prorate

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended ~~June 30, 2018~~March 31, 2019


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

For the transition period from to

Commission file number 0-14719

SKYWEST, INC.


Incorporated under the laws of Utah		87-0292166
		(I.R.S. Employer ID No.)

444 South River Road

St. George, Utah 84790

(435) 634-3000

(Address of principal executive offices and telephone number)

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

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


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
~~(Do not check if a smaller reporting company)~~

Emerging growth company ☐

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

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

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


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on which Registered
Common Stock, No Par Value	SKYW	The Nasdaq Global Select Market

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


Class		Outstanding at ~~July 31, 2018~~April 30, 2019
Common stock, no par value		~~52,078,165~~51,233,435

Table of Contents

SKYWEST, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets as of ~~June 30, 2018~~March 31, 2019 (unaudited) and December 31, ~~2017~~2018	3
		Consolidated Statements of Comprehensive Income (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	5
		Consolidated Statements of Stockholders Equity (unaudited) for the three months ended March 31, 2019 and 2018	6
		Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	67
		Notes to Condensed Consolidated Financial Statements	78
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2019
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3529
	Item 4.	Controls and Procedures	3530

PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	3630
	Item 1A.	Risk Factors	3630
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3631
	Item 6.	Exhibits	3631
		Signature	3732

Exhibit 31.1	Certification of Chief Executive Officer
Exhibit 31.2	Certification of Chief Financial Officer
Exhibit 32.1	Certification of Chief Executive Officer
Exhibit 32.2	Certification of Chief Financial Officer

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

ASSETS

June 30,

December 31,


2018

2017 (a)

(unaudited)

CURRENT ASSETS:

Cash and cash equivalents

$
175,728

$
181,792

Marketable securities

473,362

503,503

Income tax receivable

11,115

5,316

Receivables, net

71,240

42,731

Inventories, net

118,901

119,755

Prepaid aircraft rents

90,324

115,098

Other current assets

34,555

26,938

Total current assets

975,225

995,133

PROPERTY AND EQUIPMENT:

Aircraft and rotable spares

5,929,735

5,335,870

Deposits on aircraft

49,000

49,000

Buildings and ground equipment

285,283

265,608

6,264,018

5,650,478

Less-accumulated depreciation and amortization

(1,604,814)

(1,467,475)

Total property and equipment, net

4,659,204

4,183,003

OTHER ASSETS:

  Long-term prepaid assets

207,470

230,923

Other assets

71,194

65,341

Total other assets

278,664

296,264

Total assets

$
5,913,093

$
5,474,400

~~(a)~~

~~Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information.~~


	March 31,		December 31,
	2019		2018
	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	290,885	$	328,384
Marketable securities		253,397		360,945
Income tax receivable		21,255		25,936
Receivables, net		78,370		64,194
Inventories, net		112,566		127,690
Prepaid aircraft rents		—		87,031
Other current assets		24,921		26,614
Total current assets		781,394		1,020,794

PROPERTY AND EQUIPMENT:
Aircraft and rotable spares		6,696,982		6,433,916
Deposits on aircraft		37,602		42,012
Buildings and ground equipment		270,665		291,544
		7,005,249		6,767,472
Less-accumulated depreciation and amortization		(1,730,681)		(1,761,728)
Total property and equipment, net		5,274,568		5,005,744

OTHER ASSETS:
Operating lease right-of-use assets		341,898		—
Long-term prepaid assets		—		181,830
Other assets		146,672		104,844
Total other assets		488,570		286,674
Total assets	$	6,544,532	$	6,313,212

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

June 30,

December 31,


2018

2017 (a)

(unaudited)

CURRENT LIABILITIES:

Current maturities of long-term debt

$
353,743

$
309,678

Accounts payable

291,009

288,904

Accrued salaries, wages and benefits

160,428

154,367

Taxes other than income taxes

16,762

19,228

Other current liabilities

56,653

48,648

Total current liabilities

878,595

820,825

LONG-TERM DEBT, net of current maturities

2,615,637

2,377,346

DEFERRED INCOME TAXES PAYABLE

459,927

419,020

DEFERRED AIRCRAFT CREDITS

36,281

44,225

OTHER LONG-TERM LIABILITIES

62,001

58,662

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS’ EQUITY:

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

—

—

Common stock, no par value, 120,000,000 shares authorized; 81,104,752 and 80,398,104 shares issued, respectively

682,545

672,593

Retained earnings

1,636,768

1,516,957

Treasury stock, at cost, 29,058,982 and 28,643,535 shares, respectively

(458,645)

(435,178)

Accumulated other comprehensive loss

(16)

(50)

Total stockholders’ equity

1,860,652

1,754,322

Total liabilities and stockholders’ equity

$
5,913,093

$
5,474,400

~~(a)~~


	March 31,		December 31,
	2019		2018
	(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt	$	362,797	$	350,206
Accounts payable		340,195		331,982
Accrued salaries, wages and benefits		118,074		161,606
Taxes other than income taxes		13,901		16,024
Current maturities of operating lease liabilities		73,524		—
Other current liabilities		36,836		65,008
Total current liabilities		945,327		924,826

LONG-TERM DEBT, net of current maturities		2,734,317		2,809,768

DEFERRED INCOME TAXES PAYABLE		541,196		518,159

DEFERRED AIRCRAFT CREDITS		—		29,308

NONCURRENT OPERATING LEASES		275,088		—

OTHER LONG-TERM LIABILITIES		48,037		66,870

COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS’ EQUITY:
Preferred stock, 5,000,000 shares authorized; none issued		—		—
Common stock, no par value, 120,000,000 shares authorized; 81,798,773 and 81,239,289 shares issued, respectively		692,593		690,910
Retained earnings		1,845,467		1,776,585
Treasury stock, at cost, 30,500,393 and 29,850,999 shares, respectively		(537,493)		(503,182)
Accumulated other comprehensive loss		—		(32)
Total stockholders’ equity		2,000,567		1,964,281
Total liabilities and stockholders’ equity	$	6,544,532	$	6,313,212

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,


2018

2017 (a)

2018

2017 (a)

OPERATING REVENUES:

Flying agreements

$
793,637

$
781,724

$
1,561,602

$
1,516,253

Airport customer service and other

11,878

9,788

27,313

22,425

Total operating revenues

805,515

791,512

1,588,915

1,538,678

OPERATING EXPENSES:

Salaries, wages and benefits

293,677

294,795

600,396

592,462

Aircraft maintenance, materials and repairs

139,774

152,356

281,380

284,681

Depreciation and amortization

82,714

71,206

160,298

141,320

Aircraft rentals

37,508

55,413

82,188

113,123

Aircraft fuel

30,011

20,071

56,950

38,504

Airport-related expenses

25,890

28,949

55,197

60,897

Other operating expenses

69,263

62,126

137,653

124,801

Total operating expenses

678,837

684,916

1,374,062

1,355,788

OPERATING INCOME

126,678

106,596

214,853

182,890

OTHER INCOME (EXPENSE):

Interest income

1,705

1,330

3,409

1,990

Interest expense

(28,811)

(27,063)

(55,045)

(51,612)

Other income (expense), net

(1,245)

—

2,313

—

Total other expense, net

(28,351)

(25,733)

(49,323)

(49,622)

INCOME BEFORE INCOME TAXES

98,327

80,863

165,530

133,268

PROVISION FOR INCOME TAXES

22,468

30,386

35,310

48,005

NET INCOME

$
75,859

$
50,477

$
130,220

$
85,263

BASIC EARNINGS PER SHARE

$
1.46

$
0.98

$
2.51

$
1.65

DILUTED EARNINGS PER SHARE

$
1.43

$
0.95

$
2.46

$
1.61

Weighted average common shares:

Basic

52,046

51,751

51,983

51,785

Diluted

52,913

52,977

52,973

53,090

COMPREHENSIVE INCOME:

Net income

$
75,859

$
50,477

$
130,220

$
85,263

Net unrealized appreciation on marketable securities, net of taxes

84

17

33

56

TOTAL COMPREHENSIVE INCOME

$
75,943

$
50,494

$
130,253

$
85,319

~~(a)~~


	Three months ended
	March 31,
	2019		2018
OPERATING REVENUES:
Flying agreements	$	700,001	$	767,964
Airport customer service and other		23,693		15,436
Total operating revenues		723,694		783,400
OPERATING EXPENSES:
Salaries, wages and benefits		257,588		306,719
Aircraft maintenance, materials and repairs		118,262		141,606
Depreciation and amortization		89,986		77,585
Airport-related expenses		30,647		29,307
Aircraft fuel		25,656		26,939
Aircraft rentals		20,158		44,680
Special items		21,869		—
Other operating expenses		63,109		68,389
Total operating expenses		627,275		695,225
OPERATING INCOME		96,419		88,175
OTHER INCOME (EXPENSE):
Interest income		3,807		1,705
Interest expense		(32,507)		(26,234)
Other income (expense), net		46,725		3,558
Total other expense, net		18,025		(20,971)
INCOME BEFORE INCOME TAXES		114,444		67,204
PROVISION FOR INCOME TAXES		26,263		12,842
NET INCOME	$	88,181	$	54,362

BASIC EARNINGS PER SHARE	$	1.71	$	1.05
DILUTED EARNINGS PER SHARE	$	1.69	$	1.03
Weighted average common shares:
Basic		51,440		51,921
Diluted		52,098		53,033

COMPREHENSIVE INCOME:
Net income	$	88,181	$	54,362
Net unrealized appreciation (depreciation) on debt securities, net of taxes		32		(50)
TOTAL COMPREHENSIVE INCOME	$	88,213	$	54,312

See accompanying notes to condensed consolidated financial statements

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS EQUITY

(UNAUDITED)

(In Thousands)

Six months ended

June 30,

2018

2017

NET CASH PROVIDED BY OPERATING ACTIVITIES

$
350,822

$
331,783

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of marketable securities

(1,377,448)

(738,101)

Sales of marketable securities

1,407,623

665,246

Proceeds from the sale of aircraft, property and equipment

—

50,652

Acquisition of property and equipment:

Aircraft and rotable spare parts

(553,877)

(514,443)

Buildings and ground equipment

(19,070)

(2,420)

Aircraft deposits applied towards acquired aircraft

—

16,824

Increase in other assets

(4,962)

(6,098)

NET CASH USED IN INVESTING ACTIVITIES

(547,734)

(528,340)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt

383,644

384,825

Principal payments on long-term debt

(160,387)

(169,550)

Net proceeds from issuance of common stock

2,320

1,783

Purchase of treasury stock and employee income tax paid on equity awards

(23,467)

(13,871)

Increase in debt issuance cost

(1,917)

(3,221)

Payment of cash dividends

(9,345)

(6,727)

NET CASH PROVIDED BY FINANCING ACTIVITIES

190,848

193,239

Decrease in cash and cash equivalents

(6,064)

(3,318)

Cash and cash equivalents at beginning of period

181,792

146,766

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
175,728

$
143,448

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Non-cash investing activities:

Acquisition of rotable spare parts

$
426

$
2,038

Debt assumed on aircraft acquired off lease

$
59,132

$
—

Cash paid during the period for:

Interest, net of capitalized amounts

$
54,765

$
50,943

Income taxes

$
1,852

$
598


									Accumulated
									Other
	Common Stock			Retained		Treasury Stock			Comprehensive
	Shares	Amount		Earnings		Shares	Amount		Income (Loss)		Total
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	—		—		88,181	—		—		—		88,181
Net unrealized depreciation on marketable securities, net of tax of $10	—		—		—	—		—		32		32
Exercise of common stock options and stock issued under equity award plan	521		641		—	—		—		—		641
Sale of common stock under employee stock purchase plan	39		1,620		—	—		—		—		1,620
Stock-based compensation expense (forfeiture credit) associated with equity awards, net	—		(578)		—	—		—		—		(578)
Treasury shares acquired from vested employee stock awards for income tax withholdings	—		—		—	(173)		(9,311)		—		(9,311)
Treasury stock purchases	—		—		—	(476)		(25,000)		—		(25,000)
Cash dividends declared ($0.12 per share)	—		—		(6,158)	—		—		—		(6,158)
Balance at March 31, 2019	81,799	$	692,593	$	1,845,467	(30,500)	$	(537,493)	$	—	$	2,000,567

Balance at December 31, 2017	80,398	$	672,593	$	1,516,957	(28,644)	$	(435,178)	$	(50)	$	1,754,322
Net income	—		—		54,362	—		—		—		54,362
Net unrealized depreciation on marketable securities, net of tax of $16	—		—		—	—		—		(50)		(50)
Exercise of common stock options and stock issued under equity award plan	677		836		—	—		—		—		836
Sale of common stock under employee stock purchase plan	30		1,485		—	—		—		—		1,485
Stock based compensation expense associated with equity awards	—		4,854		—	—		—		—		4,854
Treasury shares acquired from vested employee stock awards for income tax withholdings	—		—		—	(238)		(10,003)		—		(10,003)
Treasury stock purchases	—		—		—	(177)		(13,464)		—		(13,464)
Cash dividends declared ($0.10 per share)	—		—		(5,205)	—		—		—		(5,205)
Balance at March 31, 2018	81,105	$	679,768	$	1,566,114	(29,059)	$	(458,645)	$	(100)	$	1,787,137

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)


	Three months ended
	March 31,
	2019		2018
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	154,914	$	165,895

