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**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **

| **x**                                                                                                                                                                                                                                                                                  | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                   |                                                                                                     |
| **For the quarterly period  ended March 31, 2010**                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                   |                                                                                                     |
| **OR**                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                   |                                                                                                     |
| **o**                                                                                                                                                                                                                                                                                  | **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**

** **

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was to required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 
| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

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

 
| **Class**                  | ** ** | **Outstanding at May 3, 2010** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| Common stock, no par value |       | 55,936,136                                         |       |

 

 

 

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**SKYWEST, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I       | FINANCIAL INFORMATION:                    |                                                                                                                  | 3      |
|-------------------|-------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|              | Item 1.                                   | Financial Statements                                                                                                  |   | 3 |
|              |                                      | Consolidated  Balance Sheets as of March 31, 2010 (unaudited) and December 31,  2009                        |   | 3 |
|              |                                      | Consolidated  Statements of Income (unaudited) for the three months ended March 31,  2010 and 2009               |   | 5 |
|              |                                      | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 2010 and 2009 |   | 6 |
|              |                                      | Notes to Condensed Consolidated Financial Statements                                                                  |   | 7 |
|              | Item 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   | 14 |
|              | Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                           |   | 20 |
|              | Item 4.                                   | Controls and  Procedures                                                                                              |   | 21 |
|              |                                      |                                                                                                                  |   |   |
| PART II      | OTHER INFORMATION:                        |                                                                                                                  | 21     |
|              | Item 1.                                   | Legal Proceedings                                                                                                     |   | 21 |
|              | Item 1A.                                  | Risk Factors                                                                                                          |   | 22 |
|              | Item 2                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          |   | 22 |
|              | Item 6.                                   | Exhibits                                                                                                              |   | 23 |
|              |                                      | Signature                                                                                                             |   | 24 |
|              |                                      |                                                                                                                  |   |   |
| 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 |                                                                                                                  |   |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**SKYWEST, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Dollars in Thousands)**

** **

ASSETS

 
| ** **                                     | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                |       |                     |       |                        |       |
| Cash and cash equivalents                      |       | $                        | 64,441     |                        | $          | 76,414 |   |
| Marketable securities                          |       | 654,511                  |       | 645,301                     |       |
| Restricted cash                                |       | 10,730                   |       | 10,730                      |       |
| Income tax receivable                          |       | 12,531                   |       | 12,608                      |       |
| Receivables, net                               |       | 104,756                  |       | 111,902                     |       |
| Inventories, net                               |       | 90,469                   |       | 89,876                      |       |
| Prepaid aircraft rents                         |       | 282,960                  |       | 237,350                     |       |
| Deferred tax assets                            |       | 44,504                   |       | 45,197                      |       |
| Other current assets                           |       | 15,885                   |       | 24,721                      |       |
| Total current assets                           |       | 1,280,787                |       | 1,254,099                   |       |
|                                           |       |                     |       |                        |       |
| PROPERTY AND EQUIPMENT:                        |       |                     |       |                        |       |
| Aircraft and rotable spares                    |       | 3,711,730                |       | 3,612,658                   |       |
| Deposits on aircraft                           |       | —                   |       | 4,247                       |       |
| Buildings and ground equipment                 |       | 241,948                  |       | 240,438                     |       |
|                                           |       | 3,953,678                |       | 3,857,343                   |       |
| Less-accumulated depreciation and amortization |       | (1,027,293               | )          | (977,637                    | )          |
| Total property and equipment, net              |       | 2,926,385                |       | 2,879,706                   |       |
|                                           |       |                     |       |                        |       |
| OTHER ASSETS                                   |       |                     |       |                        |       |
| Intangible assets, net                         |       | 23,434                   |       | 23,997                      |       |
| Other assets                                   |       | 168,403                  |       | 153,000                     |       |
| Total other assets                             |       | 191,837                  |       | 176,997                     |       |
| Total assets                                   |       | $                        | 4,399,009  |                        | $          | 4,310,802 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Dollars in Thousands)**

** **

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                              |       |               |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                  | 153,565    |                  | $          | 148,571 |   |
| Accounts payable                                                                                                  |       | 175,529            |       | 165,825               |       |
| Accrued salaries, wages and benefits                                                                              |       | 66,861             |       | 67,377                |       |
| Accrued aircraft rents                                                                                            |       | 8,065              |       | 17,661                |       |
| Taxes other than income taxes                                                                                     |       | 21,015             |       | 17,476                |       |
| Other current liabilities                                                                                         |       | 39,450             |       | 32,925                |       |
| Total current liabilities                                                                                         |       | 464,485            |       | 449,835               |       |
|                                                                                                              |       |               |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 39,779             |       | 38,540                |       |
|                                                                                                              |       |               |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,865,898          |       | 1,816,318             |       |
|                                                                                                              |       |               |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 546,645            |       | 536,540               |       |
|                                                                                                              |       |               |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 114,996            |       | 117,350               |       |
|                                                                                                              |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                     |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |               |       |                  |       |
| Preferred stock, 5,000,000 shares authorized; none  issued                                                        |       | —             |       | —                |       |
| Common stock, no par value, 120,000,000 shares  authorized; 75,034,096 and 74,626,660 shares issued, respectively |       | 581,503            |       | 578,153               |       |
| Retained earnings                                                                                                 |       | 1,065,134          |       | 1,052,375             |       |
| Treasury stock, at cost, 19,100,933 and 19,017,645  shares, respectively                                          |       | (280,793           | )          | (279,619              | )          |
| Accumulated other comprehensive income                                                                            |       | 1,362              |       | 1,310                 |       |
| Total stockholders’ equity                                                                                   |       | 1,367,206          |       | 1,352,219             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                  | 4,399,009  |                  | $          | 4,310,802 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

(Dollars and Shares in Thousands, Except per ShareAmounts)

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended  March  31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                               | ** ** | **2009** | ** ** |
| OPERATING REVENUES:                         |       |                                                   |       |   |   |
| Passenger                                   |       | $                                                      | 623,112    |   | $ | 664,883 |   |
| Ground handling and other                   |       | 9,131                                                  |       | 7,759 |   |
| Total operating revenues                    |       | 632,243                                                |       | 672,642 |   |
| OPERATING EXPENSES:                         |       |                                                   |       |   |   |
| Aircraft fuel                               |       | 73,514                                                 |       | 140,629 |   |
| Salaries, wages and benefits                |       | 178,563                                                |       | 176,872 |   |
| Aircraft maintenance, materials and repairs |       | 106,755                                                |       | 92,158 |   |
| Aircraft rentals                            |       | 76,459                                                 |       | 72,782 |   |
| Depreciation and amortization               |       | 58,146                                                 |       | 54,584 |   |
| Station rentals and landing fees            |       | 28,885                                                 |       | 32,874 |   |
| Ground handling services                    |       | 29,444                                                 |       | 25,448 |   |
| Other, net                                  |       | 38,056                                                 |       | 36,471 |   |
| Total operating expenses                    |       | 589,822                                                |       | 631,818 |   |
| OPERATING INCOME                            |       | 42,421                                                 |       | 40,824 |   |
| OTHER INCOME (EXPENSE):                     |       |                                                   |       |   |   |
| Interest income                             |       | 3,970                                                  |       | 2,722 |   |
| Interest expense                            |       | (21,585                                                | )          | (22,951 | ) |
| Impairment of marketable securities         |       | —                                                 |       | (7,115 | ) |
| Other                                       |       | (255                                                   | )          | (319 | ) |
| Total other expense, net                    |       | (17,870                                                | )          | (27,663 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 24,551                                                 |       | 13,161 |   |
| PROVISION FOR INCOME TAXES                  |       | 9,537                                                  |       | 3,789 |   |
| NET INCOME                                  |       | $                                                      | 15,014     |   | $ | 9,372 |   |
| BASIC EARNINGS PER SHARE                    |       | $                                                      | 0.27       |   | $ | 0.17 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                                      | 0.26       |   | $ | 0.16 |   |
| Weighted average common shares:             |       |                                                   |       |   |   |
| Basic                                       |       | 55,855                                                 |       | 56,546 |   |
| Diluted                                     |       | 56,864                                                 |       | 57,427 |   |
|                                        |       |                                                   |       |   |   |
| Dividends declared per share                |       | $                                                      | 0.04       |   | $ | 0.04 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

(In Thousands)

 
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                                        |       |                                             |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                   |       | $                                                | 62,461     |   | $ | 67,344 |   |
|                                                        |       |                                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                       |       |                                             |       |   |   |
| Purchases of marketable securities                          |       | (117,311                                         | )          | (130,781 | ) |
| Sales of marketable securities                              |       | 107,910                                          |       | 145,555 |   |
| Proceeds from the sale of equipment                         |       | 75                                               |       | 16,142 |   |
| Payments received on note receivable from United  Air Lines |       | 2,001                                            |       | — |   |
| Acquisition of property and equipment:                      |       |                                             |       |   |   |
| Aircraft and rotable spare parts                            |       | (106,158                                         | )          | (40,715 | ) |
| Buildings and ground equipment                              |       | (1,758                                           | )          | (470 | ) |
| Increase in other assets                                    |       | (17,051                                          | )          | (23,242 | ) |
|                                                        |       |                                             |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                       |       | (132,292                                         | )          | (33,511 | ) |
| ** **                                                  | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                       |       |                                             |       |   |   |
| Proceeds from issuance of long-term debt                    |       | 81,698                                           |       | 20,986 |   |
| Principal payments on long-term debt                        |       | (27,124                                          | )          | (35,482 | ) |
| Return of deposits on aircraft and rotable spare  parts     |       | 4,247                                            |       | 1,078 |   |
| Net proceeds from issuance of common stock                  |       | 2,466                                            |       | 5,905 |   |
| Purchase of treasury stock                                  |       | (1,174                                           | )          | (12,602 | ) |
| Payment of cash dividends                                   |       | (2,255                                           | )          | (2,284 | ) |
|                                                        |       |                                             |       |   |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES        |       | 57,858                                           |       | (22,399 | ) |
|                                                        |       |                                             |       |   |   |
| Increase (decrease) in cash and cash equivalents            |       | (11,973                                          | )          | 11,434 |   |
| Cash and cash equivalents at beginning of period            |       | 76,414                                           |       | 125,892 |   |
|                                                        |       |                                             |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                  |       | $                                                | 64,441     |   | $ | 137,326 |   |
|                                                        |       |                                             |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:           |       |                                             |       |   |   |
|                                                        |       |                                             |       |   |   |
| Cash paid during the year for:                              |       |                                             |       |   |   |
| Interest, net of capitalized amounts                        |       | $                                                | 15,558     |   | $ | 17,396 |   |
| Income taxes                                                |       | $                                                | 180        |   | $ | 110 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Note A — CondensedConsolidated Financial Statements

