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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 SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2009**

 

**OR**

 

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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  ̈                |   | 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 November 3,  2009** |
|----------------------------|------------|-----------------------------------------------------|
| Common stock, no par value |       | 55,605,328                                          |

 

 

 

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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 September  30, 2009 (unaudited) and  December 31, 2008                       | 3 |
|              |                                     | Condensed Consolidated Statements of Income  (unaudited) for the three and nine months ended September 30, 2009 and  2008 | 5 |
|              |                                     | Condensed Consolidated Statements of Cash Flows  (unaudited) for the nine months ended September 30, 2009 and 2008        | 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                                                                    | 25 |
|              | Item  4.                                 | Controls  and Procedures                                                                                                       | 26 |
|              |                                     |                                                                                                                           |
| PART II      | OTHER  INFORMATION:                      | 26                                                                                                                             |
|              | Item 1.                                  | Legal  Proceedings                                                                                                             | 26 |
|              | Item 1A.                                 | Risk Factors                                                                                                                   | 27 |
|              | Item  2                                  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   | 28 |
|              | Item 6.                                  | Exhibits                                                                                                                       | 28 |
|              |                                     | Signature                                                                                                                      | 29 |
|              |                                     |                                                                                                                           |
| 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)**

 
| ** **                                     | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| ASSETS                                         |       |                         |       |                        |       |
| CURRENT ASSETS:                                |       |                         |       |                        |       |
| Cash and cash equivalents                      |       | $                            | 108,199    |                        | $          | 125,892 |   |
| Marketable securities                          |       | 695,937                      |       | 568,567                     |       |
| Restricted cash                                |       | 10,729                       |       | 10,728                      |       |
| Income tax receivable                          |       | 11,549                       |       | 14,868                      |       |
| Receivables, net                               |       | 67,069                       |       | 55,458                      |       |
| Inventories, net                               |       | 102,950                      |       | 104,383                     |       |
| Prepaid aircraft rents                         |       | 225,829                      |       | 226,474                     |       |
| Deferred tax assets                            |       | 51,176                       |       | 76,093                      |       |
| Other current assets                           |       | 34,369                       |       | 38,205                      |       |
| Total current assets                           |       | 1,307,807                    |       | 1,220,668                   |       |
|                                           |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT:                        |       |                         |       |                        |       |
| Aircraft and rotable spares                    |       | 3,418,678                    |       | 3,273,705                   |       |
| Deposits on aircraft                           |       | 12,642                       |       | 20,390                      |       |
| Buildings and ground equipment                 |       | 241,016                      |       | 239,573                     |       |
|                                           |       | 3,672,336                    |       | 3,533,668                   |       |
| Less-accumulated depreciation and amortization |       | (935,273                     | )          | (824,293                    | )          |
| Total property and equipment, net              |       | 2,737,063                    |       | 2,709,375                   |       |
|                                           |       |                         |       |                        |       |
| OTHER ASSETS                                   |       |                         |       |                        |       |
| Intangible assets, net                         |       | 24,559                       |       | 26,247                      |       |
| Other assets                                   |       | 78,836                       |       | 58,001                      |       |
| Total other assets                             |       | 103,395                      |       | 84,248                      |       |
| Total assets                                   |       | $                            | 4,148,265  |                        | $          | 4,014,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Dollars in Thousands)**

