount or timing of the future amounts of netretained earnings (after income however the principal versus agent considerations under ASU No. 2014-09 will result in the Company recording directly reimbursed fuel expense under its fixed-fee contracts as a reduction to the applicable operating expense (net) rather than revenue (gross)tax). The Company’s analysis of information necessary to recast prior period results is still preliminary and additional impacts could still result when the standard is first applied to revenue transactions during the first quarter of 2018.
Recently Adopted Standards
In February 2016, the FASB issued Accounting Standards Update 2016‑02,ASU 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”Topic 842”). ASU No. 2016‑02 amends the existing accounting standards for lease accounting, including requiring lesseesTopic 842 and subsequently issued amendments require certain leases with durations longer than 12 months to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016‑02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 2016‑02 is permitted. ASU No. 2016‑02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company’s management is currently
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evaluating the impact the adoption of ASU 2016‑02 is anticipated to haverecognized on the balance sheet. The Company adopted Topic 842 effective January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s consolidated financial statements.
contracts are or contain leases, (2) lease classification and (3) initial direct costs. In 2016,July 2018, the FASB issued Accounting Standards Update 2016‑15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” and Accounting Standard Update 2016‑18, “Statement of Cash Flows (Topic 230): Restricted Cash” related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity’s statement of cash flows, respectively. These standards are effective for interim and annual reporting periods beginning after December 15, 2017, but early adoption is permitted. The Company anticipates adopting this standard in the first quarter of 2018 that will modify the presentation of changes in restricted cash in the Company’s Consolidated Statement of Cash Flows.
Recently Adopted Standards
Pursuant to the guidelines of the recently issued Accounting Standards Update 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015‑17”), all net deferred tax assets and liabilities are to be classified as non-current. As permitted under ASU 2015‑17, the Company adopted this guidance for the quarter ended March 31, 2017. The Company adopted ASU 2015‑17 retrospectively. Upon adoption, approximately $129.3 million of formerly recorded current deferred tax assets as of December 31, 2016 were reclassified to non-current and netted against non-current deferred income taxes payable as of December 31, 2016 in the accompanying financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016‑09, “Compensation—Stock Compensation (Topic 718)” (“ASU No. 2016‑09”)2018-11, “Targeted Improvements - Leases (Topic 842). ASU No. 2016‑09 makes several amendments” This update provides an optional transition method that allows entities to Topic 718, which simplifiedelect to apply the accounting for share-based payment transactions, includingstandard using the income tax consequences, the calculation of diluted earnings per share, the treatment of forfeitures and the classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements and forfeitures should be applied using a modified retrospective transitionapproach at its effective date, versus recasting the prior years presented. If this adoption method by means ofis elected, an entity would recognize a cumulative-effect adjustment to equity asthe
52
opening balance of the period in which the guidance is adopted. Amendments requiring the recognition of excess tax benefits and tax deficienciesretained earnings in the income statement should be applied prospectively. Prioryear of adoption. The Company elected this adoption method and recognized a cumulative-effect adjustment to the adoptionopening balance of ASU No. 2016‑09, accounting principles generally accepted in the United States of America (“GAAP”) required tax effects of deductions for share-based payments in excess of compensation cost and tax deficiencies to be recorded in equity. Under ASU No. 2016‑09, the tax effects of awards are treated as discrete income tax expense items in the reporting period in which they occur.
The Company adopted ASU No. 2016‑09 as of January 1, 2017. The adoption of this standard resulted in the recognition in of $0.9 million of previously unrecognized excess tax benefits in net deferred tax liabilities and an increase to retained earnings on January 1, 2019.
Additionally, the consolidated balance sheet asCompany’s adoption of the beginning of the current year, andTopic 842 did not have a significant impact on the recognition, measurement or presentation of $5.4 millionlease revenue and lease expenses within the condensed consolidated statements of excess tax benefits inoperations and comprehensive income or the income tax provision for the year ended December 31, 2017.condensed consolidated statements of cash flows. The Company’s adoption of ASU No. 2016‑09Topic 842 did not have a material impact on the statementtiming or amount of cash flows presentation. the Company’s lease revenue as a lessor. The Company’s prepaid aircraft rents, accrued aircraft rents and deferred rent credits that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019. The consolidated financial statements for 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.
See Note 6, "Leases" for more information.
(2) Segment Reporting
Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company’s chief operating decision maker when deciding how to allocate resources and in assessing performance.
ThePrior to the Company’s threesale of ExpressJet on January 22, 2019, the Company’s 3 reporting segments consistconsisted of the operations of SkyWest Airlines, ExpressJet and SkyWest Leasing activities. Corporate overhead expenses incurred byThe segment information presented for ExpressJet reflects the period of time prior to the sale, when ExpressJet was operating as a subsidiary of the Company. The Company concluded that the sale of ExpressJet did not meet the criteria for a discontinued operation. Following the sale of ExpressJet, the Company are allocated to the operating expenses ofhas 2 reportable segments: SkyWest Airlines and ExpressJet.SkyWest Leasing.
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 aircraft (including operating costs and associated revenue)fleet, separately from the profitability of the Company’s capital deployed for ownership and financing costs and associated revenue of the Company’s E175 aircraft (including depreciation expense, interest expense and associated revenue).such aircraft. The SkyWest LeasingAirlines segment includes revenue attributed to the Company’s E175 aircraft ownership cost earned under the applicable fixed-fee contracts attributed to operating such aircraft and the respective operating costs. The SkyWest Leasing segment includes applicable revenue earned under the applicable fixed-fee contracts 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 Company’s E175 aircraft.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 acquired E175 aircraft. The SkyWest Leasing segment additionally includes the activityissuance of four CRJ200 aircraftdebt and assets leased to a third-party. third parties.
67
The following represents the Company’s segment data for the years ended December 31, 2017, 20162019, 2018 and 20152017 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
| Year Ended December 31, 2017 | |||||||||||||||||||||||
|
|
| SkyWest |
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
| Airlines |
|
| ExpressJet |
|
| SkyWest Leasing |
|
| Consolidated |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | | Year Ended December 31, 2019 | |||||||||||||||||||||||
| | | SkyWest | | | | | | | | | |
| |||||||||||||
| | | Airlines | | | ExpressJet | | | SkyWest Leasing | | | Consolidated |
| |||||||||||||
Operating revenues |
| $ | 2,173,384 |
| $ | 790,942 |
| $ | 239,942 |
| $ | 3,204,268 |
| | $ | 2,478,681 | | $ | 24,050 | | $ | 469,232 | | $ | 2,971,963 | |
Operating expense |
|
| 1,888,556 |
|
| 819,343 |
|
| 108,170 |
|
| 2,816,069 |
| |
| 2,214,632 | | | 28,690 | | | 216,383 | |
| 2,459,705 | |
Depreciation and amortization expense |
|
| 134,563 |
|
| 51,982 |
|
| 106,223 |
|
| 292,768 |
| |
| 168,246 | |
| 971 | |
| 198,881 | |
| 368,098 | |
Special items | | | 18,508 | | | 3,361 | | | — | | | 21,869 | | |||||||||||||
Interest expense |
|
| 21,544 |
|
| 4,127 |
|
| 79,254 |
|
| 104,925 |
| |
| 13,525 | |
| — | |
| 114,230 | |
| 127,755 | |
Segment profit (loss) (1) |
|
| 263,284 |
|
| (32,528) |
|
| 52,518 |
|
| 283,274 |
| |
| 250,524 | |
| (4,640) | |
| 138,619 | |
| 384,503 | |
Identifiable intangible assets, other than goodwill |
|
| — |
|
| 4,896 |
|
| — |
|
| 4,896 |
| |||||||||||||
Total assets |
|
| 2,228,930 |
|
| 599,122 |
|
| 2,630,227 |
|
| 5,458,279 |
| |
| 2,728,964 | |
| — | |
| 3,928,165 | |
| 6,657,129 | |
Capital expenditures (including non-cash) |
|
| 124,955 |
|
| 14,278 |
|
| 550,165 |
|
| 689,398 |
| |
| 270,191 | |
| — | |
| 576,279 | |
| 846,470 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2016 |
| |||||||||
|
|
| SkyWest |
|
|
|
|
|
|
|
|
|
|
|
|
| Airlines |
|
| ExpressJet |
|
| SkyWest Leasing |
|
| Consolidated |
|
Operating revenues |
| $ | 1,935,378 |
| $ | 1,044,828 |
| $ | 141,000 |
| $ | 3,121,206 |
|
Operating expense |
|
| 1,886,173 |
|
| 1,339,569 |
|
| 68,148 |
|
| 3,293,890 |
|
Depreciation and amortization expense |
|
| 139,159 |
|
| 83,935 |
|
| 61,875 |
|
| 284,969 |
|
Special items |
|
| 184,295 |
|
| 281,354 |
|
| — |
|
| 465,649 |
|
Interest expense |
|
| 26,211 |
|
| 6,773 |
|
| 45,193 |
|
| 78,177 |
|
Segment profit (loss) (1) |
|
| 22,994 |
|
| (301,514) |
|
| 27,659 |
|
| (250,861) |
|
Identifiable intangible assets, other than goodwill |
|
| — |
|
| 8,249 |
|
| — |
|
| 8,249 |
|
Total assets |
|
| 2,250,276 |
|
| 582,890 |
|
| 2,174,800 |
|
| 5,007,966 |
|
Capital expenditures (including non-cash) |
|
| 57,761 |
|
