SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020


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

For the transition period from to

Commission file number 0-14719

SKYWEST, INC.


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

444 South River Road

St. George, Utah 84790

(435) 634-3000

(Address of principal executive offices and telephone number)

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


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

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

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

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


Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐

Emerging growth company ☐

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

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

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


Class		Outstanding at ~~October 31, 2019~~May 4, 2020
Common stock, no par value		~~50,421,364~~50,140,172

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	3
		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Stockholders Equity	6
		Condensed Consolidated Statements of Cash Flows	87
		Notes to Condensed Consolidated Financial Statements	98
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2223
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3634
	Item 4.	Controls and Procedures	3735

PART II	OTHER INFORMATION:
	Item 1.	Legal Proceedings	3735
	Item 1A.	Risk Factors	3735
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
	Item 6.	Exhibits	38
		Signature	39

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


	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(unaudited)				(unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	307,909	$	328,384	$	289,544	$	87,206
Marketable securities		263,597		360,945		288,351		432,966
Income tax receivable		24,478		25,936		18,945		11,141
Receivables, net		77,532		64,194		37,197		82,977
Inventories, net		111,941		127,690		104,800		110,503
Prepaid aircraft rents		—		87,031
Other current assets		24,932		26,614		30,131		35,553
Total current assets		810,389		1,020,794		768,968		760,346

PROPERTY AND EQUIPMENT:
Aircraft and rotable spares		6,903,732		6,433,916		7,203,714		7,078,801
Deposits on aircraft		50,906		42,012		48,858		48,858
Buildings and ground equipment		248,405		291,544		244,751		265,398
		7,203,043		6,767,472		7,497,323		7,393,057
Less-accumulated depreciation and amortization		(1,906,345)		(1,761,728)		(2,103,585)		(1,998,376)
Total property and equipment, net		5,296,698		5,005,744		5,393,738		5,394,681

OTHER ASSETS:
Operating lease right-of-use assets		326,700		—		326,698		336,009
Long-term prepaid assets		—		181,830
Other assets		163,872		104,844		172,007		166,093
Total other assets		490,572		286,674		498,705		502,102
Total assets	$	6,597,659	$	6,313,212	$	6,661,411	$	6,657,129

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


	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(unaudited)				(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt	$	362,582	$	350,206	$	364,579	$	364,126
Accounts payable		328,854		331,982		407,290		284,473
Accrued salaries, wages and benefits		129,507		161,606		112,972		133,856
Current maturities of operating lease liabilities		87,472		—		88,649		94,806
Taxes other than income taxes		18,708		16,024		14,148		15,004
Other current liabilities		34,416		65,008		32,205		32,411
Total current liabilities		961,539		924,826		1,019,843		924,676

LONG-TERM DEBT, net of current maturities		2,622,236		2,809,768		2,537,613		2,628,989

DEFERRED INCOME TAXES PAYABLE		596,897		518,159		633,110		623,580

DEFERRED AIRCRAFT CREDITS		—		29,308

NONCURRENT OPERATING LEASE LIABILITIES		254,258		—		259,039		259,237

OTHER LONG-TERM LIABILITIES		46,469		66,870		48,368		45,633

COMMITMENTS AND CONTINGENCIES (Note 6)
COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS’ EQUITY:
Preferred stock, 5,000,000 shares authorized; NaN issued		—		—		—		—
Common stock, 0 par value, 120,000,000 shares authorized; 81,742,904 and 81,239,289 shares issued, respectively		684,541		690,910
Common stock, 0 par value, 120,000,000 shares authorized; 82,053,807 and 81,742,937 shares issued, respectively						690,065		686,806
Retained earnings		2,012,691		1,776,585		2,090,509		2,079,179
Treasury stock, at cost, 31,252,786 and 29,850,999 shares, respectively		(580,972)		(503,182)
Accumulated other comprehensive loss		—		(32)
Treasury stock, at cost, 31,913,635 and 31,420,179 shares, respectively						(617,136)		(590,971)
Total stockholders’ equity		2,116,260		1,964,281		2,163,438		2,175,014
Total liabilities and stockholders’ equity	$	6,597,659	$	6,313,212	$	6,661,411	$	6,657,129

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				Nine months ended				Three months ended
	September 30,				September 30,				March 31,
	2019		2018		2019		2018		2020		2019
OPERATING REVENUES:
Flying agreements	$	738,838	$	816,057	$	2,164,173	$	2,377,659	$	709,494	$	700,001
Airport customer service and other		21,457		13,218		64,199		40,531
Lease, airport services and other										20,442		23,693
Total operating revenues		760,295		829,275		2,228,372		2,418,190		729,936		723,694
OPERATING EXPENSES:
Salaries, wages and benefits		251,414		301,378		752,768		901,775		249,160		257,588
Aircraft maintenance, materials and repairs		133,521		142,285		376,572		423,665		160,216		118,262
Depreciation and amortization		92,795		86,088		272,929		246,386		111,708		89,986
Airport-related expenses										30,640		30,647
Aircraft fuel		31,063		30,258		87,570		87,208		25,413		25,656
Airport-related expenses		27,808		25,655		89,237		80,852
Aircraft rentals		17,676		36,827		55,840		119,015		17,056		20,158
Special items		—		—		21,869		—		—		21,869
Other operating expenses		59,577		68,859		184,634		206,511		69,422		63,109
Total operating expenses		613,854		691,350		1,841,419		2,065,412		663,615		627,275
OPERATING INCOME		146,441		137,925		386,953		352,778		66,321		96,419
OTHER INCOME (EXPENSE):
Interest income		3,542		2,283		11,081		5,692		2,564		3,807
Interest expense		(31,606)		(31,440)		(96,884)		(86,485)		(30,204)		(32,507)
Other income (expense), net		361		1,157		47,367		3,470		398		46,725
Total other expense, net		(27,703)		(28,000)		(38,436)		(77,323)
Total other income (expense), net										(27,242)		18,025
INCOME BEFORE INCOME TAXES		118,738		109,925		348,517		275,455		39,079		114,444
PROVISION FOR INCOME TAXES		27,399		26,879		80,945		62,189		9,091		26,263
NET INCOME	$	91,339	$	83,046	$	267,572	$	213,266	$	29,988	$	88,181

BASIC EARNINGS PER SHARE	$	1.80	$	1.60	$	5.24	$	4.10	$	0.60	$	1.71
DILUTED EARNINGS PER SHARE	$	1.79	$	1.57	$	5.19	$	4.03	$	0.59	$	1.69
Weighted average common shares:
Basic		50,746		52,039		51,111		52,002		50,277		51,440
Diluted		51,129		52,981		51,568		52,976		50,559		52,098

COMPREHENSIVE INCOME:
Net income	$	91,339	$	83,046	$	267,572	$	213,266	$	29,988	$	88,181
Net unrealized appreciation on debt securities, net of taxes		—		(2)		32		32		—		32
TOTAL COMPREHENSIVE INCOME	$	91,339	$	83,044	$	267,604	$	213,298	$	29,988	$	88,213

See accompanying notes to condensed consolidated financial statements

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(UNAUDITED)

(In Thousands)


									Accumulated
									Other				Common Stock			Retained		Treasury Stock
	Common Stock			Retained		Treasury Stock			Comprehensive				Shares	Amount		Earnings		Shares	Amount		Total
	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
Balance at December 31, 2019													81,743	$	686,806	$	2,079,179	(31,420)	$	(590,971)	$	2,175,014
Change in accounting principle and other (see Note 1)													—				(11,639)	—		—		(11,639)
Balance at December 31, 2019, as adjusted													81,743		686,806		2,067,540	(31,420)		(590,971)		2,163,375
Net income	—		—		267,572	—		—		—		267,572	—		—		29,988	—		—		29,988
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	707		3,105		—	—		—		—		3,105	287		38		—	—		—		38
Sale of common stock under employee stock purchase plan	65		3,165		—	—		—		—		3,165	24		1,494		—	—		—		1,494
Stock-based compensation expense associated with equity awards, net of forfeitures	—		3,506		—	—		—		—		3,506	—		1,727		—	—		—		1,727
Treasury shares acquired from vested employee stock awards for income tax withholdings	—		—		—	(173)		(9,313)		—		(9,313)	—		—		—	(108)		(6,165)		(6,165)
Treasury stock purchases	—		—		—	(1,229)		(68,477)		—		(68,477)	—		—		—	(386)		(20,000)		(20,000)
Common stock purchased and cancelled	(268)		(16,145)									(16,145)
Cash dividends declared ($0.12 per share)	—		—		(18,325)	—		—		—		(18,325)
Balance at September 30, 2019	81,743	$	684,541	$	2,012,691	(31,253)	$	(580,972)	$	—	$	2,116,260

Balance at June 30, 2019	81,703	$	680,802	$	1,927,412	(30,811)	$	(555,969)	$	—	$	2,052,245
Net income	—		—		91,339	—		—		—		91,339
Exercise of common stock options and stock issued under equity award plan	13		185		—	—		—		—		185
Sale of common stock under employee stock purchase plan	27		1,545		—	—		—		—		1,545
Stock-based compensation expense associated with equity awards, net of forfeitures	—		2,009		—	—		—		—		2,009
Treasury stock purchases	—		—		—	(442)		(25,003)		—		(25,003)
Cash dividends declared ($0.12 per share)	—		—		(6,060)	—		—		—		(6,060)
Balance at September 30, 2019	81,743	$	684,541	$	2,012,691	(31,253)	$	(580,972)	$	—	$	2,116,260
Cash dividends declared ($0.14 per share)													—		—		(7,019)	—		—		(7,019)
Balance at March 31, 2020													82,054	$	690,065	$	2,090,509	(31,914)	$	(617,136)	$	2,163,438

~~See accompanying notes to condensed consolidated financial statements.~~

~~Table of Contents~~

~~SKYWEST, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY~~

~~(UNAUDITED)~~

~~(In Thousands)~~

																					Accumulated
									Accumulated												Other
									Other				Common Stock			Retained		Treasury Stock			Comprehensive
	Common Stock			Retained		Treasury Stock			Comprehensive				Shares	Amount		Earnings		Shares	Amount		Income (Loss)		Total
	Shares	Amount		Earnings		Shares	Amount		Income (Loss)		Total
Balance at December 31, 2017	80,398	$	672,593	$	1,516,957	(28,644)	$	(435,178)	$	(50)	$	1,754,322
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 7)													—				(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	—		—		213,266	—		—		—		213,266	—		—		88,181	—		—		—		88,181
Net unrealized depreciation on marketable securities, net of tax of $11	—		—		—	—		—		32		32
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	780		2,174		—	—		—		—		2,174	521		641		—	—		—		—		641
Sale of common stock under employee stock purchase plan	61		3,038		—	—		—		—		3,038	39		1,620		—	—		—		—		1,620
Stock based compensation expense associated with equity awards	—		10,363		—	—		—		—		10,363
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	—		—		—	(428)		(25,164)		—		(25,164)	—		—		—	(173)		(9,311)		—		(9,311)
Treasury stock purchases	—		—		—	(239)		(13,556)		—		(13,556)	—		—		—	(476)		(25,000)		—		(25,000)
Cash dividends declared ($0.10 per share)	—		—		(15,602)	—		—		—		(15,602)
Balance at September 30, 2018	81,239	$	688,168	$	1,714,621	(29,311)	$	(473,898)	$	(18)	$	1,928,873
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 June 30, 2018	81,105	$	682,546	$	1,636,768	(29,059)	$	(458,645)	$	(17)	$	1,860,652
Net income	—		—		83,046	—		—		—		83,046
Net unrealized depreciation on marketable securities	—		—		—	—		—		(1)		(1)
Exercise of common stock options and stock issued under equity award plan	103		1,338		—	—		—		—		1,338
Sale of common stock under employee stock purchase plan	31		1,553		—	—		—		—		1,553
Stock based compensation expense associated with equity awards	—		2,731		—	—		—		—		2,731
Treasury shares acquired from vested employee stock awards for income tax withholdings	—		—		—	(250)		(15,161)		—		(15,161)
Treasury stock purchases	—		—		—	(2)		(92)		—		(92)
Cash dividends declared ($0.10 per share)	—		—		(5,193)	—		—		—		(5,193)
Balance at September 30, 2018	81,239	$	688,168	$	1,714,621	(29,311)	$	(473,898)	$	(18)	$	1,928,873

See accompanying notes to condensed consolidated financial statements.

Table of Contents

SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)


	Nine months ended				Three months ended
	September 30,				March 31,
	2019		2018		2020		2019
NET CASH PROVIDED BY OPERATING ACTIVITIES	$	582,468	$	573,127	$	269,483	$	154,914

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		(1,469,091)		(1,575,991)		(236,527)		(498,113)
Sales of marketable securities		1,566,471		1,699,284		381,142		605,693
Proceeds from the sale of aircraft, property and equipment		25,604		—		1,366		43
Acquisition of property and equipment:
Aircraft and rotable spare parts		(419,508)		(848,723)		(73,482)		(197,341)
Buildings and ground equipment		(61,021)		(35,870)		(3,542)		(52,075)
Deposits on aircraft		(31,817)		—
Aircraft deposits applied towards acquired aircraft		23,298		21,421		—		4,660
Net cash received from sale of ExpressJet subsidiary		53,200		—		—		53,200
Decrease (increase) in other assets		7,570		(2,479)		(13,970)		7,028
NET CASH USED IN INVESTING ACTIVITIES		(305,294)		(742,358)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES						54,987		(76,905)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		99,914		626,163		—		19,940
Principal payments on long-term debt		(291,250)		(262,923)		(89,796)		(98,204)
Net proceeds from issuance of common stock		6,270		5,212		1,532		2,261
Purchase of treasury and common stock and employee income tax paid on equity awards		(93,935)		(38,720)		(26,165)		(34,311)
Increase in debt issuance cost		(1,242)		(3,182)
Increase in debt issuance and lessor initial direct costs						(1,664)		(53)
Payment of cash dividends		(17,406)		(14,550)		(6,039)		(5,141)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(297,649)		312,000
NET CASH PROVIDED USED IN FINANCING ACTIVITIES						(122,132)		(115,508)

Increase (decrease) in cash and cash equivalents		(20,475)		142,769		202,338		(37,499)
Cash and cash equivalents at beginning of period		328,384		181,792		87,206		328,384
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	307,909	$	324,561	$	289,544	$	290,885

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing activities:
Acquisition of rotable spare parts	$	3,662	$	10,346	$	34,100	$	—
Debt assumed on aircraft acquired under operating leases	$	14,475	$	59,132	$	—	$	14,475
Engines contributed to joint venture	$	22,313	$	—
Non-cash assets used to acquire aircraft under operating leases	$	153,566	$	—	$	—	$	150,688
Lease liability arising from the recognition of right-of-use asset	$	456,472	$	—	$	—	$	456,472
Cash paid during the period for:
Interest, net of capitalized amounts	$	100,100	$	85,611	$	31,413	$	34,288
Income taxes	$	2,415	$	2,382	$	126	$	1,653

SUPPLEMENTAL DISCLOSURE OF SALE OF SUBSIDIARY:
Decrease in carrying amount of assets	$	(101,448)	$	—	$	—	$	(101,448)
Decrease in carrying amount of liabilities		68,341		—		—		68,341
Cash received from buyers		79,632		—		—		79,632
Gain on sale of subsidiary	$	46,525	$	—	$	—	$	46,525

See accompanying notes to condensed consolidated financial statements.