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		(498,113)		(387,572)
Sales of marketable securities		605,693		496,945
Proceeds from the sale of aircraft, property and equipment		43		—
Acquisition of property and equipment:
Aircraft and rotable spare parts		(197,341)		(198,777)
Buildings and ground equipment		(52,075)		(9,305)
Aircraft deposits applied towards acquired aircraft		4,660		—
Net cash received from sale of ExpressJet subsidiary		53,200		—
Decrease (increase) in other assets		7,028		(1,364)
NET CASH USED IN INVESTING ACTIVITIES		(76,905)		(100,073)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		19,940		101,317
Principal payments on long-term debt		(98,204)		(71,587)
Net proceeds from issuance of common stock		2,261		2,320
Purchase of treasury stock and employee income tax paid on equity awards		(34,311)		(23,467)
Increase in debt issuance cost		(53)		(610)
Payment of cash dividends		(5,141)		(4,140)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(115,508)		3,833

Increase (decrease) in cash and cash equivalents		(37,499)		69,655
Cash and cash equivalents at beginning of period		328,384		181,792

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	290,885	$	251,447

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing activities:
Acquisition of rotable spare parts	$	—	$	574
Debt assumed on aircraft acquired under operating leases	$	14,475	$	59,132
Right of use assets applied to aircraft acquired under operating leases	$	150,688	$	—
Lease liability arising from the recognition of right-of-use asset	$	456,472	$	—
Cash paid during the period for:
Interest, net of capitalized amounts	$	34,288	$	26,481
Income taxes	$	1,653	$	486

DETAILS OF SALES OF SUBSIDIARIES:
Decrease in carrying amount of assets	$	(101,448)	$	—
Decrease in carrying amount of liabilities		68,341		—
Transaction costs		—		—
Cash received from buyers		79,632		—
Gain on sale of subsidiaries	$	46,525	$	—

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Condensed Consolidated Financial Statements

Basis of Presentation

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating ~~subsidiaries,~~subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”) and ~~ExpressJet Airlines,~~its leasing subsidiary SkyWest Leasing, Inc. (“~~ExpressJet”~~SkyWest Leasing”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). On January 22, 2019, the Company completed the sale of its former wholly-owned subsidiary, ExpressJet Airlines, Inc. (“ExpressJet”). The Company’s financial and operating results presented in this Report include the financial results of ExpressJet for the period of time ExpressJet was operating as a subsidiary of the Company. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. The results of operations for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will likely differ, and may differ materially, from those estimates and assumptions. ~~The Company reclassified certain prior period amounts to conform to the current period presentation~~.

Recent Accounting Pronouncements

Recently Adopted Standards ~~Effective in Future Years and Not Yet Adopted~~

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update ~~2016‑02,~~2016-02, “Leases (Topic 842)” (“Topic 842”). Topic 842 ~~amends~~and subsequently issued amendments require certain leases with durations longer than 12 months to be recognized on the ~~existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their~~ balance ~~sheets and making targeted changes to lessor accounting.~~sheet. The Company adopted Topic 842 ~~will be~~ effective ~~beginning~~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 contracts are or contain leases, (2) lease classification and (3) initial direct costs. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the ~~first quarter~~year of adoption. The Company elected this adoption method and recognized a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. ~~Early~~

Additionally, the Company’s adoption of Topic 842 is permitted. Topic 842 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 has~~did not ~~completed its assessment, but the adoption of Topic 842 will have a significant impact on its consolidated balance sheets. However, the Company does not expect the adoption to~~ have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the condensed consolidated statements of operations and comprehensive income or the condensed consolidated statements of cash flows. ~~See Note 6, “Commitments and Contingencies,” about the~~The Company’s ~~undiscounted future lease payments and the timing of those payments.~~

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~~Recently Adopted Standards~~

In May 2014, the FASB issued Accounting Standards Update No. 2014‑09, “Revenue from Contracts with Customers, (Topic 606)” (“Topic 606”). Under Topic 606, revenue is recognized at the time a good or service is transferred to a customer 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. The Company adopted this standard as of January 1, 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, in addition to the aircraft lease, the individual flights are distinct services and the flight services promised in a capacity purchase 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 Topic ~~606~~842 did not have a material impact on ~~recorded amounts when applied to~~ the opening balance sheet as of January 1, 2018. The adoption of Topic 606 only affected the Company’s consolidated balance sheets and statements of comprehensive income classification, with no impact on the Company’s operating income (loss), net income (loss), earnings (loss) per sharetiming or cash flows, however the principal versus agent considerations under Topic 606 resulted 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). This classification change resulted in a reduction to total revenue and a reduction to operating expenses by the same amount, resulting in no change to operating income. Additionally, under the nonrefundable up-front fees and contract costs considerations of Topic 606, reimbursements from the Company’s major airline partners for up-front contract costs will be deferred and amortized over the contract term. The related up-front costs to obtain the contract will also be capitalized and amortized over the contract term. ~~As the~~ amount of the ~~up-front reimbursement is determined from the~~ Company’s actual costs to fulfill the contract, this change is not expected to impact the Company’s operating income (loss) as the amount of deferred revenue and the amount of capitalized costs will be recognized over the same period. ~~This change also resulted in a deferred revenue liability and a capitalized contract cost on the balance sheet of the same amount.~~

Prior to the Company’s adoption of Topic 606, the Company segregated its revenue into two categories: “Passenger revenue” and “Ground handling and other revenue.” “Passenger revenue” included revenue from fixed-fee contracts, prorate flying agreements and airport customer service agreements for flights operated by the Company. “Ground handling and other revenue” included revenue from airport customer service agreements for flights operated by third parties and other revenue. Under the disaggregated revenue disclosure considerations in Topic 606, the Company segregated its revenue into the following categories: “Flying agreements revenue” and “Airport customer service and other revenues.” “Flying agreements revenue” includes revenue from fixed-fee contracts, prorate flying agreements and other revenue generated from flying the Company’s aircraft, primarily lease revenue ~~for the use of the aircraft. “Airport customer service~~as a lessor. The Company’s prepaid aircraft rents, accrued aircraft rents and other revenues” includes revenue from airport customer services agreements. This change reclassifies amounts previously reported as “Passenger revenue” and “Ground handling and other revenue”. Additionally, in connection with the Company’s adoption of Topic 606, the Company renamed the operating expense “Ground handling services” to “Airport-related expenses.” Certain airport-related expenses, such as landing fees and airport facility rents,deferred rent credits that were ~~previously reported as “Other operating expenses” and have been reclassified as “Airport-related expenses.”~~

In 2016, 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. The Company adopted this standard in the first quarter of 2018 and modified the presentation to include changes in restricted cashseparately stated in the Company’s ~~Consolidated Statement~~December 31, 2018 balance sheet have been classified as a component of ~~Cash Flows, which had an immaterial impact.~~

the Company’s right-of-use assets effective January 1, 2019. The consolidated financial statements for the three months ended March 31, 2019 are

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~~Impact of Recently Adopted Standards~~

~~The Company recast certain prior period amounts~~presented under the new standard, while comparative years presented are not adjusted and continue to ~~conform~~be reported in accordance with the ~~adoption of Topic 606, as shown in the tables below (in thousands):~~

Three Months Ended
June 30, 2017
Income Statement:

Previously Reported

Adjustments

Current Presentation
OPERATING REVENUES:

Flying agreements (1)

$
791,341

$
(9,617)

$
781,724
Airport customer service and other (2)

18,418

(8,630)

9,788
Total operating revenues

$
809,759

$
(18,247)

$
791,512

OPERATING EXPENSES:

Salaries, wages and benefits

$
295,929

$
(1,134)

$
294,795
Aircraft fuel

37,183

(17,112)

20,071
Airport-related expenses (3)

15,902

13,047

28,949
Other operating expenses

75,174

(13,048)

62,126
Total operating expenses

703,163

(18,247)

684,916

~~In previously reported periods, this line item was presented as passenger revenue.~~

~~In previously reported periods, this line item was presented as ground handling and other.~~

~~In previously reported periods, this line item was presented as ground handling services.~~

Six Months Ended
June 30, 2017
Income Statement:

Previously Reported

Adjustments

Current Presentation
OPERATING REVENUES:

Flying agreements (1)

$
1,536,752

$
(20,499)

$
1,516,253
Airport customer service and other (2)

38,422

(15,997)

22,425
Total operating revenues

$
1,575,174

$
(36,496)

$
1,538,678

OPERATING EXPENSES:

Salaries, wages and benefits

$
595,969

$
(3,507)

$
592,462
Aircraft fuel

71,493

(32,989)

38,504
Airport-related expenses (3)

35,436

25,461

60,897
Other operating expenses

150,262

(25,461)

124,801
Total operating expenses

1,392,284

(36,496)

1,355,788

~~In previously reported periods, this line item was presented as passenger revenue.~~

~~In previously reported periods, this line item was presented as ground handling and other.~~

~~In previously reported periods, this line item was presented as ground handling services.~~

Balance Sheet:

Previously Reported December 31, 2017

Adjustments

Current Presentation December 31, 2017
ASSETS:

Other long-term assets

$
49,220

$
16,121

$
65,341

LIABILITIES:

Other long-term liabilities

$
42,541

$
16,121

$
58,662

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The $16.1 million adjustment to other long-term assets and other long-term liabilities reflects the amount of capitalized up-front contract costs and the amount of deferred revenue for up-front reimbursements as of December 31, 2017. The $16.1 million capitalized contract costs and deferred revenue is expected to be amortized over the applicable remaining contract term. For the six months ended June 30, 2018 and 2017, the Company recognized $0.9 million and $0.7 million, respectively, of revenue associated with the amortization of the up-front contract reimbursements.Company’s historical accounting policy.

As of June 30, 2018, the Company had $71.2 million in accounts receivables of which $64.0 million related to flying agreements. As of December 31, 2017, the Company had $42.7 million in accounts receivables of which $33.9 million related to flying agreements.See Note 6, "Leases, Commitments and Contingencies," for more information.

Note 2 — Flying Agreements Revenue and Airport Customer Service and Other Revenues

The Company recognizes flying ~~agreement~~agreements revenue and airport 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 hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion and on-time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement, such as airport landing fees and airport rents. Under the fixed-fee arrangements, ~~revenue~~the Company’s performance obligation is ~~earned~~met when each flight is 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 ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, fixed-fee arrangements represented approximately ~~84.7%~~84.8% of the Company’s flying agreements revenue.

Under the Company’s revenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner. ~~Revenue is recognized under~~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 ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, prorate flying arrangements represented approximately ~~15.3%~~15.2% 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. As of March 31, 2019, the Company leased regional jet aircraft and spare engines to third parties. Of the Company’s $5.3 billion of property and equipment, net, $23.2 million was leased to third parties under operating leases as of March 31, 2019. The Company mitigates the residual asset risks of these assets by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases typically have specified lease return condition requirements paid by the lessee to the Company and the Company typically maintains inspection rights under the leases. The following table summarizes future minimum rental income under operating leases primarily related to leased aircraft that had remaining non-cancelable lease terms as of March 31, 2019 (in thousands):



April 2019 through December 2019	$	18,495
2020		13,034
2021		7,956
2022		3,125
2023		185
Thereafter		—
	$	42,795

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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.

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The following table represents the Company’s flying agreements revenue by type for the ~~three~~three-month period ended March 31, 2019 and ~~six-month periods ended June 30,~~ 2018 ~~and 2017~~ (in thousands):


	For the three months ended June 30,				For the six months ended June 30,				For the three months ended March 31,
	2018		2017		2018		2017		2019		2018
Capacity purchase agreements revenue: flight operations	$	462,824	$	459,350	$	931,849	$	905,069	$	386,545	$	469,025
Capacity purchase agreements revenue: aircraft lease revenue		201,306		208,669		390,375		407,132		207,381		189,068
Prorate agreements revenue		129,507		113,705		239,378		204,052		106,075		109,871
Flying agreements revenue	$	793,637	$	781,724	$	1,561,602	$	1,516,253	$	700,001	$	767,964

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 ~~compensation structure~~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 ~~associated with~~received for the use of the aircraft under the Company’s fixed-fee agreements is ~~deemed to be~~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 Accounting Standards Update No. 2014‑09, “Revenue from Contracts with Customers, (Topic 606)” (“Topic ~~606,~~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 table summarizes the significant provisions of each code-share agreement ~~the Company~~SkyWest Airlines has with each major airline partner:


Delta Connection Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
~~SkyWest Airlines~~ Delta Connection Agreement (fixed-fee arrangement)	•CRJ 200 •CRJ 700 •CRJ 900 •E175	6058 2718 3643 3250	•Individual aircraft have scheduled removal dates from ~~2018~~2019 to ~~2027~~2030
~~ExpressJet~~ ~~Delta Connection Agreement~~ ~~(fixed-fee arrangement)~~	~~•CRJ 700~~	22	~~•Individual aircraft have scheduled removal dates throughout 2018~~
~~SkyWest Airlines~~ Delta Connection Prorate Agreement (revenue-sharing arrangement)	•CRJ 200	3429	•Terminable with 30-day notice

1110

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United Express Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
~~SkyWest Airlines~~ United Express Agreements (fixed-fee arrangement)	•CRJ 200 •CRJ 700 •E175	6468 2019 65	•Individual aircraft have scheduled removal dates from ~~2018~~2020 to 2029
~~ExpressJet~~ ~~United ERJ Agreement~~ ~~(fixed-fee arrangement)~~	~~•ERJ 135~~ ~~•ERJ 145~~	3 97	~~•Individual aircraft have scheduled removal dates from 2018 to 2022~~
~~SkyWest Airlines~~ United Express Prorate Agreement (revenue-sharing arrangement)	•CRJ 200	2125	•Terminable with 120-day notice

American Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
~~SkyWest Airlines~~ American Agreement (fixed-fee arrangement)	•CRJ ~~200~~ ~~•CRJ~~ 700	10 3862	•Individual aircraft have scheduled removal dates from ~~2018~~2022 to ~~2023~~2025
~~SkyWest Airlines~~ American Prorate Agreement (revenue-sharing arrangement)	•CRJ 200	7	•Terminable with 120-day notice
~~ExpressJet~~ ~~American Agreement~~ ~~(fixed-fee arrangement)~~	~~•CRJ 700~~	16	~~•Individual aircraft have scheduled removal dates from 2018 to 2019~~


Alaska Capacity Purchase Agreement
Agreement	Aircraft type	Number of Aircraft		Term / Termination Dates
~~SkyWest Airlines~~ Alaska Agreement (fixed-fee arrangement)	•~~CRJ 200~~ •E175	2 2932		•Individual aircraft have scheduled removal dates from ~~2018~~2027 to 2030

In addition to the contractual arrangements described above, SkyWest Airlines has entered into fixed-fee agreements with Alaska and Delta to place additional Embraer E175 dual-class regional jet aircraft ~~(which are typically configured with 76 seats)~~ (“E175”) ~~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 ~~June 30, 2018,~~March 31, 2019, the Company ~~anticipated placing an additional six~~was scheduled to take delivery of eight E175 aircraft in connection with ~~Alaska~~its agreement with Delta (four aircraft in 2019 and ~~17 E175 or E175 SC~~four aircraft ~~with Delta. The delivery dates for the new E175/E175 SC aircraft are expected to take place by the end of 2018 or early 2019 with the exception of~~in 2020) and three E175 aircraft in 2021 in connection with ~~Alaska that have been deferred until 2021.~~its agreement with Alaska. Final delivery dates may be adjusted based on various factors.