| 15,396 |
|
| 1,085,844 |
|
| 1,159,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended December 31, 2015 |
| |||||||||
|
|
| SkyWest |
|
|
|
|
|
|
|
|
|
|
|
|
| Airlines |
|
| ExpressJet |
|
| SkyWest Leasing |
|
| Consolidated |
|
Operating revenues |
| $ | 1,848,363 |
| $ | 1,169,923 |
| $ | 77,277 |
| $ | 3,095,563 |
|
Operating expense |
|
| 1,630,200 |
|
| 1,192,070 |
|
| 38,778 |
|
| 2,861,048 |
|
Depreciation and amortization expense |
|
| 141,189 |
|
| 86,382 |
|
| 36,936 |
|
| 264,507 |
|
Interest expense |
|
| 36,141 |
|
| 12,091 |
|
| 27,618 |
|
| 75,850 |
|
Segment profit (loss) (1) |
|
| 182,022 |
|
| (34,238) |
|
| 10,881 |
|
| 158,665 |
|
Identifiable intangible assets, other than goodwill |
|
| — |
|
| 10,499 |
|
| — |
|
| 10,499 |
|
Total assets |
|
| 2,300,388 |
|
| 1,331,000 |
|
| 1,150,596 |
|
| 4,781,984 |
|
Capital expenditures (including non-cash) |
|
| 30,897 |
|
| 24,679 |
|
| 659,513 |
|
| 715,089 |
|
53
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2018 |
| |||||||||
| | | SkyWest | | | | | | | | | |
|
| | | Airlines | | | ExpressJet | | | SkyWest Leasing | | | Consolidated |
|
Operating revenues | | $ | 2,346,251 | | $ | 564,202 | | $ | 311,226 | | $ | 3,221,679 | |
Operating expense | |
| 2,022,560 | | | 577,608 | | | 147,231 | |
| 2,747,399 | |
Depreciation and amortization expense | |
| 155,511 | |
| 37,290 | |
| 141,788 | |
| 334,589 | |
Interest expense | |
| 17,021 | |
| 2,340 | |
| 101,048 | |
| 120,409 | |
Segment profit (loss) (1) | |
| 306,670 | |
| (15,746) | |
| 62,947 | |
| 353,871 | |
Total assets | |
| 2,531,707 | |
| 279,303 | |
| 3,502,202 | |
| 6,313,212 | |
Capital expenditures (including non-cash) | |
| 149,731 | |
| 10,137 | |
| 996,408 | |
| 1,156,276 | |
| | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | |||||||||
| | | SkyWest | | | | | | | | | |
|
| | | Airlines | | | ExpressJet | | | SkyWest Leasing | | | Consolidated |
|
Operating revenues | | $ | 2,092,368 | | $ | 790,282 | | $ | 239,942 | | $ | 3,122,592 | |
Operating expense | |
| 1,807,540 | | | 818,683 | | | 108,170 | | | 2,734,393 | |
Depreciation and amortization expense | |
| 134,563 | |
| 51,982 | |
| 106,223 | | | 292,768 | |
Interest expense | |
| 21,544 | |
| 4,127 | |
| 79,254 | | | 104,925 | |
Segment profit (loss) (1) | |
| 263,284 | |
| (32,528) | |
| 52,518 | |
| 283,274 | |
Identifiable intangible assets, other than goodwill | |
| — | | | 4,896 | | | — | | | 4,896 | |
Total assets | |
| 2,245,051 | | | 599,122 | | | 2,630,227 | | | 5,474,400 | |
Capital expenditures (including non-cash) | |
| 124,955 | |
| 14,278 | |
| 550,165 | |
| 689,398 | |
| (1) |
| Segment profit is operating income less interest expense |
(3) Long-term Debt
(3) Long‑term Debt
Long‑termLong-term debt consisted of the following as of December 31, 20172019 and 20162018 (in thousands):
| | | | | | | |
|
| December 31, |
| December 31, |
| ||
| | 2019 | | 2018 |
| ||
Notes payable to banks, due in semi-annual installments, variable interest based on LIBOR, or with an interest rate of 4.00% through 2019, secured by aircraft | | $ | — | | $ | 6,429 | |
Notes payable to a financing company, due in semi-annual installments, with a fixed interest rate of 3.25% through 2021, secured by aircraft | |
| 18,412 | |
| 36,324 | |
Notes payable to banks, due in semi-annual installments plus interest at 6.10% to 6.51% through 2021, secured by aircraft | |
| 22,557 | |
| 41,592 | |
Notes payable to banks, due in monthly installments, plus interest at 1.95% to 6.86% through 2029, secured by aircraft | |
| 438,878 | |
| 476,369 | |
Notes payable to banks, due in quarterly installments, plus interest at 3.39% to 5.08% through 2031, secured by aircraft | | | 2,537,676 | | | 2,621,416 | |
Notes payable to banks due in monthly installments, interest at 3.30% through 2019, secured by spare engines | |
| — | |
| 3,308 | |
Long-term debt | | $ | 3,017,523 | | $ | 3,185,438 | |
Current portion of long-term debt | |
| (367,954) | |
| (354,072) | |
Less long-term portion of unamortized debt issue cost, net | | | (20,580) | | | (21,598) | |
Long-term debt, net of current maturities and debt issue costs | | $ | 2,628,989 | | $ | 2,809,768 | |
| | | | | | | |
Current portion of long-term debt | |
| 367,954 | |
| 354,072 | |
Less current portion of unamortized debt issue cost, net | | | (3,828) | | | (3,866) | |
Current portion of long-term debt, net of debt issue costs | | $ | 364,126 | | $ | 350,206 | |
|
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Notes payable to banks, due in semi-annual installments, variable interest based on LIBOR, or with interest rates ranging from 2.91% to 3.43% through 2020, secured by aircraft |
| $ | 34,905 |
| $ | 63,408 |
|
Notes payable to a financing company, due in semi-annual installments, variable interest based on LIBOR, or with interest rates ranging from 2.85% to 3.25% through 2021, secured by aircraft |
|
| 97,612 |
|
| 146,266 |
|
Notes payable to banks, due in semi-annual installments plus interest at 6.06% to 6.51% through 2021, secured by aircraft |
|
| 63,090 |
|
| 86,052 |
|
Notes payable to a financing company, due in semi-annual installments plus interest at 5.78% to 6.23% through 2017, secured by aircraft |
|
| — |
|
| 8,854 |
|
Notes payable to banks, due in monthly installments plus interest of 2.68% to 6.86% through 2025, secured by aircraft |
|
| 372,157 |
|
| 426,389 |
|
Notes payable to banks, due in monthly installments, plus interest at 4.16% to 6.05% through 2029, secured by aircraft |
|
| 49,001 |
|
| 8,998 |
|
Notes payable to banks, due in monthly installments, plus interest at 3.44% through 2019, secured by aircraft |
|
| — |
|
| 3,280 |
|
Notes payable to banks, due in quarterly installments, plus interest at 3.39% to 4.73% through 2029, secured by aircraft |
|
| 2,085,822 |
|
| 1,806,981 |
|
Notes payable to banks, due in monthly installments, plus interest based on LIBOR at 3.54% through 2017, secured by aircraft |
|
| — |
|
| 4,666 |
|
Notes payable to banks due in monthly installments, interest at 3.30% through 2019, secured by spare engines |
|
| 9,763 |
|
| 16,010 |
|
Long-term debt |
| $ | 2,712,350 |
| $ | 2,570,904 |
|
Current portion of long-term debt |
|
| (313,243) |
|
| (308,945) |
|
Less long-term portion of unamortized debt issue cost, net |
|
| (21,761) |
|
| (21,908) |
|
Long-term debt, net of current maturities and debt issue costs |
| $ | 2,377,346 |
| $ | 2,240,051 |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
| 313,243 |
|
| 308,945 |
|
Less current portion of unamortized debt issue cost, net |
|
| (3,565) |
|
| (3,485) |
|
Current portion of long-term debt, net of debt issue costs |
| $ | 309,678 |
| $ | 305,460 |
|
54
During the year ended December 31, 2017,2019, the Company acquired 21 newtook delivery of 10 E175 aircraft that the Company financed through $200.0 million of long-term debt. The debt associated with the 10 E175 aircraft has a 12-year term, is due in quarterly installments with fixed annual interest rates ranging from 3.4% to 4.1% and is secured by the E175 aircraft. Approximately 85%Additionally, the Company purchased 2 previously leased aircraft during the first quarter of 2019, for which the Company assumed $14.5 million of long-term debt. The debt associated with the 2 previously leased aircraft purchase price was financed throughhas a term of 18 months with monthly interest only payments with a fixed annual interest rate of 2.0% and is secured by the issuance of debt and 15% of the aircraft purchase price was paid with cash.previously leased aircraft.
As of December 31, 20172019 and 2016,2018, the Company had $2.7$3.0 billion and $2.6$3.2 billion, respectively, of long‑termlong-term debt obligations primarily related to the acquisition of aircraft and certain spare engines. The average effective interest rate on the debt related to those long-term debt obligations at December 31, 20172019 and 2016,2018, was approximately 3.9% and 3.8%, respectively.4.2%.
During the year ended December 31, 2016,2019, the Company used $16.5$30.1 million in cash to extinguish $18.4$30.1 million in debt early. The payment resultedDuring the year ended December 31, 2018, the Company used $43.5 million in cash to extinguish $43.5 million in debt early. These payments did not result in a pre-tax gain of $1.3 million, reflected as other incomeor loss in the consolidated statements of comprehensive income (loss). During the year ended December 31, 2015, the Company used $110.8 million in cash to pay off $145.4 million in debt. The payment resulted in a pre-tax gain of $33.7 million, reflected as other income in the consolidated statements of comprehensive income (loss). The Company did not extinguish any debt early during 2017.
69
income.
The aggregate amounts of principal maturities of long‑termlong-term debt as of December 31, 20172019 were as follows (in thousands):
|
|
|
|
| ||||
2018 |
| $ | 313,243 |
| ||||
2019 |
|
| 315,753 |
| ||||
| | | | | ||||
2020 |
|
| 284,998 |
|
| $ | 367,954 |
|
2021 |
|
| 272,470 |
| |
| 352,005 | |
2022 |
|
| 280,360 |
| |
| 365,907 | |
2023 | |
| 374,906 | | ||||
2024 | |
| 327,630 | | ||||
Thereafter |
|
| 1,245,526 |
| |
| 1,229,121 | |
|
| $ | 2,712,350 |
| ||||
| | $ | 3,017,523 | | ||||
As of December 31, 20172019 and 2016,2018, SkyWest Airlines had a $75 million line of credit. The line of credit includes minimum liquidity and profitability covenants and is secured by certain assets. As of December 31, 20172019, the Company was in compliance with the line of credit covenants. As of December 31, 2019 and 2016,2018, SkyWest Airlines had no0 amount outstanding under the facility. However, at December 31, 20172019 and 20162018 the Company had $14.8$8.8 million and $6.5$9.7 million, respectively, in letters of credit issued under the facility which reduced the amount available under the facility to $60.2$66.2 million and $68.5$65.3 million, respectively. The facility expires on JuneSeptember 1, 20182021 and has a variable interest rate of LIBOR plus 2.5% (4.1% at December 31, 2017).2019.
As of December 31, 20172019 and 2016,2018, the Company had $87.4$61.7 million and $87.7$78.7 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.institutions in addition to the letters of credit outstanding under the line of credit.