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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 subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”) and its leasing subsidiary SkyWest Leasing, Inc. (“SkyWest Leasing”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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, ~~2018. The~~2019. Due in part to the severe impacts from the global COVID-19 (coronavirus) pandemic, in addition to other factors, the results of operations for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020.

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.

Recent Accounting Pronouncements

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

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”), which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosure regarding significant estimates and judgments used in estimating credit losses. Topic 326 is effective for the Company beginning January 1, 2020. ~~Early adoption is permitted~~The Company adopted Topic 326 on January 1, 2020. The Company’s primary financial assets as of ~~January 1, 2019.~~December 31, 2019 included trade receivables from its flying agreements, a note receivable from the sale of ExpressJet, and receivables from aircraft manufacturers and other third parties in the airline industry. The Company ~~anticipates adopting~~recorded a credit loss of $11.6 million net of income tax in conjunction with the adoption of Topic ~~326 beginning~~326. The Company recorded this credit loss as a January 1, 2020 beginning balance sheet entry to retained earnings (net of income tax). Due to the COVID-19 pandemic, the Company recorded additional reserves against certain of the Company’s outstanding financial instruments during the three months ended March 31, 2020. See Note 3, “Flying Agreements Revenue and ~~is currently evaluating~~Lease, Airport Services and Other Revenues,” for more information.

Note 2 — Impact of the COVID-19 Pandemic

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experienced an unprecedented decline in the demand for air travel, which has materially and adversely affected the Company’s revenues, particularly under its prorate agreements (as defined in Note 3 below). The spread of the virus and the resulting global pandemic has affected the majority of the domestic and international networks of the Company’s major airline partners for whom it conducts flight operations and relies on to set its flight schedules. While the length and severity of the reduction in demand due to COVID-19 are uncertain, the Company presently expects a more significant negative impact on its results of operations in the second quarter of 2020 and for the remainder of 2020.

In response to these developments, the Company has implemented measures to focus on the personal safety of its passengers and employees, while at the same time seeking to mitigate the impact ~~of this update~~ on the ~~consolidated~~Company’s financial ~~statements.~~position and operations. These measures include, but are not limited to, the following:

~~Recently Adopted Standards~~

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”). Topic 842 and subsequently issued amendments require certain leases with durations longer than 12 months to be recognizedFocus on the ~~balance sheet.~~Personal Safety of Passengers and Employees. The ~~Company adopted Topic 842 effective January 1, 2019~~safety and ~~elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any~~well-being of the Company’s ~~contracts~~passengers and employees are ~~or contain leases, (2) lease classification~~the Company’s priorities in every decision it makes. As the COVID-19 pandemic has developed, the Company has taken numerous steps to help passengers and ~~(3) initial direct costs.~~ ~~In July 2018,~~employees take appropriate safety measures on the ~~FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides~~ground and in the air in keeping with current Centers for Disease Control and Prevention recommendations, including:

●

Working with the Company’s major airline partners to enhance its aircraft cleaning procedures.

●

Working with the Company’s major airline partners to provide masks for crewmembers and ensuring that all fleet service personnel have the necessary personal protective equipment for disinfecting the aircraft.

●

Providing a number of options to employees who are diagnosed with COVID-19, including pay protection and extended leave options.

●

Implementing workforce social distancing and protection measures, enhanced cleaning of the Company’s facilities, including training facilities, using methods and products similar to what the Company is using on its aircraft.

Capacity Reductions. Beginning in March 2020, the Company and its major airline partners experienced an ~~optional transition method that allows entities~~unprecedented decrease in demand for air travel and expect this decline to ~~elect~~continue. The Company depends on its major airline partners to ~~apply~~contract with the ~~standard using~~Company to schedule flights. Therefore, in response to this decreased demand, the ~~modified retrospective approach at~~Company has significantly reduced its ~~effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment~~capacity. Prior to the ~~opening balance of retained earnings~~COVID-19 pandemic, the Company anticipated operating approximately 2,500 daily departures in the ~~year~~month of ~~adoption.~~ April 2020. However, in April it operated approximately 800 to 900 daily departures as a result of COVID-19-related schedule reductions. The Company ~~elected this adoption method~~also anticipates similar schedule reductions will likely continue into the second quarter of 2020 and ~~recognized~~may continue throughout the remainder of 2020 and into 2021. The Company will continue to work with its major airline partners regarding future schedules and make further demand-driven adjustments to its capacity as needed. The Company anticipates certain aircraft with scheduled contract expirations in 2020 will not be extended as a ~~cumulative-effect adjustment~~result of decreased demand including 55 Canadair CRJ200 regional aircraft (“CRJ200”) operating under the SkyWest Airlines Delta Connection Agreement. The Company also expects that its American Prorate Agreement on 7 CRJ200 aircraft will terminate in 2020 and the Company may have further reductions in the number of CRJ200 aircraft operating under its other prorate agreements. The Company may receive requests by its major airline partners to ~~the opening balance~~defer deliveries of ~~retained earnings on January 1, 2019.~~new or used aircraft that were previously scheduled for 2020 and 2021.

Cost Reductions. With the reduction in revenue, the Company has, and will continue to implement, cost saving initiatives, including:

●

Reducing employee-related costs including by:

Offering voluntary unpaid leave to employees.

Suspending all non-scale pay increases.

Instituting a company-wide hiring freeze.

●

Delaying non-essential maintenance projects and reducing or suspending other discretionary spending.

Liquidity. At March 31, 2020, the Company had $644.1 million in total available liquidity, consisting of $577.9 million in cash and marketable securities and $66.2 million available under SkyWest Airlines’ line of credit. On April 23, 2020, SkyWest Airlines entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the U.S. Department of Treasury (“Treasury”) with respect to the grant program (the “Payroll Support Program”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), pursuant to which it expects to receive

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~~Additionally,~~approximately $438.0 million in the ~~Company’s adoption~~aggregate, 50% of ~~Topic 842 did not have a significant impact~~which was received in April 2020. See Note 15 for more information on the ~~recognition, measurement or presentation of lease revenue~~Payroll Support Program. The CARES Act also provides for up to $25 billion in secured loans to the airline industry, and ~~lease expenses within~~ the ~~condensed consolidated statements of operations~~Company has applied for and comprehensive income or the condensed consolidated statements of cash flows. The Company’s adoption of Topic 842 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor. The Company’s prepaid aircraft rents, accrued aircraft rents and deferred rent credits that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019. The consolidated financial statementsexpects to be eligible for ~~the three and nine months ended September 30, 2019 are presented~~approximately $497.0 million under the ~~new standard, while comparative years presented are not adjusted~~loan program and ~~continue to be reported in accordance with the Company’s historical accounting policy.~~is currently evaluating its level of participation.

~~See Note 6, "Leases, Commitments and Contingencies," for more information.~~

Note 23 — Flying Agreements Revenue and Lease, Airport ~~Customer Service~~Services and Other Revenues

The Company recognizes flying agreements revenue and lease, airport ~~customer service~~services 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 pays for or reimburses the Company for certain direct expenses incurred under the ~~fixed-fee arrangement,~~capacity purchase agreement, such as fuel, airport landing fees and airport rents. Under the ~~fixed-fee arrangements,~~capacity purchase agreements, the Company’s performance obligation is met when each flight is completed and is reflected in flying agreements revenue. The transaction price for the ~~fixed-fee~~capacity purchase agreements is determined from the fixed-fee consideration, incentive consideration and directly reimbursed expenses earned as flights are completed over the agreement term. For the ~~nine~~three months ended ~~September 30, 2019, fixed-fee arrangements~~March 31, 2020, capacity purchase agreements represented approximately ~~82.1%~~85.9% 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. Under the Company’s prorate flying agreements, the performance obligation is met and revenue is recognized when each flight is completed based upon the portion of the prorate passenger fare the Company anticipates that it will receive for each completed flight. The transaction price for the prorate agreements is determined from the proration formula derived from each passenger ticket amount on each completed flight over the agreement term. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, prorate flying arrangements represented approximately ~~17.9%~~14.1% of the Company’s flying agreements revenue.

~~Airport customer service~~Lease, airport services and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. The transaction price for airport customer service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled by the Company over the agreement term. Additionally, airport customer service and other revenues includes revenue generated from aircraft and spare engines leased to third parties. Of the Company’s ~~$5.3~~$5.4 billion of property and equipment, net as of ~~September 30, 2019, $76.7~~March 31, 2020, $154.1 million of regional jet aircraft and spare engines was leased to third parties under operating leases as of ~~September 30, 2019.~~March 31, 2020. 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, 2020 (in thousands):



April 2020 through December 2020	$	23,484
2021		27,849
2022		27,606
2023		24,704
2024		24,396
Thereafter		87,235
	$	215,274

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~~rental income under operating leases primarily related~~Additionally, lease, airport services and other revenues includes airport agent services, 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 ~~leased aircraft that had remaining non-cancelable lease terms as~~the applicable number of ~~September 30,~~flights handled by the Company over the agreement term. The following represents the Company’s airport and customer service and other revenue for the three months ended March 31, 2020 and 2019 (in thousands):

October 2019 through December 2019

$
4,975

2020

17,733

2021

17,333

2022

10,775

2023

4,549

Thereafter

14,521

$
69,886


	For the three months ended March 31,
	2020		2019
Airport customer service revenue	$	9,896	$	14,635
Operating lease revenue		10,546		9,058
Lease, airport services and other	$	20,442	$	23,693

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

The following table represents the Company’s flying agreements revenue by type for the ~~three-and nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
	2019		2018		2019		2018		2020		2019
Capacity purchase agreements revenue: flight operations	$	385,537	$	472,952	$	1,155,814	$	1,404,801	$	366,409	$	386,545
Capacity purchase agreements revenue: aircraft lease revenue		207,467		208,813		621,526		599,188		242,734		207,381
Prorate agreements revenue		145,834		134,292		386,833		373,670		100,351		106,075
Flying agreements revenue	$	738,838	$	816,057	$	2,164,173	$	2,377,659	$	709,494	$	700,001

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

The Company’s ~~fixed-fee~~capacity purchase and prorate agreements include weekly provisional cash payments from the respective major airline partner based on a projected level of flying each month. The Company and each major airline partner subsequently reconcile these payments to the actual completed flight activity on a monthly or quarterly basis. 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 ASU No. 2014-09, “Revenue from Contracts with Customers, (Topic 606)” (“Topic 606”), where the Company records revenue to the extent it believes that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly or quarterly 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.

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The following table summarizes the significant provisions of each code-share agreement SkyWest Airlines has with each major airline partner:


Delta Connection Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
Delta Connection Agreement (~~fixed-fee arrangement)~~capacity purchase agreement)	• CRJ 200 • CRJ 700 • CRJ 900 • E175	55 148 43 5462	• Individual aircraft have scheduled removal dates from ~~2019~~2020 to 2029
Delta Connection Prorate Agreement ~~(revenue-sharing~~(prorate arrangement)	• CRJ 200	2827	• Terminable with 30-day notice

United Express Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
United Express Agreements (~~fixed-fee arrangement)~~capacity purchase agreement)	• CRJ 200 • CRJ 700 • E175	6770 19 6569	• Individual aircraft have scheduled removal dates from ~~2020~~2022 to 2029
United Express Prorate Agreement (~~revenue-sharing~~prorate arrangement)	• CRJ 200	3331	• Terminable with 120-day notice


American Agreements
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
American Agreement (~~fixed-fee arrangement)~~capacity purchase agreement)	• CRJ 700	6661	• Individual aircraft have scheduled removal dates from 2022 to 2025
American Prorate Agreement (~~revenue-sharing~~prorate arrangement)	• CRJ 200	7	• Terminable with 120-day notice








Alaska Capacity Purchase Agreement
Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
Alaska Agreement (~~fixed-fee arrangement)~~capacity purchase agreement)	• E175	32	• Individual aircraft have scheduled removal dates from 2027 to 2030

In addition to the contractual arrangements described above, SkyWest Airlines has entered into ~~a fixed-fee agreement~~capacity purchase agreements with Delta, American and United to place additional new and used Embraer E175 dual-class regional jet aircraft (“E175”) into service. The Company is coordinating with its major airline partners on the timing of upcoming fleet deliveries under previously announced deals in response to COVID-19 schedule reductions. The anticipated future delivery dates summarized below are subject to change.

As of ~~September 30, 2019,~~March 31, 2020, the Company was scheduled to ~~take delivery of~~ 11acquire and place into service 6 new E175 aircraft in connection with its agreement with ~~Delta (5 aircraft in the fourth quarter of 2019 and 6 aircraft in 2020). Final~~Delta. The delivery dates ~~may be adjusted based on various factors. Each~~for these six new E175 aircraft ~~will replace either a Canadair CRJ900 regional jet aircraft (“CRJ900”) or a Canadair CRJ700 regional jet aircraft (“CRJ700”)~~are currently scheduled to ~~expire under SkyWest Airlines’ flying contract with Delta. Separate from these new aircraft deliveries,~~be completed during 2020. Additionally, the Company is scheduled to add 63 used E175 aircraft ~~to be~~that are financed by Delta under the Delta agreement during 2020.

SkyWest Airlines also entered into an agreement with Delta to ~~operate 13~~place 1 Canadair CRJ900 regional jet aircraft (“CRJ900”) that is financed by Delta under a ~~fixed-fee agreement.~~ nine-year capacity purchase agreement in 2020.

As of ~~September 30, 2019,~~March 31, 2020, the Company was scheduled to acquire and place into service 20 new E175 aircraft in connection with its agreement with American. The delivery dates for the new E175 aircraft were originally scheduled to be completed by 2021. The Company is currently coordinating with American and the manufacturer on revised delivery dates due to COVID-19-related schedule reductions. Additionally, SkyWest Airlines ~~had placed 12~~has a flying contract with American to operate a total of ~~these CRJ900~~70 used Canadair CRJ700 regional jet aircraft ~~into service~~(“CRJ700s”), of which 61 aircraft were under contract at March 31, 2020. The Company is also coordinating with ~~Delta. The delivery date~~American on in-service dates for the remaining ~~aircraft is expected to take place during 2020.~~ 9 aircraft.

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The ~~remaining new CRJ900~~Company anticipates its American Prorate Agreement on seven CRJ200 aircraft will ~~replace~~terminate in 2020 as a ~~CRJ700~~result of COVID-19-related passenger demand reductions. The Company may have further reductions in the number of CRJ200 aircraft operating under prorate agreements with its other major airline partners throughout 2020.

During the three months ended March 31, 2020, SkyWest Airlines placed four used E175 aircraft financed by United under a capacity purchase agreement with United. As of March 31, 2020, SkyWest Airlines was scheduled to add 21 used E175 aircraft that were financed by United under the United agreement throughout 2020 and 2021.