 
| ** **                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                         |       |                   |       |                  |       |
| CURRENT LIABILITIES:                                                                                              |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                      | 138,727    |                  | $          | 129,783 |   |
| Accounts payable                                                                                                  |       | 149,789                |       | 110,902               |       |
| Accrued salaries, wages and benefits                                                                              |       | 67,666                 |       | 66,553                |       |
| Accrued aircraft rents                                                                                            |       | 12,200                 |       | 25,676                |       |
| Taxes other than income taxes                                                                                     |       | 24,347                 |       | 16,651                |       |
| Other current liabilities                                                                                         |       | 38,394                 |       | 37,039                |       |
| Total current liabilities                                                                                         |       | 431,123                |       | 386,604               |       |
|                                                                                                              |       |                   |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 39,561                 |       | 41,525                |       |
|                                                                                                              |       |                   |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,706,556              |       | 1,681,705             |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 518,756                |       | 507,113               |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 119,574                |       | 121,823               |       |
|                                                                                                              |       |                   |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (Note I)                                                                            |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |                   |       |                  |       |
| Preferred stock, 5,000,000 shares authorized; none  issued                                                        |       | —                 |       | —                |       |
| Common stock, no par value, 120,000,000 shares  authorized; 74,621,715 and 73,520,292 shares issued, respectively |       | 576,308                |       | 562,395               |       |
| Retained earnings                                                                                                 |       | 1,035,128              |       | 977,736               |       |
| Treasury stock, at cost, 19,017,645 and 17,150,580  shares, respectively                                          |       | (279,619               | )          | (261,174              | )          |
| Accumulated other comprehensive income (loss)                                                                     |       | 878                    |       | (3,436                | )          |
| Total stockholders’ equity                                                                                   |       | 1,332,695              |       | 1,275,521             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                      | 4,148,265  |                  | $          | 4,014,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| OPERATING REVENUES:                         |       |                                                 |       |                                           |       |   |   |   |   |
| Passenger                                   |       | $                                                    | 629,955    |                                           | $          | 926,193 |   | $ | 1,985,978 |   | $ | 2,728,922 |   |
| Ground handling and other                   |       | 7,793                                                |       | 7,919                                          |       | 23,235 |   | 24,032 |   |
| Total operating revenues                    |       | 637,748                                              |       | 934,112                                        |       | 2,009,213 |   | 2,752,954 |   |
| OPERATING EXPENSES:                         |       |                                                 |       |                                           |       |   |   |   |   |
| Aircraft fuel                               |       | 61,842                                               |       | 363,735                                        |       | 331,513 |   | 1,022,590 |   |
| Salaries, wages and benefits                |       | 175,552                                              |       | 182,103                                        |       | 526,286 |   | 548,675 |   |
| Aircraft maintenance, materials and repairs |       | 119,055                                              |       | 99,294                                         |       | 327,604 |   | 280,662 |   |
| Aircraft rentals                            |       | 76,189                                               |       | 74,318                                         |       | 224,929 |   | 221,638 |   |
| Depreciation and amortization               |       | 55,461                                               |       | 55,141                                         |       | 164,722 |   | 164,687 |   |
| Station rentals and landing fees            |       | 27,500                                               |       | 33,923                                         |       | 90,352 |   | 102,149 |   |
| Ground handling services                    |       | 23,538                                               |       | 25,107                                         |       | 72,109 |   | 83,994 |   |
| Other airline expense                       |       | 35,358                                               |       | 40,232                                         |       | 107,852 |   | 127,126 |   |
| Total operating expenses                    |       | 574,495                                              |       | 873,853                                        |       | 1,845,367 |   | 2,551,521 |   |
| OPERATING INCOME                            |       | 63,253                                               |       | 60,259                                         |       | 163,846 |   | 201,433 |   |
| OTHER INCOME (EXPENSE):                     |       |                                                 |       |                                           |       |   |   |   |   |
| Interest income                             |       | 1,841                                                |       | 4,627                                          |       | 7,287 |   | 16,398 |   |
| Interest expense                            |       | (21,149                                              | )          | (23,872                                        | )          | (65,216 | ) | (80,389 | ) |
| Impairment on marketable securities         |       | —                                               |       | —                                         |       | (7,115 | ) | — |   |
| Other                                       |       | 1,582                                                |       | —                                         |       | 1,378 |   | 6,308 |   |
|                                        |       | (17,726                                              | )          | (19,245                                        | )          | (63,666 | ) | (57,683 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 45,527                                               |       | 41,014                                         |       | 100,180 |   | 143,750 |   |
| PROVISION FOR INCOME TAXES                  |       | 16,961                                               |       | 14,858                                         |       | 36,022 |   | 52,019 |   |
| NET INCOME                                  |       | $                                                    | 28,566     |                                           | $          | 26,156 |   | $ | 64,158 |   | $ | 91,731 |   |
|                                        |       |                                                 |       |                                           |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                    |       | $                                                    | 0.51       |                                           | $          | 0.46 |   | $ | 1.15 |   | $ | 1.58 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                                    | 0.50       |                                           | $          | 0.45 |   | $ | 1.13 |   | $ | 1.55 |   |
| Weighted average common shares:             |       |                                                 |       |                                           |       |   |   |   |   |
| Basic                                       |       | 55,605                                               |       | 57,027                                         |       | 55,936 |   | 58,139 |   |
| Diluted                                     |       | 56,652                                               |       | 57,682                                         |       | 56,879 |   | 59,014 |   |
|                                        |       |                                                 |       |                                           |       |   |   |   |   |
| Dividends declared per share                |       | $                                                    | 0.04       |                                           | $          | 0.03 |   | $ | 0.12 |   | $ | 0.09 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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** **