55
(4) Income Taxes
The provision (benefit) for income taxes includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year ended December 31, |
| |||||||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
| | Year ended December 31, |
| |||||||||||||||||
| | 2019 | | 2018 | | 2017 |
| |||||||||||||
Current tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
| |
|
| |
|
| |
| |
Federal |
| $ | 5,853 |
| $ | (3,801) |
| $ | 3,801 |
| | $ | (4,395) | | $ | (21,598) | | $ | 5,853 | |
State |
|
| 180 |
|
| 111 |
|
| 1,035 |
| |
| 891 | |
| 1,465 | |
| 180 | |
|
|
| 6,033 |
|
| (3,690) |
|
| 4,836 |
| ||||||||||
Foreign | | | — | | | 1,575 | | | — | | ||||||||||
| |
| (3,504) | |
| (18,558) | |
| 6,033 | | ||||||||||
Deferred tax provision (benefit): |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Federal |
|
| (166,890) |
|
| (77,430) |
|
| 66,430 |
| |
| 95,655 | |
| 92,250 | |
| (166,890) | |
State |
|
| 20,133 |
|
| (6,106) |
|
| 5,239 |
| |
| 14,055 | |
| 12,250 | |
| 20,133 | |
|
|
| (146,757) |
|
| (83,536) |
|
| 71,669 |
| ||||||||||
| |
| 109,710 | |
| 104,500 | |
| (146,757) | | ||||||||||
Provision (benefit) for income taxes |
| $ | (140,724) |
| $ | (87,226) |
| $ | 76,505 |
| | $ | 106,206 | | $ | 85,942 | | $ | (140,724) | |
70
The following is a reconciliation between a federal income tax rate of 21% in 2019 and 2018 and 35% for 2017 of income (loss) before income taxes and the effective tax rate which is derived by dividing the provision (benefit) for income taxes by the income (loss) before the provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Year ended December 31, |
| |||||||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||||||
Computed provision (benefit) for income taxes at the statutory rate |
| $ | 100,864 |
| $ | (87,084) |
| $ | 68,013 |
| ||||||||||
| | | | | | | | | | | ||||||||||
| | Year ended December 31, |
| |||||||||||||||||
| | 2019 | | 2018 | | 2017 |
| |||||||||||||
Computed provision for income taxes at the statutory rate |
| $ | 93,724 |
| $ | 76,926 |
| $ | 100,864 | | ||||||||||
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
State income tax provision (benefit), net of federal income tax benefit |
|
| 7,778 |
|
| (5,768) |
|
| 5,416 |
| ||||||||||
State income tax provision, net of federal income tax benefit | |
| 15,645 | |
| 12,711 | |
| 7,778 | | ||||||||||
Non-deductible expenses |
|
| 3,230 |
|
| 3,552 |
|
| 3,641 |
| | | 3,934 | | | 1,956 | | | 3,230 | |
Valuation allowance changes affecting the provision for income taxes |
|
| 505 |
|
| 751 |
|
| (899) |
| |
| (517) | |
| (1,187) | |
| 505 | |
Foreign income taxes, net of federal & state benefit | | | — | | | 1,192 | | | — | | ||||||||||
Excess tax benefits from share-based compensation |
|
| (5,377) |
|
| — |
|
| — |
| | | (3,525) | | | (4,548) | | | (5,377) | |
Revaluation of net deferred taxes for the Tax Act |
|
| (246,845) |
|
| — |
|
| — |
| ||||||||||
Revaluation of net deferred taxes for the Tax Cuts and Jobs Act of 2017 | | | — | | | — | | | (246,845) | | ||||||||||
Other, net |
|
| (879) |
|
| 1,323 |
|
| 334 |
| |
| (3,055) | |
| (1,108) | |
| (879) | |
Provision (benefit) for income taxes |
| $ | (140,724) |
| $ | (87,226) |
| $ | 76,505 |
| | $ | 106,206 | | $ | 85,942 | | $ | (140,724) | |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that may affect our income tax accounting at December 31, 2017 and future periods, including, but not limited to reducing the U.S. federal corporate tax rate from the previous rate of 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.
The SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act and consistent with the requirement to record a provisional estimate when applicable, the Company made a reasonable estimate of the effects of the Tax Act and recorded a discrete net income tax benefit at December 31, 2017 of approximately $246.8 million. This provisional estimate primarily consists of a net benefit for the corporate rate reduction due to the revaluing of the Company’s net deferred tax liabilities, including certain state related effects, as a result of the reduction in the federal corporate tax rates. The Company made certain estimates in evaluating the Tax Act impact on state income taxes and other deferred tax items. The Company is continuing to gather information and analyze aspects of the Tax Act, which could potentially affect the estimated impact on the deferred tax balances. These estimates may be affected as the Company gains a more thorough understanding of the Tax Act, including the deductibility of purchased assets, state tax treatment, and amounts related to employee compensation.
The impact of the Tax Act may differ from our estimates, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Act. The Company will continue to update the provisional estimates as information is obtained, such as state impacts regarding decoupling from the Tax Act provisions, realization of deferred amounts, and accounting method elections that may be made by the Company.
71
For the yearsyear ended December 31, 2017, 2016 and 20152019, the Company recorded areleased $0.5 million $0.8 million and $0.9of valuation allowance against certain deferred tax assets primarily associated with ExpressJet state net operating losses. For the year ended December 31, 2018, the Company released $1.2 million valuation allowance, respectively against certain deferred tax assets primarily associated with ExpressJet state net operating losses with a limited carry forward period and Company capital losses with a limited carry forward period. For the year ended December 31, 2017, the Company recorded $0.5 million of valuation allowance against certain deferred tax assets primarily associated with ExpressJet state net operating losses. The increase ofdecrease in the valuation allowance for 2019 was primarily based on changes in state tax laws and the Company's income tax projections which increasedreduced the amount of deferred tax assets that are anticipated to expire before the deferred tax assets may be utilized.
The Company recorded a $3.5 million, $4.5 million and $5.4 million benefit from share-based compensation in 2019, 2018 and 2017, respectively, relating to ASU 2016-09 which, beginning in 2017, requires excess tax benefits and deficiencies to be recognized in the income tax provision during the period stock options are exercised and when stock awards vest.
56
The significant components of the Company’s net deferred tax assets and liabilities as of December 31, 20172019 and 20162018 are as follows (in thousands):
|
|
|
|
|
|
|
| |||||||
|
| As of December 31, |
| |||||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | As of December 31, |
| |||||||||||
| | 2019 | | 2018 |
| |||||||||
Deferred tax assets: |
|
|
|
|
|
|
|
| |
|
| |
| |
Intangible asset |
| $ | (206) |
| $ | 4,983 |
| |||||||
Accrued benefits |
|
| 31,651 |
|
| 48,482 |
| | $ | 20,848 | | $ | 32,462 | |
Net operating loss carryforward |
|
| 122,648 |
|
| 286,389 |
| |
| 358,685 | |
| 344,375 | |
AMT credit carryforward |
|
| 23,443 |
|
| 17,589 |
| |
| 4,397 | |
| 15,744 | |
Deferred aircraft credits |
|
| 53,870 |
|
| 60,415 |
| |||||||
Aircraft credits | |
| 9,114 | |
| 35,924 | | |||||||
Accrued reserves and other |
|
| 26,853 |
|
| 47,906 |
| |
| 17,225 | |
| 18,710 | |
Total deferred tax assets |
|
| 258,259 |
|
| 465,764 |
| |
| 410,269 | |
| 447,215 | |
Valuation allowance |
|
| (10,642) |
|
| (8,877) |
| |
| (892) | |
| (9,455) | |
Deferred tax liabilities: |
|
|
|
|
|
|
| | | | | | | |
Accelerated depreciation |
|
| (666,637) |
|
| (1,022,291) |
| |
| (1,032,957) | |
| (955,919) | |
Total deferred tax liabilities |
|
| (666,637) |
|
| (1,022,291) |
| |
| (1,032,957) | |
| (955,919) | |
Net deferred tax liability |
| $ | (419,020) |
| $ | (565,404) |
| | $ | (623,580) | | $ | (518,159) | |
The Company’s deferred tax liabilities were primarily generated through accelerated depreciation, combined with shorter depreciable tax lives, allowed under the IRS tax code for purchased aircraft and support equipment compared to the Company’s depreciation policy under GAAP for such assets using the straight-line method (see note 1 Nature of Operations and Summary of Significant Accounting Policies).
The Company's valuation allowance is related to certain deferred tax assets with a limited carry forward period where the Company does not anticipate utilizing these deferred tax assets prior to the lapse of the carry forward period. The Company's AMT credit carryforward includes credits from prior acquisitions.
AtDecember 31, 20172019 and 2016,2018, the Company had federal net operating losses of approximately $491.4$1,581.1 million and $763.9$1,504.9 million and state net operating losses of approximately $302.5$766.4 million and $469.2$562.0 million, respectively. The estimated effective tax rate applicable to the federal and state net operating losses at December 31, 20172019 was 21.0% and 3.36%3.36%, respectively. The Company anticipated that the federal and state net operating losses will start to expire in 20342030 and 2018,2020, respectively. The Company has recorded a valuation allowance for state net operating losses the Company anticipates will expire before the benefit will be realized due to the limited carry forward periods. As of December 31, 20172019 and 2016,2018, the Company also had an alternative minimum tax credit of approximately $23.4$4.4 million and $17.6$8.8 million, respectively, which does not expire. Under the newTax Cuts and Jobs Act of 2017, the Tax Act,Company will realize the alternative minimum tax credit is anticipated to be realized by the Company either by offsetting regular tax due or as a refundable credit over the next fourtwo years. The Company has no ongoing federal or state examinations. Federal tax years. 2016, 2017 and 2018 are open to examination.
Under ASC Topic 740, the accounting guidance related to uncertainty in tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2019 and 2018 is as follows (in thousands):
| | | | | | |||
| | As of December 31, | | |||||
|
| 2019 |
| 2018 |
| |||
Unrecognized tax benefits at the beginning of year | | $ | 14,553 | | $ | 2,223 |
| |
Gross increases - current year tax positions | | | — | |
| 13,899 | | |
Gross increases - prior year tax positions | | | 67 | |
| — | | |
Gross decreases - prior year tax positions | |
| — | |
| (1,569) | | |
Unrecognized tax benefits at end of year | | $ | 14,620 | | $ | 14,553 | | |
Interest and penalties in year-end balance | | $ | 67 | | $ | — | | |
7257
For the year ending December 31, 2019, the Company has recorded $67,000 of interest expense related to uncertain tax positions not offset by the Company's tax attributes.