As of March 31, 2020, the Company’s capacity purchase agreement with Delta included 55 CRJ200 aircraft that are scheduled to expire ~~under SkyWest Airlines’ flying contract~~in increments during the remainder of 2020 and are not expected to be extended as a result of the decreased demand caused by the COVID-19 pandemic. The Company leases 19 of the 55 aircraft from Delta and anticipates returning the leased aircraft to Delta in 2020. The Company owns the remaining 36 CRJ200 aircraft and anticipates parking the 36 CRJ200 aircraft following removal from service. The Company has no outstanding financing obligations on the 36 owned CRJ200 aircraft. The Company reduced the estimated useful lives of these 36 CRJ200 aircraft to align with ~~Delta.~~

~~SkyWest Airlines also entered into an agreement with American to place 10 used CRJ700s under a multi-year contract beginning~~each aircraft’s anticipated removal dates, which resulted in ~~late 2019.~~approximately $15.0 million of incremental depreciation expense during the three months ended March 31, 2020. The Company anticipates ~~acquiring 7 CRJ700 aircraft~~it will incur $29.1 million of additional depreciation expense from ~~a third party and internally sourcing 3 CRJ700 aircraft through upcoming scheduled contract expirations.~~April to December 2020 resulting from the shorter estimated useful lives of the 36 owned CRJ200 aircraft.

When an aircraft is scheduled to be removed from a ~~fixed-fee arrangement,~~capacity purchase agreement, the Company may, as practical

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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~~using aircraft ~~to use the~~parts and engines ~~and parts~~ as spare inventory or ~~to lease the~~leasing spare engines to a third party. In the event practical alternative uses for the aircraft removed from service are not available, the Company may park and store the aircraft.

The Company’s operating revenues could be impacted by a number of factors, including the impact of the COVID-19 pandemic on the demand for air travel and associated reduction in flight schedules, 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.

Allowance for credit losses

The Company monitors publicly available credit ratings for entities for which the Company has a significant receivable balance. As of March 31, 2020, the Company had gross receivables of $42.0 million in current assets and gross receivables of $76.7 million in other long-term assets. The Company has established credit loss reserves based on publicly available historic default rates issued by a third party for companies with similar credit ratings, factoring in the term of the respective accounts receivable or note receivable. During the three months ended March 31, 2020, the credit ratings were lowered on certain entities for which the Company has outstanding accounts receivable or notes receivable, which was the primary driver for the increase in the Company’s credit loss reserve when benchmarked against historic default rates of similarly rated companies during the three months ended March 31, 2020.

The following table summarizes the changes in allowance for credit losses:


	Allowance for
	Credit Losses
Balance at January 1, 2020	$	15,388
Additions to credit loss reserve		3,756
Write-offs charged against the allowance		—
Balance at March 31, 2020	$	19,144

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Note 34 — Share-Based Compensation and Stock Repurchases

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company granted ~~104,120~~82,505 restricted stock units and ~~87,864~~69,132 performance shares to certain employees of the Company and its subsidiaries under ~~the SkyWest, Inc. 2010 Long-Term Incentive Plan and~~ the SkyWest, Inc. 2019 Long-Term Incentive Plan. Both the restricted stock units and performance shares have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries. The number of performance shares awardable from the ~~2019~~2020 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 restricted stock unit and performance share will be replaced with 1 share of common stock. The ~~weighted average~~ fair value of these restricted stock units and performance shares on their date of grant was ~~$48.73~~$61.45 per share. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company did not grant any options to purchase shares of common stock. Additionally, during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company granted ~~18,576~~14,643 fully vested shares of common stock to the Company’s directors at a grant date fair value of ~~$48.45.~~$61.45.

The Company accounts for forfeitures of stock options, restricted stock units and performance share grants 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 ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company recorded pre-tax share-based compensation expense of $~~8.0~~1.7 million and ~~$10.4~~$3.9 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 ~~nine~~three months ended ~~September 30,~~March 31, 2019.

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company repurchased ~~1,496,648~~385,606 shares of its common stock for ~~$84.6~~$20.0 million and paid $6.2 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees. During the three months ended March 31, 2019, the Company repurchased 476,277 shares of its common stock for $25.0 million and paid $9.3 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees. ~~During~~

In connection with the ~~nine months ended September 30, 2018,~~Company’s receipt of financial support under the Payroll Support Program, the Company ~~repurchased 427,869~~agreed not to repurchase shares of or make dividend payments in respect of its common stock ~~for $25.2 million and paid $13.6 million for the income tax obligation on vested employee equity awards and issued the net, after-tax shares to employees.~~through September 30, 2021.

Note 45 — 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 ~~nine~~three months ended ~~September 30, 2019, 150,000~~March 31, 2020, 219,000 performance shares (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of ~~September 30, 2019.~~March 31, 2020. During the ~~nine~~three months ended ~~September 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 ~~September 30, 2018.~~March 31, 2019.

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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				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2019		2018		2019		2018		2020		2019
Numerator:
Net Income	$	91,339	$	83,046	$	267,572	$	213,266	$	29,988	$	88,181

Denominator:
Weighted average number of common shares outstanding		50,746		52,039		51,111		52,002		50,277		51,440
Effect of outstanding share-based awards		383		942		457		974		282		658
Weighted average number of shares for diluted net income per common share		51,129		52,981		51,568		52,976		50,559		52,098

Basic earnings per share	$	1.80	$	1.60	$	5.24	$	4.10	$	0.60	$	1.71
Diluted earnings per share	$	1.79	$	1.57	$	5.19	$	4.03	$	0.59	$	1.69

Note ~~5 -~~6 — Segment Reporting

Prior to the Company’s sale of ExpressJet on January 22, 2019, the Company’s 3 reporting segments consisted of the operations of SkyWest Airlines, ExpressJet and SkyWest Leasing activities. The segment information presented for ExpressJet reflects the period of time prior to the sale, when ExpressJet was operating as a subsidiary of the Company. The Company concluded that the sale of ExpressJet did not meet the criteria for a discontinued operation.

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

The following represents the Company’s segment data for the three-month periods ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Three months ended September 30, 2019								Three months ended March 31, 2020
	SkyWest				SkyWest				SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated		Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1)	$	641,947	$	—	$	118,348	$	760,295	$	606,842	$	—	$	123,094	$	729,936
Operating expense		560,646		—		53,208		613,854		594,141		—		69,474		663,615
Depreciation and amortization expense		43,353		—		49,442		92,795		51,775		—		59,933		111,708
Interest expense		3,165		—		28,441		31,606		2,541		—		27,663		30,204
Segment profit (loss) (2)		78,136		—		36,699		114,835
Total assets (as of September 30, 2019)		2,744,191		—		3,853,468		6,597,659
Segment profit (2)										10,160		—		25,957		36,117
Total assets (as of March 31, 2020)										2,650,094		—		4,011,317		6,661,411
Capital expenditures (including non-cash)		67,394		—		34,597		101,991		38,879		—		72,245		111,124

1415

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	Three months ended September 30, 2018								Three months ended March 31, 2019
	SkyWest				SkyWest				SkyWest				SkyWest
	Airlines		ExpressJet		Leasing		Consolidated		Airlines		ExpressJet		Leasing		Consolidated
Operating revenues (1)	$	607,052	$	140,155	$	82,068	$	829,275	$	585,768	$	24,050	$	113,876	$	723,694
Operating expense		512,278		139,736		39,336		691,350		545,901		28,690		52,684		627,275
Depreciation and amortization expense		39,651		8,683		37,754		86,088		40,053		971		48,962		89,986
Special Items										18,508		3,361		—		21,869
Interest expense		4,044		649		26,747		31,440		3,818		—		28,689		32,507
Segment profit (loss) (2)		90,730		(230)		15,985		106,485		36,049		(4,640)		32,503		63,912
Identifiable intangible assets, other than goodwill		—		1,224		—		1,224
Total assets (as of September 30, 2018)		2,251,563		565,266		3,368,031		6,184,860
Total assets (as of March 31, 2019)										2,738,248		—		3,806,284		6,544,532
Capital expenditures (including non-cash)		44,689		3,069		273,808		321,566		68,650		—		345,929		414,579

~~(1)~~

~~Prorate revenue and airport customer service revenue are primarily reflected in the SkyWest Airlines segment.~~

~~(2)~~

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

~~The following represents the Company’s segment data for the nine-month periods ended September 30, 2019 and 2018 (in thousands):~~

Nine months ended September 30, 2019

SkyWest

SkyWest


Airlines

ExpressJet

Leasing

Consolidated

Operating revenues (1)

$
1,854,803

$
24,050

$
349,519

$
2,228,372

Operating expense

1,651,966

28,690

160,763

1,841,419

Depreciation and amortization expense

124,048

971

147,910

272,929

Special Items

18,508

3,361

—

21,869

Interest expense

10,699

—

86,185

96,884

Segment profit (loss) (2)

192,138

(4,640)

102,571

290,069

Total assets (as of September 30, 2019)

2,744,191

—

3,853,468

6,597,659

Capital expenditures (including non-cash)

184,019

—

468,213

652,232

Nine months ended September 30, 2018

SkyWest

SkyWest


Airlines

ExpressJet

Leasing

Consolidated

Operating revenues (1)

$
1,750,827

$
444,943

$
222,420

$
2,418,190

Operating expense

1,505,298

455,084

105,030

2,065,412

Depreciation and amortization expense

115,979

30,044

100,363

246,386

Interest expense

12,722

2,264

71,499

86,485

Segment profit (loss) (2)

232,807

(12,405)

45,891

266,293

Identifiable intangible assets, other than goodwill

—

1,224

—

1,224

Total assets (as of September 30, 2018)

2,251,563

565,266

3,368,031

6,184,860

Capital expenditures (including non-cash)

121,010

5,996

827,065

954,071

(1)	Prorate revenue and airport customer service revenue are primarily reflected in the SkyWest Airlines segment.

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

Note 67 — 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 operating lease right-of-use asset and operating lease liability at the present value of lease payments over the term. The Company used its incremental borrowing rate to discount the lease payments based on information available at lease commencement.

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Aircraft

During the first quarter of 2019, the Company acquired 52 CRJ aircraft under an early lease buyout arrangement with the lessor for $111.7 million. During the third quarter of 2019, the Company acquired 4 CRJ900 aircraft under an early lease buyout arrangement with the lessor for $30.0 ~~million.~~ As of ~~September 30, 2019,~~March 31, 2020, the Company had 91103 aircraft under operating leases with remaining terms ranging from less than one year to ten years.

With the adoption of Topic 842 on January 1, 2019, the Company evaluated whether leased aircraft asset groups within the Company’s 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 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.

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.~~various airports. The remaining lease terms for facility space vary from one month to 3736 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 ~~September 30, 2019,~~March 31, 2020, the Company’s right-of-use assets were $326.7 million, the Company’s current maturities of operating lease liabilities were ~~$87.5~~$88.6 million, and the Company’s noncurrent lease liabilities were ~~$254.3~~$259.0 million. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company paid ~~$58.6~~$17.7 million in operating leases reflected as a reduction from operating cash flows.

The table below presents lease related terms and discount rates as of ~~September 30, 2019.~~March 31, 2020.



	~~September 30, 2019~~
~~Weighted-average remaining lease term~~
~~Operating leases~~		~~6.75 years~~
~~Weighted-average discount rate~~
~~Operating leases~~		~~6.4%~~

~~The Company’s lease costs for the three- and nine-months ended September 30, 2019 and 2018 included the following components (in thousands):~~

For the three months ended September 30,

2019

2018
Operating lease cost

$
25,173

$
42,286
Variable and short-term lease cost

1,343

1,184
Sublease income

(357)

—
Total lease cost

$
26,159

$
43,470

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For the nine months ended September 30,

2019

2018
Operating lease cost

$
80,041

$
140,544
Variable and short-term lease cost

4,164

3,996
Sublease income

(357)

—
Total lease cost

$
83,848

$
144,540



	March 31, 2020
Weighted-average remaining lease term for operating leases	6.8 years
Weighted-average discount rate for operating leases		6.4%

The Company’s lease costs for the three months ended March 31, 2020 and 2019 included the following components (in thousands):


	For the three months ended March 31,
	2020		2019
Operating lease cost	$	25,018	$	27,221
Variable and short-term lease cost		1,344		1,475
Sublease income		(1,571)		—
Total lease cost	$	24,791	$	28,696

As of ~~September 30, 2019,~~March 31, 2020, 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 ~~September 30, 2019~~March 31, 2020 (in thousands):


October 2019 through December 2019	$	17,603
2020		91,892
April 2020 through December 2020			$	75,137
2021		80,540		85,409
2022		70,900		75,776
2023		65,521		69,623
2024				28,320
Thereafter		103,819		100,234
	$	430,275	$	434,499

The Company is coordinating with its major airline partners on the timing of upcoming fleet deliveries under previously announced deals in response to COVID-19-related schedule reductions. The anticipated future delivery dates are subject to change. As of ~~September 30, 2019,~~March 31, 2020, the Company had a firm purchase commitment for 1126 E175 aircraft from Embraer, S.A. (“Embraer”) with ~~scheduled~~original delivery dates through ~~2020.~~2021. The Company has also agreed to purchase 72 used CRJ700 aircraft from a third party with anticipated delivery dates in 2020.

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


	Total		Oct - Dec 2019		2020		2021		2022		2023		Thereafter		Total		Apr - Dec 2020		2021		2022		2023		2024		Thereafter
Operating lease payments for aircraft and facility obligations	$	430,275	$	17,603	$	91,892	$	80,540	$	70,900	$	65,521	$	103,819	$	434,499	$	75,137	$	85,409	$	75,776	$	69,623	$	28,320	$	100,234
Firm aircraft and spare engine commitments		365,794		167,037		187,757		11,000		—		—		—		714,797		435,183		274,114		5,500		—		—		—
Interest commitments (1)		582,997		31,628		116,550		101,468		87,294		71,252		174,805		543,153		88,581		104,678		90,251		73,946		59,373		126,324
Principal maturities on long-term debt		3,008,588		91,192		361,131		344,937		358,586		367,322		1,485,420		2,927,262		277,692		352,005		365,907		374,906		327,630		1,229,122
Total commitments and obligations	$	4,387,654	$	307,460	$	757,330	$	537,945	$	516,780	$	504,095	$	1,764,044	$	4,619,711	$	876,593	$	816,206	$	537,434	$	518,475	$	415,323	$	1,455,680

(1)	At ~~September 30, 2019,~~March 31, 2020, all of the ~~Company had variable rate notes representing only 0.1% of its~~Company’s total long-term ~~debt.~~debt had fixed interest rates.