 

Thecondensed consolidated financial statements of SkyWest, Inc. (“SkyWest” orthe “Company”) and its wholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWestAirlines”) and Atlantic Southeast Airlines, Inc. (“ASA”) included hereinhave been prepared, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughSkyWest believes that the following disclosures are adequate to make theinformation presented not misleading. These condensed consolidated financialstatements reflect all adjustments that, in the opinion of management, arenecessary to present fairly the results of operations for the interim periodspresented. All adjustments are of a normal recurring nature, unless otherwisedisclosed. The Company suggests that these condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009. The results of operations for the three month period ended March 31,2010 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2010.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results will differ and may differmaterially from those estimates and assumptions.

 

In preparing theaccompanying unaudited condensed consolidated financial statements, the Companyhas reviewed, as determined necessary by the Company’s management, events thathave occurred after March 31, 2010, up until the issuance of the condensedconsolidated financial statements, which occurred on May 7, 2010.

 

Note B — NewAccounting Pronouncements

 

On September 23, 2009, the Financial Accounting Standards Board (“FASB”)ratified Emerging Issues Task Force Issue No. 08-1, *Revenue Arrangements with Multiple Deliverables*(“EITF 08-1”). EITF 08-1 updates the current guidance pertaining tomultiple-element revenue arrangements included in ASC Subtopic 605-25, whichoriginated primarily from EITF 00-21, also titled *Revenue Arrangements with Multiple Deliverables*.EITF 08-1 will be effective for annual reporting periods beginning January 1,2011 for calendar-year entities. The Company is currently evaluating the impactof EITF 08-1 on its financial position, results of operations, cash flows,and disclosures.

 

In January 2010,the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, *Improving Disclosures about Fair Value Measurements* anamendment to ASC Topic 820, *Fair Value Measurementsand Disclosures.*  This amendment requires an entity to: (i) discloseseparately the amounts of significant transfers in and out of Level 1 and Level2 fair value measurements and describe the reasons for the transfers and (ii) presentseparate information for Level 3 activity pertaining to gross purchases, sales,issuances, and settlements.   ASU No. 2010-06 is effective for theCompany for interim and annual reporting periods beginning after December 15,2009, with one new disclosure effective after December 15, 2010. TheCompany has adopted this ASU in full with respect to the interim period ended March 31,2010.  See Note I to these condensed consolidated financialstatements, set forth below.

 

Note C — Passenger andGround Handling Revenue

 

The Company recognizes passenger and ground handling revenues when theservice is provided. Under the Company’s contract and pro-rate flyingagreements with Delta Air Lines, Inc. (“Delta”), United Air Lines, Inc.(“United”) and AirTran Airways, Inc. (“AirTran”), revenue is consideredearned when the flight is completed. Revenue is recognized under the Company’spro-rate flying agreements based upon the portion of the pro-rate passengerfare the Company anticipates that it will receive.

 

SkyWest Airlines and ASA have each entered into a Delta ConnectionAgreement with Delta, pursuant to which SkyWest Airlines and ASA providecontract flight services for Delta.  TheDelta Connection Agreements provide for fifteen-year terms, subject to earlytermination by Delta, SkyWest Airlines or ASA, as applicable, upon theoccurrence of certain events. Delta’s termination rights include (i) cross-terminationrights between the two Delta Connection Agreements, (ii) the right toterminate each of the Delta Connection Agreements upon the occurrence ofcertain force majeure events, including certain labor-related events, thatprevent SkyWest Airlines or ASA from performance for certain periods, and (iii) theright to terminate each of the Delta Connection

 

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Agreementsif SkyWest Airlines or ASA fails to maintain competitive base rate costs,subject to certain adjustment rights. The SkyWest Airlines and ASA DeltaConnection Agreements contain multi-year rate reset provisions beginning in2010 and each 5th yearthereafter. In the Delta Connection Agreements, the fixed-fee rates arespecifically defined through 2009. The parties agreed that on or after aspecified date in 2010 the parties would reset such rates to reflect SkyWestAirlines’ actual costs in 2010 (with a similar process on each 5th yearthereafter). In addition to the termination rights, Delta has the right toextend the term of the Delta Connection Agreements upon the occurrence ofcertain events or at the expiration of the initial term. SkyWest Airlines andASA have the right to terminate their respective Delta Connection Agreementupon the occurrence of certain breaches by Delta, including the failure to curepayment defaults. SkyWest Airlines and ASA also have cross-termination rightsbetween the two Delta Connection Agreements.

 

Under the terms of the SkyWest Airlines Delta Connection Agreement,Delta has agreed to compensate SkyWest Airlines for the direct costs associatedwith operating the Delta Connection flights, plus a payment based on blockhours flown. Under the terms of the ASA Delta Connection Agreement, Delta hasagreed to compensate ASA for its direct costs associated with operating theDelta Connection flights, plus, if ASA completes a certain minimum percentageof its Delta Connection flights, an additional percentage of such costs.Additionally, ASA’s Delta Connection Agreement provides for the payment ofincentive compensation upon satisfaction of certain performance goals. Theincentives are defined in the ASA Delta Connection Agreement as being measuredand determined on a monthly and quarterly basis. At the end of each quarter,the Company calculates the incentives achieved during the quarter andrecognizes revenue accordingly. The parties to the Delta Connection Agreementsmade customary representations, warranties and covenants, including withrespect to various operational, marketing and administrative matters.

 

In the event that the contractual rates under the Delta ConnectionAgreements have not been finalized at quarterly or annual financial statementdates, the Company records revenues based on the lower of prior period’sapproved rates, as adjusted to reflect any contract negotiations and theCompany’s estimate of rates that will be implemented in accordance with revenuerecognition guidelines. Among other provisions, the Delta Connection Agreementsprovide that, beginning with the third anniversary of the execution of theagreements (September 8, 2008), Delta has the right to require thatcertain contractual rates under those agreements shall not exceed the averagerate of all carriers within the Delta Connection Program. On October 23,2009, Delta sent letters to SkyWest Airlines and ASA requiring them to eitheradjust the rates payable under their respective Delta Connection Agreements oraccept termination of those agreements. Delta’s letters also notified SkyWestAirlines and ASA of Delta’s estimate of the average rates to be applied underthose agreements. On October 28, 2009, SkyWest Airlines and ASA notifiedDelta of their election to adjust the rates payable under the Delta ConnectionAgreements; however, they also notified Delta of their disagreement with Delta’sestimated rates and their belief that the methodology Delta used to calculateits estimated rates is inconsistent with the terms of the Delta ConnectionAgreements. SkyWest Airlines and ASA, on one hand, and Delta, on the other hand,have exchanged subsequent correspondence, and SkyWest Airlines and ASA continueto negotiate with Delta in an effort to determine an appropriate methodologyfor calculating the average rates of the carriers within the Delta ConnectionProgram. Because SkyWest Airlines and ASA have not reached an agreement withDelta regarding the final contractual rates to be established under the DeltaConnection Agreements, the Company has evaluated the method for calculating theaverage rate of the carriers within the Delta Connection Program under therevenue recognition accounting guidance and recorded revenue under thoseagreements based on management’s understanding of the applicable terms in theDelta Connection Agreements and management’s best estimate of the revenue thatwill ultimately be realized upon settlement of the contractual rates with Deltawith respect to the three months ended March 31, 2010.

 

The SkyWest Airlines and the ASA Delta Connection Agreements providethat, beginning with the fifth anniversary of the execution of the agreements (September 8,2010), Delta has the right to require that certain contractual rates underthose agreements shall not exceed the second lowest of all carriers withinthe Delta Connection Program.

 

In the event the Company has a reimbursement dispute with a majorpartner, the Company evaluates the dispute under its established revenuerecognition criteria and, provided the revenue recognition criteria have beenmet, the Company recognizes revenue based on management’s estimate of theresolution of the dispute. During the quarter ended December 31, 2007,Delta notified the Company, SkyWest Airlines and ASA of a dispute under theDelta Connection Agreements executed by Delta with SkyWest Airlines and ASA.The dispute relates to allocation of liability for certain irregular operations(“IROP”) expenses that are paid by SkyWest Airlines and ASA to their passengersunder certain situations. As a result, Delta withheld a combined total ofapproximately $25 million (pretax) from one of the weekly scheduled wirepayments to SkyWest Airlines and ASA during December 2007. Delta continuesto withhold a portion of the funds the Company believes are payable as weeklyscheduled wire payments to SkyWest Airlines and ASA (See Note K foradditional details).

 

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SkyWest Airlines and United have entered into a United ExpressAgreement, which sets forth the principal terms and conditions governingSkyWest Airlines’ United Express operations. Under the terms of the UnitedExpress Agreement, SkyWest Airlines is compensated primarily on afee-per-completed-block hour and departure basis and is reimbursed for fuel andother costs. Additionally, SkyWest Airlines is eligible for incentivecompensation upon the achievement of certain performance criteria. Theincentives are defined in the United Express Agreement as being measured anddetermined on a monthly basis. At the end of each month, the Company calculatesthe incentives achieved during the month and recognizes revenue accordingly.