(5) Commitments and Contingencies
Lease ObligationsSelf-Insurance
The Company leases 319 aircraft, as well as airport facilities, office space, and various other property and equipment under non‑cancelable operating leases which are generally on a long‑term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The following table summarizes future minimum rental payments required under operating leases that have non‑cancelable lease terms as of December 31, 2017 (in thousands):
|
|
|
|
|
2018 |
| $ | 142,157 |
|
2019 |
|
| 104,297 |
|
2020 |
|
| 121,119 |
|
2021 |
|
| 112,657 |
|
2022 |
|
| 75,981 |
|
Thereafter |
|
| 160,621 |
|
|
| $ | 716,832 |
|
The majority of the Company’s leased aircraft are owned and leased through trusts whose sole purpose is to purchase, finance and lease these aircraft to the Company (“Leveraged Lease Agreements”); therefore, they meet the criteria of a variable interest entity. However, since these are single owner trusts in which the Company does not participate, the Company is not considered at risk for losses and is not considered the primary beneficiary. As a result, the Company has not consolidated any of these trusts or any other entities in applying the accounting guidance. The Company’s management believes that the Company’s maximum exposure under these leases is the remaining lease payments.
Total rental expense for non-cancelable aircraft operating leases was approximately $215.8 million, $262.6 million and $273.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. The minimum rental expense for airport station rents was approximately $30.3 million, $31.4 million and $35.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Self‑insurance
The Company self‑insuresself-insures a portion of its potential losses from claims related to workers’ compensation, environmental issues, property damage, medical insurance for employees and general liability. Losses are accrued based on an estimate of the ultimate aggregate liability for claims incurred, using standard industry practices and the Company’s actual experience. The Company uses judgment and estimates in determining the ultimate aggregate liabilities for claims incurred in its workers’ compensation liability. The Company also used significant assumptions in determining the workers compensation liability such as an estimation of loss payment and loss reporting development patterns. At December 31, 2019 and 2018, the Company’s accrued workers’ compensation liability totaled $23.9 million and $42.0 million, respectively. Actual results could differ from these estimates.
Legal Matters
The Company is subject to certain legal actions which it considers routine to its business activities. As of December 31, 2017,2019, 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.
Concentration Risk and Significant Customers
The Company requires no collateral from its major airline partners or customers, but monitors the financial condition of its major airline partners. Under the majority of the Company’s code-share agreements, the Company receives weekly payments from its major code-share partners that approximate a significant percentage of the compensation earned for such period. Additionally, the Company provides certain customer service functions at multiple airports for various airlines and the Company maintains an allowance for doubtful accounts receivable based upon expected collectability of all accounts receivable. The Company’s allowance for doubtful accounts totaled $157,000$18,000 and $173,000$158,000 as of December 31, 20172019 and 2016,2018, respectively. For the years ended December 31, 2017, 2016
73
2019, 2018 and 2015,2017, the Company’s contractual relationships with Delta and United combined accounted for approximately 78.8%77.6%, 85.4%81.4% and 86.9%82.9%, respectively of the Company’s total revenues.
Employees Under Collective Bargaining Agreements
As of December 31, 2017,2019, the Company had approximately 16,300 full‑13,700 full-time equivalent employees. Approximately 22.0% of theseAlthough 0 SkyWest Airlines employees wereare represented by unions, includinga national union, certain SkyWest Airline employees are covered under a stable and binding collective bargaining agreement that is administered by employee representatives.
(6) Leases
Effective January 1, 2019, the following employee groups. NotwithstandingCompany adopted Topic 842. The Company leases property and equipment under operating leases. For leases with durations longer than 12 months, the completionCompany recorded the related operating lease right-of-use asset and operating lease liability at the present value of lease payments over the ExpressJet Combination, ExpressJet’s employeeterm. The Company used its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Aircraft
During the first quarter of 2019, the Company acquired 52 CRJ aircraft under an early lease buyout arrangement with the lessor for $111.7 million. During the third quarter of 2019, the Company acquired 4 CRJ900 aircraft under an
58
early lease buyout arrangement with the lessor for $30.0 million. As of December 31, 2019, the Company had 94 aircraft under operating leases with remaining terms ranging from less than one year to ten years.
With the adoption of Topic 842, the Company evaluated whether leased aircraft asset groups continuewithin the Company’s fleet were impaired. Under the transition guidance for Topic 842, a company is permitted to be represented by those unions who provided representationrecognize a previously unrecognized impairment related to a right-of-use asset in the period prior to the ExpressJet Combination.
Accordingly,adoption date of Topic 842 if the following table refers to ExpressJet’s employee groups based upon their union affiliations priorevent giving rise to the ExpressJet Combination.impairment occurred before the adoption date. In 2016, the Company recorded an impairment on certain of its long-lived assets, which included the Company’s CRJ200 aircraft. In 2016, the market lease rate was less than the contractual lease rate on the Company’s CRJ200 leased aircraft. The Company recorded an impairment of $13.1 million (net of tax) as an adjustment to the Company’s January 1, 2019 retained earnings related to the previously unrecognized impairment of these leased CRJ200s.
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 airport. The remaining lease terms for facility space vary from one month to 37 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 December 31, 2019, the Company’s right-of-use assets were $336.0 million, the Company’s current maturities of operating lease liabilities were $94.8 million, and the Company’s noncurrent lease liabilities were $259.2 million. During 2019, the Company paid $75.4 million in operating leases reflected as a reduction from operating cash flows.
The table below presents lease related terms and discount rates as of December 31, 2019.
| | | | | ||||
| | | | | ||||
| | | | | ||||
| As of December 31, 2019 | |||||||
Weighted-average remaining lease term |
| |
| |||||
Operating leases | | | 6.84 years | | ||||
Weighted-average discount rate | |
|
| | ||||
Operating leases | |
| 6.4% | |||||
|
| |||||||
|
|
|
| |||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| ||||||
|
|
| | |||||
In JanuaryThe Company’s lease costs for 2019 and 2018 included the ExpressJet Delaware Mechanics ratifiedfollowing components (in thousands):
| | | | | | |
| | | | | | |
| | For the year ended December 31, | ||||
|
| 2019 |
| 2018 | ||
Operating lease cost |
| $ | 104,011 |
| $ | 185,337 |
Variable and short-term lease cost | |
| 5,232 | |
| 5,143 |
Sublease income | | | (1,436) | | | — |
Total lease cost |
| $ | 107,807 |
| $ | 190,480 |
59
As of December 31, 2019, the Company leased aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases, which are generally on a one-year contract extensionlong-term, triple-net lease basis pursuant to their labor agreement.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 will 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 December 31, 2019 (in thousands):
| | | | |
2020 |
| $ | 94,806 |
|
2021 | |
| 84,285 | |
2022 | |
| 73,960 | |
2023 | |
| 68,581 | |
2024 | |
| 27,282 | |
Thereafter | |
| 94,746 | |
| | $ | 443,660 | |
(6)The majority of the Company’s leased aircraft are owned and leased through trusts whose sole purpose is to purchase, finance and lease these aircraft to the Company (“Leveraged Lease Agreements”). The Company is not a beneficiary of such trusts and the Company does not have an ownership interest in such trusts. The Company’s leveraged leases do not require the Company to guarantee a portion of the residual values of the leased assets held by the trust and the Company’s leveraged lease agreements do not contain a fixed purchase option or have any other terms that represent variable interests in such trusts. As a result, the Company has not consolidated any of these trusts.
Total rental expense for non-cancelable aircraft operating leases was approximately $72.0 million, $154.9 million and $215.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. The minimum rental expense for airport station rents was approximately $23.1 million, $19.6 million and $30.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Disclosures related to periods prior to the adoption of the New Lease Standard
The following table summarizes future minimum rental payments required under operating leases that had non-cancelable lease terms in excess of one year as of December 31, 2018 (in thousands):
| | | | |
2019 |
| $ | 87,256 |
|
2020 | |
| 101,741 | |
2021 | |
| 90,787 | |
2022 | |
| 72,593 | |
2023 | |
| 65,749 | |
Thereafter | |
| 59,820 | |
| | $ | 477,946 | |
(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 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. |
60
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 |
74
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 December 31, 2017,2019, 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 December 31, 2019 | | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Marketable Securities | | | | | | | | | | | | | |
Bonds and bond funds | | $ | 267,243 | | $ | — | | $ | 267,243 | | $ | — | |
Commercial paper | |
| 165,723 | |
| — | |
| 165,723 | |
| — | |
| | $ | 432,966 | | $ | — | | $ | 432,966 | | $ | — | |
Cash, Cash Equivalents and Restricted Cash | | | 87,206 | |
| 87,206 | |
| — | |
| — | |
Total Assets Measured at Fair Value | | $ | 520,172 | | $ | 87,206 | | $ | 432,966 | | $ | — | |
| | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2018 |
| ||||||||||
| | Total | | Level 1 | | Level 2 | | Level 3 |
| ||||
Marketable Securities |
| |
|
| |
|
| |
|
| |
| |
Bonds and bond funds | | $ | 229,783 | | $ | — | | $ | 229,783 | | $ | — | |
Commercial paper | |
| 131,162 | |
| — | |
| 131,162 | |
| — | |
| | $ | 360,945 | | $ | — | | $ | 360,945 | | $ | — | |
Cash, Cash Equivalents and Restricted Cash | | | 328,384 | |
| 328,384 | |
| — | |
| — | |
Total Assets Measured at Fair Value | | $ | 689,329 | | $ | 328,384 | | $ | 360,945 | | $ | — | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2017 |
| ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Marketable Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and bond funds |
| $ | 344,251 |
| $ | — |
| $ | 344,251 |
| $ | — |
|
Commercial paper |
|
| 159,252 |
|
| — |
|
| 159,252 |
|
| — |
|
|
| $ | 503,503 |
| $ | — |
| $ | 503,503 |
| $ | — |
|
Cash, Cash Equivalents and Restricted Cash |
|
| 181,792 |
|
| 181,792 |
|
| — |
|
| — |
|
Total Assets Measured at Fair Value |
| $ | 685,295 |
| $ | 181,792 |
| $ | 503,503 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements as of December 31, 2016 |
| ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Marketable Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and bond funds |
| $ | 409,885 |
| $ | — |
| $ | 409,885 |
| $ | — |
|
Commercial paper |
|
| 13 |
|
| — |
|
| 13 |
|
| — |
|
|
| $ | 409,898 |
| $ | — |
| $ | 409,898 |
| $ | — |
|
Cash, Cash Equivalents and Restricted Cash |
|
| 155,009 |
|
| 155,009 |
|
| — |
|
| — |
|
Total Assets Measured at Fair Value |
| $ | 564,907 |
| $ | 155,009 |
| $ | 409,898 |
| $ | — |
|
The Company’s “Marketable Securities” classified as Level 2 primarily utilize broker quotes in a non‑activenon-active market for valuation of these securities.