~~Disclosures related to periods prior to the adoption of the New Lease Standard~~

~~The following table summarizes future minimum rental payments required under operating leases that have non-cancelable lease terms in excess of one year as of December 31, 2018 (in thousands):~~

2019

$
87,256

2020

101,741

2021

90,787

2022

72,593

2023

65,749

Thereafter

59,820

$
477,946

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Note 78 — Fair Value Measurements

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


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

As of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):


	Fair Value Measurements as of September 30, 2019								Fair Value Measurements as of March 31, 2020
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	307,909	$	307,909	$	—	$	—	$	289,544	$	289,544	$	—	$	—
Marketable securities
Bonds and bond funds	$	207,538	$	—	$	207,538	$	—	$	179,964	$	—	$	179,964	$	—
Commercial paper		56,059		—		56,059		—		108,387		—		108,387		—
		263,597		—		263,597		—		288,351		—		288,351		—
Total assets measured at fair value	$	571,506	$	307,909	$	263,597	$	—	$	577,895	$	289,544	$	288,351	$	—


	Fair Value Measurements as of December 31, 2018								Fair Value Measurements as of December 31, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Cash and cash equivalents	$	328,384	$	328,384	$	—	$	—	$	87,206	$	87,206	$	—	$	—
Marketable securities
Bonds and bond funds	$	229,783	$	—	$	229,783	$	—	$	267,243	$	—	$	267,243	$	—
Commercial paper		131,162		—		131,162		—		165,723		—		165,723		—
		360,945		—		360,945		—		432,966		—		432,966		—
Total assets measured at fair value	$	689,329	$	328,384	$	360,945	$	—	$	520,172	$	87,206	$	432,966	$	—

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

The Company did not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. 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 ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, the Company classified ~~$263.6~~$288.4 million and ~~$360.9~~$433.0 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. As of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, the cost of the Company’s total cash and cash equivalents and available for sale securities was $~~571.4~~577.9 million and ~~$689.4~~$520.2 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 ~~$2.98~~$2.96 billion as of ~~September 30, 2019~~March 31, 2020 and ~~$3.16~~$2.99 billion as of December 31, ~~2018,~~2019, as compared to the carrying amount of ~~$3.01~~$2.93 billion as of ~~September 30, 2019~~March 31, 2020 and ~~$3.19~~$3.02 billion as of December 31, ~~2018.~~2019.

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Note 89 — Long-Term Debt

Long-term debt consisted of the following as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Current portion of long-term debt	$	366,248	$	354,072	$	368,558	$	367,954
Current portion of unamortized debt issue cost, net		(3,666)		(3,866)		(3,979)		(3,828)
Current portion of long-term debt, net of debt issue costs	$	362,582	$	350,206	$	364,579	$	364,126

Long-term debt, net of current maturities	$	2,642,340	$	2,831,366	$	2,558,704	$	2,649,569
Long-term portion of unamortized debt issue cost, net		(20,104)		(21,598)		(21,091)		(20,580)
Long-term debt, net of current maturities and debt issue costs	$	2,622,236	$	2,809,768	$	2,537,613	$	2,628,989

Total long-term debt (including current portion)	$	3,008,588	$	3,185,438	$	2,927,262	$	3,017,523
Total unamortized debt issue cost, net		(23,770)		(25,464)		(25,070)		(24,408)
Total long-term debt, net of debt issue costs	$	2,984,818	$	3,159,974	$	2,902,192	$	2,993,115

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company ~~took delivery of 5 E175 aircraft that the Company financed through $99.9 million of~~did 0t issue any long-term debt. The debt associated with the 5 E175 aircraft has a 12-year term, is due in quarterly installments with fixed annual interest rates ranging from 3.8% to 4.1% and is secured by the E175 aircraft. Additionally, the Company purchased 2 previously leased aircraft during the first quarter of 2019, for which the Company assumed $14.5 million of long-term debt. The debt associated with the 2 previously leased aircraft has a term of 18 months with monthly interest only payments with a fixed annual interest rate of 2.0% and is secured by the previously leased aircraft.

As of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, the Company had ~~$72.8~~$61.8 million and ~~$78.7~~$61.7 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.

As of March 31, 2020, SkyWest Airlines had a $75 million line of credit. The line of credit includes minimum liquidity and profitability covenants and is secured by certain assets. As of March 31, 2020, the Company was in compliance with the line of credit covenants. As of March 31, 2020, SkyWest Airlines had 0 amount outstanding under the facility. However, at March 31, 2020 SkyWest Airlines had $8.8 million in letters of credit issued under the facility, which reduced the amount available under the facility to $66.2 million. Subsequent to March 31, 2020, the Company obtained a waiver under the line of credit to allow the Company to receive funding under the CARES Act. See Note 15 for more information on the funding received under the CARES Act.

Note 910 — Gain on Sale of ExpressJet

On January 22, 2019, the Company completed the sale of its former wholly owned subsidiary ExpressJet. The Company recorded a gain of $46.5 million ~~(pre-tax)~~before income 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

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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 1011 — Special Items

During the ~~nine~~three months ended ~~September 30,~~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 ~~nine~~three months ended ~~September 30,~~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 ~~nine~~three months ended ~~September 30,~~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. The Company had 0 special expense items for the three months ended ~~September 30, 2019.~~March 31, 2020.

Note 1112 — Investment in Other Companies

During ~~the nine months ended September 30,~~ 2019, the Company created a joint venture with Regional One, Inc. (“Regional One”) by investing $22.3 million for a 75% ownership interest in Aero Engines, LLC. (“Aero Engines”). The primary purpose of Aero Engines is to lease engines to third parties. Aero Engines requires unanimous approval from the Company and Regional One for its engine purchases, dispositions, lease agreements with third parties and all other material transactions. The Company determined Aero Engines is a variable interest entity as the Company has a 75% ownership interest in Aero Engines and all material decisions require unanimous approval from the Company and Regional One, resulting in disproportionate ownership rights relative to voting rights. As unanimous approval is required for all Aero Engines’ material activities. Aero Engines has no primary beneficiary. The Company accounts for its investment in Aero Engines under the equity method. The Company’s exposure in its investment in Aero Engines primarily consists of the Company’s portion of income or loss from Aero Engines’ engine lease agreements with third parties and the Company’s ownership percentage in Aero Engines’ engines book value. The Company purchased 1415 spare engines and sold the 1415 spare engines to Aero Engines at net book value during ~~the nine months ended September 30,~~ 2019. Aero Engines had no0 debt outstanding as of ~~September 30, 2019.~~March 31, 2020. As of ~~September 30, 2019,~~March 31, 2020, the Company’s investment balance in Aero Engines was ~~$22.6~~$24.3 million. The Company’s investment in Aero Engines has been recorded in “Other Assets” on the Company’s consolidated balance sheet. The Company’s portion of the income generated by Aero Engines for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$0.3 million.~~$0.4 million, which is recorded in “Other Income” on the Company’s consolidated statements of comprehensive income.

Note 1213 — Income Taxes

The Company’s effective tax rate for the three months ended ~~September 30, 2019~~March 31, 2020 was ~~23.1%~~23.3%. The Company’s effective tax rate for the three months ended ~~September 30,~~March 31, 2020 varied from the federal statutory rate of 21.0% primarily due to the provision for state income taxes and the impact of non-deductible expenses, partially offset by a $1.4 million discrete tax benefit from excess tax deductions generated from employee equity transactions that occurred during the three months ended March 31, 2020.

The Company’s effective tax rate for the three months ended March 31, 2019 was 23.0%. The Company’s effective tax rate for the three months ended 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 expenses, partially offset by a ~~$1.5 million discrete tax benefit from the release of a valuation allowance on federal limited net operating losses.~~

The Company’s effective tax rate for the nine months ended September 30, 2019 was 23.2%. The Company’s effective tax rate for the nine months ended September 30, 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 expenses, partially offset by a $3.6$2.3 million discrete tax benefit from excess tax deductions generated from employee equity transactions ~~and a $1.5 million discrete tax benefit from the release of a valuation allowance on federal limited net operating losses~~ that occurred during the ~~nine~~three months ended ~~September 30,~~March 31, 2019.

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~~Note 13 — Related Party Transactions~~

On June 13, 2019, the Company repurchased 268,025 shares of its common stock from Jerry Atkin, Chairman of the Board, at a price of $60.24 per share, representing the volume-weighted average price of the Company’s common stock over the five trading days immediately prior to such repurchase. The transaction was part of Mr. Atkin’s personal long-term strategy for asset diversification, tax and estate planning and to fund philanthropic and charitable efforts. The transaction was approved by the Company’s Audit Committee and was effected pursuant to the Company’s previously announced stock repurchase plan.

Note 14 — Legal Matters

The Company is subject to certain legal actions which it considers routine to its business activities. As of ~~September 30, 2019,~~March 31, 2020, the Company’s management believed, after consultation with legal counsel, that the ultimate outcome of such

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legal matters was not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations.

Note 15 — Subsequent Events

On April 23, 2020, SkyWest Airlines entered into the PSP Agreement with Treasury with respect to the Payroll Support Program under the CARES Act.

The CARES Act also provides for up to $25 billion in secured loans to the airline industry, and the Company has applied for and expects to be eligible for approximately $497.0 million under the loan program and is currently evaluating its level of participation.

Payroll Support Program Agreement

Pursuant to the PSP Agreement, SkyWest Airlines expects to receive from Treasury approximately $438.0 million in the aggregate. Of the $438.0 million, approximately $336.6 million will be a direct grant and approximately $101.4 million will be in the form of a promissory note issued by SkyWest Airlines and guaranteed by the Company (the “Promissory Note”). NaN percent of the funding was disbursed by Treasury on April 23, 2020 (the “Closing Date”), and the Company anticipates receiving three additional disbursements from May to July 2020 (each, a “Disbursement Date”).

In connection with the receipt of financial assistance under the Payroll Support Program, SkyWest Airlines is required to comply with the relevant provisions of the CARES Act, including the requirement that the funding be used exclusively for the continuation of payment of employee wages, salaries and benefits. SkyWest Airlines and, in some cases, the Company will also be subject to certain restrictions, including, but not limited to, limitations on involuntary terminations and furloughs through September 30, 2020, requirements to maintain certain levels of scheduled service, restrictions on the payment of dividends and the repurchase of shares through September 30, 2021, and certain limitations on executive compensation.

Promissory Note

As partial compensation to Treasury for the provision of financial assistance under the PSP Agreement, SkyWest Airlines issued the Promissory Note to Treasury on the Closing Date. The Promissory Note provides for SkyWest Airlines’ unconditional promise to pay to Treasury the principal sum of up to approximately $101.4 million. On the Closing Date, the principal amount of the Promissory Note was approximately $35.7 million, and such principal amount will be increased by an amount equal to 30% of each additional disbursement of grants to SkyWest Airlines under the PSP Agreement on each Disbursement Date following the Closing Date.

The Promissory Note will bear interest at a rate equal to 1.00% per annum until the fifth anniversary of the Closing Date, and 2.00% plus an interest rate based on the secured overnight financing rate per annum (but not less than 0.00%) thereafter until the tenth anniversary of the Closing Date (the “Maturity Date”). Accrued interest will be payable in arrears on the last business day of each of March and September of each year, beginning with September 30, 2020. The aggregate unpaid principal amount of the Promissory Note, all accrued and unpaid interest and all other amounts payable under the Promissory Note will be due and payable on the Maturity Date.

SkyWest Airlines may, at any time, make voluntary prepayments of amounts due under the Promissory Note without penalty or premium. Within 30 days of a Change of Control (as defined in the Promissory Note), SkyWest Airlines is required to make mandatory prepayments of the aggregate principal amount outstanding and any accrued interest or other amounts owing under the Promissory Note at such time.

The Promissory Note is SkyWest Airlines’ senior unsecured obligation, and the guarantee of the Promissory Note is the senior unsecured obligation of the Company. The Promissory Note contains certain events of default, including cross-default with respect to acceleration or failure to pay at maturity other material indebtedness of SkyWest Airlines and the Company. Subject to certain grace periods, upon the occurrence of an event of default, the outstanding

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obligations under the Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.

Warrant Agreement and Warrants

In connection with the PSP Agreement and as partial compensation to Treasury for the provision of financial assistance under the PSP Agreement, the Company has agreed to issue warrants (each a “Warrant” and, collectively, the “Warrants”) to Treasury to purchase up to an aggregate of 357,317 shares (the “Warrant Shares”) of the Company’s common stock, at an exercise price of $28.38 per share (the “Exercise Price”), which was the closing price of the Company’s common stock on The Nasdaq Stock Market on April 9, 2020. The Warrants will be issued pursuant to the terms of a Warrant Agreement entered into by the Company and Treasury on the Closing Date (the “Warrant Agreement”). The number of Warrant Shares to be issued is subject to adjustment as a result of certain anti-dilution provisions contained in the Warrants.

On the Closing Date, the Company issued a Warrant to Treasury to purchase 125,804 shares of the Company’s common stock. On each Disbursement Date, the Company will issue to Treasury an additional Warrant to purchase a number of shares of its common stock determined by the quotient of (a) the product of the amount by which the principal amount of the Promissory Note is increased on the closing date of such Warrant, multiplied by 0.1, divided by (b) the Exercise Price.

The Warrants are freely transferable and do not have any voting rights. The Warrant Agreement also provides for certain registration rights. The right to purchase Warrant Shares expires on the fifth anniversary of the date of issuance of each Warrant. The Warrants will be exercisable either through net share settlement or cash, at the Company’s option.

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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 nine-month~~three-month periods ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Also discussed is our financial condition as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. You should read this discussion in conjunction with our condensed consolidated financial statements for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, 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~~period ended ~~September 30,~~March 31, 2019, ~~and September 30, 2018, and our financial position as of December 31, 2018~~ contained in this Report, include the financial results ~~and position~~ of ExpressJet for ~~those~~the respective ~~periods,~~period, 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 statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements ~~about~~regarding the impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. Readers should keep in mind that all forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the consequences of the COVID-19 pandemic to global economic conditions, the travel industry and our major airline partners in general and our financial condition and results of operations in particular; the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on our operations; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest conducts flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; realization of manufacturer residual value guarantees on applicable SkyWest aircraft; residual aircraft values and related impairment charges; the impact of global instability; labor relations and costs; potential fluctuations in fuel costs, and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; and the ability to attract and retain qualified pilots, as well as 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, ~~2018,~~2019, 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. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that the Company has filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic.

There may be other factors that may affect matters discussed in forward-looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.

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Impact of the COVID-19 Pandemic

COVID-19, which was declared a global health pandemic by the World Health Organization in March 2020, has surfaced in nearly all regions of the world and driven the implementation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, closing of borders, “shelter in place” orders and business closures. Consequently, we and our major airline partners, have experienced an unprecedented decline in the demand for air travel, which has materially and adversely affected our revenues, particularly under our prorate agreements (as defined below). The spread of the virus and the resulting global pandemic has affected the majority of the domestic and international networks of our major airline partners for whom we conduct flight operations and rely on to set our flight schedules. While the length and severity of the reduction in demand due to COVID-19 is uncertain, we presently expect a more significant negative impact on our results of operations in the second quarter of 2020 and for the remainder of 2020.

In response to these developments, we have implemented measures to focus on the personal safety of our passengers and employees, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following:

Focus on the Personal Safety of Passengers and Employees. The safety and well-being of our passengers and employees are our priorities in every decision we make. As the COVID-19 pandemic has developed, we have taken numerous steps to help passengers and employees take appropriate safety measures on the ground and in the air in keeping with current Centers for Disease Control and Prevention recommendations, including:

●

Working with our major airline partners to enhance our aircraft cleaning procedures.

●

Working with our major airline partners to provide masks for crewmembers and ensuring that all fleet service personnel have the necessary personal protective equipment for disinfecting the aircraft.