 

On February 10, 2010, ASA and United entered into a United ExpressAgreement, pursuant to which ASA agreed to operate 14 Bombardier CRJ200 (“CRJ200”)regional jet aircraft  as a UnitedExpress carrier.  On February 11,2010, ASA began operating as a United Express carrier, and the Companyanticipates that the 14 United Express regional jets to be flown by ASA will bein operation by May of 2010.  TheASA United Express Agreement is a capacity purchase agreement with a five-yearterm, and other terms which are generally consistent with the SkyWest AirlinesUnited Express Agreement.

 

On November 4, 2009, SkyWest Airlines entered into a code-shareagreement with AirTran. Under the terms of the code-share agreement, SkyWestAirlines operates five CRJ200s for AirTran under a pro-rate arrangement.SkyWest Airlines commenced AirTran service with two aircraft in December 2009,two aircraft in January 2010 and one aircraft in February 2010. Thecode-share agreement has a three-year term; however, after May 15, 2010,either party may terminate the agreement upon 120 days written notice.

 

The Company’s passenger and ground handling revenues could be impactedby a number of factors, including changes to the Company’s code-shareagreements with Delta, United or AirTran, contract modifications resulting fromcontract re-negotiations, the Company’s ability to earn incentive paymentscontemplated under the Company’s code-share agreements, settlement ofreimbursement disputes with the Company’s major partners and settlement of theDelta rates.

 

#### Note D — Share-Based Compensation

####  

The fair value of stock options granted by theCompany has been estimated as of the grant date using the Black-Scholes optionpricing model. During the three months ended March 31, 2010 the Companygranted options to purchase 320,458 shares of common stock under the SkyWest, Inc.2006 Long-Term Incentive Plan (the “2006 Incentive Plan”).  The following table shows the assumptionsused and weighted average fair value for stock option grants during the threemonths ended March 31, 2010.

 

| Expected annual dividend rate                |   | 1.10 | %      |
|----------------------------------------------|--------|------|--------|
| Risk-free interest rate                      |   | 1.88 | %      |
| Average expected life (years)                |   | 4.6  |   |
| Expected volatility of common stock          |   | .402 |   |
| Forfeiture rate                              |   | 0.0  | %      |
| Weighted average fair value of option grants |   | $    | 4.78   |   |
|                                              |        |      |        |  |

 

During the three months ended March 31, 2010,the Company granted 220,779 restricted stock units to the Company’s employeesunder the 2006 Incentive Plan.  Therestricted stock units have a three-year vesting period, during which therecipient must remain employed with the Company or one of the Company’ssubsidiaries.  Upon vesting, a restrictedstock unit will be replaced with a common share of stock. Additionally, duringthe three months ended March 31, 2010, the Company granted 27,605fully-vested shares of common stock to the Company’s directors.  The weighted average fair value of the sharesof restricted stock on the date of grant was $14.49 per share.

 

The Company records share-based compensation expenseonly for those options and restricted stock units that are expected tovest.  The estimated fair value of thestock options and restricted stock units is amortized over the applicablevesting periods.  During the three monthsended March 31, 2010 and 2009, the Company recorded pre-tax share-basedcompensation expense of $2.0 million and $2.6 million, respectively.

 

NoteE — Net Income Per Common Share

 

Basicnet income per common share (“Basic EPS”) excludes dilution and is computed bydividing net income by the weighted average number of common shares outstandingduring the period. Diluted net income per common share (“Diluted EPS”) reflectsthe potential dilution that could occur if stock options or other contracts toissue common stock were exercised or converted into common stock. Thecomputation of Diluted EPS does not assume exercise or conversion of securitiesthat would have an anti-dilutive effect on net income per common share. Duringthe three months ended March 31, 2010 and 2009 options to acquire4,401,000 and 4,569,000 

 

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shares, respectively, wereexcluded from the computation of Diluted EPS as their impact was anti-dilutive.

 

Thecalculation of the weighted average number of common shares outstanding forBasic EPS and Diluted EPS for the periods indicated (in thousands, except pershare data) is as follows:

 

| ** **                                                                 | ** ** | **Three months ended March  31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                                   | ** ** | **2009** | ** ** |
| **Numerator**                                                              | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Net Income                                                                 |       | $                                                          | 15,014     |   | $ | 9,372 |   |
| ** **                                                                 | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| **Denominator**                                                            | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Weighted average number of common shares  outstanding                      |       | 55,855                                                     |       | 56,546 |   |
| Effect of outstanding share-based compensation                             |       | 1,009                                                      |       | 881 |   |
| Weighted average number of shares for diluted net  income per common share |       | 56,864                                                     |       | 57,427 |   |
|                                                                       |       |                                                       |       |   |   |
| Basic earnings per share                                                   |       | $                                                          | 0.27       |   | $ | 0.17 |   |
| Diluted earnings per share                                                 |       | $                                                          | 0.26       |   | $ | 0.16 |   |

 

Note F — ComprehensiveIncome

 

Comprehensive income includes charges and credits to stockholders’equity that are not the result of transactions with shareholders. Also,comprehensive income consisted of net income plus changes in unrealizedappreciation (depreciation) on marketable securities and unrealized gain (loss)on foreign currency translation adjustment related to the Company’s equityinvestment in Trip Linhas Aereas (“Trip”), net of tax, for the periodsindicated (in thousands):

 

| ** **                                                                                  | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Net Income**                                                                              |       | $                                                    | 15,014     |   | $ | 9,372 |   |
| Proportionate share of other companies foreign  currency translation adjustment, net of tax |       | 267                                                  |       | (180 | ) |
| Unrealized appreciation (depreciation) on  marketable securities, net of tax           |       | (214                                                 | )          | 4,219 |   |
|                                                                                        |       |                                                 |       |   |   |
| **Comprehensive income**                                                                    |       | $                                                    | 15,067     |   | $ | 13,411 |   |

 

Note G — Long-Term Debt

 

Long-termdebt of the Company consisted of the following for the periods indicated (inthousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 0.43% to 3.81% through 2012 to 2020, secured by aircraft                                     |       | $                        | 462,562    |                        | $          | 469,663 |   |
| Notes payable to a financing company, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 0.43% to 7.52% through 2021, secured by aircraft                               |       | 549,920                  |       | 557,293                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                   |       | 226,755                  |       | 231,002                     |       |
| Notes payable to a financing company, due in  semi-annual installments plus interest at 5.78% to 6.23% through 2019,  secured by aircraft                                                                                     |       | 66,018                   |       | 67,963                      |       |
| Notes payable to banks, due in monthly  installments plus interest of 3.15% to 8.18% through 2020, secured by  aircraft                                                                                                       |       | 687,905                  |       | 611,829                     |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                 |       | 23,449                   |       | 23,939                      |       |
| Notes payable to banks, due in semi-annual installments,  plus interest at 3.72% to 3.86%, net of the benefits of interest rate  subsidies through the Brazilian Export financing program, through 2011,  secured by aircraft |       | 2,854                    |       | 3,200                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                        | 2,019,463  |                        | $          | 1,964,889 |   |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Less current maturities                                                                                                                                                                                                       |       | (153,565                 | )          | (148,571                    | )          |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                     |       | $                        | 1,865,898  |                        | $          | 1,816,318 |   |

 

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AtMarch 31, 2010, the three-month and six-month LIBOR rates were 0.29% and0.44%, respectively.   At December 31,2009, the three-month and six-month LIBOR rates were 0.25% and 0.43%,respectively.

 

Asof March 31, 2010, SkyWest Airlines had a $25 million line of credit withno amount outstanding under the facility. The facility is scheduled to expire on March 31, 2011 and has arate of 4.50%.

 

Duringthe three months ended March 31, 2010, the Company issued $81.7 million oflong-term debt related to the purchase of four new CRJ700s.

 

Note H — Commitments andContingencies

 

TheCompany leases 282 aircraft, as well as airport facilities, office space, andvarious other property and equipment under non-cancelable operating leaseswhich are generally on a long-term net rent basis where the Company pays taxes,maintenance, insurance and certain other operating expenses applicable to theleased property.  The Company expectsthat, in the normal course of business, leases that expire will be renewed orreplaced by other leases.  The followingtable summarizes future minimum rental payments required under operating leasesthat had initial or remaining non-cancelable lease terms in excess of one yearas of March 31, 2010 (in thousands):

 

| April through December 2010 |   | $         | 191,653   |   |
|---------------------------------------|--------|-----------|-----------|--------|
| 2011                                  |   | 328,539   |      |
| 2012                                  |   | 323,948   |      |
| 2013                                  |   | 313,418   |      |
| 2014                                  |   | 302,012   |      |
| Thereafter                            |   | 1,306,568 |      |
|                                  |   | $         | 2,766,138 |   |

 

NoteI — Fair Value Measurements

 

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

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

 

As of March 31, 2010, the Company held certain assets that arerequired to be measured at fair value on a recurring basis. The Company hasinvested in auction rate security instruments, which are classified asavailable for sale securities and reflected at fair value. However, due primarily to credit market eventsbeginning during the first quarter of 2008, the auction events for most ofthese instruments failed. Therefore, quoted prices in active marketsare no longer available and the Company has estimated the fair values of thesesecurities utilizing a discounted cash flow analysis as of March 31, 2010.These analyses consider, among other items, the collateralization underlyingthe security investments, the creditworthiness of the counterparty, the timingof expected future cash flows, and the expectation of the next time thesecurity is expected to have a successful auction.