SkyWest Airlines ~~has~~ also entered into an agreement with Delta in the second quarter of 2018 to operate 20 ~~new~~Canadair CRJ900 ~~aircraft.~~regional jet aircraft (“CRJ900”) aircraft under a fixed-fee agreement. As of March 31, 2019, SkyWest Airlines had placed eight of these CRJ900 aircraft into service with Delta. The ~~aircraft will be acquired by Delta with~~ delivery dates for the remaining 12 aircraft are expected to ~~take place beginning in late 2018~~continue through the end of 2020. ~~These~~The remaining 12 new CRJ900 aircraft will replace 2012 Canadair CRJ700 regional jet aircraft (“CRJ700”) scheduled to expire under SkyWest’s flying contracts with Delta.

SkyWest Airlines also reached an agreement with American to place 20 used CRJ700 aircraft into service under a four-year contract. The 20 CRJ700 aircraft are expected to be sourced from within the Company’s fleet. These aircraft have started to be placed into service and are expected to all be in service by early 2019.

Additionally, SkyWest Airlines and United have agreed to extend the flying contract for 19 CRJ700 aircraft. These aircraft previously had expirations scheduled for mid-2019, which were extended to mid-2022.

When an aircraft is scheduled 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 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.~~inventory or to lease the engines to a third party.

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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, 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.

Note 3 — Share-Based Compensation and Stock Repurchases

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company granted ~~15,165 fully-vested shares of common stock to the Company’s directors at a grant date fair value of $53.40. Additionally, during the six months ended June 30, 2018, the Company granted 114,856~~101,400 restricted stock units and ~~89,982~~83,784 performance shares to certain employees of the Company and its subsidiaries under the SkyWest, Inc. 2010 Long-Term Incentive Plan. Both the restricted stock units and performance shares have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries. The number of performance shares awardable from the ~~2018~~2019 grants can range from 0% to 200% of the original amount granted depending on the Company’s performance over the three-year vesting period against the pre-established targets. Upon vesting, each

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restricted stock unit and performance share will be replaced with one share of common stock. The fair value of the restricted stock units and performance shares on the date of grant was ~~$53.40~~$48.45 per share. During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company did not grant any options to purchase shares of common stock. Additionally, during the three months ended March 31, 2019, the Company granted 18,576 fully-vested shares of common stock to the Company’s directors at a grant date fair value of $48.45.

The Company accounts for forfeitures of stock options, restricted stock units and performance share grants in ~~2018~~2019 when forfeitures occur. The estimated fair value of the stock options, restricted stock units and performance shares is amortized over the applicable vesting periods. During the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the Company recorded pre-tax share-based compensation expense of ~~$7.6~~$3.9 million and ~~$5.8~~$4.9 million, respectively. Additionally, the Company incurred $7.9 million of employee severance related costs associated with the sale of ExpressJet, partially offset by a forfeiture credit of $4.5 million, primarily resulting from stock-based compensation awards that terminated upon the sale of ExpressJet during the three months ended March 31, 2019.

The Company repurchased ~~177,580~~476,277 shares of its common stock for ~~$10.0~~$25.0 million, and paid ~~$13.5~~$9.3 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The Company repurchased ~~281,000~~177,580 shares of its common stock for $10.0 million and paid ~~$3.8~~$13.5 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees during the ~~six~~three months ended ~~June 30, 2017~~ March 31, 2018.

Note 4 — Net Income Per Common Share

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. During the ~~six~~three months ended ~~June 30, 2018, 207,000~~March 31, 2019, 241,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of ~~June 30, 2018.~~March 31, 2019. During the ~~six~~three months ended ~~June 30, 2017, 285,000~~March 31, 2018, 372,600 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of ~~June 30, 2017.~~March 31, 2018.

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2018		2017		2018		2017		2019		2018
Numerator:
Net Income	$	75,859	$	50,477	$	130,220	$	85,263	$	88,181	$	54,362
						��
Denominator:
Weighted average number of common shares outstanding		52,046		51,751		51,983		51,785		51,440		51,921
Effect of outstanding share-based awards		867		1,226		990		1,305		658		1,112
Weighted average number of shares for diluted net income per common share		52,913		52,977		52,973		53,090		52,098		53,033

Basic earnings per share	$	1.46	$	0.98	$	2.51	$	1.65	$	1.71	$	1.05
Diluted earnings per share	$	1.43	$	0.95	$	2.46	$	1.61	$	1.69	$	1.03

Note 5 - Segment Reporting

The Company’s three reporting segments ~~consist~~consisted of the operations of SkyWest Airlines, ExpressJet and SkyWest Leasing activities. ~~Corporate overhead expenses incurred by~~ The Company sold ExpressJet on January 22, 2019. The segment information for ExpressJet reflects the period of time ExpressJet was operating as a subsidiary of the Company. The Company ~~are allocated to~~concluded that the ~~operating expenses~~sale of ~~SkyWest Airlines and ExpressJet.~~ExpressJet did not meet the criteria for a discontinued operation.

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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 Leasing segment includes applicable revenue ~~attributed to the Company’s E175 aircraft ownership related revenues~~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 Airlines segment includes revenue earned under the ~~Company’s E175 aircraft.~~applicable fixed-fee contracts attributed to operating such aircraft and the respective operating costs. The SkyWest Leasing segment includes the activity of leasing regional jet aircraft and spare engines to third parties. The SkyWest Leasing segment’s total assets and capital expenditures include new aircraft acquired through the ~~acquired E175 aircraft. The SkyWest Leasing segment additionally includes the ownership~~issuance of debt and ~~activity of four CRJ200 aircraft~~assets leased to a third ~~party.~~parties.

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The following represents the Company’s segment data for the three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three months ended June 30, 2018								Three months ended March 31, 2019
	SkyWest				SkyWest				SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated		Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1)	$	587,480	$	143,707	$	74,328	$	805,515	$	585,768	$	24,050	$	113,876	$	723,694
Operating expense		494,143		148,525		36,169		678,837		545,901		28,690		52,684		627,275
Depreciation and amortization expense		38,841		10,200		33,673		82,714		40,053		971		48,962		89,986
Special Items										18,508		3,361		—		21,869
Interest expense		4,202		788		23,821		28,811		3,818		—		28,689		32,507
Segment profit (loss) (2)		89,135		(5,606)		14,338		97,867		36,049		(4,640)		32,503		63,912
Identifiable intangible assets, other than goodwill		—		2,448		—		2,448
Total assets (as of June 30, 2018)		2,222,784		563,198		3,127,111		5,913,093
Total assets (as of March 31, 2019)										2,738,248		—		3,806,284		6,544,532
Capital expenditures (including non-cash)		40,039		1,588		323,090		364,717		68,650		—		345,929		414,579


	Three months ended June 30, 2017								Three months ended March 31, 2018
	SkyWest				SkyWest				SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated		Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1) (3)	$	519,708	$	211,819	$	59,985	$	791,512
Operating revenues (1)									$	556,294	$	161,081	$	66,025	$	783,400
Operating expense ~~(3)~~		442,600		214,864		27,452		684,916		498,875		166,824		29,526		695,225
Depreciation and amortization expense		32,530		11,710		26,966		71,206		37,487		11,161		28,937		77,585
Interest expense		5,735		1,088		20,240		27,063		4,476		827		20,931		26,234
Segment profit (loss) (2) (3)		71,373		(4,133)		12,293		79,533
Segment profit (loss) (2)										52,943		(6,570)		15,568		61,941
Identifiable intangible assets, other than goodwill		—		7,124		—		7,124		—		3,672		—		3,672
Total assets (as of June 30, 2017) (3)		2,235,863		529,175		2,580,107		5,345,145
Total assets (as of March 31, 2018)										2,184,306		581,722		2,834,159		5,600,187
Capital expenditures (including non-cash)		25,346		4,501		265,955		295,802		36,283		1,338		230,167		267,788

(1)

Prorate revenue, Airport customer service and other revenues is primarily reflected in the SkyWest Airlines segment.

(2)

Segment profit (loss) is equal to operating income less interest expense.

Note 6 — Leases, Commitments and Contingencies

Effective January 1, 2019, the Company adopted Topic 842. The Company leases property and equipment under operating leases. For leases with durations longer than 12 months, the Company recorded the related asset and obligation at the present value of lease payments over the term. The Company used its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

Aircraft

During the three months ended March 31, 2019, the Company acquired 52 CRJ aircraft under an early lease buyout arrangement with the lessor for $111.7 million. As of March 31, 2019, the Company had 89 aircraft under operating leases with remaining terms ranging from less than oneyear to nine years.

~~(3)~~

1513

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~~The following represents~~With the adoption of Topic 842, the Company evaluated whether leased aircraft asset groups within the Company’s ~~segment data~~fleet were impaired. Under the transition guidance for Topic 842, a company is permitted to recognize a previously unrecognized impairment related to a right-of-use asset in the ~~six-month periods ended June 30, 2018 and 2017 (in thousands):~~period prior to the adoption date of Topic 842 if the event giving rise to the 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 50-seat Bombardier CRJ200 regional jet aircraft (“CRJ200”). 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.

Six months ended June 30, 2018

SkyWest

SkyWest


Airlines

ExpressJet

Leasing

Consolidated

Operating revenues (1)

$
1,143,775

$
304,788

$
140,352

$
1,588,915

Operating expense

993,019

315,349

65,694

1,374,062

Depreciation and amortization expense

76,327

21,362

62,609

160,298

Interest expense

8,678

1,615

44,752

55,045

Segment profit (loss) (2)

142,078

(12,176)

29,906

159,808

Identifiable intangible assets, other than goodwill

—

2,448

—

2,448

Total assets (as of June 30, 2018)

2,222,784

563,198

3,127,111

5,913,093

Capital expenditures (including non-cash)

76,322

2,926

553,257

632,505

Six months ended June 30, 2017

SkyWest

SkyWest


Airlines

ExpressJet

Leasing

Consolidated

Operating revenues (1) (3)

$
984,624

$
440,266

$
113,788

$
1,538,678

Operating expense (3)

859,931

444,146

51,711

1,355,788

Depreciation and amortization expense

64,347

26,235

50,738

141,320

Interest expense

11,535

2,202

37,875

51,612

Segment profit (loss) (2) (3)

113,158

(6,082)

24,202

131,278

Identifiable intangible assets, other than goodwill

—

7,124

—

7,124

Total assets (as of June 30, 2017) (3)

2,235,863

529,175

2,580,107

5,345,145

Capital expenditures (including non-cash)

58,777

10,155

449,969

518,901

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 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 March 31, 2019, the Company’s right-of-use assets were $341.9 million, the Company’s current maturities of operating lease liabilities were $73.5 million, and the Company’s noncurrent lease liabilities were $275.1 million. During the three months ended March 31, 2019, the Company had operating cash flows from operating leases of $19.7 million.

The table below presents lease related terms and discount rates as of March 31, 2019.

~~(1)~~

~~Prorate revenue, Airport customer service and other revenues is primarily reflected in the SkyWest Airlines segment.~~

	~~(2)~~
		~~Segment profit (loss) is equal to operating income less interest expense.~~

	~~(3)~~
		~~Amounts adjusted due to the adoption of Accounting Standards Update No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606). See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information.~~ March 31, 2019
Weighted-average remaining lease term
Operating leases			7.0 years
Weighted-average discount rate
Operating leases			6.4%

~~Note 6 — Commitments and Contingencies~~The Company’s lease costs for the periods indicated included the following components (in thousands):


	For the three months ended March 31,
	2019		2018		$ Change		% Change
Operating lease cost	$	27,221	$	52,833	$	(25,612)	(48.5)	%
Variable and short-term lease cost		1,475		1,419		56	3.9	%
Total lease cost	$	28,696	$	54,252	$	(25,556)	(47.1)	%

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As of ~~June 30, 2018,~~March 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 long-term, triple net lease basis pursuant to which the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The Company expects that, in the normal course of business, such operating leases that expire 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 ~~June 30, 2018~~March 31, 2019 (in thousands):


July through December 2018	$	43,683
2019		85,317
April 2019 through December 2019			$	54,799
2020		101,529		93,640
2021		93,117		75,898
2022		75,178		67,668
2023				62,498
Thereafter		159,347		87,591
	$	558,171	$	442,094

As of ~~June 30, 2018,~~March 31, 2019, the Company had a firm purchase commitment for ~~23 E175/~~eleven E175 SC aircraft from Embraer, S.A. with scheduled delivery dates through ~~the end of 2018 or early 2019 with the exception of three E175 aircraft that have been deferred until~~ 2021.