●

Providing a number of options to employees who are diagnosed with COVID-19, including pay protection and extended leave options.

●

Implementing workforce social distancing and protection measures, enhanced cleaning of our facilities, including training facilities, using methods and products similar to what we are using on our aircraft.

Capacity Reductions. Beginning in March 2020, we and our major airline partners experienced an unprecedented decrease in demand for air travel and expect this decline to continue. We depend on our major airline partners to contract with us to schedule flights. Therefore, in response to this decreased demand, we have significantly reduced our capacity. Prior to the COVID-19 pandemic, we anticipated operating approximately 2,500 daily departures in the month of April 2020; however, in April we operated approximately 800 to 900 daily departures as a result of COVID-19-related schedule reductions. We also anticipate similar schedule reductions will likely continue into the second quarter of 2020 and may continue throughout the remainder of 2020 and into 2021. We will continue to work with our major airline partners regarding future schedules and make further demand-driven adjustments to our capacity as needed. We anticipate certain aircraft with scheduled contract expirations in 2020 will not be extended as a result of decreased demand including 55 Canadair CRJ200 regional aircraft (“CRJ200”) operating under the SkyWest Airlines Delta Connection Agreement. We also expect that our American Prorate Agreement on seven CRJ200 aircraft will terminate in 2020 and we may have further reductions in the number of CRJ200 aircraft operating under our other prorate agreements. We may receive requests by our major airline partners to defer deliveries of new or used aircraft that were previously scheduled for 2020 and 2021.

Cost Reductions. With the reduction in revenue, we have, and will continue to implement, cost saving initiatives, including:

●

Reducing employee-related costs including by:

Offering voluntary unpaid leave to employees.

Suspending all non-scale pay increases.

Instituting a company-wide hiring freeze.

●

Delaying non-essential maintenance projects and reducing or suspending other discretionary spending.

Liquidity. At March 31, 2020, we had $644.1 million in total available liquidity, consisting of $577.9 million in cash and marketable securities and $66.2 million available under SkyWest Airlines’ line of credit. On April 23, 2020,

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SkyWest Airlines entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the U.S. Department of Treasury (“Treasury”) with respect to the grant program (the “Payroll Support Program”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), pursuant to which it expects to receive approximately $438.0 million in the aggregate, 50% of which was received in April 2020. See Note 15 for more information on the Payroll Support Program. The CARES Act also provides for up to $25 billion in secured loans to the airline industry, and we have applied for and expect to be eligible for approximately $497.0 million under the loan program and we are currently evaluating our level of participation.

Overview

We have the largest regional airline operations in the United States through our operating subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”). As of ~~September 30, 2019,~~March 31, 2020, SkyWest Airlines offered scheduled passenger service with approximately 2,300 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. Our fleet of Embraer E175 regional jet aircraft (“E175”), Canadair CRJ900 regional jet aircraft (“CRJ900”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) have a multiple-class seat configuration, whereas our ~~Canadair~~ CRJ200 ~~regional~~ aircraft ~~(“CRJ200”)~~ have a single-class seat configuration. As of ~~September 30, 2019,~~March 31, 2020, SkyWest Airlines had a total fleet of ~~530~~559 aircraft, of which ~~483~~484 were in scheduled service, summarized as follows:

CRJ200

CRJ700

CRJ900

E175

Total

Delta

83

14

43

54

194

United

100

19

—

65

184

American

7

66

—

—

73

Alaska

—

—

—

32

32

Aircraft in scheduled service

190

99

43

151

483

Subleased to an un-affiliated entity

4

4

5

—

13

Other*

16

18

—

—

34

Total

210

121

48

151

530


	CRJ200	CRJ700	CRJ900	E175	Total
Delta	82	8	43	62	195
United	101	19	—	69	189
American	7	61	—	—	68
Alaska	—	—	—	32	32
Aircraft in scheduled service	190	88	43	163	484
Subleased to an un-affiliated entity	4	16	5	—	25
Other*	23	27	—	—	50
Total	217	131	48	163	559

*As of ~~September 30, 2019,~~March 31, 2020, these aircraft have been removed from service and are in the process of being placed under a leasing arrangement with a third party, are aircraft transitioning between code-share agreements with our major airline partners and being used as supplemental spare aircraft, or are in the process of being ~~prepared to be leased to third parties.~~

parted out.

As of ~~September 30, 2019,~~March 31, 2020, approximately ~~40.2%~~40% of our aircraft in scheduled service was operated for Delta, approximately ~~38.1%~~39% was operated for United, approximately ~~15.1%~~14% was operated for American and approximately ~~6.6%~~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~~capacity purchase agreements 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 dependent on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics. From ~~September 30, 2018~~March 31, 2019 to ~~September 30, 2019,~~March 31, 2020, we ~~have~~ added 13nine new E175 aircraft and ~~eleven new CRJ900~~seven used E175 aircraft to our fleet, and removed ~~100 Embraer ERJ145 regional jet aircraft (“ERJ145”) and Embraer ERJ135 regional jet aircraft (“ERJ135”) and 28~~eleven CRJ700 aircraft from scheduled service that are temporarily removed from service during a transition period between flying contracts with our major partners or were ~~operating~~placed under ~~less profitable or unprofitable flying agreements.~~a lease with a third party.

We ~~anticipate~~are coordinating with our major airline partners on the timing of upcoming fleet ~~will continue~~deliveries under previously announced deals in response to ~~evolve, as~~COVID-19 schedule reductions. The anticipated future delivery dates summarized below are subject to change. As of March 31, 2020, we are scheduled to add ~~eleven~~six new E175 and one new CRJ900 aircraft to ~~existing fixed-fee agreements by the end of~~our capacity purchase agreement with Delta during 2020. We also anticipate ~~these~~adding 20 new E175 aircraft ~~will be replacing older CRJ900~~with American under a capacity purchase agreement. We are currently coordinating with American and ~~CRJ700 aircraft currently operating under fixed-fee agreements.~~the manufacturer on revised delivery dates. In addition to the new aircraft deliveries, we are scheduled to take delivery of ~~six~~three used E175 aircraft to be financed by Delta under our agreement with Delta in 2020 and 21 used E175 aircraft to be financed by United under our agreement with United throughout 2020.

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As of March 31, 2020, our capacity purchase contract with Delta included 55 CRJ200 aircraft that are scheduled to expire in increments during the remainder of 2020 and are not expected to be extended as a result of the decrease demand caused by the COVID-19 pandemic. We lease 19 of the 55 aircraft from Delta and anticipate returning the leased aircraft to Delta in 2020. ~~Our primary objective~~We own the remaining 36 CRJ200 aircraft and anticipate parking the 36 CRJ200 aircraft following removal from service. We have no outstanding financing obligations on the 36 owned CRJ200 aircraft. We reduced the estimated useful lives of these 36 CRJ200 aircraft to align with each aircraft’s anticipated removal dates, which resulted in approximately $15.0 million of incremental depreciation expense during the three months ended March 31, 2020. We anticipate we will incur $29.1 million of additional depreciation expense from April to December 2020 resulting from the shorter estimated useful lives of the 36 owned CRJ200 aircraft.

We anticipate our American Prorate Agreement on seven CRJ200 aircraft will terminate in 2020 as a result of COVID-19-related passenger demand reductions. We may have further reductions in the ~~fleet changes is to improve our profitability by adding~~number of CRJ200 aircraft ~~to fixed-fee agreements at improved economics, including the E175 aircraft, while removing aircraft that were~~ operating under ~~less profitable or unprofitable arrangements.~~prorate agreements with our other major airline partners throughout 2020.

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 ~~nine~~three months ended ~~September 30, 2019, contract flying~~March 31, 2020, capacity purchase revenue and prorate revenue represented approximately ~~82.1%~~85.9% and ~~17.9%~~14.1%, 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 and profitability may fluctuate based on ticket prices and passenger loads and we are responsible for all costs to operate the flight, including fuel.

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~~Third~~First Quarter Summary

Our total operating revenues of ~~$760.3~~$729.9 million for the three months ended ~~September 30, 2019 decreased 8.3%~~March 31, 2020 increased 0.9% compared to total operating revenues of ~~$829.3~~$723.7 million for the three months ended ~~September 30, 2018.~~March 31, 2019. We had net income of ~~$91.3~~$30.0 million, or ~~$1.79~~$0.59 per diluted share, for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to net income of ~~$83.0~~$88.2 million, or ~~$1.57~~$1.69 per diluted share, for the three months ended ~~September 30, 2018.~~March 31, 2019.

Significant items affecting our financial performance during the three months ended ~~September 30, 2019~~March 31, 2020 are outlined below.

Revenue

The number of aircraft we have in scheduled service and the number of block hours we generate on our flights are primary drivers to our flying agreements revenue under our ~~fixed-fee arrangements.~~capacity purchase agreements. The number of flights we operate and the corresponding number of passengers we carry are the primary drivers to our revenue under our prorate flying agreements. ~~During the three months ended September 30,~~From March 31, 2019 to March 31, 2020, we ~~had a net decrease in~~increased the number of aircraft ~~operating under fixed-fee agreements, primarily related~~in scheduled service from 476 aircraft to 484 aircraft, including 16 E175 aircraft, three CRJ200 aircraft and the ~~sale~~removal of ~~ExpressJet during the three months ended March 31, 2019. As summarized under the Fleet activity section below, from September 30, 2018 to September 30, 2019, we removed 128~~eleven CRJ700 aircraft ~~from service~~ that were ~~operating under less profitable flying contracts and added 37 aircraft~~leased to ~~new or existing fixed-fee arrangements at improved economics. The number of aircraft available for scheduled service decreased from 574 aircraft at September 30, 2018 to 483 at September 30, 2019.~~a third party. Our completed block hours ~~decreased 16.1%~~increased 2.2% over the same period primarily due to the ~~sale of ExpressJet and the corresponding decrease in block hours generated by ExpressJet.~~additional aircraft added subsequent to March 31, 2019.

Our total revenues ~~decreased $69.0~~increased $6.2 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to the additional aircraft added subsequent to March 31, 2019, partially offset by the effects of the COVID-19 pandemic discussed below and the sale of ExpressJet and the corresponding decrease in revenue associated with ExpressJet flying ~~contracts.~~contracts during the three months ended March 31, 2019. ExpressJet revenue was ~~$140.2~~$24.1 million for the three months ended ~~September 30, 2018.~~March 31, 2019. Revenue from SkyWest Airlines and our leasing subsidiary SkyWest Leasing, Inc. (“SkyWest Leasing”) increased from ~~$689.1~~$729.9 million for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$760.3~~$699.6 million for the three months ended ~~September 30, 2019. This increase in~~March 31, 2020.

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March 31, 2019 to 65 aircraft as of March 31, 2020, or 6.6%. However, our prorate revenue ~~was primarily related~~decreased from $106.1 million for the three months ended March 31, 2019 to ~~additional revenue generated from 13 new E175 aircraft~~$100.4 million for the three months ended March 31, 2020, or 5.8%. The negative impact to our revenues as a result of the COVID-19 pandemic and ~~eleven new CRJ900 aircraft added under fixed-fee contracts since September 30, 2018.~~its associated effects on the travel industry is anticipated to continue into the second quarter of 2020 and throughout the remainder of 2020.

Operating Expenses

Our total operating expenses ~~decreased $77.5~~increased $36.3 million for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the three months ended ~~September 30, 2018.~~March 31, 2019. This ~~decrease~~increase was primarily due to the additional operating expenses of SkyWest Airlines and SkyWest Leasing that resulted from additional aircraft we placed into service since March 31, 2019, partially offset by the sale of ExpressJet and the corresponding reduction in ExpressJet operating expenses ~~partially offset by additional operating expenses at SkyWest Airlines and SkyWest Leasing that resulted from new, additional aircraft we placed into service since September 30, 2018.~~of $28.7 million. 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 September 30, 2019 and 2018:~~for the three months ended:

Aircraft in Service

September 30, 2019

September 30, 2018

CRJ200s

190

185

CRJ700s

99

114

CRJ900s

43

37

ERJ145/135s

—

100

E175s

151

138

Total

483

574

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~~Changes in our fleet activity from September 30, 2018 to September 30, 2019 are summarized as follows:~~


~~Aircraft available for scheduled service at September 30, 2018:~~		~~574~~
~~Additions:~~
~~New E175 aircraft:~~	13
~~New CRJ900 aircraft:~~	11
~~New aircraft added to fleet:~~		24

~~Used aircraft transitioned back into service, net~~		13

~~ExpressJet removals:~~
~~ERJ145/ERJ135 aircraft:~~	~~(100)~~
~~CRJ700 aircraft:~~	~~(28)~~
~~Total ExpressJet removals:~~		~~(128)~~

~~Aircraft available for scheduled service at September 30, 2019:~~		~~483~~


Aircraft in Service	March 31, 2020	December 31, 2019	March 31, 2019
CRJ200s	190	190	187
CRJ700s	88	94	99
CRJ900s	43	43	43
E175s	163	156	147
Total	484	483	476

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, ~~2018,~~2019, which are presented in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. 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, self-insurance and ~~stock-based compensation expense.~~income tax. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates.

~~We adopted Topic 842 as of January 1, 2019, utilizing the~~ ~~modified retrospective 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 for a description of recent accounting pronouncements.

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Results of Operations

Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

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 September 30,						For the three months ended March 31,
	2019		2018		% Change
SkyWest Airlines block hours	375,933		355,264		5.8	%
ExpressJet block hours	—		92,761		(100.0)	%
Block hours by aircraft type:							2020		2019		% Change
E175s							132,679		126,749		4.7	%
CRJ900s							28,920		30,965		(6.6)	%
CRJ700s							68,074		71,768		(5.1)	%
CRJ200s							127,550		119,907		6.4	%
Total block hours	375,933		448,025		(16.1)	%	357,223		349,389		2.2	%

SkyWest Airlines Only

Departures	219,272		207,074		5.9	%	209,283		193,475		8.2	%
Passengers carried	11,568,831		10,784,556		7.3	%	8,864,506		9,614,952		(7.8)	%
Passenger load factor	83.9	%	83.0	%	0.9	pts	67.5	%	78.6	%	(11.1)	pts
Average passenger trip length (miles)	501		489		2.5	%	493		507		(2.8)	%

~~During~~ExpressJet generated 16,904 block hours during the three months ended ~~September 30, 2018,~~March 31, 2019 prior to our sale of ExpressJet ~~had 54,308~~in January 2019. The number of ExpressJet departures, passengers carried and ~~2,087,099 passengers carried.~~other operating statistics presented above was not significant for the three months ended March 31, 2019, prior to the sale of ExpressJet.