 

As of March 31, 2010, the Company owned $4.2 million ofauction rate security instruments. The auction rate security instruments heldby the Company at March 31, 2010 were tax-exempt municipal bondinvestments, for which the market has experienced some successful auctions. TheCompany has classified the investments as non-current and has identified themas “Other assets” in its Consolidated Balance Sheet as of March 31, 2010.The Company has classified these securities as non current due to the Company’sbelief that the market for these securities may take in excess of twelve monthsto fully recover. As of March 31, 2010, the Company continued to recordinterest on all of its auction rate security instruments. Any futurefluctuations in fair value related to these instruments that the Company deemsto be temporary, including any recoveries of previous write downs, would berecorded to 

 

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accumulatedother comprehensive income. If the Company determines that any future valuationadjustment was other than temporary, a charge would be recorded to earnings asappropriate.

 

Asof March 31, 2010, the Company held certain assets that are required to bemeasured at fair value on a recurring basis. Assets measured at fair value on a recurring basisare summarized below (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of March 31,  2010** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                            |       |   |   |   |   |   |   |
| Marketable Securities                      |       |                                                                            |       |   |   |   |   |   |   |
| Bond and bond fund                         |       | $                                                                               | 653,523    |   | $ | — |   | $ | 653,523 |   | $ | — |   |
| Asset backed securities                    |       | 988                                                                             |       | — |   | 988 |   | — |   |
|                                       |       | 654,511                                                                         |       | — |   | 654,511 |   | — |   |
|                                       |       |                                                                            |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | 75,171                                                                          |       | 75,171 |   | — |   | — |   |
| Other Assets (a)                           |       | 4,248                                                                           |       | — |   | — |   | 4,248 |   |
| Total Assets Measured at Fair Value        |       | $                                                                               | 733,930    |   | $ | 75,171 |   | $ | 654,511 |   | $ | 4,248 |   |

 

----

(a)          Auction rate securities included in “Other assets” inthe unaudited Condensed Consolidated Balance Sheet

 

Based on market conditions, the Company uses a discounted cash flowvaluation methodology for auction rate securities. Accordingly, for purposes ofthe foregoing condensed consolidated financial statements, these securitieswere categorized as Level 3 securities. The Company’s “Marketable Securities” classified asLevel 2 primarily utilize broker quotes in a non-active market for valuation ofthese securities.

 

No significanttransfers between Level 1, Level 2 and Level 3 occurred during the three monthsended March 31, 2010.  The Company’s policy regarding therecording of transfers between levels is to record any such transfers at theend of the reporting period.

 

The following table presents the Company’s assets measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)at March 31, 2010 (in thousands):

 

**Fair ValueMeasurements Using Significant Unobservable Inputs**

**(Level 3)**

 
| ** **                                      | ** ** | **Auction Rate  Securities** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2010                 |       | $                                 | 4,259      |   |
| Total realized and unrealized gains or (losses) |       |                              |       |
| Included in earnings                            |       | —                            |       |
| Included in other comprehensive income          |       | (11                               | )          |
| Transferred out                                 |       | —                            |       |
| Settlements                                     |       | —                            |       |
| Balance at March 31, 2010                  |       | $                                 | 4,248      |   |

 

Thefair value of the Company’s long-term debt is estimated based on current ratesoffered to the Company for similar debt and was estimated to be $2,088.1million as of March 31, 2010, as compared to the carrying amount of$2,019.5 million as of March 31, 2010.

 

Note J — Investment in Other Companies

 

During the three months ended March 31, 2010, the Company investedan additional $10 million in Trip. As of March 31, 2010, the Company’sinvestment balance in Trip was $33.5 million which represents a 20%ownership interest and is recorded as an “Other asset” on the Company’sconsolidated balance sheet. The Company accounts for its interest in Trip usingthe equity method of accounting. The Company records its equity in Trip’searnings on a one-quarter lag. The Company’s portion of Trip’s loss for thethree months ended March 31, 2010 was $280,000.

 

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Note K — Legal Matters

 

***Legal Matters***

 

The Company issubject to certain legal actions which it considers routine to its businessactivities. As of March 31, 2010, management believes, after consultationwith legal counsel, that the ultimate outcome of such legal matters is notlikely to have a material adverse effect on the Company’s financial position,liquidity or results of operations. However, the following is a significantoutstanding legal matter and if the dispute is not resolved consistent with theposition taken by the Company, the Company’s financial results would benegatively impacted.

 

*ASA andSkyWest Airlines v. Delta*

 

During the quarterended December 31, 2007, Delta notified the Company, SkyWest Airlines andASA of a dispute under the Delta Connection Agreements executed by Delta withSkyWest Airlines and ASA. The dispute relates to allocation of liability forIROP expenses that are paid by SkyWest Airlines and ASA to their passengersunder certain situations. As a result, Delta withheld a combined total ofapproximately $25 million (pretax) from one of the weekly scheduled wirepayments to SkyWest Airlines and ASA during December 2007. Delta continuesto withhold a portion of the funds the Company believes are payable as weeklyscheduled wire payments to SkyWest Airlines and ASA. As of March 31, 2010,the Company had recognized a cumulative total of $31.7 million of revenueassociated with the funds withheld by Delta. On February 1, 2008, SkyWestAirlines and ASA filed a lawsuit in Georgia state court disputing Delta’streatment of the matter (the “Complaint”). Delta filed an Answer to theComplaint and a Counterclaim against SkyWest Airlines and ASA on March 24,2008. Delta’s Counterclaim alleges that ASA and SkyWest Airlines breached theDelta Connection Agreements by invoicing Delta for the IROP expenses that werepaid pursuant to Delta’s policies, and claims only a portion of those expensesmay be invoiced to Delta. Delta seeks unspecified damages in its counterclaim.

 

On March 24,2008, Delta filed a Motion to Dismiss the Complaint (the “Motion to Dismiss”).A hearing on the Motion to Dismiss was held September 5, 2008. In an orderentered September 13, 2008, the Court granted in part and denied in partthe Motion to Dismiss. The Court denied the Motion to Dismiss with respect tothe breach of contract claim contained in the Complaint. The Court denied inpart the Motion to Dismiss with respect to the action for declaratory judgmentcontained in the Complaint, and granted in part the Motion to Dismiss to theextent the Complaint seeks to read alternative or supplemental obligationscreated by prior conduct into the Delta Connection Agreements. The Courtgranted the Motion to Dismiss with respect to claims for estoppel, unilateralmistake, and mutual mistake contained in the Complaint. The breach of contractclaims and declaratory relief claims were not dismissed

 

On July 31,2009, SkyWest Airlines and ASA filed an Amended Complaint in the lawsuit addingclaims under Georgia law for voluntary payment and mutual departure from thestrict terms of the Delta Connection Agreements. Under those claims, SkyWestAirlines and ASA seek recovery of all of the approximately $25 millionwithheld by Delta during December 2007. SkyWest Airlines and ASA are alsoseeking recovery of additional amounts withheld by Delta subsequent to December 2007.Discovery on SkyWest Airlines’ and ASA’s claims and defenses has not yet beencompleted. On September 4, 2009, Delta filed a motion to dismiss theAmended Complaint in part. Delta asserted that the claims added by SkyWestAirlines and ASA in the Amended Complaint should be dismissed based on legalarguments set forth in Delta’s memorandum in support of its motion. SkyWestAirlines and ASA opposed the motion.  On January 22,2010, the Court granted Delta’s motion in part, dismissing the claims underGeorgia law for voluntary payment and mutual departure from the strict terms ofthe Connection Agreements. SkyWest Airlines and ASA continue to vigorouslypursue their claims set forth in the Amended Complaint, to the extent permittedby the Court’s ruling on the Motion to Dismiss, and their defenses to Delta’scounterclaims.  The Court’s rulingsaffect the current posture of the case, but do not preclude pursuit of theclaims for breach of contract or for declaratory relief, under which SkyWestAirlines and ASA continue to seek recovery of the majority of the amountswithheld by Delta.

 

For financialreporting purposes the Company accrues an estimated loss if the loss isprobable and reasonably estimable. Because these conditions have not beensatisfied, the Company had not recorded a loss related to the preceding disputeas of March 31, 2010.

 

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**ITEM 2:**               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

** **

*The following discussion and analysis presents factors that had a materialeffect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”)during the three months ended March 31, 2010 and 2009. Also discussed isour financial position as of March 31, 2010 and December 31, 2009.You should read this discussion in conjunction with our condensed consolidatedfinancial statements for the three months ended March 31, 2010, includingthe notes thereto, appearing elsewhere in this Report.  This discussion and analysis containsforward-looking statements. Please refer to the sections of this Reportentitled “Cautionary Statement Concerning Forward-Looking Statements” and “RiskFactors” for discussion of the uncertainties, risks and assumptions associatedwith these statements.*

 

**Cautionary Statement ConcerningForward-Looking Statements**

 

Certain of the statementscontained in this Report should be considered “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  These forward-looking statementsmay 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 regardingSkyWest’s outlook, the revenue environment, SkyWest’s contract relationships,and SkyWest’s expected financial performance. These statements include, but are not limited to, statements aboutSkyWest’s future growth and development plans, including SkyWest’s futurefinancial and operating results, SkyWest’s plans for SkyWest Airlines and ASA,SkyWest’s objectives, expectations and intentions, and other statements thatare not historical facts.  You should also keep in mind that allforward-looking statements are based on SkyWest’s existing beliefs aboutpresent and future events outside of SkyWest’s control and on assumptions thatmay prove to be incorrect.  If one ormore risks identified in this Report materializes, or any other underlyingassumption proves incorrect, SkyWest’s actual results will vary, and may varymaterially, from those anticipated, estimated, projected, or intended.

 

There may be other factorsnot identified above of which SkyWest is not currently aware that may affectmatters discussed in the forward-looking statements, and may also cause actualresults to differ materially from those discussed.  SkyWest assumes no obligation to publiclyupdate any forward-looking statement to reflect actual results, changes inassumptions or changes in other factors affecting these statements other thanas required by law.