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


	Total		Jul - Dec 2018		2019		2020		2021		2022		Thereafter		Total		Apr - Dec 2019		2020		2021		2022		2023		Thereafter
Operating lease payments for aircraft and facility obligations	$	558,171	$	43,683	$	85,317	$	101,529	$	93,117	$	75,178	$	159,347	$	442,094	$	54,799	$	93,640	$	75,898	$	67,668	$	62,498	$	87,591
Firm aircraft and spare engine commitments		626,980		508,740		21,200		10,600		86,440		—		—		329,327		139,974		131,657		57,696		—		—		—
Interest commitments (1)		600,413		60,497		111,075		96,051		82,139		69,227		181,424		628,528		95,377		114,048		98,884		84,754		68,950		166,515
Principal maturities on long-term debt		2,994,776		172,320		357,548		330,229		319,827		310,891		1,503,961		3,121,661		279,873		357,228		339,297		352,717		361,215		1,431,331
Total commitments and obligations	$	4,780,340	$	785,240	$	575,140	$	538,409	$	581,523	$	455,296	$	1,844,732	$	4,521,610	$	570,023	$	696,573	$	571,775	$	505,139	$	492,663	$	1,685,437

(1)

At ~~June 30, 2018,~~March 31, 2019, the Company had variable rate notes representing ~~1.6%~~only 0.2% of its total long-term debt. ~~Actual interest commitments will change based on the actual variable interest.~~

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Note 7 — Fair Value Measurements

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


Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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 June 30, 2018								Fair Value Measurements as of March 31, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Cash, Cash Equivalents									$	290,885	$	290,885	$	—	$	—
Marketable Securities
Bonds and bond funds	$	206,184	$	—	$	206,184	$	—	$	154,407	$	—	$	154,407	$	—
Commercial paper		267,178		—		267,178		—		98,990		—		98,990		—
	$	473,362	$	—	$	473,362	$	—		253,397		—		253,397		—
Cash, Cash Equivalents		175,728		175,728		—		—
Total Assets Measured at Fair Value	$	649,090	$	175,728	$	473,362	$	—	$	544,282	$	290,885	$	253,397	$	—


	Fair Value Measurements as of December 31, 2017								Fair Value Measurements as of December 31, 2018
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Cash, Cash Equivalents									$	328,384	$	328,384	$	—	$	—
Marketable Securities
Bonds and bond funds	$	344,251	$	—	$	344,251	$	—	$	229,783	$	—	$	229,783	$	—
Commercial paper		159,252		—		159,252		—		131,162		—		131,162		—
	$	503,503	$	—	$	503,503	$	—		360,945		—		360,945		—
Cash, Cash Equivalents		181,792		181,792		—		—
Total Assets Measured at Fair Value	$	685,295	$	181,792	$	503,503	$	—	$	689,329	$	328,384	$	360,945	$	—

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

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The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 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.

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company classified ~~$473.4~~$253.4 million and ~~$503.5~~$360.9 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the cost of the Company’s total cash and cash equivalents and available for sale securities was ~~$649.1~~$544.2 million and $685.5 million, respectively. As of June 30, 2018 and December 31, 2017, the fair value of the Company’s total cash and cash equivalents and available for sale securities was $649.1 million and $685.3$689.4 million, respectively.

The fair value of the Company’s long-term debt classified as Level 2 debt was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was estimated to be ~~$3.0~~$3.10 billion as of ~~June 30, 2018~~March 31, 2019 and ~~$2.7~~$3.16 billion as of December 31, ~~2017,~~2018, as compared to the carrying amount of ~~$2.99~~$3.12 billion as of ~~June 30, 2018~~March 31, 2019 and ~~$2.71~~$3.19 billion as of December 31, ~~2017.~~2018.

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Note 8 — Long-Term Debt

Long-term debt consisted of the following as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Current portion of long-term debt	$	357,465	$	313,243	$	366,583	$	354,072
Current portion of unamortized debt issue cost, net		(3,722)		(3,565)		(3,786)		(3,866)
Current portion of long-term debt, net of debt issue costs	$	353,743	$	309,678	$	362,797	$	350,206

Long-term debt, net of current maturities	$	2,637,311	$	2,399,107	$	2,755,078	$	2,831,366
Long-term portion of unamortized debt issue cost, net		(21,674)		(21,761)		(20,761)		(21,598)
Long-term debt, net of current maturities and debt issue costs	$	2,615,637	$	2,377,346	$	2,734,317	$	2,809,768

Total long-term debt (including current portion)	$	2,994,776	$	2,712,350	$	3,121,661	$	3,185,438
Total unamortized debt issue cost, net		(25,396)		(25,326)		(24,547)		(25,464)
Total long-term debt, net of debt issue costs	$	2,969,380	$	2,687,024	$	3,097,114	$	3,159,974

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company took delivery of 19one E175 aircraft ~~and purchased nine previously-leased aircraft, which~~that the Company financed through ~~$383.6~~$19.9 million of long-term debt. Additionally, the Company purchased two previously-leased aircraft, for which the Company assumed $14.5 million of long-term debt. The debt associated with the 19one E175 aircraft has a 12-year term, is due in quarterly installments with a fixed annual interest rate ~~ranging from 4.6% to 4.9%~~of 3.9% and is secured by the E175 aircraft. The Company acquired ~~nine~~two aircraft ~~off a lease~~pursuant to the acquisition of debt under the existing leases during the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019. The debt associated with the ~~nine~~two previously-leased aircraft has a term ~~ranging from three to four years, is due in semi-annual installments~~of 18 months with monthly interest only payments with a fixed annual interest rate of ~~6.45%~~2.0% and is secured by the previously-leased aircraft.

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company had ~~$87.9~~$80.0 million and ~~$87.4~~$78.7 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.

Note 9 — Gain on Sale

ExpressJet Sale

On January 22, 2019, the Company completed the sale of its former wholly-owned subsidiary ExpressJet. The Company recorded a gain of $46.6 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

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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 agreed to lease 16 CRJ200 aircraft to ExpressJet for up to a five-year term as part of the transaction.

Note 10 — Special Items

During the three months ended March 31, 2019, 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 agreement, the Company recorded a non-cash expense of $18.5 million (pre-tax) during the three months ended March 31, 2019 to write-off the terminated aircraft part credits, which was reflected as a special items operating expense in the consolidated statement of comprehensive income.

Additionally, during the three months ended March 31, 2019, the Company incurred $3.4 million of employee severance related costs associated with the sale of ExpressJet that are also reflected in special items.

Note 11 — Income Taxes

The Company’s effective tax rate for the three months ended ~~June 30, 2018~~March 31, 2019 was ~~22.9%~~23.0%. The Company’s effective tax rate for the three months ended ~~June 30, 2018~~March 31, 2019 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible ~~crew per diem meal~~ expenses, partially offset by a ~~$0.9 million discrete tax benefit from a capital loss carryforward valuation allowance resulting from a gain on sale of capital assets during the three months ended June 30, 2018.~~

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The Company’s effective tax rate for the six months ended June 30, 2018 was 21.3%. The Company’s effective tax rate for the six months ended June 30, 2018 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible crew per diem meal expenses, partially offset by a $4.3$2.3 million discrete tax benefit from excess tax deductions generated from employee equity transactions that occurred during the six months ended June 30, 2018 pursuant to Accounting Standards Update No. 2016‑09, “Compensation—Stock Compensation (Topic 718)” and a $0.9 million discrete tax benefit from a capital loss carryforward valuation allowance resulting from a gain on sale of capital assets during the three months ended ~~June 30, 2018.~~

In connection with the Tax Cuts and Jobs Act of 2017 (“Tax Act”) enacted in December 2017, the Company recorded a provisional amount of income tax benefit of $246.8 million related to the re-measurement of deferred tax balances for the year ended DecemberMarch 31, 2017. In accordance with relevant SEC guidance, the effects of the Tax Act may be adjusted within a one-year measurement period from the enactment date for the items that were previously reported as provisional, or where a provisional estimate could not be made. The income tax provision for the six months ended June 30, 2018 did not reflect any adjustments to the provisional amounts as of December 31, 2017. The Company is still analyzing the impacts of the Tax Act on $13.9 million of alternative minimum tax credits that may be refundable as of June 30, 2018. The Company will continue to assess forthcoming guidance and accounting interpretations on the effects of the Tax Act and expects to complete its analysis within the measurement period in accordance with SEC guidance.2019.

Note 1012 — Legal Matters

The Company is subject to certain legal actions which it considers routine to its business activities. As of ~~June 30, 2018,~~March 31, 2019, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations.

1918

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

The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the ~~three and six-month~~three-month periods ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Also discussed is our financial condition as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. You should read this discussion in conjunction with our condensed consolidated financial statements for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of uncertainties, risks and assumptions associated with these statements.

On January 22, 2019, we completed the sale of our former wholly-owned subsidiary ExpressJet Airlines, Inc. (“ExpressJet”). Our financial and operating results for the periods ended March 31, 2019 and March 31, 2018, and our financial position as of December 31, 2018 contained in this Report, include the financial results and position of ExpressJet for those respective periods, as we concluded that the sale of ExpressJet did not meet the criteria for presentation of discontinued operations.

Cautionary Statement Concerning Forward-Looking Statements

Certain of the statements contained in this Report should be considered ~~“forward-looking~~“forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These ~~forward-looking~~forward‑looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements about ~~the expected delivery, and removal from service and/or placement into service, of certain aircraft,~~ our future growth and development plans, including our future financial and operating results, our plans, ~~for SkyWest Airlines, Inc. (“SkyWest Airlines”) and ExpressJet Airlines, Inc. (“ExpressJet”), our~~ objectives, expectations ~~estimates,~~and intentions and other statements that are not historical facts. ~~All forward-looking~~Readers should keep in mind that all forward‑looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on ~~the operations of SkyWest, SkyWest Airlines or ExpressJet;~~our operations; fluctuations in flight schedules, which are determined by the major airline partners for whom ~~SkyWest’s operating airlines conduct~~SkyWest conducts flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; realization of manufacturer residual value guarantees on applicable SkyWest aircraft; residual aircraft values and related impairment charges; the impact of global instability; labor relations and costs; potential fluctuations in fuel costs, and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; and the ability to attract and retain qualified ~~pilots; the~~ pilots, as well as other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors.

There may be other factors ~~not identified above of which we are not currently aware~~ that may affect matters discussed in ~~the forward-looking~~forward‑looking statements ~~and~~set forth in this Report, which factors may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any ~~forward-looking~~forward‑looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.

2019

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Overview

~~Through SkyWest Airlines and ExpressJet, we~~We have the largest regional airline operations in the United ~~States.~~States through our operating subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”). As of ~~June 30, 2018,~~March 31, 2019, SkyWest Airlines ~~and ExpressJet~~ offered scheduled passenger service with approximately ~~2,800~~2,150 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of ~~June 30, 2018,~~March 31, 2019, SkyWest Airlines ~~and ExpressJet~~ had a total fleet of ~~617~~522 aircraft, of which ~~583~~476 were in scheduled service, summarized as follows:


	CRJ200	CRJ700	CRJ900	ERJ135	ERJ145	E175	Total	CRJ200	CRJ700	CRJ900	E175	Total
United	85	20	—	3	97	65	270	93	19	—	65	177
Delta	94	49	36	—	—	32	211	87	18	43	50	198
American	17	54	—	—	—	—	71	7	62	—	—	69
Alaska	2	—	—	—	—	29	31	—	—	—	32	32
Aircraft in scheduled service	198	123	36	3	97	126	583	187	99	43	147	476
Subleased to an un-affiliated entity	4	—	—	—	—	—	4	20	—	—	—	20
Other*	6	8	—	—	16	—	30	—	25	1	—	26
Total	208	131	36	3	113	126	617	207	124	44	147	522

*As of ~~June 30, 2018,~~March 31, 2019, these aircraft have been removed from service and are in the process of being returned under the applicable leasing arrangement or are aircraft transitioning between code-share agreements with our major airline partners.

As of ~~June 30, 2018,~~March 31, 2019, approximately ~~46.3%~~41.6% of our aircraft in scheduled service ~~operated for United, approximately 36.2%~~ was operated for Delta, approximately ~~12.2%~~37.2% was operated for United, approximately 14.5% was operated for American and approximately ~~5.3%~~6.7% was operated for Alaska.

Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements, typically in the form of fixed-fee arrangements or prorate arrangements, each as defined below, between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners. Our success is principally ~~centered~~dependent on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics. Since March 31, 2018, we have added 35 new Embraer E175 dual-class regional jet aircraft (“E175”) and eight new Canadair CRJ900 regional jet aircraft (“CRJ900”) to our fleet, and removed 100 Embraer ERJ145 regional jet aircraft (“ERJ145”) and Embraer ERJ135 regional jet aircraft (“ERJ135”), 28 CRJ700 regional jet aircraft (“CRJ700”) and 7 CRJ900 aircraft that were operating under less profitable or unprofitable flying agreements.

We anticipate our fleet will continue to evolve, as we are scheduled to add eleven new E175 and 12 new CRJ900 aircraft to existing fixed-fee agreements by the end of 2021. We anticipate these new aircraft will be replacing older CRJ900 and CRJ700 aircraft currently operating under fixed-fee agreements. 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, while removing aircraft that were operating under less profitable or unprofitable arrangements.

Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee agreements,” “fixed-fee contracts,” “contract flying arrangements” or “capacity purchase agreements”) and revenue-sharing arrangements (referred to as “prorate” arrangements). For the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, contract flying revenue and prorate revenue represented approximately ~~84.7%~~84.8% and ~~15.3%~~15.2%, respectively, of our total flying agreements revenue. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures and other operating measures. On prorate routes, our revenue may fluctuate based on ticket prices and passenger loads and we are responsible for all costs to operate the flight, including fuel.