Operating Revenues

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


	For the three months ended September 30,								For the three months ended March 31,
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Flying agreements	$	738,838	$	816,057	$	(77,219)	(9.5)	%	$	709,494	$	700,001	$	9,493	1.4	%
Airport customer service and other		21,457		13,218		8,239	62.3	%
Lease, airport services and other										20,442		23,693		(3,251)	(13.7)	%
Total operating revenues	$	760,295	$	829,275	$	(68,980)	(8.3)	%	$	729,936	$	723,694	$	6,242	0.9	%

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~~Lease, airport services and other revenues consist of revenue earned from providing airport counter, gate and ramp 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 September 30,								For the three months ended March 31,
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Capacity purchase agreements revenue: flight operations	$	385,537	$	472,952	$	(87,415)	(18.5)	%	$	366,409	$	386,545	$	(20,136)	(5.2)	%
Capacity purchase agreements revenue: aircraft lease revenue		207,467		208,813		(1,346)	(0.6)	%		242,734		207,381		35,353	17.0	%
Prorate agreements revenue		145,834		134,292		11,542	8.6	%		100,351		106,075		(5,724)	(5.4)	%
Flying agreements revenue	$	738,838	$	816,057	$	(77,219)	(9.5)	%	$	709,494	$	700,001	$	9,493	1.4	%

The decrease in “Capacity purchase agreements revenue: flight operations” of ~~$87.4~~$20.1 million was primarily due to the sale of ExpressJet in 2019 and the corresponding ~~decrease~~elimination of ExpressJet revenue in ~~revenue.~~2020 and due to schedule reductions experienced in March 2020 resulting from the COVID-19 pandemic. The ~~decrease~~increase in “Capacity purchase agreement revenue: aircraft lease revenue” of ~~$1.3~~$35.4 million was primarily due to the ~~sale of ExpressJet and the corresponding decrease in revenue, partially offset by the~~ incremental revenue generated from ~~13 new~~16 E175 aircraft added to our fleet and economic improvements made to certain existing ~~fixed-fee~~capacity purchase agreements since ~~September 30, 2018.~~March 31, 2019. The ~~increase~~decrease in prorate agreements revenue of ~~$11.5~~$5.7 million was primarily due to ~~an increase in~~ the ~~number~~impact of ~~prorate flights operated during the three months ended September 30, 2019 compared to the three months ended September 30, 2018.~~

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COVID-19 and the corresponding decrease in prorate passengers during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

The ~~$8.2~~$3.3 million ~~increase~~decrease in lease, airport ~~customer service~~services and other revenues was primarily related to ~~an increase~~a decrease in ~~revenue from leasing aircraft and spare engines~~the number of flights at locations where we were contracted to ~~third parties.~~provide airport customer service during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Operating Expenses

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


	For the three months ended September 30,								For the three months ended March 31,
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Salaries, wages and benefits	$	251,414	$	301,378	$	(49,964)	(16.6)	%	$	249,160	$	257,588	$	(8,428)	(3.3)	%
Aircraft maintenance, materials and repairs		133,521		142,285		(8,764)	(6.2)	%		160,216		118,262		41,954	35.5	%
Depreciation and amortization		92,795		86,088		6,707	7.8	%		111,708		89,986		21,722	24.1	%
Airport-related expenses										30,640		30,647		(7)	(0.0)	%
Aircraft fuel		31,063		30,258		805	2.7	%		25,413		25,656		(243)	(0.9)	%
Airport-related expenses		27,808		25,655		2,153	8.4	%
Aircraft rentals		17,676		36,827		(19,151)	(52.0)	%		17,056		20,158		(3,102)	(15.4)	%
Special items										—		21,869		(21,869)	NM
Other operating expenses		59,577		68,859		(9,282)	(13.5)	%		69,422		63,109		6,313	10.0	%
Total operating expenses	$	613,854	$	691,350	$	(77,496)	(11.2)	%	$	663,615	$	627,275	$	36,340	5.8	%
Interest expense		31,606		31,440		166	0.5	%		30,204		32,507		(2,303)	(7.1)	%
Total airline expenses	$	645,460	$	722,790	$	(77,330)	(10.7)	%	$	693,819	$	659,782	$	34,037	5.2	%

Salaries, wages and benefits. The ~~$50.0~~$8.4 million decrease in salaries, wages and benefits was primarily due to ~~a decrease~~$14.4 million of ExpressJet salaries, wages and benefits reflected in ~~direct labor costs resulting from~~the three months ended March 31, 2019 prior to the sale of ExpressJet ~~partially offset by increased labor costs~~in January 2019. As a result of decreased demand for air travel due to the COVID-19 pandemic, we have instituted a company-wide hiring freeze, suspended all non-scale pay increases and ~~employee benefit costs for certain work groups, including flight crews at SkyWest Airlines.~~offered voluntary unpaid leave to our employees.

Aircraft maintenance, materials and repairs. The ~~$8.8~~$42.0 million ~~decrease~~increase in aircraft maintenance expense was primarily due to ~~a decrease~~an increase in direct maintenance costs ~~that corresponds with our sale of ExpressJet. This decrease in aircraft maintenance expense was partially offset by~~ ~~an increase in maintenance parts expense and direct maintenance costs~~ incurred on a portion of SkyWest Airlines’ CRJ200 and CRJ700 fleet intended to extend the operational performance and reliability of the aircraft and increased engine maintenance expense during the three months ended ~~September 30, 2019~~March 31, 2020 compared to the three months ended ~~September 30, 2018.~~March 31, 2019.

Depreciation and amortization. The ~~$6.7~~$21.7 million increase in depreciation and amortization expense was primarily due to a reduction in the ~~purchase~~estimated useful life of ~~13 E175 aircraft~~a certain portion of SkyWest Airlines’ CRJ200 fleet that are expected to expire under our flying agreements during 2020 and ~~spare engines subsequent~~are not expected to ~~September 30, 2018.~~be extended.

Aircraft fuel. The ~~$0.8~~$0.2 million ~~increase~~decrease in fuel cost was primarily due to a decrease in our average fuel cost per gallon from $2.43 for the three months ended March 31, 2019 to $2.23 for the three months ended March 31, 2020, partially offset by an increase in the number of prorate flights we operated and corresponding increase in gallons of fuel we ~~purchased, partially offset by a decrease in our average fuel cost per gallon from $2.69 for the three months ended September 30, 2018 to $2.48 for the three months ended September 30, 2019.~~purchased. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our ~~fixed-fee contracts~~capacity purchase agreements are either purchased directly by our major airline ~~partner,~~partners or if purchased by us ~~we record~~and reimbursed by our major airline partners, with the direct reimbursement recorded 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 September 30,						For the three months ended March 31,
(in thousands)	2019		2018		% Change		2020		2019		% Change
Fuel gallons purchased		12,510		11,245	11.2	%		11,415		10,579	7.9	%
Fuel expense	$	31,063	$	30,258	2.7	%	$	25,413	$	25,656	(0.9)	%

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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 ~~$2.2 million increase~~decrease in airport-related expenses was primarily due to a decrease in deicing events partially offset by an increase in airport terminal rents and subcontract airport services related to our prorate operations during the three months ended ~~September 30, 2019.~~March 31, 2020.

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Aircraft rentals. The ~~$19.2~~$3.1 million decrease in aircraft rentals was primarily ~~due~~related to ~~the acquisition of 52 CRJ aircraft under an early lease buyout arrangement during the three months ended March 31, 2019 and through~~ a reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to ~~September 30, 2018.~~

~~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 $9.3 million decrease in other operating expenses was primarily related to the sale of ExpressJet and the related decrease in crew costs associated with the decrease in expenses associated with that operation.

~~Interest Expense.~~ The $0.2 million increase in interest expense was primarily related to the additional interest expense associated with the 13 E175 aircraft added to our fleet subsequent to September 30, 2019, which were debt financed.

~~Total airline expenses.~~ The $77.3 million decrease in total airline expenses was primarily related to the sale of ExpressJet and the related expenses associated with ExpressJet’s prior operations, partially offset by additional operating expenses at SkyWest Airlines and SkyWest Leasing that resulted from new, additional aircraft we placed into service since September 30, 2018.

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

~~Interest income.~~ Interest income increased $1.3 million, or 55.1%, during the three months ended September 30, 2019, compared to the three months ended September 30, 2018. The increase in interest income was primarily related to an increase in interest earned from loans to third parties executed subsequent to September 30, 2018.

~~Other income (expense), net.~~ During the three months ended September 30, 2019, we had other income, net of $0.4 million primarily related to investments in joint ventures with third parties. During the three months ended September 30, 2018, we had other income, net of $1.2 million primarily related to a gain on the sale of excess rotable spare parts sold during the three months ended September 30, 2018.

~~Income taxes.~~Our provision for income taxes was 23.1% and 24.5% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate primarily relates to a tax benefit recorded in the three months ended September 30, 2019 for the release of a valuation allowance related to federal limited net operating losses.

~~Net income.~~ Primarily due to the factors described above, we generated net income of $91.4 million, or $1.79 per diluted share, for the three months ended September 30, 2019, compared to net income of $83.0 million, or $1.57 per diluted share, for the three months ended September 30, 2018.

~~Nine months ended September 30, 2019 and 2018~~

~~Operational Statistics.~~ ~~The following table sets forth our major operational statistics and the associated percentage changes for the nine months ended September 30, 2019 and 2018:~~

For the nine months ended September 30,


2019

2018

% Change

SkyWest Airlines block hours

1,096,104

1,028,492

6.6
%
ExpressJet block hours

16,904

295,074

(94.3)
%
Total block hours

1,113,008

1,323,566

(15.9)
%

SkyWest Airlines Only

Departures

627,799

592,139

6.0
%
Passengers carried

32,566,966

30,101,561

8.2
%
Passenger load factor

82.3
%
81.6
%
0.7
pts
Average passenger trip length (miles)

501

490

2.2
%

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During the nine months ended September 30, 2018, ExpressJet had 172,931 departures and 6,370,670 passengers carried. The number of ExpressJet departures and passengers carried was not significant for the nine months ended September 30, 2019, given that the sale of ExpressJet was completed in JanuaryMarch 31, 2019.

~~Operating Revenues~~

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

For the nine months ended September 30,


2019

2018

$ Change

% Change

Flying agreements

$
2,164,173

$
2,377,659

$
(213,486)

(9.0)
%
Airport customer service and other

64,199

40,531

23,668

58.4
%
Total operating revenues

$
2,228,372

$
2,418,190

$
(189,818)

(7.8)
%

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 consist of revenue earned from providing airport counter, gate and ramp 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 nine months ended September 30,

2019

2018

$ Change

% Change

Capacity purchase agreements revenue: flight operations

$
1,155,814

$
1,404,801

$
(248,987)

(17.7)
%
Capacity purchase agreements revenue: aircraft lease revenue

621,526

599,188

22,338

3.7
%
Prorate agreements revenue

386,833

373,670

13,163

3.5
%
Flying agreements revenue

$
2,164,173

$
2,377,659

$
(213,486)

(9.0)
%

The decrease in “Capacity purchase agreements revenue: flight operations” of $249.0 million was primarily due to the sale of ExpressJet and the corresponding decrease in revenue, partially offset by the incremental revenue generated from 13 new E175 aircraft and eleven new CRJ900 aircraft added to our fleet and economic improvements made to certain existing fixed-fee agreements since September 30, 2018. The increase in “Capacity purchase agreement revenue: aircraft lease revenue” of $23.3 million was primarily due to the 13 new E175 aircraft added subsequent to September 30, 2018. The increase in prorate agreement revenue of $13.2 million was primarily due to an increase in the number of prorate flights operated during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

~~The $23.7 million increase in airport customer service and other revenues was primarily related to an increase in revenue from leasing aircraft and spare engines to third parties.~~

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~~Operating Expenses~~

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

For the nine months ended September 30,

2019

2018

$ Change

% Change

Salaries, wages and benefits

$
752,768

$
901,775

$
(149,007)

(16.5)
%

Aircraft maintenance, materials and repairs

376,572

423,665

(47,093)

(11.1)
%

Depreciation and amortization

272,929

246,386

26,543

10.8
%

Airport-related expenses

89,237

80,852

8,385

10.4
%

Aircraft fuel

87,570

87,208

362

0.4
%

Aircraft rentals

55,840

119,015

(63,175)

(53.1)
%

Special items

21,869

—

21,869

NM

Other operating expenses

184,634

206,511

(21,877)

(10.6)
%

Total operating expenses

$
1,841,419

$
2,065,412

$
(223,993)

(10.8)
%

Interest expense

96,884

86,485

10,399

12.0
%

Total airline expenses

$
1,938,303

$
2,151,897

$
(213,594)

(9.9)
%

~~Salaries, wages and benefits.~~ The $149.0 million decrease in salaries, wages and benefits was primarily due to a decrease in direct labor costs resulting from the sale of ExpressJet, partially offset by increased labor costs and employee benefit costs for certain work groups, including flight crews at SkyWest Airlines.

~~Aircraft maintenance, materials and repairs.~~ The $47.1 million decrease in aircraft maintenance expense was primarily due to a decrease in direct maintenance costs that corresponds with our sale of ExpressJet. This decrease in aircraft maintenance expense was partially offset by an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ200 fleet and 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 13 E175 aircraft added subsequent to September 30, 2018.

~~Depreciation and amortization.~~ ~~The $26.5 million increase in depreciation and amortization expense was primarily due to the purchase of 13 E175 aircraft and spare engines subsequent to September 30, 2018.~~

~~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 $8.4 million increase in airport-related expenses was primarily due to an increase in airport terminal rents, subcontract airport services and deicing events related to our prorate operations during the nine months ended September 30, 2019.

~~Aircraft fuel.~~ The $0.4 million increase in fuel cost was primarily due to an increase in the number of prorate flights we operated and corresponding increase in gallons of fuel we purchased, partially offset by a decrease in our average fuel cost per gallon from $2.58 for the nine months ended September 30, 2018 to $2.49 for the nine months ended September 30, 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 nine months ended September 30,
(in thousands)

2019

2018

% Change

Fuel gallons purchased

35,108

33,858

3.7
%
Fuel expense

$
87,570

$
87,208

0.4
%

~~Aircraft rentals.~~ During the nine months ended September 30, 2019, we acquired 52 CRJ aircraft under an early lease buyout arrangement. The $55.8 million decrease in aircraft rentals was primarily due to the acquisition of

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~~these 52 CRJ aircraft and through a reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to September 30, 2018.~~

Special Items. The $21.9 million special items expense for the ~~nine~~three months ended ~~September 30,~~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. We did not have a comparable special items expense during the three months ended March 31, 2020.

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 ~~$21.9~~$6.3 million ~~decrease~~increase in other operating expenses was primarily related to credit loss reserves recorded, resulting from our adoption of Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”) during the ~~sale of ExpressJet and the related decrease in crew costs associated with the decrease in expenses associated with that operation.~~three months ended March 31, 2020.

Interest Expense. The ~~$10.4~~$2.3 million increase in interest expense was primarily related to the additional interest expense associated with the 13nine new E175 aircraft added to our fleet ~~since September 30, 2018,~~subsequent to March 31, 2019, which were debt financed.

Total airline expenses. The ~~$213.6~~$34.0 million ~~decrease~~increase in total airline expenses was primarily related to ~~the sale of ExpressJet and the related expenses associated with ExpressJet’s prior operations, partially offset by~~ additional operating expenses at SkyWest Airlines and SkyWest Leasing that resulted from new, additional aircraft we placed into service since ~~September 30, 2018.~~March 31, 2019, partially offset by the sale of ExpressJet and the related expenses associated with ExpressJet’s prior operations during the three months ended March 31, 2019.