 

**Overview**

 

Through SkyWest Airlines, Inc. (“SkyWest Airlines”) and AtlanticSoutheast Airlines, Inc. (“ASA”), we operate the largest regional airlinein the United States. As of March 31, 2010, SkyWest Airlines and ASA offeredscheduled passenger and air freight service with more than 2,600 total dailydepartures to 226 destinations in the United States, Canada, Mexico and theCaribbean. Additionally, as of March 31, 2010, we provided ground handlingservices for approximately 11 other airlines throughout our system. As of March 31,2010, we operated a combined fleet of 454 aircraft consisting of 252 50-seatBombardier Aerospace (“Bombardier”) CRJ 200 Regional Jets (the “CRJ200”) (91assigned to United Air Lines, Inc. (“United”), 156 assigned to Delta AirLines, Inc. (“Delta”) and  fiveassigned to Air Tran Airways, Inc. (“AirTran”)) 121 70-seat BombardierCRJ700 Regional Jets (the “CRJ700”)  (70assigned to United and 51 assigned to Delta), 31 CRJ900s (all assigned toDelta) and 50 30-seat Embraer Brasilia EMB-120 turboprop aircraft (the “Brasiliaturboprop”) (39 assigned to United and 11 assigned to Delta). We believe oursuccess in attracting multiple contractual relationships with our major airlinepartners is attributable to our delivery of high-quality customer service withan all cabin-class fleet at a competitive cost structure. For the three monthsended March 31, 2010, approximately 50.7% of our aggregate capacity wasoperated under the Delta code, approximately 48.5% was operated under theUnited code and approximately 0.8% under the AirTran code.

 

SkyWest Airlines has been a code-share partner with Delta in Salt LakeCity and United in Los Angeles since 1987 and 1997, respectively. In 1998,SkyWest Airlines expanded its relationship with United to provide service inPortland, Seattle/Tacoma, San Francisco and additional Los Angeles markets. In2004, SkyWest Airlines expanded its United Express operations to provideservice in Chicago. On November 4, 2009, SkyWest Airlines entered into acode-share agreement with AirTran.

 

As of March 31, 2010, SkyWest Airlines operated as a DeltaConnection carrier in Salt Lake City, a United Express carrier in Los Angeles,San Francisco, Denver, Chicago and the Pacific Northwest, and an AirTrancarrier in Milwaukee, operating more than 1,700 total daily flights.

 

ASA has been a code-share partner with Delta in Atlanta since 1984 andUnited since February 2010. As of March 31, 2010, ASA operated as aDelta Connection carrier in Atlanta and Cincinnati and a United Express carrierin Chicago and Washington Dulles, operating approximately 900 daily flights.

 

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We provide a substantial majority of the regional airline service forDelta in Atlanta and Salt Lake City. In connection with our acquisition of ASAin September 2005, we established new, separate, but substantiallysimilar, long-term fixed-fee Delta Connection Agreements with Delta for bothSkyWest Airlines and ASA. We also obtained the right to use 29 gates in theHartsfield-Jackson International Airport located in Atlanta, from which wecurrently provide service to Delta. Pursuant to the terms of the DeltaConnection Agreement executed by ASA and Delta, Delta has also agreed that ifDelta solicits requests for proposals to fly Delta Connection regionalaircraft, ASA will be permitted to bid to maintain the same percentage of totalDelta Connection regional jet flights that it operated during 2007, and, if ASAdoes not achieve the winning bid for the proposed flying, ASA will be permittedto match the terms of the winning bid to the extent necessary for ASA tomaintain the same percentage of Delta Connection regional jet flights that itoperated during 2007.

 

On February 10, 2010, ASA and United entered into a United ExpressAgreement, pursuant to which ASA has agreed to operate 14 CRJ200 aircraft as aUnited Express carrier. On February 11, 2010, ASA began operating as aUnited Express carrier, and we anticipate that the 14 United Express regionaljets to be flown by ASA will all be in operation by May of 2010. The ASAUnited Express Agreement is a capacity purchase agreement with a five-year term,and other terms which are generally consistent with the SkyWest Airlines UnitedExpress Agreement.

 

Historically, multiple contractual relationships have enabled us toreduce reliance on any single major airline code and to enhance and stabilizeoperating results through a mix of contract flying and our controlled or “pro-rate”flying. For the three months ended March 31, 2010, contract flying revenueand pro-rate revenue represented approximately 90% and 10%, respectively, ofour total passenger revenues. On contract routes, the major airline partnercontrols scheduling, ticketing, pricing and seat inventories and we arecompensated by the major airline partner at contracted rates based on thecompleted block hours, flight departures and other operating measures. Onpro-rate flights, we control scheduling, ticketing, pricing and seatinventories and receive a pro-rated portion of passenger fares. For the threemonths ended March 31, 2010, essentially all of our Brasilia turbopropsflown for Delta were flown under pro-rate arrangements, while approximately 26%of our Brasilia turboprops flown in the United system were flown undercontractual arrangements, with the remaining 74% flown under pro-ratearrangements. For the three months ended March 31, 2010, approximately 89%of our CRJ200s flown in the United system were flown under contractualarrangements, with the remaining 11% flown under pro-rate arrangements. On November 4,2009, SkyWest Airlines entered into a code-share agreement with AirTran. Underthe terms of the code-share agreement, SkyWest Airlines has agreed to operatefive CRJ200s for AirTran under a pro-rate arrangement. SkyWest Airlinescommenced AirTran service with two aircraft in December 2009, twoadditional aircraft in January 2010 and one aircraft in February 2010.

 

**FirstQuarter Summary**

 

We had revenues of $632.2 million for the three months ended March 31,2010, a 6.0% decrease, compared to revenues of $672.6 million for thethree months ended March 31, 2009. We had net income of $15.0 million,or $0.26 per diluted share, for the three months ended March 31, 2010, anincrease of 60.2%, compared to $9.4 million of net income, or $0.16 perdiluted share, for the three months ended March 31, 2009.

 

The significant items affecting our financial performance during thethree months ended March 31, 2010 are outlined below:

 

Ourmaintenance costs increased $14.6 million, or 15.8%, during the threemonths ended March 31, 2010, compared to the three months ended March 31,2009. The increase was primarily related to the timing of engine overhaulevents. During the three months ended March 31, 2010, our CRJ200 engineexpense under our United Express Agreements increased $11.6 millioncompared to the three months ended March 31, 2009.  The increase in CRJ 200 engine overhaulsreimbursed at a fixed hourly rate was principally due to scheduled enginemaintenance events.  We anticipate thenumber of scheduled engine maintenance events experienced during the three monthsended March 31, 2010 will likely continue each quarter through the firstquarter of 2012.

 

On October 23, 2009, Delta sent letters to SkyWest Airlines andASA requiring them to either adjust the rates payable under their respectiveDelta Connection Agreements or accept termination of those agreements, andnotifying SkyWest Airlines and ASA of Delta’s estimate of the average rates tobe applied under the agreements. On October 28, 2009, SkyWest Airlines andASA notified Delta of their election to adjust the rates payable under theDelta Connection Agreements; however, they also notified Delta of theirdisagreement with Delta’s estimated rates and their belief that the methodologyDelta used to calculate its estimated rates is inconsistent with the terms ofthe Delta Connection Agreements. SkyWest Airlines and ASA continue to negotiatewith Delta in an effort to determine an appropriate methodology for calculatingthe average rates of the carriers within the Delta Connection Program. BecauseSkyWest Airlines and ASA have not reached an agreement with Delta regarding thefinal contractual rates to be established under the Delta ConnectionAgreements, we have evaluated the dispute for calculating the average rate ofthe carriers within the Delta Connection Program under the revenue recognitionaccounting guidance and recorded revenue under those agreements based onmanagement’s understanding of the applicable terms in the Delta ConnectionAgreements and management’s best estimate of the 

 

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revenuethat will ultimately be realized upon settlement of the contractual rates withDelta with respect to the three months ended March 31, 2010.

 

Total available seat miles (“ASMs”) for the three months ended March 31,2010 increased 9.9%, compared to the three months ended March 31, 2009,primarily due to SkyWest Airlines taking delivery of 18 new CRJ700s and ASAtaking delivery of ten CRJ900s since January 1, 2009. During the threemonths ended March 31, 2010, we generated 5.6 billion ASMs, comparedto 5.1 billion ASMs during the three months ended March 31,2009.

 

**Critical Accounting Policies**

 

Our significant accounting policies are summarizedin Note 1 to our consolidated financial statements for the year ended December 31,2009, which are presented in our Annual Report on Form 10-K for the yearended December 31, 2009.  Criticalaccounting policies are those policies that are most important to thepreparation of our consolidated financial statements and require management’ssubjective and complex judgments due to the need to make estimates about theeffect of matters that are inherently uncertain. Our critical accountingpolicies relate to revenue recognition, maintenance, aircraft leases,impairment of long-lived assets and intangibles, stock-based compensationexpense and fair value. The application of these accounting policies involvesthe exercise of judgment and the use of assumptions as to future uncertaintiesand, as a result, actual results will differ, and could differ materially, fromsuch estimates.