No significant transfers between Level 1, Level 2 and Level 3 occurred during the year ended December 31, 2017.2019. The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
(7) Investment in Other Companies
In 2014, the Company completed the sale of its 20% interest in Brazilian airline, TRIP Linhas Aéreas (“TRIP”), to TRIP Investments Ltd. (“TRIP Investimentos”). As part of the sale transaction, the Company also received options to acquire a minority interest in TRIP Investimentos. The options have an initial exercise price per share equal to the price paid by TRIP Investimentos to acquire TRIP shares from the Company subject to annual escalations. The options are scheduled to expire in 2018. The options were recorded as an asset at a nominal amount in 2014.
(8) Special Items
The following table summarizes the components of the Company's special items, for the year ended December 31, 2017, 20162019, 2018 and 20152017 (in thousands):
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2019 |
| 2018 |
| 2017 | |||
Special items: | | | | | | | | | |
Parts credit1 | | $ | 18,508 | | $ | — | | $ | — |
Employee severance 2 | |
| 3,361 | | | — |
| | — |
Total special items | | $ | 21,869 | | $ | — | | $ | — |
| (1) | The Company terminated an agreement with an aircraft manufacturer that obligated the Company to future aircraft lease return conditions on aircraft the Company leased. In conjunction with the terminated agreement, the aircraft manufacturer released the Company from the future aircraft lease return obligations and the Company agreed to terminate aircraft part credits previously issued by the manufacturer to the Company. As a result of the terminated |
7561
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, |
| |||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||
Special items: |
|
|
|
|
|
|
|
|
|
|
CRJ200 aircraft related items 1 |
| $ | — |
| $ | 424,466 |
| $ | — |
|
ERJ145 aircraft related items 2 |
|
| — |
|
| 41,183 |
|
| — |
|
Total special items |
| $ | — |
| $ | 465,649 |
| $ | — |
|
|
|
| (2) |
|
|
(9) Capital Transactions
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock in one or more series without shareholder approval. NoNaN shares of preferred stock are presently outstanding. The Company’s Board of Directors is authorized, without any further action by the shareholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges.
Stock Compensation
On May 4, 2010,7, 2019, the Company’s shareholders approved the adoption of the SkyWest, Inc. 2010 Long‑Term2019 Long-Term Incentive Plan, which provides for the issuance of up to 5,150,0004,500,000 shares of common stock to the Company’s directors, employees, consultants and advisors (the “2010“2019 Incentive Plan”). The 20102019 Incentive Plan provides for awards in the form of options to acquire shares of common stock, stock appreciation rights, restricted stock grants, restricted stock units and performance awards. The 20102019 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”), which is authorized to designate option grants as either incentive stock options. As of December 31, 2019, the 2019 Incentive Plan had 4.4 million shares remaining available for income tax purposes (“ISO”) or non-statutory stock options ISOs are granted at not less than 100% of the market value of the underlying common stock on the date of grant. Non‑statutory stock options are granted at a price as determined by the Compensation Committee.future issuance.
Stock Options
The fair value of stock options awarded under the Company’s stock option plans has been estimated as of the grant date using the Black‑ScholesBlack-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output
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of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors. During the yearyears ended December 31, 2019, 2018 and 2017, the Company did not grant any options to purchase shares of common stock. The Company granted 206,021 and 267,433 stock options to employees under the 2010 Incentive Plan during the years ended December 31, 2016 and 2015, respectively. Stock options granted in 2015 and 2016 vest in three equal installments over a three-year period. The following table shows the assumptions used and weighted average fair value for grants in the years ended December 31, 2016 and 2015.
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| 2015 |
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Expected annual dividend rate |
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| 1.08 | % |
| 1.18 | % |
Risk-free interest rate |
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| 1.15 | % |
| 1.62 | % |
Average expected life (years) |
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| 5.7 |
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| 5.7 |
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Expected volatility of common stock |
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| 0.412 |
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| 0.401 |
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Forfeiture rate |
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| 0.0 | % |
| 0.0 | % |
Weighted average fair value of option grants |
| $ | 5.27 |
| $ | 4.75 |
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The Company recorded share‑based compensation expense only for those options that are expected to vest. The estimated fair value of the stock options is amortized over the vesting period of the respective stock option grants.
Options are exercisable for a period as defined by the Compensation Committee on the date granted; however, no stock option will be exercisable before six months have elapsed from the date of grant and no stock option shall be exercisable after seven years from the date of grant. The following table summarizes the stock option activity for all of the Company’s plans for the years ended December 31, 2017, 20162019, 2018 and 2015:2017.
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| 2015 |
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| Aggregate |
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| Average |
| Remaining |
| Intrinsic |
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| Number of |
| Exercise |
| Contractual |
| Value |
| Number of |
| Exercise |
| Number of |
| Exercise |
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| Options |
| Price |
| Term |
| ($000) |
| Options |
| Price |
| Options |
| Price |
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Outstanding at beginning of year |
| 819,981 |
| $ | 13.58 |
| 4.4 | years | $ | 18,756.9 |
| 1,064,429 |
| $ | 13.64 |
| 2,888,074 |
| $ | 16.46 |
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Granted |
| — |
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| — |
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| 206,021 |
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| 14.90 |
| 267,433 |
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| 13.63 |
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Exercised |
| (356,209) |
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| 13.36 |
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| (351,296) |
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| 14.17 |
| (544,917) |
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| 14.68 |
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Cancelled |
| (5,669) |
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| 14.33 |
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| (99,173) |
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| 14.90 |
| (1,546,161) |
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| 18.53 |
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Outstanding at end of year |
| 458,103 |
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| 13.73 |
| 4.0 | years | $ | 18,034.1 |
| 819,981 |
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| 13.58 |
| 1,064,429 |
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| 13.64 |
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Exercisable at December 31, 2017 |
| 254,192 |
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| 13.17 |
| 3.4 | years | $ | 10,150.8 |
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Exercisable at December 31, 2016 |
| 263,851 |
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| 13.76 |
| 2.8 | years | $ | 5,985.5 |
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| | 2019 | | 2018 | | 2017 |
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| | | | | | | Weighted | | | | | | | | | | | | |
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| | | | Weighted | | Average | | Aggregate | | | | Weighted | | | | Weighted |
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| | | | Average | | Remaining | | Intrinsic | | | | Average | | | | Average |
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| | Number of | | Exercise | | Contractual | | Value | | Number of | | Exercise | | Number of | | Exercise |
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| | Options | | Price | | Term | | ($000) | | Options | | Price | | Options | | Price |
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Outstanding at beginning of year |
| 300,580 | | $ | 13.70 |
| 3.0 | years | $ | 9,249.4 |
| 458,103 |
| $ | 13.73 |
| 819,981 |
| $ | 13.58 | |
Granted |
| — | |
| — | | | | | |
| — | |
| — |
| — | |
| — | |
Exercised |
| (232,514) | |
| 13.36 | | | | | |
| (157,523) | |
| 13.80 |
| (356,209) | |
| 13.36 | |
Cancelled |
| (7,835) | |
| 15.86 | | | | | |
| — | |
| — |
| (5,669) | |
| 14.33 | |
Outstanding at end of year |
| 60,231 | |
| 14.74 |
| 3.1 | years | $ | 3,005.1 |
| 300,580 | |
| 13.70 |
| 458,103 | |
| 13.73 | |
Exercisable at December 31, 2019 |
| 60,231 | | | 14.74 | | 3.1 | years | $ | 3,005.1 | | | | | | | | | | | |
Exercisable at December 31, 2018 |
| 235,672 | | | 13.36 | | 2.7 | years | $ | 7,330.7 | | | | | | | | | | | |
The total intrinsic value of options to acquire shares of the Company’s common stock that were exercised during the years ended December 31, 2019, 2018 and 2017 2016was $10.5 million, $7.1 million and 2015 was $9,940,000, $4,250,000 and $1,800,000,$9.94 million, respectively.
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The following table summarizes the status of the Company’s non‑vestednon-vested stock options as of December 31, 2017:2019:
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| Fair Value |
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| | Number of | | Grant-Date |
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Non-vested shares at beginning of year |
| 556,130 |
| $ | 4.86 |
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| 64,908 | | $ | 5.32 | |
Granted |
| — |
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| — |
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| — | | | — | |
Vested |
| (346,550) |
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| 4.67 |
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| (57,073) | |
| 5.27 | |
Cancelled |
| (5,669) |
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| 5.14 |
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| (7,835) | | | 5.66 | |
Non-vested shares at end of year |
| 203,911 |
| $ | 5.17 |
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| — | | $ | — | |
The following table summarizes information about the Company’s stock options outstanding at December 31, 2017:2019:
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| Options Outstanding |
| Options Exercisable |
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| Weighted Average |
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| Number |
| Remaining |
| Weighted Average |
| Number |
| Weighted Average |
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Range of Exercise Prices |
| Outstanding |
| Contractual Life |
| Exercise Price |
| Exercisable |
| Exercise Price |
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$8.00 | to | $12.99 |
| 79,990 |
| 3.1 | years |
| $ | 12.06 |
| 79,990 |
| $ | 12.06 |
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$13.00 | to | $14.99 |
| 371,480 |
| 4.2 | years |
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| 14.02 |
| 173,481 |
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| 13.67 |
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$15.00 | to | $19.00 |
| 6,633 |
| 4.8 | years |
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| 17.77 |
| 721 |
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| 15.03 |
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$8.00 | to | $19.00 |
| 458,103 |
| 4.0 | years |
| $ | 13.73 |
| 254,192 |
| $ | 13.17 |
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| | | | Options Outstanding | | Options Exercisable |
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| | | | | | Weighted Average | | | | | | | | |
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| | | | Number | | Remaining | | Weighted Average | | Number | | Weighted Average |
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Range of Exercise Prices | | Outstanding | | Contractual Life | | Exercise Price | | Exercisable | | Exercise Price |
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$13.00 | to | $13.99 |
| 2,034 |
| 2.1 | years |
| $ | 13.51 | | 2,034 |
| $ | 13.51 | |
$14.00 | to | $15.00 |
| 58,197 |
| 3.1 | years | |
| 14.78 |
| 58,197 | |
| 14.78 | |
$13.00 | to | $15.00 |
| 60,231 |
| 3.1 | years | | $ | 14.74 |
| 60,231 | | $ | 14.74 | |
Restricted Stock Units (“RSUs”)
During the year ended December 31, 2017,2019, the Company granted 160,137104,120restricted stock units to certain of the Company’s employees under the 20102019 Incentive Plan. The restricted stock units granted during the year ended December 31, 20172019 have a three‑yearthree-year cliff-vesting period, during which the recipient must remain employed with the Company or its subsidiaries. The weighted average fair value of the restricted stock units at the date of grants made during the year ended December 31, 20172019 was $35.81$48.65 per share.