~~Second Quarter Summary~~

Our total operating revenues of $805.5 million for the three months ended June 30, 2018 increased 1.8% compared to total operating revenues of $791.5 million for the three months ended June 30, 2017. We had net income of $75.9 million, or $1.43 per diluted share, for the three months ended June 30, 2018, compared to net income of $50.5 million, or $0.95 per diluted share, for the three months ended June 30, 2017.

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First Quarter Summary

Our total operating revenues of $723.7 million for the three months ended March 31, 2019 decreased 7.6% compared to total operating revenues of $783.4 million for the three months ended March 31, 2018. We had net income of $88.2 million, or $1.69 per diluted share, for the three months ended March 31, 2019, compared to net income of $54.4 million, or $1.03 per diluted share, for the three months ended March 31, 2018.

Significant items affecting our financial performance during the three months ended ~~June 30, 2018~~March 31, 2019 are outlined ~~below:~~below.

Revenue

The number of aircraft we have ~~under contract~~in scheduled service and the number of ~~actual~~ block hours we ~~incur~~generate on ~~completed~~our flights are ~~significant~~primary drivers to our flying agreements revenue ~~drivers~~ under our fixed-fee arrangements. We are currently in the process of a fleet transition that involves increasing the number of large dual-class regional jets we operate, including the Embraer E175 dual-class regional jet aircraft (“E175s”), while reducing the number of less profitable or older 50-seat regional jets we operate, including a portion of our Embraer ERJ145 regional jet aircraft (“ERJ145s”), Embraer ERJ135 regional jet aircraft (“ERJ135s”) and Canadair CRJ200 regional jet aircraft (“CRJ200s”). Additionally, duringDuring the three months ended ~~June 30, 2018,~~March 31, 2019, we ~~completed the process of returning our Canadair CRJ900 regional jet aircraft (“CRJ900s”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) operated by ExpressJet under~~had a ~~fixed-fee contract and aircraft lease with Delta to Delta. Our objective~~net decrease in the ~~fleet transition is~~number of aircraft operating under fixed-fee agreements, primarily related to ~~improve our profitability through~~ the ~~addition~~sale of ~~new dual class aircraft, while removing~~ExpressJet. As summarized under the Fleet activity section below, from March 31, 2018 to March 31, 2019, we removed 147 aircraft from service that ~~have been~~were operating under ~~unprofitable or~~ less profitable flying contracts and added 43 aircraft to new or existing fixed-fee ~~contracts.~~

~~Although the~~arrangements at improved economics. The number of ~~our~~ aircraft ~~operating in~~available for scheduled service decreased ~~by 6.9% since June 30, 2017,~~from 580 aircraft at March 31, 2018 to 476 at March 31, 2019. Our completed block hours decreased 16.1% over the same period primarily due to the sale of ExpressJet and ~~we had a 6.0% reduction~~the corresponding decrease in ~~our~~related block ~~hour production since June 30, 2017, our~~hours.

Our total revenues ~~increased $14.0~~decreased $59.7 million for the three months ended ~~June 30, 2018~~March 31, 2019 compared to the three months ended ~~June 30, 2017. The~~March 31, 2018, related to the sale of ExpressJet and the corresponding decrease in revenue associated with ExpressJet flying contracts. ExpressJet revenue decreased from $161.1 million to $28.7 million for the three months ended March 31, 2018 and 2019, respectively. Revenue from SkyWest Airlines and our leasing subsidiary SkyWest Leasing, Inc. (“SkyWest Leasing”) increased from $622.3 million for the three months ended March 31, 2018 to $699.6 million for the three months ended March 31, 2019. This increase in revenue ~~despite the decrease in fleet size and block hour production,~~ was primarily ~~driven by the increase in~~related to additional revenue generated from 2335 new E175 aircraft and eight new CRJ900 aircraft added ~~to flying arrangements~~under fixed-fee contracts since ~~June 30, 2017, significantly offset by the removal of 66 CRJ200s, ERJ145s, CRJ700s and CRJ900s with a lower revenue per aircraft since June 30, 2017.~~March 31, 2018.

Operating Expenses

Our total operating expenses decreased ~~$6.1~~$68.0 million for the three months ended ~~June 30, 2018,~~March 31, 2019, compared to the three months ended ~~June 30, 2017.~~March 31, 2018. This decrease was ~~primarily~~ due to ~~a net~~the sale of ExpressJet and the corresponding reduction in ~~our fleet size and related level of departures and block hours,~~ExpressJet operating expenses, partially offset by ~~increased compensation paid to our crews~~additional operating expenses at SkyWest Airlines and SkyWest Leasing that resulted from new, additional aircraft we placed into service since June 30, 2017, an increase in our average fuel cost per gallon on our prorate flying and an increase in engine maintenance costs as an increased percentage of our fleet is under long-term Power-By-The-Hour engine maintenance agreements. “Power-By-The-Hour” agreements are agreements between us and a third-party vendor, pursuant to which we pay the third-party vendor 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, subject to certain specified exclusions.March 31, 2018. Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”

Fleet activity

The following table summarizes our fleet scheduled for service as of ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


Aircraft in Service	June 30, 2018	June 30, 2017	March 31, 2019	March 31, 2018
CRJ200s	198	206	187	199
CRJ700s	123	129	99	127
CRJ900s	36	64	43	42
ERJ145/135s	100	124	—	100
E175s	126	103	147	112
Total	583	626	476	580

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Changes in our fleet activity from ~~June 30, 2017~~March 31, 2018 to ~~June 30, 2018~~March 31, 2019 are summarized as follows:


Aircraft available for scheduled service at ~~June 30, 2017:~~March 31, 2018:		~~626~~580
Additions:
New E175 ~~aircraft added with Alaska:~~aircraft:	935
New ~~E175 aircraft added with Delta:~~CRJ900 aircraft:	148
New aircraft added to fleet:		23
~~Removals, net:~~
~~ERJ145/ERJ135 aircraft removed from service:~~	~~(24)~~
~~CRJ200 aircraft removed from service:~~	~~(8)~~
~~CRJ700 aircraft removed from service:~~	~~(6)~~
~~CRJ900 aircraft removed from service:~~	~~(28)~~
~~Total removals, net:~~		~~(66)~~43

~~Aircraft available for scheduled~~Used aircraft transitioned back into service, ~~at June 30, 2018:~~net		~~583~~3

ExpressJet removals:
ERJ145/ERJ135 aircraft:	(100)
CRJ700 aircraft:	(43)
CRJ900 aircraft:	(6)
Total ExpressJet removals:		(149)

SkyWest Airlines removal:
CRJ900 aircraft:		(1)
Aircraft available for scheduled service at March 31, 2019:		476

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, ~~2017,~~2018, which are presented in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. 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, maintenance, aircraft leases, impairment of long-lived assets and stock-based compensation expense. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates.

We adopted Topic ~~606~~842 as of January 1, ~~2018,~~2019, utilizing the ~~full~~modified retrospective ~~option.~~ approach. See Note 1 to the financial statements contained in Part I, Item 1 of this report for additional information.

Recent Accounting Pronouncements

See Note 1 to the ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements for a description of recent accounting pronouncements. ~~Certain prior period amounts were reclassified to conform to the current period presentation.~~

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Results of Operations

Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~

Operational Statistics. The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below:


	For the three months ended June 30,						For the three months ended March 31,
	2018		2017		% Change			2019		2018		% Change
Block hours	439,174		467,100		(6.0)	%
SkyWest Airlines block hours											349,389		328,944	6.2	%
ExpressJet block hours											16,904		107,423	(84.3)	%
Total block hours											366,293		436,367	(16.1)	%

SkyWest Airlines Only
Departures	255,561		280,326		(8.8)	%		193,475		185,478		4.3	%
Passengers carried	12,339,631		13,364,974		(7.7)	%		9,614,952		9,059,473		6.1	%
Passenger load factor	81.9	%	81.8	%	0.1	pts		78.6	%	78.8	%	(0.2)	pts
Average passenger trip length (miles)	522		511		2.2	%		507		493		2.8	%

During the three months ended March 31, 2018, ExpressJet had departures and passengers carried of 62,649 and 2,260,754, respectively. The number of ExpressJet departures and passengers carried was not significant for the three months ended March 31, 2019, given that the sale of ExpressJet was completed in January 2019.

~~Table of Contents~~

Operating Revenues

The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):


	For the three months ended June 30,								For the three months ended March 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
Flying agreements	$	793,637	$	781,724	$	11,913	1.5	%	$	700,001	$	767,964	$	(67,963)	(8.8)	%
Airport customer service and other		11,878		9,788		2,090	21.4	%		23,693		15,436		8,257	53.5	%
Total operating revenues	$	805,515	$	791,512	$	14,003	1.8	%	$	723,694	$	783,400	$	(59,706)	(7.6)	%

Flying agreements revenue primarily consists of 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.~~services, and revenue from leasing regional jet aircraft and spare engines to third parties. Changes in our flying agreements revenue are summarized below (dollar amounts in thousands).


	For the three months ended June 30,								For the three months ended March 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
Capacity purchase agreements revenue: flight operations	$	462,824	$	459,350	$	3,474	0.8	%	$	386,545	$	469,025	$	(82,480)	(17.6)	%
Capacity purchase agreements revenue: aircraft lease revenue		201,306		208,669		(7,363)	(3.5)	%		207,381		189,068		18,313	9.7	%
Prorate agreements revenue		129,507		113,705		15,802	13.9	%		106,075		109,871		(3,796)	(3.5)	%
Flying agreements revenue	$	793,637	$	781,724	$	11,913	1.5	%	$	700,001	$	767,964	$	(67,963)	(8.8)	%

The ~~increase~~decrease in “Capacity purchase agreements revenue: flight operations” of ~~$3.5~~$82.4 million was primarily due to the sale of ExpressJet and the corresponding decrease in revenue, partially offset by the incremental revenue generated from 2335 new E175 aircraft and eight new CRJ900 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since ~~June 30, 2017, partially offset by the timing of the removal of 66 CRJ200, ERJ145/135, CRJ700 and CRJ900 aircraft from flying arrangements with a lower revenue per aircraft since June 30, 2017.~~March 31, 2018. The ~~decrease~~increase in “Capacity purchase agreement revenue: aircraft lease revenue” of ~~$7.4~~$18.3 million was primarily due to the ~~net reduction of 43~~35 new E175 aircraft ~~from our fleet since June 30, 2017 and the related reduction in aircraft lease revenue under our fixed-fee agreements.~~added subsequent to March 31, 2018. The ~~increase~~decrease in prorate agreement revenue of ~~$15.8~~$3.8 million was primarily due to a decrease in the ~~incremental revenue generated from seven CRJ200 aircraft added~~number of prorate flights operated during the three months ended March 31, 2019 compared to ~~our prorate agreements and other economic improvements made to certain prorate agreements since June 30, 2017.~~the three months ended March 31, 2018.

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The ~~$2.1~~$8.3 million increase in airport customer service and other revenues was primarily related to ~~a combination of~~ an increase in ~~volume of airport service agreements~~revenue from leasing aircraft and ~~contract rate increases on agreements that were renewed since June 30, 2017.~~spare engines to third parties.

Operating Expenses

The following table summarizes our operating expenses and interest expense, collectively, “Total airline expense" for the periods indicated (dollar amounts in thousands):


	For the three months ended June 30,								For the three months ended March 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
Salaries, wages and benefits	$	293,677	$	294,795	$	(1,118)	(0.4)	%	$	257,588	$	306,719	$	(49,131)	(16.0)	%
Aircraft maintenance, materials and repairs		139,774		152,356		(12,582)	(8.3)	%		118,262		141,606		(23,344)	(16.5)	%
Depreciation and amortization		82,714		71,206		11,508	16.2	%		89,986		77,585		12,401	16.0	%
Airport-related expenses										30,647		29,307		1,340	4.6	%
Aircraft fuel										25,656		26,939		(1,283)	(4.8)	%
Aircraft rentals		37,508		55,413		(17,905)	(32.3)	%		20,158		44,680		(24,522)	(54.9)	%
Aircraft fuel		30,011		20,071		9,940	49.5	%
Airport-related expenses		25,890		28,949		(3,059)	(10.6)	%
Special items										21,869		—		21,869	NM
Other operating expenses		69,263		62,126		7,137	11.5	%		63,109		68,389		(5,280)	(7.7)	%
Total operating expenses	$	678,837	$	684,916	$	(6,079)	(0.9)	%	$	627,275	$	695,225	$	(67,950)	(9.8)	%
Interest expense		28,811		27,063		1,748	6.5	%		32,507		26,234		6,273	23.9	%
Total airline expenses	$	707,648	$	711,979	$	(4,331)	(0.6)	%	$	659,782	$	721,459	$	(61,677)	(8.5)	%

~~Table of Contents~~

Salaries, wages and ~~employee~~ benefits. The ~~$1.1~~$49.1 million decrease in salaries, wages and ~~employee~~ benefits was primarily due to a decrease in direct labor costs resulting from ~~a net reduction in our fleet size and related level~~the sale of ~~departures and block hours, which was~~ExpressJet, partially offset by ~~higher crew compensation~~increased labor costs ~~resulting from labor agreements executed during the second half of 2017.~~and employee benefit costs for certain work groups, including flight crews at SkyWest Airlines.

Aircraft maintenance, materials and repairs. The ~~$12.6~~$23.3 million decrease in aircraft maintenance expense was primarily due to a decrease in direct maintenance costs that corresponds with our ~~net decrease in fleet size and block hour reduction~~sale of ~~6.0% and a decrease in the number of maintenance events during the three months ended June 30, 2018 compared to the three months ended June 30, 2017.~~ExpressJet. This decrease in aircraft maintenance expense was partially offset by an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements at SkyWest Airlines, including the additional 2335 E175 aircraft added since ~~June 2017.~~March 31, 2018.