 

**Results of Operations**

 

**Three Months Ended March 31,2010 and 2009**

 

*Operational Statistics.*  The following table sets forth our majoroperational statistics and the associated percentages-of-change for the periodsidentified below.

 
| ** **                                    | ** ** | **For the three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                               | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 4,348,176                                                              |       | 3,849,527 |   | 13.0 |   |
| Available seat miles (“ASMs”) (000) |       | 5,640,970                                                              |       | 5,134,723 |   | 9.9 |   |
| Block hours                                   |       | 344,153                                                                |       | 324,797 |   | 6.0 |   |
| Departures                                    |       | 222,240                                                                |       | 205,880 |   | 7.9 |   |
| Passengers carried                            |       | 8,717,803                                                              |       | 7,633,909 |   | 14.2 |   |
| Passenger load factor                         |       | 77.1                                                                   | %          | 75.0 | % | 2.1 | Pts |
| Revenue per available seat mile               |       | 11.2                                                                   | ¢     | 13.1 | ¢ | (14.5 | ) |
| Cost per available seat mile                  |       | 10.8                                                                   | ¢     | 12.8 | ¢ | (15.6 | ) |
| Cost per available seat mile excluding fuel   |       | 9.5                                                                    | ¢     | 10.1 |   | (5.9 | ) |
| Fuel cost per available seat mile             |       | 1.3                                                                    | ¢     | 2.7 | ¢ | (51.9 | ) |
| Average passenger trip length (miles)         |       | 499                                                                    |       | 504 |   | (1.0 | ) |

 

*Revenues.*  Operating revenues decreased$40.4 million, or 6.0%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. We are reimbursed forour actual fuel costs by our major partners under our contract flyingarrangements. For financial reporting purposes, we record these reimbursementsas operating revenue. Under the SkyWest Airlines and ASA Delta ConnectionAgreements, we are reimbursed for our engine overhaul expenses. We also recordthose engine overhaul reimbursements as operating revenue. The following tablesummarizes the amount of fuel and engine overhaul reimbursements included inour passenger revenues for the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                                               | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                      | 623,112    |   | $ | 664,883 |   | $ | (41,771 | ) | (6.3 | )% |
| Less: Fuel reimbursement from major partners                          |       | 55,155                                                                 |       | 136,552 |   | (81,397 | ) | (59.6 | )% |
| Less: Engine overhaul reimbursement from major  partners              |       | 25,737                                                                 |       | 16,444 |   | 9,293 |   | 56.5 | % |
| Passenger revenue excluding fuel and engine overhauls  reimbursements |       | $                                                                      | 542,220    |   | $ | 511,887 |   | $ | 30,333 |   | 5.9 | % |

 

*Passenger revenues.*  Passenger revenues decreased$41.8 million, or 6.3%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. The decrease in passengerrevenues was primarily due to a decrease in fuel reimbursements from our majorpartners. The fuel reimbursement from our major partners decreased$81.4 million or 59.6%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. Our passenger revenues,excluding fuel and engine overhaul reimbursements from major partners,increased $30.3 million, or 5.9%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009. The increase inpassenger revenues, excluding fuel and engine overhaul reimbursements, wasprimarily due to two factors. First, ASA experienced an abnormally high numberof flight cancellations during 

 

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thethree months ended March 31, 2009. ASA incurred significant weather related cancellations in its Atlantahub during the three months ended March 31, 2009. Additionally, on March 31,2009, as a result of an internal audit, ASA grounded 60 CRJ200 aircraft inorder to perform engine safety inspections in accordance with the manufacturer’srecommendations. ASA cancelled approximately 750 more flights than normal as aresult of the severe weather and the aircraft grounding during the quarter. Asa result of the abnormally high number of cancellations, ASA experienced anegative impact on passenger revenues of approximately $7.6 million. Second,our block hour production increased 6.0% during the three months end March 31,2010, compared to the three months ended March 31, 2009.The increase inblock hours is primarily due to SkyWest Airlines taking delivery of 18 CRJ 700ssince January 1, 2009.

 

*Ground handling and other.*  Total ground handling and other revenuesincreased $1.4 million, or 17.7%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009. Revenue earnedunder ground handling contracts where we provide ground handling services for otherairlines is presented in the “Ground handling and other” line in ourconsolidated statements of income. The increase was primarily related to thehigher volume of flights serviced under ground handling contracts with Unitedand Delta, whereby we perform ground handling services for several otherregional airlines.

 

Individual expense components are also expressed in the following tableon the basis of cents per ASM. ASM is a common metric used in the airlineindustry to measure an airline’s passenger capacity. ASMs reflect both thenumber of aircraft in an airline’s fleet and the seat capacity for the aircraftin the fleet. As the size of our fleet is the underlying driver of ouroperating costs, the primary basis for our presentation in MD&A is on a costper ASM basis to discuss significant changes in our costs not proportionate tothe relative changes in our fleet size (dollar amounts in thousands).

 
| ** **                                  | ** ** | **For the three months ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **2010**                                                               | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                             | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                      | 73,514     |   | $ | 140,629 |   | $ | (67,115 | ) | (47.7 | )% | 1.3 |   | 2.7 |   |
| Salaries, wages and benefits                |       | 178,563                                                                |       | 176,872 |   | 1,691 |   | 1.0 | % | 3.2 |   | 3.5 |   |
| Aircraft maintenance, materials and repairs |       | 106,755                                                                |       | 92,158 |   | 14,597 |   | 15.8 | % | 1.9 |   | 1.8 |   |
| Aircraft rentals                            |       | 76,459                                                                 |       | 72,782 |   | 3,677 |   | 5.1 | % | 1.3 |   | 1.4 |   |
| Depreciation and amortization               |       | 58,146                                                                 |       | 54,584 |   | 3,562 |   | 6.5 | % | 1.0 |   | 1.1 |   |
| Station rentals and landing fees            |       | 28,885                                                                 |       | 32,874 |   | (3,989 | ) | (12.1 | )% | 0.5 |   | 0.6 |   |
| Ground handling services                    |       | 29,444                                                                 |       | 25,448 |   | 3,996 |   | 15.7 | % | 0.5 |   | 0.5 |   |
| Other                                       |       | 38,056                                                                 |       | 36,471 |   | 1,585 |   | 4.3 | % | 0.7 |   | 0.7 |   |
| Total operating expenses                    |       | 589,822                                                                |       | 631,818 |   | (41,996 | ) | (6.6 | )% | 10.4 |   | 12.3 |   |
| Interest                                    |       | 21,585                                                                 |       | 22,951 |   | (1,366 | ) | (6.0 | )% | 0.4 |   | 0.5 |   |
| Total airline expenses                      |       | $                                                                      | 611,407    |   | $ | 654,769 |   | (43,362 | ) | (6.6 | )% | 10.8 |   | 12.8 |   |
|                                             |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $67.1 million, or47.7%, during the three months ended March 31, 2010, compared to the threemonths ended March 31, 2009. The average cost per gallon of fuel increasedto $2.52 per gallon during the three months ended March 31, 2010, from$1.65 during the three months ended March 31, 2009. The increase in theaverage cost per gallon was offset by Delta purchasing the majority of the fuelfor our Delta Connection aircraft, commencing on June 1, 2009.  United also purchased fuel directly from afuel vendor for our United Express aircraft under contract flying operated outof Chicago, San Francisco, Los Angeles and Denver. The following tablesummarizes the gallons of fuel we purchased directly, and the change in fuelprice per gallon on our fuel expense, for the periods indicated:

 
| ** **                                                             | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2010**                                                               | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 29,210                                                                 |       | 85,311 |   | (65.8 | )% |
| Average price per gallon                                               |       | $                                                                      | 2.52       |   | $ | 1.65 |   | 52.7 | % |
| Fuel expense                                                           |       | $                                                                      | 73,514     |   | $ | 140,629 |   | (47.7 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsincreased $1.7 million, or 1.0%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009. The averagenumber of full-time equivalent employees decreased 5.9% to 12,448 for the threemonths ended March 31, 2010, from 13,224 for the three months ended March 31,2009. The decrease in number of employees was primarily due to a reduction inour customer service employees resulting from Delta transitioning 23 stationsfrom SkyWest Airlines and ASA to other ground handlers during the secondquarter of 2009.  Although our decreasein full-time equivalent employees was primarily due to a reduction in customerservice agents, we experienced an increase of 6.0% in block hours, whichresulted in an increase in crew related salaries, wages and employeebenefits.  The net impact resulted in a1.0% increase in salaries, wages and employee benefits

 

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*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$14.6 million, or 15.8%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009. The followingtable summarizes the amount of engine overhauls and engine overhaulreimbursements included in our aircraft maintenance expense for the periodsindicated (dollar amounts in thousands).

 
| ** **                                                                                                                    | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                                                                                   |       | $                                             | 106,755    |   | $ | 92,158 |   | $ | 14,597 |   | 15.8 | % |
| Less: Engine overhaul reimbursed from major  partners                                                                         |       | 25,737                                        |       | 16,444 |   | 9,293 |   | 56.5 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                               |       | 15,327                                        |       | 3,769 |   | 11,558 |   | 306.7 | % |
| Aircraft maintenance excluding reimbursed engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                             | 65,691     |   | $ | 71,945 |   | $ | (6,254 | ) | (8.7 | )% |

 

Aircraft maintenance expense excluding reimbursed engine overhauls andCRJ 200 engine overhauls reimbursed at fixed hourly rates, decreased$6.3 million, or 8.7%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. The decrease inmaintenance excluding engine overhaul costs was principally due to timing ofscheduled maintenance events.

 

Underthe SkyWest Airlines and ASA United Express Agreements, we recognize revenue inour condensed consolidated statement of income at a fixed hourly rate formature engine maintenance on regional jet engines and we recognize enginemaintenance expense on our CRJ200 regional jet engines in our condensedconsolidated statement of income on an as-incurred basis as maintenanceexpense. During the three months ended March 31, 2010, our CRJ200 engineexpense under our SkyWest Airlines United Express Agreements increased$11.6 million compared to the three months ended March 31, 2009.  The increase in CRJ 200 engine overhaulsreimbursed at a fixed hourly rate was principally due to scheduled enginemaintenance events.  We anticipate thenumber of scheduled engine maintenance events experienced during the threemonths ended March 31, 2010 will likely continue each quarter through thefirst quarter of 2012.

 

Under our Delta Connection Agreements we are reimbursed for engineoverhaul costs by Delta at the time the maintenance event occurs. Suchreimbursements are reflected as passenger revenue in our condensed consolidatedstatements of income.