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The following table summarizes the activity of restricted stock units granted to certain Company employees for the years ended December 31, 2017, 20162019, 2018 and 2015:
During the year ended December 31, 2016, the Company granted 380,358 shares of restricted stock units to certain Company’s employees under the 2010 Incentive Plan. The restricted stock units granted during the year ended December 31, 2016 have a three‑year vesting period, during which the recipient must remain employed with the Company or its subsidiaries. The weighted average fair value of the restricted stock units the date of grants made during the year ended December 31, 2016 was $14.81 per share. The following table summarizes the activity of restricted stock units granted to certain Company employees as of December 31, 2016, 2015 and 2014: |
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| Weighted-Average |
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| Grant-Date Fair |
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| Number of Shares |
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| Value |
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Non-vested shares outstanding at December 31, 2014 |
| 723,176 |
| $ | 12.70 |
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Granted |
| 408,163 |
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| 13.57 |
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Vested |
| (215,856) |
|
| 13.06 |
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Cancelled |
| (106,184) |
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| 13.52 |
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Non-vested shares outstanding at December 31, 2015 |
| 809,299 |
| $ | 13.13 |
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Granted |
| 384,148 |
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| 14.81 |
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Vested |
| (215,146) |
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| 13.29 |
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Cancelled |
| (51,370) |
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| 13.72 |
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Non-vested shares outstanding at December 31, 2016 |
| 926,931 |
| $ | 13.65 |
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Granted |
| 160,137 |
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| 35.81 |
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Vested |
| (230,903) |
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| 12.01 |
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Cancelled |
| (40,575) |
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| 15.78 |
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Non-vested shares outstanding at December 31, 2017 |
| 815,590 |
| $ | 18.35 |
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2017:
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| | Weighted-Average |
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| | | | | Grant-Date Fair |
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| | Number of RSUs | | | Value |
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Non-vested RSUs outstanding at December 31, 2016 |
| 926,931 | | $ | 13.65 | |
Granted |
| 160,137 | |
| 35.81 | |
Vested |
| (230,903) | |
| 12.01 | |
Cancelled |
| (40,575) | |
| 15.78 | |
Non-vested RSUs outstanding at December 31, 2017 |
| 815,590 | | $ | 18.35 | |
Granted |
| 115,044 | |
| 53.40 | |
Vested |
| (330,580) | |
| 13.57 | |
Cancelled |
| (24,273) | |
| 27.77 | |
Non-vested RSUs outstanding at December 31, 2018 |
| 575,781 | | $ | 27.71 | |
Granted |
| 104,120 | |
| 48.65 | |
Vested |
| (251,853) | |
| 14.79 | |
Cancelled |
| (143,362) | |
| 30.85 | |
Non-vested RSUs outstanding at December 31, 2019 |
| 284,686 | | $ | 45.21 | |
Performance Stock Units
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(“PSUs”)
During the year ended December 31, 2017,2019, the Compensation Committee granted performance share units, which are performance based restricted stock units, to certain Company employees with three-year performance-based financial metrics that the Company must meet before those awards may be earned and the performance period is measured for the three years ending December 31, 2019.2021. The Company’s compensation expense for performance share units is based upon the projected number of performance share units estimated to be awarded at the conclusion of the performance period. During 2019, the Compensation Committee awarded 67,853 additional shares of stock related to the performance share grant in 2016 based on the Company’s performance for the three years ended December 31, 2018 measured against the pre-established targets for the same period. The Compensation Committee will determine the achievement of performance results and corresponding vesting of performance shares for each year’s grant in 2015, 20162017, 2018 and 2017.2019 following the conclusion of the respective performance period. At the end of each performance period, the number of shares awarded can range from 0% to 200% of the original granted amount for performance share units granted in 20172019, 2018 and can range from 0% to 150%2017.
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The following table summarizes the activity of performance share units granted at target as of December 31, 2017.2019.
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| Weighted-Average |
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| Grant-Date Fair |
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| Number of Shares |
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| Value |
Non-vested shares outstanding at December 31, 2014 |
| — |
| $ | — |
Granted |
| 222,583 |
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| 13.61 |
Vested |
| — |
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| — |
Cancelled |
| (19,754) |
|
| 13.51 |
Non-vested shares outstanding at December 31, 2015 |
| 202,829 |
| $ | 13.62 |
Granted |
| 183,577 |
|
| 14.89 |
Vested |
| — |
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| — |
Cancelled |
| (22,413) |
|
| 14.16 |
Non-vested shares outstanding at December 31, 2016 |
| 363,993 |
| $ | 14.23 |
Granted |
| 119,315 |
|
| 35.81 |
Vested |
| — |
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| — |
Cancelled |
| (14,732) |
|
| 15.00 |
Non-vested shares outstanding at December 31, 2017 |
| 468,576 |
| $ | 19.70 |
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| | Weighted-Average |
| | | | | Grant-Date |
| | Number of PSUs | | | Fair Value |
Non-vested PSUs outstanding at December 31, 2016 |
| 363,993 | | $ | 14.23 |
Granted |
| 119,315 | |
| 35.81 |
Vested |
| — | |
| — |
Cancelled |
| (14,732) | |
| 15.00 |
Non-vested PSUs outstanding at December 31, 2017 |
| 468,576 | | $ | 19.70 |
Granted |
| 90,264 | |
| 53.41 |
Additional PSUs awarded from the 2015 grant |
| 92,335 | |
| 13.62 |
Vested |
| (277,029) | |
| 13.62 |
Cancelled |
| (3,229) | |
| 30.09 |
Non-vested PSUs outstanding at December 31, 2018 |
| 370,917 | | $ | 30.84 |
Granted |
| 87,864 | |
| 48.81 |
Additional PSUs awarded from the 2016 grant |
| 67,853 | |
| 14.80 |
Vested |
| (203,582) | |
| 14.80 |
Cancelled |
| (89,481) | |
| 34.70 |
Non-vested PSUs outstanding at December 31, 2019 |
| 233,571 | | $ | 45.44 |
During the years ended December 31, 2017, 20162019, 2018 and 20152017 the Company granted fully‑vestedfully-vested shares of common stock to the Company’s directors in the amounts of 22,617, 42,62418,576, 15,165 and 36,95022,617 shares, respectively, with a weighted average grant‑dategrant-date fair value of $35.81, $14.78,$48.45, $53.40, and $14.05,$35.81 respectively.
During the year ended December 31, 2017, 20162019, 2018 and 2015,2017, the Company recorded equity‑basedequity-based compensation expense of $10.3 million, $13.1 million and $10.6 million, $7.6respectively. Additionally, the Company incurred $7.9 million and $5.4of employee severance related costs associated with the sale of ExpressJet, partially offset by a forfeiture credit of $4.5 million, respectively.primarily resulting from stock-based compensation awards that terminated upon the sale of ExpressJet during 2019.
As of December 31, 2017,2019, the Company had $10.6$10.0 million of total unrecognized compensation cost related to non‑vested stock options, non‑vestednon-vested restricted stock grants and non-vested performance stock units. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize this cost over a weighted average period of 1.7 years.
Taxes
The Company’s treatment of stock option grants of non‑qualifiednon-qualified options, restricted stock units and performance shares results in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised or the restrictions lapse.
(10) Retirement Plans and Employee Stock Purchase Plans
SkyWest Retirement Plan
The Company sponsors the SkyWest, Inc. Employees’ Retirement Plan (the “SkyWest Plan”). Employees who have completed 90 days of service and are at least 18 years of age are eligible for participation in the SkyWest Plan. Employees may elect to make contributions to the SkyWest Plan. Generally, the Company matches 100% of such
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contributions up to levels ranging from 2% to 7%12% of compensation, based on position and years of service. Additionally, a discretionary contribution may be made by the Company. The Company’s combined contributions to the SkyWest Plan were $26.1$40.7 million, $23.2$35.6 million and $20.4$26.1 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
ExpressJet and Atlantic Southeast Retirement Plans65
ExpressJet (formerly Atlantic Southeast) sponsors the Atlantic Southeast Airlines, Inc. Investment Savings Plan (the “Atlantic Southeast Plan”). Employees who have completed 90 daysTable of service and are 18 years of age are eligible for participation in the Atlantic Southeast Plan. Employees may elect to make contributions to the Atlantic Southeast Plan, ExpressJet will match up to 8% of each participant’s total compensation, based on years of service and other provisions included in the Atlantic Southeast Plan. Additionally, participants are 100% vested in their elective deferrals and rollover amounts and from 10% to 100% vested in company matching contributions based on length of service.Contents
ExpressJet additionally sponsors the ExpressJet Airlines, Inc. 401(k) Savings Plan (the “ExpressJet Retirement Plan”). Substantially all of ExpressJet’s domestic employees were covered by this plan at the time the Company acquired ExpressJet in 2010. Effective January 1, 2009, the ExpressJet Retirement Plan was amended such that certain matching payment amounts have been reduced or eliminated depending on the terms of the collective bargaining unit or work group, as applicable.
ExpressJet’s contribution to the Atlantic Southeast and the ExpressJet Retirement Plans was $17.8 million, $21.0 million and $24.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Employee Stock Purchase Plans
In May 2009, the Company’s Board of Directors approved the SkyWest, Inc. 2009 Employee Stock Purchase Plan (the “2009 Stock Purchase Plan”). All employees who have completed 90 days of employment with the Company or one of its subsidiaries are eligible to participate in the 2009 Stock Purchase Plan, except employees who own five5 percent or more of the Company’s common stock. The 2009 Stock Purchase Plan enables employees to purchase shares of the Company’s common stock at a five5 percent discount, through payroll deductions. Employees can contribute up to 15% of their base pay, not to exceed $25,000 each calendar year, for the purchase of shares. Shares are purchased semi-annually at a five5 percent discount based on the end of the period price. Employees can terminate their participation in the 2009 Stock Purchase Plan at any time upon written notice.