Depreciation and amortization. The ~~$11.5~~$12.4 million increase in depreciation and amortization expense was primarily due to the purchase of 2335 E175 aircraft and spare engines subsequent to ~~June 30, 2017, which was partially offset by a reduction of 50-seat owned aircraft and related depreciation during the same period.~~March 31, 2018.

~~Aircraft rentals.~~ ~~The $17.9 million decrease in aircraft rentals was primarily due to a reduction of our fleet size that was financed through leases subsequent to June 30, 2017.~~

~~Aircraft Fuel.~~ The $9.9 million increase in fuel cost was primarily due to an increase in the number of prorate flights we operated and the corresponding additional gallons of fuel we purchased along with an increase in our average fuel cost per gallon from $1.93 for the three months ended June 30, 2017 to $2.63 for the three months ended June 30, 2018. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our fixed-fee contracts are either purchased directly by our major partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:

For the three months ended June 30,
(in thousands)

2018

2017

% Change

Fuel gallons purchased

11,400

10,381

9.8
%
Fuel expense

$
30,011

$
20,071

49.5
%

Airport-related expenses. Airport-related expenses include airport-related customer service costs 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 ~~$3.1~~$1.3 million ~~decrease~~increase in airport-related expenses was primarily due to ~~a decrease~~an increase in ~~airport terminal rents~~deicing events for aircraft in our prorate operations during the three months ended ~~June 30, 2018.~~March 31, 2019.

~~Other operating expenses.~~Aircraft fuel. ~~Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, and crew hotel costs.~~ The $7.1 million increase in other operating expenses was primarily related to an increase in the use of hotels for crews and property tax on additional aircraft added since June 30, 2017, which was partially offset by the decrease in fleet size and other operating costs that resulted from the reduction in departures.

~~Interest Expense.~~ The $1.7 million increase in interest expense was primarily related to the additional interest expense associated with the 23 E175 aircraft added to our fleet since June 30, 2017 which were primarily debt financed.

~~Table of Contents~~

~~Total airline expense.~~ ~~The $4.3~~$1.3 million decrease in ~~total airline expenses~~fuel cost was primarily ~~related~~due to a ~~reduction~~decrease in ~~fleet size~~the number of prorate flights we operated and ~~related block hour production~~corresponding decrease in gallons of ~~6.0% during the three months ended June 30, 2018 compared to the three months ended June 30, 2017,~~fuel we purchased, partially offset by an increase in our average fuel cost per gallon incurred under our prorate agreements, an increase in crew compensation costs and an increase in engine maintenance costs as an increased percentage of our fleet is under long-term, Power-By-The-Hour engine maintenance agreements.

~~Summary of other income (expense) items and provision for income taxes:~~

~~Other expense.~~ ~~During the three months ended June 30, 2018, we had other expense of $1.2 million primarily related to a mark-to-market loss on trading securities sold during the three months ended June 30, 2018.~~

~~Income taxes.~~ ~~Our provision for income taxes was 22.9% and 37.6%~~from $2.40 for the three months ended ~~June 30,~~March 31, 2018 ~~and 2017, respectively. The decrease in the effective tax rate relates~~ to the Tax Cuts and Jobs Act of 2017 which reduced the federal statutory rate from 35% to 21%, a year-over-year increase in the discrete tax benefit from excess tax deductions generated from employee equity transactions, and a 2018 discrete tax benefit from a release of capital loss carryforward valuation allowance. Multiple variables may impact the future tax benefit from excess tax deductions generated from employee equity transactions including changes in our stock price, timing of employee stock option exercises and timing of restricted share vesting, among other factors.

~~Net income.~~ ~~Primarily due to the factors described above, we generated net income of $75.9 million, or $1.43 per diluted share,~~$2.43 for the three months ended ~~June 30, 2018, compared to net income of $50.5 million, or $0.95 per diluted share, for the three months ended June 30, 2017.~~

~~Six Months Ended June 30, 2018 and 2017~~

~~Operational Statistics.~~ ~~The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below:~~

For the six months ended June 30,


2018

2017

% Change

Block hours

875,541

919,783

(4.8)
%
Departures

503,688

544,188

(7.4)
%
Passengers carried

23,659,861

25,385,351

(6.8)
%
Passenger load factor

79.7
%
80.3
%
(0.6)
pts
Average passenger trip length (miles)

523

515

1.6
%

~~Operating Revenues~~

~~The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):~~

For the six months ended June 30,


2018

2017

$ Change

% Change

Flying agreements

$
1,561,602

$
1,516,253

$
45,349

3.0
%
Airport customer service and other

27,313

22,425

4,888

21.8
%
Total operating revenues

$
1,588,915

$
1,538,678

$
50,237

3.3
%

~~Table of Contents~~

~~Changes in our flying agreements revenue are summarized below (dollar amounts in thousands).~~

For the six months ended June 30,

2018

2017

$ Change

% Change

Capacity purchase agreements revenue: flight operations

$
931,849

$
905,069

$
26,780

3.0
%
Capacity purchase agreements revenue: aircraft lease revenue

390,375

407,132

(16,757)

(4.1)
%
Prorate agreements revenue

239,378

204,052

35,326

17.3
%
   Flying agreements revenue

$
1,561,602

$
1,516,253

$
45,349

3.0
%

The increase in “Capacity purchase agreements revenue: flight operations” of $26.8 million was primarily due to incremental revenue generated from 23 new E175 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since June 30, 2017, partially offset by the timing of the removal of 66 CRJ200, ERJ145/135, CRJ700 and CRJ900 aircraft from flying arrangements with a lower revenue per aircraft since June 30, 2017. The decrease in “Capacity purchase agreement revenue: aircraft lease revenue” of $16.8 million was primarily due to the net reduction of 43 aircraft from our fleet since June 30, 2017 and the related reduction in aircraft lease revenue under our fixed-fee agreements. The increase in prorate agreement revenue of $35.3 million was primarily due to the incremental revenue generated from seven CRJ200 aircraft added to our prorate agreements and other economic improvements made to certain prorate agreements since June 30, 2017.

The $4.9 million increase in airport customer service and other revenues was primarily related to a combination of an increase in volume of airport service agreements and contract rate increases on agreements that were renewed since June 30, 2017.

~~Operating Expenses~~

~~The following table summarizes our operating expenses for the periods indicated (dollar amounts in thousands):~~

For the six months ended June 30,

2018

2017

$ Change

% Change

Salaries, wages and benefits

$
600,396

$
592,462

$
7,934

1.3
%

Aircraft maintenance, materials and repairs

281,380

284,681

(3,301)

(1.2)
%

Depreciation and amortization

160,298

141,320

18,978

13.4
%

Aircraft rentals

82,188

113,123

(30,935)

(27.3)
%

Aircraft fuel

56,950

38,504

18,446

47.9
%

Airport-related expenses

55,197

60,897

(5,700)

(9.4)
%

Other operating expenses

137,653

124,801

12,852

10.3
%

    Total operating expenses

$
1,374,062

$
1,355,788

$
18,274

1.3
%

Interest expense

55,045

51,612

3,433

6.7
%

Total airline expenses

$
1,429,107

$
1,407,400

$
21,707

1.5
%

~~Salaries, wages and employee benefits.~~ The $7.9 million increase in salaries, wages and employee benefits was primarily due to higher crew compensation costs resulting from labor agreements executed during the second half of 2017, which was partially offset by a decrease in direct labor costs resulting from a net reduction in our fleet size and related level of departures and block hours.

~~Aircraft maintenance, materials and repairs.~~ The $3.3 million decrease in aircraft maintenance expense was primarily due to a decrease in direct maintenance costs that corresponds with our net decrease in fleet size and block hour reduction of 4.8% during the six months ended June 30, 2018 compared to the six months ended June 30, 2017, which was partially offset by an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 23 E175 aircraft added since June 2017.

~~Depreciation and amortization.~~ The $19.0 million increase in depreciation and amortization expense was primarily due to the purchase of 23 E175 aircraft and spare engines subsequent to June 30, 2017, which was partially offset by a reduction of 50-seat owned aircraft and related depreciation during the same period.

~~Table of Contents~~

~~Aircraft rentals.~~ ~~The $30.9 million decrease in aircraft rentals was primarily due to a reduction of our fleet size that was financed through leases subsequent to June 30, 2017.~~

~~Aircraft Fuel.~~ The $18.4 million increase in fuel cost was primarily due to an increase in the number of prorate flights we operated and the corresponding additional gallons of fuel we purchased along with an increase in our average fuel cost per gallon from $1.97 for the six months ended June 30, 2017 to $2.52 for the six months ended June 30, 2018.March 31, 2019. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our fixed-fee contracts are either purchased directly by our major airline partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:


	For the six months ended June 30,						For the three months ended March 31,
(in thousands)	2018		2017		% Change		2019		2018		% Change
Fuel gallons purchased		22,612		19,544	15.7	%		10,579		11,213	(5.7)	%
Fuel expense	$	56,950	$	38,504	47.9	%	$	25,656	$	26,939	(4.8)	%

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~~Airport-related expenses.~~Aircraft rentals. Airport-related expenses include airport-related customer service costs 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).During the three months ended March 31, 2019, we acquired 52 CRJ aircraft through an early lease buyout agreement. The ~~$5.7~~$24.5 million decrease in ~~airport-related expenses~~aircraft rentals was primarily due to the acquisition of these 52 CRJ aircraft and through a ~~decrease in airport terminal rents during~~reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to March 31, 2018.

Special Items. The $21.9 million special items expense for the ~~six~~three months ended ~~June 30, 2018.~~ March 31, 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 aircraft manufacturer. The $18.5 million of expense was included in 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 sale of ExpressJet, which was reflected in the ExpressJet segment.

Other operating expenses. Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, and crew hotel costs. The ~~$12.9~~$5.3 million ~~increase~~decrease in other operating expenses was primarily related to ~~an increase~~the sale of ExpressJet and the related decrease in ~~the use of hotels for crews and property tax on additional aircraft added since June 30, 2017, which was partially offset by~~crew costs associated with the decrease in ~~fleet size and other operating costs~~expenses associated with that ~~resulted from the reduction in departures.~~operation.

Interest Expense. The ~~$3.4~~$6.3 million increase in interest expense was primarily related to the additional interest expense associated with the 2335 E175 aircraft added to our fleet since ~~June 30, 2017~~March 31, 2018, which were ~~primarily~~ debt financed.

Total airline ~~expense.~~expenses. The ~~$21.7~~$61.7 million ~~increase~~decrease in total airline expenses was primarily related to ~~an increase in our average fuel cost per gallon incurred under our prorate agreements, an increase in crew compensation costs~~the sale of ExpressJet and ~~an increase in engine maintenance costs as an increased percentage of our fleet is under long-term Power-By-The-Hour engine maintenance agreements,~~the related expenses associated with ExpressJet’s prior operations, partially offset by ~~a reduction in fleet size~~additional operating expenses at SkyWest Airlines and ~~related block hour production of 4.8% during the six months ended June 30, 2018 compared to the six months ended June 30, 2017.~~SkyWest Leasing that resulted from new, additional aircraft we placed into service since March 31, 2018.

Summary of interest income, other income (expense) ~~items~~ and provision for income taxes:

Interest income. Interest income increased $2.1 million, or 123.3%, during the three months ended March 31, 2019, compared to the three months ended March 31, 2018. The increase in interest income was primarily related to an increase in interest rates subsequent to March 31, 2018.

Other ~~Income, net.~~income (expense). During the ~~six~~three months ended ~~June 30,~~March 31, 2019, we had other income of $46.7 million primarily related to the gain on sale of ExpressJet. During the three months ended March 31, 2018, we had other income of ~~$2.3~~$3.6 million primarily related to a mark-to-market gain on trading ~~securities sold during the six months ended June 30, 2018.~~securities.

Income taxes. Our provision for income taxes was ~~21.3%~~23.0% and ~~36.0%~~19.1% for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The ~~decrease~~increase in the effective tax rate primarily relates to ~~the Tax Cuts and Jobs Act of 2017 which reduced the federal statutory rate from 35% to 21%, and~~ a ~~2018~~smaller discrete tax benefit from ~~a release of capital loss carryforward valuation allowance.~~ excess tax deductions generated from employee equity transactions that occurred during the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Net income. Primarily due to the factors described above, we generated net income of ~~$130.2~~$88.2 million, or ~~$2.46~~$1.69 per diluted share, for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared to net income of ~~$85.3~~$54.4 million, or ~~$1.61~~$1.03 per diluted share, for the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018.

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Our Business Segments

Three Months Ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~

For the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ we had three reportable segments which ~~are~~were the basis of our internal financial reporting: SkyWest Airlines, ExpressJet and SkyWest Leasing. 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 ~~consist of~~were SkyWest Airlines, ExpressJet and SkyWest Leasing. Corporate overhead expense iswas allocated to the operating expenses of SkyWest Airlines and ExpressJet. The segment information

For the three months ended June 30,

(dollar amounts in thousands)


2018

2017

$ Change

% Change

Operating Revenues:

SkyWest Airlines operating revenue

$
587,480

$
519,708

$
67,772

13.0
%
ExpressJet operating revenues

143,707

211,819

(68,112)

(32.2)
%
SkyWest Leasing operating revenues

74,328

59,985

14,343

23.9
%
Total Operating Revenues

$
805,515

$
791,512

$
14,003

1.8
%
Airline Expenses:

SkyWest Airlines airline expense

$
498,345

$
448,335

$
50,010

11.2
%
ExpressJet airline expense

149,313

215,952

(66,639)

(30.9)
%
SkyWest Leasing airline expense

59,990

47,692

12,298

25.8
%
Total Airline Expense (1)

$
707,648

$
711,979

$
(4,331)

(0.6)
%
Segment profit (loss):

SkyWest Airlines segment profit

$
89,135

$
71,373

$
17,762

24.9
%
ExpressJet segment loss

(5,606)

(4,133)

(1,473)

35.6
%
SkyWest Leasing profit

14,338

12,293

2,045

16.6
%
Total Segment Profit

$
97,867

$
79,533

$
18,334

23.1
%
Interest Income and other income

1,705

1,330

375

28.2
%
Other Income (Expense), net

(1,245)

—

(1,245)

NM

Consolidated Income Before Taxes

$
98,327

$
80,863

$
17,464

21.6
%

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for ExpressJet for the three months ended March 31, 2019 reflects ExpressJet’s results prior to the sale of ExpressJet on January 22, 2019.