**SKYWEST, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(UNAUDITED)

(In Thousands)

 
| ** **                                                      | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
|                                                            |       |                                          |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                       |       | $                                             | 308,981    |   | $ | 348,829 |   |
|                                                            |       |                                          |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                           |       |                                          |       |   |   |
| Purchases of marketable securities                              |       | (684,040                                      | )          | (1,023,604 | ) |
| Sales of marketable securities                                  |       | 552,046                                       |       | 976,340 |   |
| Proceeds from the sale of equipment                             |       | 18,534                                        |       | 2,549 |   |
| Acquisition of property and equipment:                          |       |                                          |       |   |   |
| Aircraft and rotable spare parts                                |       | (212,274                                      | )          | (86,650 | ) |
| Buildings and ground equipment                                  |       | (2,712                                        | )          | (39,394 | ) |
| Increase in other assets                                        |       | (22,224                                       | )          | (2,978 | ) |
|                                                            |       |                                          |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                           |       | (350,670                                      | )          | (173,737 | ) |
| ** **                                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                           |       |                                          |       |   |   |
| Proceeds from issuance of long-term debt                        |       | 139,580                                       |       | 17,680 |   |
| Principal payments on long-term debt                            |       | (105,785                                      | )          | (82,221 | ) |
| Tax (deficiency) benefit from exercise of common  stock options |       | (1,023                                        | )          | 161 |   |
| Return of deposits on aircraft and rotable spare  parts         |       | 7,748                                         |       | 226 |   |
| Net proceeds from issuance of common stock                      |       | 8,721                                         |       | 14,844 |   |
| Purchase of treasury stock                                      |       | (18,445                                       | )          | (90,807 | ) |
| Payment of cash dividends                                       |       | (6,800                                        | )          | (5,583 | ) |
|                                                            |       |                                          |       |   |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES            |       | 23,996                                        |       | (145,700 | ) |
|                                                            |       |                                          |       |   |   |
| Increase (decrease) in cash and cash equivalents                |       | (17,693                                       | )          | 29,392 |   |
| Cash and cash equivalents at beginning of period                |       | 125,892                                       |       | 122,802 |   |
|                                                            |       |                                          |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                      |       | $                                             | 108,199    |   | $ | 152,194 |   |
|                                                            |       |                                          |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               |       |                                          |       |   |   |
|                                                            |       |                                          |       |   |   |
| Cash paid during the year for:                                  |       |                                          |       |   |   |
| Interest, net of capitalized amounts                            |       | $                                             | 63,849     |   | $ | 80,971 |   |
| Income taxes                                                    |       | $                                             | 2,815      |   | $ | 23,759 |   |

 

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, 2008. The results of operations for the three and nine month periods ended September 30,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009.

 

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.

 

Certain reclassifications have been made to the three and nine monthperiods ended September 30, 2008 condensed consolidated financialstatements to conform to current year presentation.

 

In preparing theaccompanying unaudited condensed consolidated financial statements, the Companyhas reviewed, as determined necessary by the Company’s management, events thathave occurred after September 30, 2009, up until the issuance of thecondensed consolidated financial statements, which occurred on November 6,2009.

 

Note B — NewAccounting Pronouncements

 

Effective July 1,2009, the Financial Accounting Standards Board’s (“FASB”) Accounting StandardsCodification (“ASC”) became the single official source of authoritative,nongovernmental generally accepted accounting principles (“GAAP”) in the UnitedStates.  The historical GAAP hierarchy was eliminated and the ASCbecame the only level of authoritative GAAP, other than guidance issued by theSecurities and Exchange Commission.  Our accounting policies were notaffected by the conversion to ASC.

 

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 Midwest Airlines, Inc. (“Midwest”), 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. Among other provisions, those DeltaConnection Agreements provide that, beginning with the third anniversary of theexecution of the agreements (September 8, 2008), Delta has the right torequire that certain contractual rates under those agreements shall not exceedthe average rate of all carriers within the Delta Connection Program. In theevent that the contractual rates under those agreements have not been finalizedat quarterly or annual financial statement dates, the Company records revenuesbased on the prior period’s approved rates, as adjusted to reflect any contractnegotiations which are then ongoing. As of September 30, 2009, SkyWestAirlines and ASA had not finalized the contractual rates under their respectiveDelta Connection Agreements.  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, and notifying SkyWest Airlines and ASAof Delta’s estimate of the average rates to be applied under theagreements.  On October 28, 2009,SkyWest Airlines and ASA notified Delta of their election to adjust the ratespayable under the Delta Connection Agreements; however, they also notifiedDelta of their disagreement with Delta’s estimated rates and their belief thatthe methodology Delta used to calculate its estimated rates is inconsistentwith the terms of the Delta Connection Agreements.  SkyWest Airlines and ASA 

 

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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 andASA have not reached an agreement with Delta regarding the final contractualrates to be established under the Delta Connection Agreements, the Companycontinues to record revenue under those agreements based on management’s bestestimate of the revenue that will ultimately be realized upon settlement of thecontractual rates with Delta with respect to the three and nine-month periodsended September 30, 2009.