The following table summarizes purchases made under the 2009 Employee Stock Purchase Plans during the years ended December 31, 2017, 20162019, 2018 and 2015:2017:
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| | Year ended December 31, |
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| | 2019 | | 2018 | | 2017 |
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Number of shares purchased |
| | 65,148 |
| | 60,950 |
| | 88,362 | |
Average price of shares purchased | | $ | 48.58 | | $ | 49.85 | | $ | 33.96 | |
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| Year ended December 31, |
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| 2017 |
| 2016 |
| 2015 |
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Number of shares purchased |
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| 88,362 |
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| 151,531 |
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| 254,098 |
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Average price of shares purchased |
| $ | 33.96 |
| $ | 20.87 |
| $ | 13.50 |
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The 2009 Stock Purchase Plan is a non‑compensatorynon-compensatory plan under the accounting guidance. Therefore, no0 compensation expense was recorded for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
(11) Stock Repurchase
The Company’s Board of Directors has adopted a stock repurchase program which authorizes the Company to repurchase shares of the Company’s common stock in the public market or in private transactions, from time to time, at prevailing prices. The Company’s stock repurchase program authorizes the repurchase of up to $100.0$250.0 million of the Company’s common stock over a three year period commencing on February 9, 2017,5, 2019, of which $80.0$159.6 million remained available at December 31, 2017.2019.
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During the years ended December 31, 20172019, 2018 and 2015,2017, the Company repurchased 0.51.7 million, 1.0 million and 1.30.5 million shares of common stock (including shares purchased from the Company’s Chairman of the Board see Note 12 Related-Party Transactions for more details) for approximately $20.0$94.6 million, $54.4 million and $18.7$20.0 million, respectively at a weighted average price per share of $56.86, $56.25 and $41.36, and $14.98, respectively. The Company did not repurchase any shares of its common stock during the year ended December 31, 2016. Additionally, during the year ended December 31, 2019, 2018 and 2017, the Company paid $9.3 million, $13.6 million and $5.1 million, respectively, for a net settlement of the income tax obligation on employee equity awards.awards that vested during the applicable periods.
(12) Related‑PartyRelated-Party Transactions
On June 13, 2019, the Company repurchased 268,025 shares of its common stock from Jerry Atkin, Chairman of the Board, at a price of $60.24 per share, representing the volume-weighted average price of the Company’s common stock over the five trading days immediately prior to such repurchase. The transaction was part of Mr. Atkin’s personal long-term strategy for asset diversification, tax and estate planning and to fund philanthropic and charitable efforts. The transaction was approved by the Company’s Audit Committee and was effected pursuant to the Company’s stock repurchase plan that commenced on February 5, 2019.
During the year ended December 31, 2017,2019, the Company purchased $198,000$93,540 of spare aircraft parts from an entity affiliated with a director of the Company.
66
(13) Gain on Sale of ExpressJet
On January 22, 2019, the Company completed the sale of its former wholly owned subsidiary ExpressJet. The Company recorded a gain of $46.5 million (pre-tax) from the sale of ExpressJet. The closing of the transaction was completed in two parts, through an asset sale and stock sale, as further described below.
Asset Sale
On January 11, 2019, pursuant to the terms and conditions of the Asset Purchase Agreement, dated as of December 17, 2018, by and among the Company, ExpressJet and United, United acquired certain specified assets and liabilities of ExpressJet, including, among other things, aircraft engines, auxiliary power units, rotable spare parts, ground support equipment and flight training equipment for $60.8 million in cash, subject to certain purchase price adjustments (the “Asset Sale”). Certain assets and liabilities of ExpressJet were expressly excluded from the Asset Sale.
Stock Sale
Additionally, on January 22, 2019, pursuant to the terms and conditions of the Stock Purchase Agreement, dated as of December 17, 2018, by and among the Company and ManaAir, LLC, a company in which United owns a minority interest (the “Buyer”), the Buyer acquired all of the outstanding shares of capital stock of ExpressJet from the Company for $18.8 million in cash, subject to certain purchase price adjustments (the “Stock Sale,”). To facilitate payment of the purchase price for the Stock Sale, at the closing of the Stock Sale, the Company loaned $26 million to Kair Enterprises, Inc. (the “Borrower”), the majority owner of the Buyer. Such loan accrues interest at the rate of 6.85% per annum, matures on the last business day of the last month immediately preceding the two-year anniversary of the closing of the Stock Sale and is secured by, among other things, the Borrower’s ownership interests in the Buyer. The Company also leased 16 CRJ200 aircraft to ExpressJet for a portion of the 2019 year. The lease of these 16 CRJ200 aircraft was terminated as of December 31, 2019.
(14) 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 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. The Company purchased 14 spare engines and sold the 14 spare engines to Aero Engines at net book value during 2019. Since the initial investment, the Company has invested an additional $1.0 million into Aero Engines during 2019. Aero Engines had 0 debt outstanding as of December 31, 2019. As of December 31, 2019, 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 the income generated by Aero Engines for 2019 was $0.6 million.
67
(15) Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 20172019 and 20162018 is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Year ended December 31, 2017 |
| |||||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
|
|
|
| ||||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Year |
| |||||||
Operating revenues |
| $ | 765,415 |
| $ | 809,759 |
| $ | 831,936 |
| $ | 797,158 |
| $ | 3,204,268 |
| ||
Operating income |
|
| 76,295 |
|
| 106,596 |
|
| 112,369 |
|
| 92,939 |
|
| 388,199 |
| ||
Net income(1) |
|
| 34,786 |
|
| 50,477 |
|
| 53,716 |
|
| 289,928 |
|
| 428,907 |
| ||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Basic |
|
| 0.67 |
|
| 0.98 |
|
| 1.04 |
|
| 5.60 |
|
| 8.28 |
| ||
Diluted |
|
| 0.65 |
|
| 0.95 |
|
| 1.01 |
|
| 5.46 |
|
| 8.08 |
| ||
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Basic: |
|
| 51,820 |
|
| 51,751 |
|
| 51,833 |
|
| 51,811 |
|
| 51,804 |
| ||
Diluted: |
|
| 53,202 |
|
| 52,977 |
|
| 53,080 |
|
| 53,140 |
|
| 53,100 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended December 31, 2016 |
| |||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
|
|
|
| ||||
|
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Year |
| |||||
Operating revenues |
| $ | 762,075 |
| $ | 801,338 |
| $ | 799,776 |
| $ | 758,017 |
| $ | 3,121,206 |
|
Operating income (loss) |
|
| 61,809 |
|
| 84,137 |
|
| 85,834 |
|
| (404,464) |
|
| (172,684) |
|
Net income (loss)(2) |
|
| 27,092 |
|
| 40,244 |
|
| 41,322 |
|
| (270,244) |
|
| (161,586) |
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.53 |
|
| 0.78 |
|
| 0.80 |
|
| (5.22) |
|
| (3.14) |
|
Diluted |
|
| 0.52 |
|
| 0.77 |
|
| 0.79 |
|
| (5.22) |
|
| (3.14) |
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
| 51,218 |
|
| 51,418 |
|
| 51,627 |
|
| 51,757 |
|
| 51,505 |
|
Diluted: |
|
| 52,014 |
|
| 52,194 |
|
| 52,471 |
|
| 51,757 |
|
| 51,505 |
|
| | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
| |||||||||||||
| | First | | Second | | Third | | Fourth | | | |
| ||||
| | Quarter | | Quarter | | Quarter | | Quarter | | Year |
| |||||
Operating revenues |
| $ | 723,694 |
| $ | 744,383 |
| $ | 760,295 |
| $ | 743,591 |
| $ | 2,971,963 | |
Operating income | |
| 96,419 | |
| 144,093 | |
| 146,441 | |
| 125,305 | |
| 512,258 | |
Net income (1) | |
| 88,181 | |
| 88,052 | |
| 91,339 | |
| 72,527 | |
| 340,099 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | |
| 1.71 | |
| 1.72 | |
| 1.80 | |
| 1.44 | |
| 6.68 | |
Diluted | |
| 1.69 | |
| 1.71 | |
| 1.79 | |
| 1.43 | |
| 6.62 | |
Weighted average common shares: | | | | | | | | | | | | | | | | |
Basic: | |
| 51,440 | |
| 51,145 | |
| 50,746 | |
| 50,395 | |
| 50,932 | |
Diluted: | |
| 52,098 | |
| 51,477 | |
| 51,129 | |
| 50,796 | |
| 51,375 | |
(1) | Net income for |
|
|
| | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 |
| |||||||||||||
| | First | | Second | | Third | | Fourth | | | |
| ||||
| | Quarter | | Quarter | | Quarter | | Quarter | | Year |
| |||||
Operating revenues |
| $ | 783,400 |
| $ | 805,515 |
| $ | 829,275 |
| $ | 803,489 |
| $ | 3,221,679 | |
Operating income | |
| 88,175 | |
| 126,678 | |
| 137,925 | |
| 121,502 | |
| 474,280 | |
Net income | |
| 54,362 | |
| 75,859 | |
| 83,046 | |
| 67,105 | |
| 280,372 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | |
| 1.05 | |
| 1.46 | |
| 1.60 | |
| 1.30 | |
| 5.40 | |
Diluted | |
| 1.03 | |
| 1.43 | |
| 1.57 | |
| 1.28 | |
| 5.30 | |
Weighted average common shares: | | | | | | | | | | | | | | | | |
Basic: | |
| 51,921 | |
| 52,046 | |
| 52,039 | |
| 51,650 | |
| 51,914 | |
Diluted: | |
| 53,033 | |
| 52,913 | |
| 52,981 | |
| 52,556 | |
| 52,871 | |
| (1) |
8168
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC rules and forms. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2017,2019, those controls and procedures were effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the most recently completed fiscal quarter, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20172019 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that evaluation, management believes that our internal control over financial reporting was effective as of December 31, 2017.2019.
The effectiveness of our internal control over financial reporting as of December 31, 2017,2019, has been audited by Ernst & Young LLP (“Ernst & Young”), the independent registered public accounting firm who also has audited our Consolidated Financial Statements included in this Report. Ernst & Young’s report on our internal control over financial reporting appears on the following page.
8269
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of SkyWest, Inc.