	For the three months ended March 31,
	(dollar amounts in thousands)
	2019		2018		$ Change		% Change
Operating Revenues:
SkyWest Airlines operating revenue	$	585,768	$	556,294	$	29,474	5.3	%
ExpressJet operating revenues		24,050		161,081		(137,031)	(85.1)	%
SkyWest Leasing operating revenues		113,876		66,025		47,851	72.5	%
Total Operating Revenues	$	723,694	$	783,400	$	(59,706)	(7.6)	%
Airline Expenses:
SkyWest Airlines airline expense	$	549,719	$	503,351	$	46,368	9.2	%
ExpressJet airline expense		28,690		167,651		(138,961)	(82.9)	%
SkyWest Leasing airline expense		81,373		50,457		30,916	61.3	%
Total Airline Expense (1)	$	659,782	$	721,459	$	(61,677)	(8.5)	%
Segment profit (loss):
SkyWest Airlines segment profit	$	36,049	$	52,943	$	(16,894)	(31.9)	%
ExpressJet segment loss		(4,640)		(6,570)		1,930	(29.4)	%
SkyWest Leasing profit		32,503		15,568		16,935	108.8	%
Total Segment Profit	$	63,912	$	61,941	$	1,971	3.2	%
Interest Income and other income		3,807		1,705		2,102	123.3	%
Other Income (Expense), net		46,725		3,558		43,167	*
Consolidated Income Before Taxes	$	114,444	$	67,204	$	47,240	70.3	%

(1)

Total Airline Expense includes operating expense and interest expense

* is more than 500%

SkyWest Airlines Segment Profit. SkyWest Airlines block hour production increased to ~~344,284,~~349,389, or ~~13.3%~~6.2%, for the three months ended ~~June 30, 2018,~~March 31, 2019, from ~~303,921~~328,944 for the three months ended ~~June 30, 2017,~~March 31, 2018, primarily due to the additional block hour production from 2335 new E175 aircraft and eight new CRJ900 aircraft added subsequent to ~~June 30, 2017.~~March 31, 2018. Significant items contributing to the SkyWest Airlines segment profit are set forth below.

The ~~$67.8~~$29.5 million, or ~~13.0%~~5.3%, increase in SkyWest Airlines Operating Revenues for the three months ended ~~June 30, 2018,~~March 31, 2019, compared to the three months ended ~~June 30, 2017,~~March 31, 2018, was primarily due to revenue associated with ~~23 additional~~35 E175 aircraft and eight CRJ900 aircraft added subsequent to ~~June 30, 2017.~~March 31, 2018.

The ~~$50.0~~$46.4 million, or ~~11.2%~~9.2%, increase in SkyWest Airlines Airline ~~Expense~~Expenses for the three months ended ~~June 30, 2018,~~March 31, 2019, compared to the three months ended ~~June 30, 2017,~~March 31, 2018, was primarily due to the following factors:

SkyWest Airlines’ salaries, wages and benefits expense increased by ~~$25.6~~$29.6 million, or 13.9%, primarily due to ~~the additional block hour production along with higher crew compensation~~increased labor costs ~~resulting from labor agreements executed during the second half of 2017.~~and employee benefit costs for certain work groups, including flight crews.

SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by ~~$5.5~~$6.8 million, or ~~5.8%~~6.2%, primarily attributable to direct maintenance costs related to the increased volume of block hours along with an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 23 E175 aircraft added since June 2017, partially offset by a decrease

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~~in the number of maintenance events~~ during the three months ended ~~June 30, 2018~~March 31, 2019 compared to the three months ended ~~June 30, 2017.~~March 31, 2018.

SkyWest Airlines’ fuel expense ~~increased $10.3~~decreased $1.3 million, or ~~52.6%~~4.8%, primarily due to a decrease in the number of prorate flights we operated and corresponding decrease in gallons of fuel we purchased, partially offset by an increase in ~~the~~our average fuel cost per gallon ~~in 2018 compared to 2017 along with an increase in the volume of gallons purchased. The average fuel cost per gallon was $2.63 and $1.93~~from $2.40 for the three months ended ~~June 30,~~March 31, 2018 ~~and 2017, respectively.~~to $2.43 for the three months ended March 31, 2019.

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SkyWest Airlines 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 ~~$11.7~~$8.0 million, or ~~27.7%~~15.4%, primarily due to an increase in the use of hotels for crews, property taxes on additional aircraft added since ~~June 30, 2017~~March 31, 2018 and an increase in direct operating costs associated with ~~a 13.3%~~the increase in block hour production year-over-year.

ExpressJet Segment Loss. ExpressJet’s ~~block hour production~~segment loss decreased ~~to 94,890, or 41.8%, for~~$1.9 million during the three months ended June 30, 2018, from 163,179 for the three months ended June 30, 2017, primarily due to the reduction in fleet size. Significant items contributing to the ExpressJet segment loss are set forth below.

~~The $68.1 million, or 32.2%, decrease in ExpressJet Operating Revenues for the three months ended June 30, 2018,~~March 31, 2019, compared to the three months ended ~~June 30, 2017, was~~March 31, 2018, primarily due to ~~a reduction in block hour production due to a reduced fleet size since June 30, 2017.~~

~~The $66.6 million, or 30.9%, decrease in~~the sale of ExpressJet ~~Airline Expense for~~during the three months ended ~~June 30, 2018, compared to the three months ended June 30, 2017, was primarily due to the following factors:~~March 31, 2019.

ExpressJet’s salaries, wages and benefits expense decreased $26.8 million, or 24.3%, primarily due to a reduction in direct labor costs associated with 41.8% fewer block hours produced year-over-year.

~~ExpressJet’s aircraft maintenance, materials and repairs expense decreased $20.0 million, or 35.6%, primarily due to the decrease in fleet size subsequent to June 30, 2017.~~

~~ExpressJet’s aircraft rental expenses decreased $8.1 million, or 81.3%, primarily due to a reduction of ExpressJet’s fleet size that was financed through leases subsequent to June 30, 2017.~~

~~ExpressJet’s airport-related expenses decreased $5.0 million, or 83.9%, primarily due to a reduction in station rents since June 30, 2017.~~

ExpressJet’s other operating expense decreased $4.5 million, or 22.5%, primarily due to a decrease in direct operating costs associated with a 41.8% reduction in block hour production year-over-year.

SkyWest Leasing Segment Profit. SkyWest Leasing profit increased ~~$2.0~~$16.9 million during the three months ended ~~June 30, 2018,~~March 31, 2019, compared to the three months ended ~~June 30, 2017,~~March 31, 2018, primarily due to 2335 E175 aircraft added to our fleet subsequent to ~~June 30, 2017.~~March 31, 2018 and additional revenue from leasing aircraft and spare engines to third parties.

~~Six Months Ended June 30, 2018 and 2017~~

For the six months ended June 30, 2018 and 2017, we had three reportable segments which are the basis of our internal financial reporting: SkyWest Airlines, ExpressJet and SkyWest Leasing. 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 consist of SkyWest Airlines, ExpressJet and SkyWest Leasing. Corporate overhead expense is allocated to the operating expenses of SkyWest Airlines and ExpressJet.

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For the six months ended June 30,

(dollar amounts in thousands)


2018

2017

$ Change

% Change

Operating Revenues:

SkyWest Airlines operating revenue

$
1,143,775

$
984,624

$
159,151

16.2
%
ExpressJet operating revenues

304,788

440,266

(135,478)

(30.8)
%
SkyWest Leasing operating revenues

140,352

113,788

26,564

23.3
%
Total Operating Revenues

$
1,588,915

$
1,538,678

$
50,237

3.3
%
Airline Expenses:

SkyWest Airlines airline expense

$
1,001,697

$
871,466

$
130,231

14.9
%
ExpressJet airline expense

316,964

446,348

(129,384)

(29.0)
%
SkyWest Leasing airline expense

110,446

89,586

20,860

23.3
%
Total Airline Expense (1)

$
1,429,107

$
1,407,400

$
21,707

1.5
%
Segment profit (loss):

SkyWest Airlines segment profit

$
142,078

$
113,158

$
28,920

25.6
%
ExpressJet segment loss

(12,176)

(6,082)

(6,094)

100.2
%
SkyWest Leasing profit

29,906

24,202

5,704

23.6
%
Total Segment Profit

$
159,808

$
131,278

$
28,530

21.7
%
Interest Income and other income

3,409

1,990

1,419

71.3
%
Other Income (Expense), net

(1,245)

—

(1,245)

NM

Consolidated Income Before Taxes

$
161,972

$
133,268

$
28,704

21.5
%

~~(1)~~

~~Total Airline Expense includes operating expense and interest expense~~

~~SkyWest Airlines Segment Profit.~~ SkyWest Airlines block hour production increased to 673,228, or 15.7%, for the six months ended June 30, 2018, from 581,756 for the six months ended June 30, 2017, primarily due to the additional block hour production from 23 new E175 aircraft added subsequent to June 30, 2017. Significant items contributing to the SkyWest Airlines segment profit are set forth below.

The $159.2 million, or 16.2%, increase in SkyWest Airlines Operating Revenues for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily due to revenue associated with 23 additional E175 aircraft subsequent to June 30, 2017.

The $130.2 million, or 14.9%, increase in SkyWest Airlines Airline Expense for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily due to the following factors:

SkyWest Airlines’ salaries, wages and benefits expense increased by $61.1 million, or 16.9%, primarily due to the additional block hour production along with higher crew compensation costs resulting from labor agreements executed during the second half of 2017.

SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $27.4 million, or 15.7%, primarily attributable to an increase in the percentage of our fleet that is under long-term, Power-By-The-Hour engine maintenance agreements, including the additional 23 E175 aircraft added since June 2017, and direct maintenance costs related to the increased volume of block hours.

SkyWest Airlines’ fuel expense increased $19.3 million, or 51.5%, primarily due to an increase in the average fuel cost per gallon in 2018 compared to 2017 along with an increase in the volume of gallons purchased. The average fuel cost per gallon was $2.52 and $1.97 for the six months ended June 30, 2018 and 2017, respectively.

SkyWest Airlines’ other operating expense increased $24.4 million, or 30.2%, primarily due to an increase in the use of hotels for crews, property taxes on additional aircraft added since June 30, 2017 and an increase in direct operating costs associated with a 15.7% increase in block hour production year-over-year.

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~~ExpressJet Segment Loss.~~ ExpressJet’s block hour production decreased to 202,313, or 40.1%, for the six months ended June 30, 2018, from 338,027 for the six months ended June 30, 2017, primarily due to the reduction in fleet size. Significant items contributing to the ExpressJet segment loss are set forth below.

The $135.5 million, or 30.8%, decrease in ExpressJet Operating Revenues for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily due to a reduction in block hour production due to a reduced fleet size since June 30, 2017.

~~The $129.4 million, or 29.0%, decrease in ExpressJet Airline Expense for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, was primarily due to the following factors:~~

ExpressJet’s salaries, wages and benefits expense decreased $53.4 million, or 23.1%, primarily due to a reduction in direct labor costs associated with 40.1% fewer block hours produced year-over-year.

~~ExpressJet’s aircraft maintenance, materials and repairs expense decreased $32.6 million, or 29.4%, primarily due to the decrease in fleet size subsequent to June 30, 2017.~~

~~ExpressJet’s aircraft rental expenses decreased $15.3 million, or 77.4%, primarily due to a reduction of ExpressJet’s fleet size that was financed through leases subsequent to June 30, 2017.~~

~~ExpressJet’s airport-related expenses decreased $10.2 million, or 84.9%, primarily due to a reduction in station rents since June 30, 2017.~~

ExpressJet’s other operating expense decreased $11.6 million, or 26.4%, primarily due to a decrease in direct operating costs associated with a 40.1% reduction in block hour production year-over-year.

~~SkyWest Leasing Segment Profit.~~ SkyWest Leasing profit increased $5.7 million during the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to 23 E175 aircraft added to our fleet subsequent to June 30, 2017.