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

Interest income. Interest income ~~increased $5.4~~decreased $1.2 million, or ~~94.7%~~32.7%, during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. The ~~increase~~decrease in interest income was primarily related to ~~an increase~~a decrease in interest rates subsequent to ~~September 30, 2018, and an increase in interest earned from loans to third parties executed subsequent to September 30, 2018.~~March 31, 2019.

Other income (expense), net. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we had other income, net of ~~$43.9~~$0.4 million primarily related to income earned from our investment in a joint venture with a third party. During the three months ended March 31, 2019, we had other income of $46.7 million primarily related to the gain on sale of ExpressJet. During the nine months ended September 30, 2018, we had other income, net of $3.5 million primarily related to a mark-to-market gain on trading securities and excess rotable spare parts sold during the nine months ended September 30, 2018.

Income taxes.Our provision for income taxes was ~~23.2%~~23.3% and ~~22.6%~~23.0% for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in the effective tax rate primarily relates to a ~~smaller~~lower discrete tax benefit from excess tax deductions generated from employee equity transactions that occurred during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the ~~nine~~three months ended September 30, 2018, partially offset by a $1.5 million discrete tax benefit from the release of a valuation allowance on federal limited net operating losses that occurred during the nine months ended September 30,March 31, 2019.

Net income. Primarily due to the factors described above, we generated net income of ~~$267.6~~$30.0 million, or ~~$5.19~~$0.59 per diluted share, for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, compared to net income of ~~$213.3~~$88.2 million, or ~~$4.03~~$1.69 per diluted share, for the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019.

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Our Business Segments

Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

For the three months ended ~~September 30, 2019~~March 31, 2020 and following the sale of ExpressJet, we had two reportable segments, which were the basis of our internal financial reporting: SkyWest Airlines 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 for the three months ended ~~September 30,~~

March 31,

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~~2018,~~ 2019, prior to the sale of ExpressJet, were SkyWest Airlines, ExpressJet and SkyWest Leasing. During ~~2018,~~2019, our corporate overhead expense was allocated to the operating expenses of SkyWest Airlines and ExpressJet.


	For the three months ended September 30,								For the three months ended March 31,
	(dollar amounts in thousands)								(dollar amounts in thousands)
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Operating Revenues:
SkyWest Airlines operating revenue	$	641,947	$	607,052	$	34,895	5.7	%	$	606,842	$	585,768	$	21,074	3.6	%
ExpressJet operating revenues		—		140,155		(140,155)	(100.0)	%		—		24,050		(24,050)	(100.0)	%
SkyWest Leasing operating revenues		118,348		82,068		36,280	44.2	%		123,094		113,876		9,218	8.1	%
Total Operating Revenues	$	760,295	$	829,275	$	(68,980)	(8.3)	%	$	729,936	$	723,694	$	6,242	0.9	%
Airline Expenses:
SkyWest Airlines airline expense	$	563,811	$	516,322	$	47,489	9.2	%	$	596,682	$	549,719	$	46,963	8.5	%
ExpressJet airline expense		—		140,385		(140,385)	(100.0)	%		—		28,690		(28,690)	(100.0)	%
SkyWest Leasing airline expense		81,649		66,083		15,566	23.6	%		97,137		81,373		15,764	19.4	%
Total Airline Expenses (1)	$	645,460	$	722,790	$	(77,330)	(10.7)	%	$	693,819	$	659,782	$	34,037	5.2	%
Segment profit (loss):
SkyWest Airlines segment profit	$	78,136	$	90,730	$	(12,594)	(13.9)	%	$	10,160	$	36,049	$	(25,889)	(71.8)	%
ExpressJet segment loss		—		(230)		230	(100.0)	%		—		(4,640)		4,640	(100.0)	%
SkyWest Leasing profit		36,699		15,985		20,714	129.6	%		25,957		32,503		(6,546)	(20.1)	%
Total Segment Profit	$	114,835	$	106,485	$	8,350	7.8	%	$	36,117	$	63,912	$	(27,795)	(43.5)	%
Interest Income		3,542		2,283		1,259	55.1	%		2,564		3,807		(1,243)	(32.7)	%
Other Income (Expense), net		361		1,157		(796)	(68.8)	%		398		46,725		(46,327)	(99.1)	%
Consolidated Income Before Taxes	$	118,738	$	109,925	$	8,813	8.0	%	$	39,079	$	114,444	$	(75,365)	(65.9)	%

(1)	Total Airline Expenses includes operating expense and interest expense

SkyWest Airlines Segment Profit. SkyWest Airlines block hour production increased to ~~375,933,~~357,223, or ~~5.8%~~2.2%, for the three months ended ~~September 30, 2019,~~March 31, 2020, from ~~355,264~~349,389 for the three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to the additional block hour production from 13nine new E175 aircraft and ~~eleven new CRJ900~~seven used E175 aircraft added subsequent to ~~September 30, 2018.~~March 31, 2019, partially offset by the reduced demand for air travel due to the COVID-19 epidemic in March 2020. Significant items contributing to the SkyWest Airlines segment profit are set forth below.

The ~~$34.9~~$21.1 million, or ~~5.7%~~3.6%, increase in SkyWest Airlines Operating Revenues for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the three months ended ~~September 30, 2018,~~March 31, 2019, was primarily due to revenue associated with 1316 E175 ~~aircraft and eleven CRJ900~~ aircraft added subsequent to ~~September 30, 2018.~~March 31, 2019. The increase in revenue was partially offset by a reduction in prorate revenue from March 31, 2019 to March 31, 2020 due to the COVID-19 pandemic that negatively impacted revenue in March 2020.

The ~~$47.5~~$47.0 million, or ~~9.2%~~8.5%, increase in SkyWest Airlines Airline Expenses for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the three months ended ~~September 30, 2018,~~March 31, 2019, was primarily due to the following factors:

●

SkyWest Airlines’ salaries, wages and benefits expense increased by ~~$30.4~~$5.8 million, or ~~13.8%~~2.4%, primarily ~~due to increased labor costs and employee benefit costs for certain work groups, including flight crews and~~ due to additional block hour production.

●

SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by ~~$24.3~~$46.5 million, or ~~22.7%~~42.4%, primarily attributable to an increase in maintenance parts expense and direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ200 and CRJ700 fleet and ~~due to an~~ increased ~~volume of block hours during the three months ended September 30, 2019 compared to the three months ended September 30, 2018.~~engine maintenance

●

SkyWest Airlines’ aircraft rental expenses decreased $17.9 million, or 51.4%, primarily due to the acquisition of 52 CRJ aircraft under an early lease buyout arrangement during the three months ended March 31, 2019 and through a reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to September 30, 2018.

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expense during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

●

SkyWest Airlines’ depreciation and amortization expense increased by $11.7 million, or 29.3%, primarily due to a decrease in the estimated useful life of a certain portion of SkyWest Airlines’ CRJ200 fleet and the related spare engines that are expected to come out of service during 2020.

●

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 during the three months ended March 31, 2019.

●

SkyWest Airlines’ other operating expense increased ~~$3.9~~$6.7 million, or ~~7.0%~~11.3%, primarily due to an increase in the use of hotels for crews and an increase in direct operating costs associated with the increase in block hour production year-over-year.

SkyWest Leasing Segment Profit. SkyWest Leasing profit ~~increased $20.7~~decreased $6.5 million during the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to 13additional depreciation expense resulting from a shortened estimated useful life of certain CRJ200 spare engines that are expected to come out of service during 2020 as a result of COVID-19, partially offset by an additional nine new E175 aircraft added to our fleet subsequent to ~~September 30, 2018 and additional revenue from leasing aircraft and spare engines to third parties.~~

~~Nine Months Ended September 30, 2019 and 2018~~

For the nine months ended September 30, 2019 and 2018 for the applicable periods prior to the sale of ExpressJet, we had three reportable segments, which were the basis of our internal financial reporting: SkyWest Airlines, ExpressJet and SkyWest Leasing.

~~Corporate overhead expense was allocated to the operating expenses of SkyWest Airlines and ExpressJet.~~

The segment information presented for ExpressJet for the nine months ended September 30, 2019 reflects ExpressJet’s results prior to the sale of ExpressJet on January 22, 2019, when ExpressJet was operating as a subsidiary of the Company.

For the nine months ended September 30,

(dollar amounts in thousands)


2019

2018

$ Change

% Change

Operating Revenues:

SkyWest Airlines operating revenue

$
1,854,803

$
1,750,827

$
103,976

5.9
%
ExpressJet operating revenues

24,050

444,943

(420,893)

(94.6)
%
SkyWest Leasing operating revenues

349,519

222,420

127,099

57.1
%
Total Operating Revenues

$
2,228,372

$
2,418,190

$
(189,818)

(7.8)
%
Airline Expenses:

SkyWest Airlines airline expense

$
1,662,665

$
1,518,020

$
144,645

9.5
%
ExpressJet airline expense

28,690

457,348

(428,658)

(93.7)
%
SkyWest Leasing airline expense

246,948

176,529

70,419

39.9
%
Total Airline Expenses (1)

$
1,938,303

$
2,151,897

$
(213,594)

(9.9)
%
Segment profit (loss):

SkyWest Airlines segment profit

$
192,138

$
232,807

$
(40,669)

(17.5)
%
ExpressJet segment loss

(4,640)

(12,405)

7,765

(62.6)
%
SkyWest Leasing profit

102,571

45,891

56,680

123.5
%
Total Segment Profit

$
290,069

$
266,293

$
23,776

8.9
%
Interest Income

11,081

5,692

5,389

94.7
%
Other Income (Expense), net

47,367

3,470

43,897

*

Consolidated Income Before Taxes

$
348,517

$
275,455

$
73,062

26.5
%

~~(1)~~

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

* is more than 500%

~~SkyWest Airlines Segment Profit.~~ SkyWest Airlines block hour production increased to 1,096,104, or 6.6%, for the nine months ended September 30, 2019, from 1,028,492 for the nine months ended September 30, 2018, primarily due to the additional block hour production from 13 new E175 aircraft and eleven new CRJ900 aircraft added subsequent to September 30, 2018. Significant items contributing to the SkyWest Airlines segment profit are set forth below.

The $104.0 million, or 5.9%, increase in SkyWest Airlines Operating Revenues for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to revenue associated with 13 E175 aircraft and eleven CRJ900 aircraft added subsequent to September 30, 2018.

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The $144.6 million, or 9.5%, increase in SkyWest Airlines Airline Expenses for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily due to the following factors:

●

SkyWest Airlines’ salaries, wages and benefits expense increased by $93.3 million, or 14.5%, primarily due to increased labor costs and employee benefit costs for certain work groups, including flight crews and due to additional block hour production.

●

SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $53.8 million, or 17.4%, primarily attributable to direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ200 fleet and 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 13 E175 aircraft added subsequent to September 30, 2018.

●

SkyWest Airlines’ aircraft rental expenses decreased $58.3 million, or 52.1%, primarily due to the acquisition of 52 CRJ aircraft under an early lease buyout arrangement during the nine months ended September 30, 2019 and through a reduction of our fleet size that was financed through leases as a result of scheduled lease expirations subsequent to September 30, 2018.

●

SkyWest Airlines’ other operating expense increased $19.9 million, or 12.4%, primarily due to an increase in the use of hotels for crews, property taxes on additional aircraft added subsequent to September 30, 2018 and an increase in direct operating costs associated with the increase in block hour production year-over-year.

~~ExpressJet Segment Loss.~~ ~~ExpressJet’s segment loss decreased~~ ~~$7.8 million during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to the sale of ExpressJet during the nine months ended September 30,~~March 31, 2019.

~~SkyWest Leasing Segment Profit.~~ SkyWest Leasing profit increased $56.7 million during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to 13 E175 aircraft added to our fleet subsequent to September 30, 2018 and additional revenue from leasing aircraft and spare engines to third parties.

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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 ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ and our total cash and marketable securities positions as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


	For the nine months ended September 30,								For the three months ended March 31,
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Net cash provided by operating activities	$	582,468	$	573,127	$	9,341	1.6	%	$	269,483	$	154,914	$	114,569	74.0	%
Net cash used in investing activities		(305,294)		(742,358)		437,064	(58.9)	%
Net cash provided by (used in) financing activities		(297,649)		312,000		(609,649)	(195.4)	%
Net cash provided by (used in) investing activities										54,987		(76,905)		131,892	(171.5)	%
Net cash used in financing activities										(122,132)		(115,508)		(6,624)	5.7	%


	September 30,		December 31,						March 31,		December 31,
	2019		2018		$ Change		% Change		2020		2019		$ Change		% Change
Cash and cash equivalents	$	307,909	$	328,384	$	(20,475)	(6.2)	%	$	289,544	$	87,206	$	202,338	232.0	%
Marketable securities		263,597		360,945		(97,348)	(27.0)	%		288,351		432,966		(144,615)	(33.4)	%
Total cash and marketable securities	$	571,506	$	689,329	$	(117,823)	(17.1)	%	$	577,895	$	520,172	$	57,723	11.1	%

Cash Flows provided by Operating Activities

The ~~$9.3~~$114.6 million increase in net cash provided by operating activities was primarily due to an increase in income before income taxes of $73.1 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in income before taxes of $73.1 million included the gain on sale of ExpressJet of $46.5 million for the nine months ended September 30, 2019. The remaining increase in net cash provided by operating activities was partially offset by changes in current asset and liability ~~accounts.~~accounts, including an increase in our accounts payable balance from $284.5 million at December 31, 2019 to $407.3 million at March 31, 2020, primarily related to the timing of engine maintenance payments.

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Cash Flows ~~used in~~provided by (used in) Investing Activities

The ~~$437.1~~$131.9 million decrease in cash used in investing activities was primarily due to the reduction of new E175 aircraft acquired from 31 during the nine months ended September 30, 2018, compared to five for the nine months ended September 30, 2019. This reduction was partially offset by the acquisition of ~~74 used CRJ~~70 previously leased aircraft ~~during the nine months ended September 30, 2019 including the 52 used CRJ aircraft purchased under an early lease buyout~~and one new E175 during the three months ended March 31, ~~2019.~~2019, compared to the acquisition of four used CRJ700 aircraft for the three months ended March 31, 2020. These changes represented a ~~$429.2~~$172.4 million decrease in aircraft ~~purchases.~~purchases and related spare aircraft assets. Additionally, during the ~~nine~~three months ended ~~September 30,~~March 31, 2019, we sold 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.

Cash Flows used in Financing Activities

The ~~$609.6~~$6.6 million increase in cash used in financing activities was primarily related to the decrease in proceeds from the issuance of long-term debt of ~~$99.9~~$19.9 million associated with ~~five~~one E175 aircraft and two previously leased aircraft acquired during the ~~nine~~three months ended ~~September 30,~~March 31, 2019, compared to ~~proceeds from the issuance of~~no long-term debt ~~of $626.2 million associated with 31 E175 aircraft acquired~~being issued during the ~~nine~~three months ended September 30, 2018. During the nine months ended September 30, 2019, we had an increase of $28.3 million in principal payments on long-term debt primarily due to the additional E175 aircraft acquired subsequent to September 30, 2018.March 31, 2020. Additionally, during the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we used an additional ~~$55.2~~$26.2 million to purchase treasury shares and make income tax payments towards vested employee equity ~~awards.~~awards compared to $34.3 million for the three months ended March 31, 2019.