Opinion on Internal Control over Financial Reporting
We have audited SkyWest, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, SkyWest, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of SkyWest, Inc. and subsidiaries as of December 31, 20172019 and 2016,2018, and the related consolidated statements of comprehensive income, (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 26, 201818, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 26, 201818, 2020
8370
None.
PART III
Items 10, 11, 12, 13 and 14 in Part III of this Report are incorporated herein by reference to our definitive proxy statement for our 20182019 Annual Meeting of Shareholders scheduled for May 8, 2018.5, 2020. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2017,2019, pursuant to Regulation 14A of the Exchange Act.
| | |
| | Headings in Proxy Statement |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | “Election of Directors,” “Executive Officers,” “Corporate Governance,” “Meetings and Committees of the Board” and | |
EXECUTIVE COMPENSATION | “Corporate Governance,” “Meetings and Committees of the Board,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Director Compensation” and “Director Summary Compensation Table” | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | “Security Ownership of Certain Beneficial Owners” “Securities Authorized for Issuance Under Equity Compensation Plans” | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | “Certain Relationships and Related Transactions” | |
PRINCIPAL ACCOUNTANT FEES AND SERVICES | “Audit and Finance Committee Disclosure” and “Fees Paid to Independent Registered Public Accounting Firm” |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Documents Filed: |
1. | Financial Statements: Reports of Independent Auditors, Consolidated Balance Sheets as of December 31, 2019 and 2018, Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017, Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017, Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, 2017 and 2016 and Notes to Consolidated Financial Statements. |
2. | Financial Statement Schedule. The following consolidated financial statement schedule of our company is included in this Item 15. |
(a)Documents Filed:
1.Financial Statements: Reports of Independent Auditors, Consolidated Balance Sheets as of December 31, 2017 and 2016, Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015, Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015, Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016, 2015 and 2014 and Notes to Consolidated Financial Statements.
2.Financial Statement Schedule. The following consolidated financial statement schedule of our company is included in this Item 15.
•Schedule II—Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.
8471
(b) | Exhibits |
72
(b)Exhibits
85
Number | Exhibit | Incorporated | |||
|---|---|---|---|---|---|
23.1 |
| ||||
| |||||
| |||||
| Filed herewith | ||||
|
| Filed herewith | |||
|
| Filed herewith | |||
|
| Filed herewith | |||
|
| Filed herewith | |||
|
| Filed herewith | |||
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
* |
|
| (1) | Incorporated by reference to the exhibits to a Registration Statement on Form S -3 (File No. 333-129831) filed on November 18, 2005 |
| (2) | Incorporated by reference to a Registration Statement on Form S- 3 (File No. 333-42508) filed on July 28, 2000 |
| (3) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed on September 13, 2005, as amended by Amendment No. 2 on Form 8-K/A filed on February 21, 2006 |
| (4) | Incorporated by reference to exhibits to Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2003 |
| (5) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended December 31, 1986 |
| (6) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on February 13, 2001 |
| (7) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 23, 2009 |
| (8) | Incorporated by reference to Appendix A to Registrant's Definitive Proxy Statement on Schedule 14A (File No. 000-14719) filed on March 12, 2010 |
| (9) | Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8-K filed on November 18, 2010 |
| (10) | Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8-K filed on December 13, 2012, as amended by Amendment No. 1 to Current Report on Form 8-K/A filed on June 25, 2013 |
| (11) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 24, 2012 |
| (12) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on August 7, 2013, as amended by Amendment No. 1 to Quarterly Report on Form 10-Q/A filed on November 4, 2013 |
*Certain portions of this exhibit have been omitted pursuant to Rule 24b‑2 and are subject to a confidential treatment request.
**Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, (ii) the Consolidated Balance Sheet at December 31, 2017 and December 31, 2016, and (iii) the Consolidated Statement of Cash Flows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015
(1)Incorporated by reference to the exhibits to a Registration Statement on Form S ‑3 (File No. 333‑129831) filed on November 18, 2005
(2)Incorporated by reference to a Registration Statement on Form S‑ 3 (File No. 333‑42508) filed on July 28, 2000
(3)Incorporated by reference to Registrant’s Current Report on Form 8‑K filed on September 13, 2005, as amended by Amendment No. 2 on Form 8‑K/A filed on February 21, 2006
(4)Incorporated by reference to exhibits to Registrant’s Quarterly Report on Form 10‑Q filed on November 14, 2003
(5)Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10‑Q filed for the quarter ended December 31, 1986
(6)Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10‑Q filed on February 13, 2001
(7)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 23, 2009
(8)Incorporated by reference to Appendix A to Registrant's Definitive Proxy Statement on Schedule 14A (File No. 000-14719) filed on March 12, 2010
(9)Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8‑K filed on November 18, 2010
(10)Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8‑K filed on December 13, 2012, as amended by Amendment No. 1 to Current Report on Form 8‑K/A filed on June 25, 2013
(11)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 24, 2012
8673
| (13) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 14, 2014 |
| (14) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 18, 2015 |
| (15) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 26, 2016 |
| (16) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 27, 2017 |
| (17) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 26, 2018 |
| (18) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 21, 2019 |
| (19) | Incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 22, 2019 |
| (20) | Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on February 15, 2019 |
Item 16. Form 10-K Summary
None.
74
(12)Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on August 7, 2013, as amended by Amendment No. 1 to Quarterly Report on Form 10-Q/A filed on November 4, 2013
(13)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 14, 2014
(14)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 18, 2015
(15)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 26, 2016
(16)Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10‑K filed on February 27, 2017
87
SKYWEST, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2017, 20162019, 2018 and 20152017
(Dollars in thousands)
|
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|
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| |||||||||||||
|
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|
|
| Additions |
|
|
|
|
|
| |||||||||||||
|
| Balance at |
| Charged to |
|
|
|
|
|
| ||||||||||||||
|
| Beginning |
| Costs and |
|
|
| Balance at |
| |||||||||||||||
| | | | | | | | | | | | |||||||||||||
|
| | |
| Additions |
| |
| | |
| |||||||||||||
| | Balance at | | Charged to | | | | | |
| ||||||||||||||
| | Beginning | | Costs and | | | | Balance at |
| |||||||||||||||
Description |
| of Year |
| Expenses |
| Deductions |
| End of Year |
| | of Year | | Expenses | | Deductions | | End of Year |
| ||||||
Year ended December 31, 2019: | | | | | | | | | | | | | ||||||||||||
Allowance for inventory obsolescence | | $ | 22,141 |
| | — |
| (6,251) |
| $ | 15,890 | | ||||||||||||
Allowance for doubtful accounts receivable | |
| 158 |
| | — |
| (140) |
| | 18 | | ||||||||||||
| | $ | 22,299 |
| | — |
| (6,391) |
| $ | 15,908 | | ||||||||||||
Year ended December 31, 2018: | | | | | | | | | | | | |||||||||||||
Allowance for inventory obsolescence | | $ | 17,098 |
| | 5,043 |
| — |
| $ | 22,141 | | ||||||||||||
Allowance for doubtful accounts receivable | |
| 157 |
| | 1 |
| — |
| | 158 | | ||||||||||||
| | $ | 17,255 |
| | 5,044 |
| — |
| $ | 22,299 | | ||||||||||||
Year ended December 31, 2017: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Allowance for inventory obsolescence(1) |
| $ | 40,497 |
|
| — |
| (23,399) |
| $ | 17,098 |
| ||||||||||||
Allowance for doubtful accounts receivable |
|
| 173 |
|
| — |
| (16) |
|
| 157 |
| ||||||||||||
|
| $ | 40,670 |
|
| — |
| (23,415) |
| $ | 17,255 |
| ||||||||||||
Year ended December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for inventory obsolescence(2) |
| $ | 13,933 |
|
| 26,564 |
| — |
| $ | 40,497 |
| ||||||||||||
Allowance for doubtful accounts receivable |
|
| 187 |
|
| — |
| (14) |
|
| 173 |
| ||||||||||||
|
| $ | 14,120 |
|
| 26,564 |
| (14) |
| $ | 40,670 |
| ||||||||||||
Year ended December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Allowance for inventory obsolescence |
| $ | 11,588 |
|
| 2,345 |
| — |
| $ | 13,933 |
| | $ | 40,497 |
| | — |
| (23,399) | | $ | 17,098 | |
Allowance for doubtful accounts receivable |
|
| 326 |
|
| — |
| (139) |
|
| 187 |
| |
| 173 |
| | — |
| (16) | |
| 157 | |
|
| $ | 11,914 |
|
| 2,345 |
| (139) |
| $ | 14,120 |
| ||||||||||||
| | $ | 40,670 |
| | — |
| (23,415) | | $ | 17,255 | | ||||||||||||
| (1) |
| The deductions in 2017 related to the disposal of excess and obsolete inventory in 2017. |
|
|
8875
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10‑K10-K for the year ended December 31, 2017,2019, to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2018.18, 2020.
| | | |
| SkyWest, Inc. | ||
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| | |
| By: | /s/ ROBERT J. SIMMONS Robert J. Simmons | |
8976
ADDITIONAL SIGNATURES
Pursuant to the requirement of the Securities Act of 1934, as amended, this Annual Report on Form 10‑K10-K has been signed below by the following persons in the capacities and on the dates indicated.
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| Name | | | | Capacities | | | | Date | | ||||||||
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/s/ Jerry C. Atkin Jerry C. Atkin | Chairman of the Board | February | ||||||||||||||||
/s/ Russell A. Childs Russell A. Childs | Chief Executive Officer and President (Principal Executive Officer) and Director | February | ||||||||||||||||
/s/ Robert J. Simmons Robert J. Simmons | Chief Financial Officer (Principal Financial Officer) | February | ||||||||||||||||
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/s/ Eric J. Woodward Eric J. Woodward | Chief Accounting Officer (Principal Accounting Officer) | February | ||||||||||||||||
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/s/ Steven F. Steven F. | Lead Director | February | ||||||||||||||||
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/s/ W. Steve Albrecht Steve Albrecht | Director | February | ||||||||||||||||
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/s/ Henry J. Eyring Henry J. Eyring | Director | February | ||||||||||||||||
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/s/ Meredith S. Madden Meredith S. Madden | Director | February | ||||||||||||||||
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/s/ Ronald J. Mittelstaedt Ronald J. Mittelstaedt | Director | February | ||||||||||||||||
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/s/ Andrew C. Roberts Andrew C. Roberts | Director | February | ||||||||||||||||
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/s/ Keith E. Smith Keith E. Smith | Director | February | ||||||||||||||||
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/s/ James L. Welch James L. Welch | Director | February | ||||||||||||||||
9077