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Liquidity and Capital Resources

Sources and Uses of Cash

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 ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ and our total cash and marketable securities positions as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	For the six months ended June 30,								For the three months ended March 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
Net cash provided by operating activities	$	350,822	$	331,783	$	19,039	5.7	%	$	154,914	$	165,895	$	(10,981)	(6.6)	%
Net cash used in investing activities		(547,734)		(528,340)		(19,394)	3.7	%		(76,905)		(100,073)		23,168	(23.2)	%
Net cash provided by financing activities		190,848		193,239		(2,391)	(1.2)	%
Net cash provided by (used in) financing activities										(115,508)		3,833		(119,341)	(3,113.5)	%


	June 30,		December 31,						March 31,		December 31,
	2018		2017		$ Change		% Change		2019		2018		$ Change		% Change
Cash and cash equivalents	$	175,728	$	181,792	$	(6,064)	(3.3)	%	$	290,885	$	328,384	$	(37,499)	(11.4)	%
Marketable securities		473,362		503,503		(30,141)	(6.0)	%		253,397		360,945		(107,548)	(29.8)	%
Total cash and marketable securities	$	649,090	$	685,295	$	(36,205)	(5.3)	%	$	544,282	$	689,329	$	(145,047)	(21.0)	%

Cash Flows provided by Operating Activities

The ~~$19.0~~$11.0 million ~~increase~~decrease in net cash provided by operating activities was primarily due to ~~an increase~~changes in ~~income before income taxes of $32.3 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.~~current asset and liability accounts. This ~~increase~~decrease in net cash provided by operating activities was partially offset by ~~changes~~an increase in ~~working capital.~~income before income taxes of $33.8 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

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Cash Flows used in Investing Activities

The ~~$19.4~~$23.2 million ~~increase~~decrease in cash used in investing activities was primarily due to the sale of ExpressJet for $79.6 million partially offset by a note receivable issued to the buyer of $26.4 million, resulting in net cash from the sale of ExpressJet of $53.2 million. The Company also acquired 70 previously leased aircraft and the acquisition of 23one E175 aircraft and the related spare aircraft assets during the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared to 17five E175 aircraft and the related spare aircraft assets purchased during the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, which in total represented an increase of ~~$56.3~~$33.1 million. ~~This~~

Cash Flows used in Financing Activities

The $119.3 million increase in cash used in investing activities was significantly offset by net liquidation of marketable securities, which provided an additional $103.0 million during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Additionally, during the six months ended June 30, 2017, we received proceeds from the sale of 15 CRJ200 aircraft, eleven EMB120 aircraft and one CRJ700 aircraft for $50.7 million.

~~Cash Flows provided by Financing Activities~~

~~The $2.4 million decrease in cash provided by~~ financing activities was primarily related to the decrease in proceeds from the issuance of long-term debt of $19.9 million associated with one E175 aircraft and two previously leased aircraft acquired during the three months ended March 31, 2019, compared to proceeds from the issuance of debt of $101.3 million associated with five E175 aircraft acquired during the three months ended March 31, 2018. During the three months ended March 31, 2019, we used an additional ~~$9.6~~$26.6 million as principal payments on long-term debt primarily due to the additional E175 aircraft acquired subsequent to March 31, 2018. Additionally, during the three months ended March 31, 2019, we used an additional $10.8 million to purchase treasury shares and make income tax payments towards vested employee equity ~~awards during the six months ended June 30, 2018. Additionally, during the six months ended June 30, 2017, we paid off debt on 15 CRJ200 aircraft and one CRJ700 aircraft that we sold.~~awards.

Liquidity and Capital Resources as of March 31, 2019

We believe that in the absence of unusual circumstances, the working capital currently available to us 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 ~~June 30, 2018,~~March 31, 2019, our total capital mix was ~~41.6%~~42.3% equity and ~~58.4%~~57.7% long-term debt, compared to ~~42.5%~~41.1% equity and ~~57.5%~~58.9% long-term debt at December 31, ~~2017.~~2018.

~~Table of Contents~~

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		Jul - Dec 2018		2019		2020		2021		2022		Thereafter		Total		Apr - Dec 2019		2020		2021		2022		2023		Thereafter
Operating lease payments for aircraft and facility obligations	$	558,171	$	43,683	$	85,317	$	101,529	$	93,117	$	75,178	$	159,347	$	442,094	$	54,799	$	93,640	$	75,898	$	67,668	$	62,498	$	87,591
Firm aircraft and spare engine commitments		626,980		508,740		21,200		10,600		86,440		—		—		329,327		139,974		131,657		57,696		—		—		—
Interest commitments (1)		600,413		60,497		111,075		96,051		82,139		69,227		181,424		628,528		95,377		114,048		98,884		84,754		68,950		166,515
Principal maturities on long-term debt		2,994,776		172,320		357,548		330,229		319,827		310,891		1,503,961		3,121,661		279,873		357,228		339,297		352,717		361,215		1,431,331
Total commitments and obligations	$	4,780,340	$	785,240	$	575,140	$	538,409	$	581,523	$	455,296	$	1,844,732	$	4,521,610	$	570,023	$	696,573	$	571,775	$	505,139	$	492,663	$	1,685,437

(1)

At ~~June 30, 2018,~~March 31, 2019, we had variable rate notes representing ~~1.6%~~only 0.2% of our total long-term debt. ~~Actual interest commitments will change based on the actual variable interest.~~

Purchase Commitments and Options

As of ~~June 30, 2018,~~March 31, 2019, we had a firm purchase commitment for ~~23 E175/~~eleven E175 SC aircraft from Embraer, S.A. with scheduled delivery dates through ~~the end of 2018 or early 2019 with the exception of three E175 aircraft that are anticipated to be delivered in~~ 2021.

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We have ~~not~~ historically funded ~~a substantial portion~~the majority of our aircraft ~~acquisitions~~acquisition cost with ~~working capital. Rather, we have generally funded our aircraft acquisitions through a combination of operating leases and~~ long-term ~~debt financing.~~debt. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select ~~one or more of these methods~~an appropriate method 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 acquisitions, as well as additional aircraft. We intend to finance the firm order for ~~23 E175/~~eleven E175 SC aircraft with approximately 85% debt and the remaining balance with cash.

~~Aircraft Lease and Facility Obligations~~

We also have significant long-term lease obligations primarily relating to our aircraft fleet. At June 30, 2018, we had 273 aircraft under lease with remaining terms ranging from one year or less to seven years. Future minimum lease payments due under all long-term operating leases were approximately $558.2 million at June 30, 2018. Assuming a 5.0% discount rate, which is the average rate used to approximate the implicit rates within the applicable aircraft leases, the present value of these lease obligations would have been equal to approximately $448.9 million at June 30, 2018.

Long-term Debt Obligations

As of ~~June 30, 2018,~~March 31, 2019, we had ~~$3.0~~$3.1 billion of long-term debt obligations, including current maturities, related to the acquisition of CRJ200, CRJ700, CRJ900 and E175 aircraft and spare engine financings. The average effective interest rate on the debt related to such aircraft and spare engine financings was approximately ~~4.1%~~4.2% at ~~June 30, 2018.~~March 31, 2019.

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. ~~We have also guaranteed the obligations of ExpressJet under the ExpressJet Delta Connection Agreement and the ExpressJet United ERJ Agreement.~~ In addition, we have guaranteed certain other obligations under aircraft financing and leasing agreements.

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Seasonality

Our results of operations for any interim period are not necessarily indicative of those for an entire year, since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased travel on our prorate routes, historically occurring during the summer months, and unfavorably affected by decreased travel during the months November through February and by inclement weather, which may occasionally or frequently, depending on the severity of the inclement weather in any given winter, result in cancelled flights during the winter months.

ITEM 3: 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 fixed-fee arrangements, United, Delta, Alaska and American 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 the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, prorate flying arrangements represented approximately ~~15.3%~~15.2% of our total flying agreements revenue. For illustrative purposes only, we have estimated the impact of the market risk of fuel price fluctuations 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 ~~$14.2~~$6.4 million in fuel expense for the ~~six~~three months ended ~~June 30, 2018.~~March 31, 2019.

Interest Rates

Our earnings may be affected by changes in interest rates due to our variable rate long-term debt. The interest rates applicable to variable rate debt may rise and increase our interest expense. At ~~June 30, 2018,~~March 31, 2019, we had variable rate notes representing ~~1.6%~~0.2% of our total long-term debt compared to ~~2.5%~~0.2% of our long-term debt at December 31, ~~2017. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase~~2018 and changes in interest rates ~~of one percentage point for variable rate long-term debt. Based~~are not expected to have a material adverse effect on ~~this hypothetical assumption, we would have incurred an additional $0.3 million in interest expense for the six months ended June 30, 2018.~~our earnings.

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 these aircraft. To the extent we place these aircraft in service under our code-share agreements with Delta, United, American, Alaska or other

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carriers, our code-share agreements currently provide that reimbursement rates will be adjusted higher or lower to reflect changes in our aircraft financing interest rates.

ITEM 4. 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of ~~June 30, 2018,~~March 31, 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 ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we implemented changes to our processes in response to the adoption of Accounting Standards Update No. ~~2014-09 “Revenue from Contracts with Customers~~2016-02 “Leases (Topic ~~606)~~842)” that

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became effective January 1, ~~2018.~~2019. The operating effectiveness of these changes will be evaluated as part of our annual assessment of the effectiveness of internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to certain legal actions which we consider routine to our business activities. As of ~~June 30, 2018,~~March 31, 2019, there were no pending legal proceedings that, if decided against us, were likely to have a material adverse effect on our financial position, liquidity or results of operations.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 and in our other filings with the SEC, which factors could materially affect our business, financial condition and results of operations. The risks described in our reports filed with the SEC are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Our~~In February 2019, our Board of Directors ~~has adopted~~authorized a new stock ~~repurchase~~purchase program ~~which authorizes us~~ to repurchase ~~shares~~up to $250.0 million of our common stock inreplacing the ~~public market or in private transactions, from time to time, at prevailing prices. Our~~previously adopted stock ~~repurchase program currently authorizes~~purchase plan that authorized the repurchase of up to $100.0 million of our common stock. ~~During the three months ended June 30, 2018,~~Between January 1, 2019 and February 5, 2019, we ~~did not repurchase any additional shares of our common stock. As of June 30, 2018, we had~~ repurchased ~~approximately 661,000~~83,282 shares of our common stock for ~~$30.0~~$4.2 million under ~~this authorization.~~the previous $100.0 million stock purchase program. Subsequent to February 6, 2019, we repurchased additional shares under our newly authorized $250.0 million stock purchase program as set forth below. The following table summarizes the repurchases under our stock purchase programs during the three months ended March 31, 2019.


	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program (1)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in Thousands)
January 1, 2019 – January 31, 2019	20,782	$	44.37	20,782	$	24,621
February 1, 2019 – February 5, 2019	62,500	$	52.62	62,500	$	21,332
February 6, 2019 — February 28, 2019	133,606	$	55.26	133,606	$	242,617
March 1, 2019 — March 31, 2019	259,389	$	51.68	259,389	$	229,211
Total	476,277	$	52.49	476,277	$	229,211

(1)

Prior to February 6, 2019, repurchases were made under the previous $100.0 million stock purchase program. Subsequent to February 6, 2019, repurchases were made under our newly authorized $250.0 million stock purchase program. Purchases are made at management’s discretion based on market conditions and financial resources. As of March 31, 2019, we had repurchased 392,995 shares of our common stock for $20.8 million under this new authorization.

ITEM 6. EXHIBITS


10.1		Severance and Release Agreement, dated as of February 12, 2019, by and between SkyWest, Inc. and Terry M. Vais (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on February 15, 2019).
31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Certification of Chief Executive Officer
32.2		Certification of Chief Financial Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2018,~~March 31, 2019, to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~August 7, 2018.~~May 6, 2019.


	SKYWEST, INC.

	By	/s/ Robert J. Simmons
		Robert J. Simmons
		Chief Financial Officer

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	Three Months Ended June 30, 2017
Income Statement:	Previously Reported		Adjustments		Current Presentation
OPERATING REVENUES:
Flying agreements (1)	$	791,341	$	(9,617)	$	781,724
Airport customer service and other (2)		18,418		(8,630)		9,788
Total operating revenues	$	809,759	$	(18,247)	$	791,512

OPERATING EXPENSES:
Salaries, wages and benefits	$	295,929	$	(1,134)	$	294,795
Aircraft fuel		37,183		(17,112)		20,071
Airport-related expenses (3)		15,902		13,047		28,949
Other operating expenses		75,174		(13,048)		62,126
Total operating expenses		703,163		(18,247)		684,916


	Six Months Ended June 30, 2017
Income Statement:	Previously Reported		Adjustments		Current Presentation
OPERATING REVENUES:
Flying agreements (1)	$	1,536,752	$	(20,499)	$	1,516,253
Airport customer service and other (2)		38,422		(15,997)		22,425
Total operating revenues	$	1,575,174	$	(36,496)	$	1,538,678

OPERATING EXPENSES:
Salaries, wages and benefits	$	595,969	$	(3,507)	$	592,462
Aircraft fuel		71,493		(32,989)		38,504
Airport-related expenses (3)		35,436		25,461		60,897
Other operating expenses		150,262		(25,461)		124,801
Total operating expenses		1,392,284		(36,496)		1,355,788


Balance Sheet:	Previously Reported December 31, 2017		Adjustments		Current Presentation December 31, 2017
ASSETS:
Other long-term assets	$	49,220	$	16,121	$	65,341

LIABILITIES:
Other long-term liabilities	$	42,541	$	16,121	$	58,662


	Six months ended June 30, 2018
	SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1)	$	1,143,775	$	304,788	$	140,352	$	1,588,915
Operating expense		993,019		315,349		65,694		1,374,062
Depreciation and amortization expense		76,327		21,362		62,609		160,298
Interest expense		8,678		1,615		44,752		55,045
Segment profit (loss) (2)		142,078		(12,176)		29,906		159,808
Identifiable intangible assets, other than goodwill		—		2,448		—		2,448
Total assets (as of June 30, 2018)		2,222,784		563,198		3,127,111		5,913,093
Capital expenditures (including non-cash)		76,322		2,926		553,257		632,505


	Six months ended June 30, 2017
	SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1) (3)	$	984,624	$	440,266	$	113,788	$	1,538,678
Operating expense (3)		859,931		444,146		51,711		1,355,788
Depreciation and amortization expense		64,347		26,235		50,738		141,320
Interest expense		11,535		2,202		37,875		51,612
Segment profit (loss) (2) (3)		113,158		(6,082)		24,202		131,278
Identifiable intangible assets, other than goodwill		—		7,124		—		7,124
Total assets (as of June 30, 2017) (3)		2,235,863		529,175		2,580,107		5,345,145
Capital expenditures (including non-cash)		58,777		10,155		449,969		518,901