 

*Aircraft rentals.*  Aircraft rentals increased $3.7 million, or5.1%, during the three months ended March 31, 2010, compared to the threemonths ended March 31, 2009. The increase in aircraft rents was primarilydue to ASA taking delivery of ten CRJ900s during 2009. These aircraft werefinanced through long-term leases. This increase was partially offset by ASAreturning 12 ATR-72 turboprops to the lessor and terminating the associatedleases in 2009.

 

*Depreciation and amortization.*  Depreciation and amortization expenseincreased $3.6 million, or 6.5%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009.  The increase in depreciation expense wasprimarily due to SkyWest Airlines taking delivery of 18 new CRJ700s since January 1,2009. These aircraft were financed through long-term debt.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $4.0 million, or 12.1%, during the three months ended March 31,2010, compared to the three months ended March 31, 2009. The decrease instation rentals and landing fees expense was primarily due to our majorpartners paying for certain station rents and landing fees directly to the applicableairports.

 

*Ground handling service.*  Ground handling service expense increased$4.0 million, or 15.7%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. The increase in groundhandling was due primarily to 16 new pro-rate stations SkyWest Airlinesoutsourced to other ground handlers since March 31, 2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, increased $1.6 million, or 4.3%, during the three monthsended March 31, 2010, compared to the three months ended March 31,2009. The increase in other expenses was primarily due to the increase in ASMsduring the three-month period.

 

*Interest.*  Interest expense decreased $1.4 million,or 6.0%, during the three months ended March 31, 2010 compared to thethree months ended March 31, 2009. The decrease in interest expense wassubstantially due to a decrease in interest rates. At March 31, 2010, wehad variable rate notes representing 36.8% of our total long-term debt . Themajority of our variable rate notes are based on the three-month and six-monthLIBOR rates. At March 31, 2010, the three-month and six-month LIBOR rateswere 0.29% and 0.44%, respectively. At March 31, 2009, the three-month andsix-month LIBOR rates were 1.19% and 1.74%, respectively.

 

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*Interest Income.* Interest income increased $1.2 million,or 45.8% during the three months ended March 31, 2010, compared to thethree months ended March 31, 2009. The increase in interest income was dueprimarily to the secured term loan SkyWest Airlines extended to United in theamount of $80 million. The term loan bears interest at a rate of 11%, witha ten-year amortization period. SkyWest Airlines also agreed to defer $49million otherwise payable by United to SkyWest Airlines under the SkyWestAirlines United Express Agreement.  Thisamount accrues a deferral fee of 8% which is included in interest income.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $43.4 million, or 6.6%, duringthe three months ended March 31, 2010, compared to the three months ended March 31,2009. We are reimbursed for our actual fuel costs by our major partners underour contract flying arrangements. We record the amount of those reimbursementsas revenue. Under the SkyWest Airlines and ASA Delta Connection Agreements, weare reimbursed for our engine overhaul expense, which we record as revenue. Thefollowing table summarizes the amount of fuel and engine overhaul expenseswhich are included in our total airline expenses for the periods indicated(dollar amounts in thousands).

 
| ** **                                                                                                                   | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                                                                                        |       | $                                             | 611,407    |   | $ | 654,769 |   | $ | (43,362 | ) | (6.6 | )% |
| Less: Fuel expense                                                                                                           |       | 73,514                                        |       | 140,629 |   | (67,115 | ) | (47.7 | )% |
| Less: Engine overhaul reimbursement from major  partners                                                                     |       | 25,737                                        |       | 16,444 |   | 9,293 |   | 56.5 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                              |       | 15,327                                        |       | 3,769 |   | 11,558 |   | 306.7 | % |
| Total airline expense excluding fuel and engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                             | 496,829    |   | $ | 493,927 |   | $ | 2,902 |   | 0.6 | % |

 

Excluding fuel and engine overhaul costs and CRJ 200 engine overhaulsreimbursed at fixed hourly rates, our total airline expenses increased$2.9 million, or 0.6%, during the three months ended March 31, 2010,compared to the three months ended March 31, 2009. The percentage increasein total airline expenses excluding fuel and engine overhauls, was less thanthe percentage increase in ASMs, which was primarily due to the increasedoperating efficiencies obtained from operating larger regional jets.

 

*Impairment of marketable securities.*  As a result of an ongoing valuation review ofour marketable securities portfolio, we recognized a pre-tax charge ofapproximately $7.1 million during the three months ended March 31, 2009for certain marketable securities deemed to have other-than-temporaryimpairment.

 

*Net Income.*  Primarily due to factors described above, netincome increased to $15.0 million, or $0.26 per diluted share, for thethree months ended March 31, 2010, compared to $9.4 million, or $0.16per diluted share, for the three months ended March 31, 2009.

 

## **Liquidity and Capital Resources**

##  

We had working capital of $816.3 million and acurrent ratio of 2.8:1 at March 31, 2010, compared to working capital of$804.3 million and a current ratio of 2.8:1 at December 31, 2009. Theincrease in working capital was principally attributable to the $62.5 millionof cash provided by operating activities.

 

The principal sources of cash during the threemonths ended March 31, 2010 were $62.5 million provided by operatingactivities, $81.7 million from the proceeds of long-term debt, $4.2 millionfrom returns on aircraft deposits, $2.5 million from the issuance of commonstock in connection with the exercise of stock options under our stock optionand employee stock purchase plans, $2.0 million from repayment of theUnited note receivable and $0.1 million from the sale of equipment.  We invested $106.2 million in flightequipment, made principal payments on long-term debt of $27.1 million,purchased $17.1 million of other assets, made net purchases of $9.4 million ofmarketable securities, paid $2.3 million in cash dividends, spent $1.8 millionfor buildings and ground equipment and repurchased $1.2 million of outstandingshares of our common stock.  Thesefactors resulted in a $12.0 million decrease in cash and cash equivalentsduring the three months ended March 31, 2010.

 

We believe that in the absence of unusualcircumstances, the working capital currently available to us will be sufficientto meet our present financial requirements, including anticipated expansion,planned capital expenditures, and scheduled lease payments and debt serviceobligations for at least the next 12 months.

 

Our position in marketable securities, consistingprimarily of bonds, bond funds and commercial paper, increased to $654.5million at March 31, 2010, compared to $645.3 million at December 31,2009.  The increase in marketablesecurities was principally attributable to the $62.5 million of cash providedby operating activities.

 

At March 31, 2010, our total capital mix was42.3% equity and 57.7% long-term debt, compared to 42.7% equity and 57.3% 

 

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long-termdebt at December 31, 2009.

 

**Significant Commitments andObligations**

 

*General*

 

The following table summarizes our commitments andobligations stated in calendar years except as noted for each of the next fiveyears and thereafter (in thousands):

 
| ** **                                                      | ** ** | **Total**  | ** ** | **Apr-Dec  2010** | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Operating lease payments for aircraft and facility  obligations |       | $          | 2,766,138  |              | $          | 191,653    |       | $          | 328,539    |       | $          | 323,948    |       | $              | 313,418    |   | $ | 302,012 |   | $ | 1,306,568 |   |
| Interest commitments                                            |       | 647,191    |       | 69,881            |       | 81,367     |       | 75,266     |       | 68,416     |       | 62,281     |       | 289,980        |       |
| Principal maturities on long-term debt                          |       | 2,019,463  |       | 123,329           |       | 156,650    |       | 203,541    |       | 157,413    |       | 163,256    |       | 1,215,274      |       |
| Total commitments and obligations                               |       | $          | 5,432,792  |              | $          | 384,863    |       | $          | 566,556    |       | $          | 602,755    |       | $              | 539,247    |   | $ | 527,549 |   | $ | 2,811,822 |   |

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term lease obligations primarily relatingto our aircraft fleet. At March 31, 2010, we had 282 aircraft under leasewith remaining terms ranging from one to 17 years. Future minimum leasepayments due under all long-term operating leases were approximately$2.8 billion at March 31, 2010. Assuming a 5.8% discount rate, whichis the average rate used to approximate the implicit rates within theapplicable aircraft leases, the present value of these lease obligations wouldhave been equal to approximately $2.0 billion at March 31, 2010.

 

*Long-term Debt Obligations*

 

As of March 31, 2010, we had $2,019.5 million of long termdebt obligations related to the acquisition of Brasilia turboprop, CRJ200,CRJ700 and CRJ900 aircraft. The average effective interest rate on the debtrelated to the Brasilia turboprop and CRJ aircraft was approximately 4.3% at March 31,2010.

 

**Seasonality**

 

Our results of operations for any interim period arenot necessarily indicative of those for an entire year, since the airlineindustry is subject to seasonal fluctuations and general economicconditions.  Our operations are somewhatfavorably affected by increased travel on our pro-rate routes, historicallyoccurring during the summer months, and unfavorably affected by decreasedtravel during the months November through February and by inclementweather, which occasionally results in cancelled flights during the wintermonths.

 

****ITEM 3:********                 ********QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK****

** **

**Aircraft Fuel**

 

In the past, we have not experienced difficulties with fuelavailability and we currently expect to be able to obtain fuel at prevailingprices in quantities sufficient to meet our future needs. Pursuant to ourcontract flying arrangements, United has agreed to bear the economic risk offuel price fluctuations on our contracted United Express flights. On our DeltaConnection regional jet flights, Delta has agreed to bear the economic risk offuel price fluctuations. We bear the economic risk of fuel price fluctuationson our pro-rate operations. For the three months ended March 31, 2010,essentially all of our Brasilia turboprops flown for Delta were flown underpro-rate arrangements while, approximately 74% of our Brasilia turboprops flownin the United system were flown under pro-rate arrangements and approximately11% of our CRJ200s flown in the United system were flown under pro-ratearrangements. As of March 31, 2010, we operated 18 CRJ 200s under apro-rate agreement with United and five CRJ200s with AirTran. The average priceper gallon of aircraft fuel increased 3.3% to $2.52 for the three months ended March 31,2010, from $2.44 for the three months ended December 31, 2009. Forillustrative purposes only, we have estimated the impact of the market risk offuel on our pro-rate operations using a hypothetical increase of 25% in theprice per gallon we purchase. Based on this hypothetical assumption, we wouldhave incurred an additional $4.6 million in fuel expense for the threemonths ended March 31, 2010.