Liquidity and Capital Resources as of ~~September 30, 2019~~March 31, 2020

WeGiven the measures discussed above that we have implemented to mitigate the impact of the COVID-19 pandemic on our financial position and operations and our assumptions about its future impact on travel demand, which could be materially different due to the inherent uncertainties of the current operating environment, we believe ~~that in the absence of unusual circumstances,~~ the working capital currently available to us (including funds from government assistance provided or to be provided pursuant to the CARES Act) 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.

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At ~~September 30, 2019,~~March 31, 2020, our total capital mix was ~~44.7%~~46.0% equity and ~~55.3%~~54.0% long-term debt, compared to ~~41.1%~~45.3% equity and ~~58.9%~~54.7% long-term debt at December 31, ~~2018.~~2019.

As discussed above and subsequent to March 31, 2020, on April 23, 2020, SkyWest Airlines entered into the PSP Agreement with Treasury with respect to the Payroll Support Program under the CARES Act, pursuant to which it expects to receive approximately $438.0 million in the aggregate, 50% of which was received in April 2020. See Note 15 to the condensed consolidated financial statements for more information on the Payroll Support Program.

We have also applied for a secured loan under the CARES Act and anticipate that we will be eligible for $497 million of financing. We are evaluating our participation in this loan as well as other financing commercially available to us.

Significant Commitments and Obligations

General

See Note 6,7, "Leases, Commitments and Contingencies," to the condensed consolidated financial statements for our commitments and obligations for each of the next five years and thereafter.

Purchase Commitments and Options

We are coordinating with our major airline partners and aircraft manufactures on the timing of upcoming fleet deliveries under previously announced deals in response to COVID-19 schedule reductions. The anticipated future delivery dates summarized below are subject to change. As of ~~September 30, 2019,~~March 31, 2020, we had a firm purchase commitment for ~~eleven~~26 new E175 aircraft from Embraer, S.A. with ~~scheduled~~original delivery dates through ~~2020.~~2021. Additionally, as of ~~September 30, 2019,~~March 31, 2020, we had agreed to purchase ~~seven~~two used CRJ700 aircraft from a third party with anticipated delivery dates in 2020.

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We have ~~historically~~in recent years funded the majority of our aircraft acquisition cost with long-term debt. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select 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 ~~eleven~~26 new E175 aircraft with approximately 85% debt and the remaining balance with cash.

Long-term Debt Obligations

As of ~~September 30, 2019,~~March 31, 2020, we had ~~$3.0~~$2.9 billion of long-term debt obligations, including current maturities, primarily related to the acquisition of E175 aircraft. The average effective interest rate on the debt related to such aircraft was approximately ~~4.2%~~4.1% at ~~September 30, 2019.~~March 31, 2020.

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. In addition, we have guaranteed certain other SkyWest Airlines obligations under its aircraft financing and leasing agreements.

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. The COVID-19 pandemic is anticipated to negatively impact our summer schedule. The magnitude of the impact will depend on various factors including passenger demand and the related flight schedules we are requested to operate by our major airline partners under our capacity purchase agreements.

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,~~capacity purchase agreements, 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 ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, prorate flying arrangements represented approximately ~~17.9%~~14.1% of our total flying agreements

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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 ~~$21.9~~$6.4 million in fuel expense for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Interest Rates

~~Our earnings may be affected by changes in~~As of March 31, 2020, all of our 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 September 30, 2019, we had variable rate notes representing 0.1% of our total long-term debt compared to 0.2% ofon our long-term debt ~~at December 31, 2018 and changes in interest rates are not expected to have a material adverse effect on our earnings.~~

were fixed rates. We currently intend to finance the acquisition of ~~new~~ aircraft ~~on order~~ through manufacturer financing or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire ~~these~~future aircraft. To the extent we place ~~these~~new aircraft in service under our code-share agreements with Delta, United, American, Alaska or other carriers, our code-share agreements currently provide that reimbursement rates will be adjusted ~~higher or lower~~ to reflect ~~changes in our~~the interest rates effective at the closing of the respective aircraft ~~financing interest rates.~~financing.

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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 ~~September 30, 2019,~~March 31, 2020, 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 ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we implemented changes to our processes in response to the adoption of Accounting Standards Update No. ~~2016-02 “Leases~~2016-13, “Financial Instruments- Credit Losses (Topic ~~842)”~~326) Measurement of Credit Losses on Financial Instruments” (“Topic 326”) that became effective January 1, ~~2019.~~2020. 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 ~~September 30, 2019,~~March 31, 2020, our management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on our financial position, liquidity or results of operations.

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, ~~2018~~2019 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. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.

The outbreak and global spread of COVID-19 has resulted in a severe decline in demand for air travel which has adversely impacted our and our major airline partners’ business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our and our major airline partners’ business, operating results, financial condition and liquidity.

In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China, and the World Health Organization subsequently declared COVID-19 a global health pandemic. On March 11, 2020, the U.S. Department of State issued a global Level 3 “reconsider travel” advisory for all travel abroad. On March 13, 2020, the U.S. government declared a national emergency. On March 19, 2020, the U.S. Department of State issued a global Level 4 “do not travel” advisory advising U.S. citizens to avoid all international travel due to the global impact of COVID-19. Additionally, the U.S. government has issued a travel advisory for residents of New York, New Jersey and Connecticut due to extensive community transmission of COVID-19 in the area. The U.S. government has also implemented enhanced screenings, mandatory 14-day quarantine requirements and other travel restrictions in connection with the

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COVID-19 pandemic, including restrictions on travel from Mexico and Canada, and many foreign and U.S. state governments have instituted similar measures and declared states of emergency.

The COVID-19 outbreak, along with the measures governments and private organizations worldwide have implemented in an attempt to contain the spread of this pandemic, has resulted in a severe decline in demand for air travel, which has adversely affected our and our major airline partners’ business, operations and financial condition to an unprecedented extent. Measures ranging from travel restrictions, “shelter in place” and quarantine orders, limitations on public gatherings to cancellation of public events have resulted in a precipitous decline in demand for both domestic and international business and leisure travel. In response to this material decrease in demand, our major airline partners, upon whom we depend to contract with us and to set our flight schedules, have drastically reduced their capacity in April 2020 compared to April 2019, with similar or greater cuts expected in May 2020 and June 2020, and possibly beyond. We in turn have significantly reduced our capacity. Prior to the COVID-19 pandemic, we anticipated operating approximately 2,500 daily departures in the month of April 2020; however, in April we operated approximately 800 to 900 daily departures as a result of COVID-19-related schedule reductions. We also anticipate similar schedule reductions will likely continue into the second quarter of 2020 and may continue throughout the remainder of 2020 and into 2021. We will continue to work with our major airline partners regarding future schedules and make further demand-driven adjustments to our capacity as needed. Additionally, we anticipate certain aircraft with scheduled contract expirations in 2020 will not be extended as a result of decreased demand, including 55 CRJ200 aircraft operating under the SkyWest Airlines Delta Connection Agreement. We also anticipate our American Prorate Agreement on seven CRJ200 aircraft will terminate in 2020 as a result of COVID-19-related passenger demand reductions. We may have further reductions in the number of CRJ200 aircraft operating under prorate agreements with our other major airline partners throughout 2020. We also may receive requests by our major airline partners to defer deliveries of new or used aircraft that were previously scheduled for 2020 and 2021. The duration and severity of the COVID-19 pandemic remain uncertain, and there can be no assurance that these actions will suffice to sustain our business and operations through this pandemic.

During March 2020, the COVID-19 pandemic had a negative impact on our revenues, primarily under our prorate agreements. The number of aircraft operating under our prorate agreements increased from 61 aircraft as of March 31, 2019 to 65 aircraft as of March 31, 2020, or 6.6%. However, our prorate revenue decreased from $106.1 million for the three months ended March 31, 2019 to $100.4 million for the three months ended March 31, 2020, or 5.8%. The negative impact to our revenues from COVID-19 is anticipated to continue into the second quarter of 2020 and throughout the remainder of 2020. Additionally, the majority of our code-share agreements set forth minimum levels of flight operations which our major airline partners are required to schedule for our operations and we are required to provide. These minimum flight operating levels are intended to provide a baseline level of expected utilization of aircraft, labor, maintenance facilities and related flight operations support. Historically, our major airline partners have utilized our flight operations at levels which exceed the minimum levels set forth in our code-share agreements; however, the COVID-19 pandemic will likely cause our major airline partners to reduce our utilization below the minimum levels and we may not be able to maintain operating efficiencies previously obtained, which would negatively impact our operating results and financial condition.

On April 23, 2020, SkyWest Airlines entered into the PSP Agreement with Treasury with respect to the Payroll Support Program under the CARES Act, pursuant to which it expects to receive approximately $438 million in the aggregate, 50% of which was received on April 23, 2020 and the remaining amounts are expected to be received in three additional disbursements from May to July 2020. Of the $438 million, approximately $337 million will be a direct grant and approximately $101 million will be in the form of a ten-year, low interest unsecured term loan. The Payroll Support Program includes certain restrictions, including limitations on involuntary terminations and furloughs through September 30, 2020, requirements to maintain certain levels of scheduled service, restrictions on the payment of dividends and the repurchase of our common stock through September 30, 2021, and certain limitations on executive compensation. The substance and duration of these restrictions will materially affect our operations, and we may not be successful in managing these impacts.

We may also take additional actions to improve our financial position, including measures to improve liquidity, such as drawing down on SkyWest Airlines’ line of credit, the issuance of secured debt securities, and/or the entry into other debt facilities. There can be no assurance as to the timing of any such drawdown or issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all. Any such actions could

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be conducted in the near term, may be material in nature and could result in significant additional borrowing. Measures to improve liquidity or other strategic actions that we may take in the future in response to COVID-19 may not be effective in offsetting decreased demand, and we will not be permitted to take certain strategic actions as a result of the CARES Act, which could result in a material adverse effect on our business, operating results and financial condition.

The full extent of the ongoing impact of COVID-19 on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, including the effectiveness of the mitigation strategies discussed above, the duration and spread of COVID-19 and related travel advisories and restrictions, the impact of COVID-19 on overall long-term demand for air travel, the impact of COVID-19 on our financial health and operations and that of our major airline partners, and future governmental actions, all of which are highly uncertain and cannot be predicted. The COVID-19 pandemic has had a material impact, and the continuation of reduced demand could have a material adverse effect, on our business, operating results, financial condition and liquidity. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2019.

In addition, a further outbreak of COVID-19, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could have a material adverse impact on our business, financial condition and operating results and those of our major airline partners. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.

We have a significant amount of contractual long-term debt obligations.

As of March 31, 2020, we had a total of approximately $2.9 billion in total long-term debt obligations. Substantially all of this long-term debt was incurred in connection with the acquisition of aircraft and engines. We also have significant long-term lease obligations primarily relating to our aircraft fleet. As of March 31, 2020, we had 103 aircraft under operating leases with remaining terms ranging from less than one year to ten years. Future minimum lease payments due under all long-term operating leases were approximately $434.5 million at March 31, 2020. At a 6.4% discount factor, which is the average rate used to approximate the implicit rates within the applicable leases, the present value of these lease obligations was equal to approximately $326.7 million at March 31, 2020. Our high level of fixed obligations could impact our ability to obtain additional financing to support additional expansion plans or divert cash flows from operations and expansion plans to service the fixed obligations.

Under our capacity purchase agreements, our major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement but is intended to cover either our aircraft principal and interest debt service costs, our aircraft depreciation and interest expense or our aircraft lease expense costs while the aircraft is under contract. In the event any of our major airline partners defaults under a capacity purchase agreement or we are unable to extend the flying contract terms on aircraft with ongoing financial obligations, our financial position and financial results could be materially adversely affected.

In addition, in response to the travel restrictions, decreased demand and other effects the COVID-19 pandemic has had and is expected to have on our business, we may seek material amounts of additional financial liquidity in the short-term, which may include drawing down on SkyWest Airlines’ line of credit, the issuance of secured debt securities and/or the entry into other debt facilities, among other items. There can be no assurance as to the timing of any such drawdown or issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all. In addition, we have received financial assistance that is available to the airline industry under the CARES Act, which financial assistance subjects us and our business to certain restrictions, including, but not limited to, limitations on involuntary terminations and furloughs through September 30, 2020, requirements to maintain certain levels of scheduled service, restrictions on the payment of dividends and the repurchase of our common stock through September 30, 2021, and certain limitations on executive compensation.

Although the Company's cash flows from operations and its available capital have been sufficient to meet its obligations and commitments to date, the Company's liquidity has been, and may in the future be, negatively affected by the risk factors discussed in our Form 10-K for the year ended December 31, 2019, as updated by this Quarterly Report,

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including risks related to future results arising from the COVID-19 pandemic. If our liquidity is materially diminished, we might not be able to timely pay our leases and debts or comply with certain covenants under SkyWest Airlines’ line of credit or with other material provisions of our contractual obligations.

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

Our Board of Directors has adopted a stock repurchase program which authorizes us to repurchase shares of our common stock in the public market or in private transactions, from time to time, at prevailing prices. Our stock repurchase program currently authorizes the repurchase of up to $250.0 million of our common stock. The following table summarizes the repurchases under our stock purchase programs during the three months ended ~~September 30, 2019.~~March 31, 2020.


	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)		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)
August 1, 2019 – August 31, 2019	329,709	$	56.00	329,709	$	176,127
September 1, 2019 — September 30, 2019	111,584	$	58.58	111,584	$	169,590
February 1, 2020 – February 29, 2020							268,391	$	55.89	268,391	$	144,590
March 1, 2020 — March 31, 2020							117,215	$	42.66	117,215	$	139,590
Total	441,293	$	56.65	441,293	$	169,590	385,606	$	51.87	385,606	$	139,590

(1)

In February 2019, our Board of Directors authorized a new stock purchase program to repurchase up to $250.0 million of our common stock. Purchases are made at management’s discretion based on market conditions and financial resources. As of ~~September 30, 2019,~~March 31, 2020, we had repurchased ~~1,413,366~~1,966,353 shares of our common stock for ~~$80.4~~$110.4 million under this authorization. In conjunction with our receipt of funding under the CARES Act, we have suspended our share repurchase activity through September 30, 2021.

ITEM 6. EXHIBITS


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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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 ~~September 30, 2019,~~March 31, 2020, to be signed on its behalf by the undersigned, thereunto duly authorized, on ~~November 5, 2019.~~May 8, 2020.


	SKYWEST, INC.

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



October 2019 through December 2019	$	4,975
2020		17,733
2021		17,333
2022		10,775
2023		4,549
Thereafter		14,521
	$	69,886


2019	$	87,256
2020		101,741
2021		90,787
2022		72,593
2023		65,749
Thereafter		59,820
	$	477,946


Aircraft in Service	September 30, 2019	September 30, 2018
CRJ200s	190	185
CRJ700s	99	114
CRJ900s	43	37
ERJ145/135s	—	100
E175s	151	138
Total	483	574