 

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**Interest Rates**

 

Our earnings are affected by changes in interest rates due to theamounts of variable rate long-term debt and the amount of cash and securitiesheld. The interest rates applicable to variable rate notes may rise andincrease the amount of interest expense. We would also receive higher amountsof interest income on cash and securities held at the time; however, the marketvalue of our available-for-sale securities would likely decline. At March 31,2010, we had variable rate notes representing 36.8% of our total long-term debtcompared to 38.6% of our long-term debt at December 31, 2009. Forillustrative purposes only, we have estimated the impact of market risk using ahypothetical increase in interest rates of one percentage point for bothvariable rate long-term debt and cash and securities. Based on thishypothetical assumption, we would have incurred an additional $1.9 millionin interest expense and received $1.8 million in additional interestincome for the three months ended March 31, 2010. However, under ourcontractual arrangement with our major partners, the majority of the increasein interest expense would be passed through and recorded as passenger revenuein our consolidated statements of income. Also for illustrative purposes only,we have likewise estimated the impact of a hypothetical decrease in interestrates of one percentage point for both variable rate long-term debt and cashand securities. Based upon this hypothetical example, we would have recognized$1.9 million less in interest expense and received $1.8 million less ininterest income for the three months ended March 31, 2010. If interestrates were to decline, our major partners would receive the principal benefitof the decline, since interest expense is generally passed through to our majorpartners, resulting in a reduction to passenger revenue in our consolidatedstatement of income.

 

We currently intend to finance the acquisition of aircraft throughmanufacturer financing, third-party leases or long-term borrowings. Changes ininterest rates may impact our actual costs of acquiring these aircraft.

 

**ITEM 4.**                    CONTROLS AND PROCEDURES

** **

**Evaluation of DisclosureControls and Procedures**

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31,2010.  In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. In addition,the design of disclosure controls and procedures must reflect the fact thatthere are resource constraints and that management is required to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

Based on that evaluation, our chief executiveofficer and chief financial officer concluded that our disclosure controls andprocedures are designed at a reasonable assurance level and are effective toprovide reasonable assurance that information we are required to disclose inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms, and that such information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

**Changes in InternalControl over Financial Reporting**

 

There were no significant changes (includingcorrective actions with regard to material weaknesses) in our internal controlover financial reporting that occurred during the period covered by this Reportthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

** **

****ITEM 1.   LEGALPROCEEDINGS****

** **

We are subject tocertain legal actions which we consider routine to our business activities. Asof March 31, 2010, our management believed, after consultation with legalcounsel, that the ultimate outcome of such legal matters is not likely to havea material adverse effect on our financial position, liquidity or results ofoperations. However, the following is a significant outstanding legal matterand if the dispute is not resolved consistent with the position we have taken inthat matter, our financial results would be negatively impacted.

 

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*ASAand SkyWest Airlines v. Delta*

 

During the quarterended December 31, 2007, Delta notified SkyWest, SkyWest Airlines and ASAof a dispute under the Delta Connection Agreements executed by Delta withSkyWest Airlines and ASA. The dispute relates to allocation of liability forIROP expenses that are paid by SkyWest Airlines and ASA to their passengersunder certain situations. As a result, Delta withheld a combined total ofapproximately $25 million (pretax) from one of the weekly scheduled wirepayments to SkyWest Airlines and ASA during December 2007. Delta continuesto withhold a portion of the funds we believe are payable as weekly scheduledwire payments to SkyWest Airlines and ASA. As of March 31, 2010, we hadrecognized a cumulative total of $31.7 million of revenue associated withthe funds withheld by Delta. On February 1, 2008, SkyWest Airlines and ASAfiled a lawsuit in Georgia state court disputing Delta’s treatment of thematter (the “Complaint”). Delta filed an Answer to the Complaint and aCounterclaim against SkyWest Airlines and ASA on March 24, 2008. Delta’sCounterclaim alleges that ASA and SkyWest Airlines breached the DeltaConnection Agreements by invoicing Delta for the IROP expenses that were paidpursuant to Delta’s policies, and claims only a portion of those expenses maybe invoiced to Delta. Delta seeks unspecified damages in its counterclaim.

 

On March 24,2008, Delta filed a Motion to Dismiss the Complaint (the “Motion to Dismiss”).A hearing on the Motion to Dismiss was held September 5, 2008. In an orderentered September 13, 2008, the Court granted in part and denied in partthe Motion to Dismiss. The Court denied the Motion to Dismiss with respect tothe breach of contract claim contained in the Complaint. The Court denied inpart the Motion to Dismiss with respect to the action for declaratory judgmentcontained in the Complaint, and granted in part the Motion to Dismiss to theextent the Complaint seeks to read alternative or supplemental obligationscreated by prior conduct into the Delta Connection Agreements. The Courtgranted the Motion to Dismiss with respect to claims for estoppel, unilateralmistake, and mutual mistake contained in the Complaint. The breach of contractclaims and declaratory relief claims were not dismissed

 

On July 31,2009, SkyWest Airlines and ASA filed an Amended Complaint in the lawsuit addingclaims under Georgia law for voluntary payment and mutual departure from thestrict terms of the Delta Connection Agreements. Under those claims, SkyWestAirlines and ASA seek recovery of all of the approximately $25 millionwithheld by Delta during December 2007. SkyWest Airlines and ASA are alsoseeking recovery of additional amounts withheld by Delta subsequent to December 2007.Discovery on SkyWest Airlines’ and ASA’s claims and defenses has not yet beencompleted. On September 4, 2009, Delta filed a motion to dismiss theAmended Complaint in part. Delta asserted that the claims added by SkyWestAirlines and ASA in the Amended Complaint should be dismissed based on legalarguments set forth in Delta’s memorandum in support of its motion. SkyWestAirlines and ASA opposed the motion.  On January 22,2010, the Court granted Delta’s motion in part, dismissing the claims underGeorgia law for voluntary payment and mutual departure from the strict terms ofthe Connection Agreements. SkyWest Airlines and ASA continue to vigorouslypursue their claims set forth in the Amended Complaint, to the extent permittedby the Court’s ruling on the Motion to Dismiss, and their defenses to Delta’scounterclaims.  The Court’s rulingsaffect the current posture of the case, but do not preclude pursuit of the claimsfor breach of contract or for declaratory relief, under which SkyWest Airlinesand ASA continue to seek recovery of the majority of the amounts withheld byDelta.

 

For financialreporting purposes we accrue an estimated loss if the loss is probable andreasonably estimable. Because these conditions have not been satisfied, we hadnot recorded a loss related to the preceding dispute as of March 31, 2010.

 

**ITEM 1A.  RISKFACTORS**

** **

There have been no material changes to the factorsdisclosed in Item 1A. “Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2009.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

Our Board of Directors has adopted a stock repurchase program whichauthorizes us to repurchase shares of our common stock in the public market,from time to time, at prevailing prices. The stock repurchase program currentlyauthorizes the repurchase of up to 15,000,000 shares of our common stock. Thefollowing table summarizes our purchases under the stock repurchase program forthe three months ended March 31, 2010:

 
| **Period**                                    | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of a  Publicly Announced  Program(1)** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Program** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| January 1 - January 31, 2010   |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                | 2,776,411  |   |
| February 1 - February 28, 2010 |       | 83,288                                               |       | 14.09                                            |       | 83,288                                                                                                                     |       | 2,693,123                                                                                                           |       |
| March 1 - March 31, 2010       |       | —                                               |       | —                                           |       | —                                                                                                                     |       | 2,693,123                                                                                                           |       |
| Total                                         |       | 83,288                                               |       | $                                                | 14.09      |                                                                                                                       | 83,288     |                                                                                                                | 2,693,123  |   |

 

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(1)        Under resolutions adopted inFebruary 2007, November 2007 and May 2008, our Board ofDirectors had authorized the repurchase of up to 15,000,000 shares of ourcommon stock as of March 31, 2010. Purchases are made at management’sdiscretion based on market conditions and our financial resources.  Inaddition, effective March 13, 2009, we enteredinto the SkyWest, Inc. Stock Repurchase Plan (the “StockRepurchase Plan”).  The Stock Repurchase Plan provides for therepurchase of up to 3,400,000 shares of our common stock (which are includedwithin, and are not in addition to, the 15,000,000 shares of common stockdescribed above) by an independent third party pursuant to trading parameterscontemplated by the Stock Repurchase Plan.  As of March 31, 2010, wehad spent approximately $248.2 million to purchase and retireapproximately 12,306,877 shares of the 15,000,000 shares of common stockdesignated for repurchase by our Board of Directors. The authorizationof our Board of Directors does not have an expiration date.  TheStock Repurchase Plan expires on March 13, 2011.  Subsequent to March 31, 2010, our Board ofDirectors adopted a resolution authorizing the repurchase of an additional5,000,000 shares of our common stock.

 

**ITEM 6:**                  EXHIBITS

 

10.5         SkyWest, Inc.2010 Long-Term Incentive Plan

31.1         Certificationof Chief Executive Officer

31.2         Certificationof Chief Financial Officer

32.1         Certificationof Chief Executive Officer

32.2         Certification of Chief FinancialOfficer

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the Registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended March 31,2010, to be signed on its behalf by the undersigned, thereunto duly authorized,on May 7, 2010.

 

 
|   | SKYWEST,  INC. |
|--------|----------------|
|   |           |   |
|   | By             | /s/  Bradford R. Rich |
|   |           | Bradford  R. Rich |
|   |           | Executive  Vice President and Chief Financial Officer |

 

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