 

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 and ASA during December 2007. Delta continues towithhold a portion of the funds the Company believes are payable as weeklyscheduled wire payments to SkyWest and ASA (See Note L for additionaldetails).

 

The Delta Connection Agreements executed by SkyWest Airlines and ASAprovide for fifteen-year terms, subject to early termination by Delta, SkyWestAirlines or ASA, as applicable, upon the occurrence of certain events. Delta’stermination rights include (i) cross-termination rights between the twoDelta Connection Agreements, (ii) the right to terminate each of the DeltaConnection Agreements upon the occurrence of certain force majeure events,including certain labor-related events, that prevent SkyWest Airlines or ASAfrom performance for certain periods, and (iii) the right to terminateeach of the Delta Connection Agreements if SkyWest Airlines or ASA fails tomaintain competitive base rate costs, subject to certain adjustment rights. TheSkyWest Airlines and ASA Delta Connection Agreements contain multi-year ratereset provisions. 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 Agreementsmake customary representations, warranties and covenants, including withrespect to various operational, marketing and administrative matters.

 

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 June 10, 2009, SkyWest Airlines and Midwest reached a mutualunderstanding to terminate the service SkyWest Airlines currently providesunder the Airline Services Agreement (the “Midwest Services Agreement”). As aresult, SkyWest Airlines has agreed to remove its remaining 12 CRJ200 regionaljet aircraft from Midwest service based on the following schedule: one aircraftwas removed in each of June 2009 and July 2009, three aircraft wereremoved in October 2009, two aircraft are scheduled to be removed in November 2009,two aircraft are scheduled to be removed in December 2009 and the lastthree aircraft are scheduled to be removed in January 2010. Additionally,SkyWest Airlines agreed to cancel an unsecured note from Midwest in the amountof approximately $9.3 million in exchange for a $4.0 million payment fromMidwest that is guaranteed by Republic Airways Holdings, Inc. Theunsecured note related to certain deferred payments Midwest owed SkyWestAirlines for services provided under the Midwest Services Agreement.  Because of the unique modified payment termsassociated with the termination of the Midwest Services Agreement, the Companydid not recognize revenue associated with the deferred amounts during the threemonths ended September 30, 2009. The deferred amounts are scheduled to bepaid to SkyWest at the rate of $400,000 per aircraft as each applicableaircraft is removed from service, starting with the aircraft scheduled to beremoved in October 2009. Midwest has agreed to continue 

 

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topay existing rates and charges to SkyWest as agreed to under the MidwestServices Agreement, as previously amended, until the aircraft are removed fromservice.

 

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 Midwest, contract modifications resulting fromcontract re-negotiations, the Company’s ability to earn incentive paymentscontemplated under the Company’s code-share agreements, Midwest’s proposedfinancial restructuring, settlement of reimbursement disputes with the Company’smajor partners and settlement of the Delta 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 nine months ended September 30, 2009 the Companygranted options to purchase 457,397 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 ninemonths ended September 30, 2009.

 
| Expected annual dividend rate                |   | 1.05 | %      |
|----------------------------------------------|--------|------|--------|
| Risk-free interest rate                      |   | 1.67 | %      |
| Average expected life (years)                |   | 4.6  |   |
| Expected volatility of common stock          |   | .351 |   |
| Forfeiture rate                              |   | 1.0  | %      |
| Weighted average fair value of option grants |   | $    | 4.42   |   |
|                                              |        |      |        |  |

 

During the nine months ended September 30,2009, the Company granted 201,204 shares of restricted stock to the Company’semployees under the 2006 Incentive Plan. The restricted stock has a three-year vesting period, during which therecipient must remain employed with the Company or one of the Company’ssubsidiaries.  Additionally, during thatnine-month period, the Company granted 26,247 fully-vested shares of commonstock to the Company’s directors under the 2006 Incentive Plan.  The weighted average fair value of the sharesof restricted stock on the date of grant was $15.24 per share.

 

The Company records share-based compensation expenseonly for those options and shares of restricted stock that are expected tovest.  The estimated fair value of thestock options and shares of restricted stock is amortized over the applicablevesting periods.  During the three monthsended September 30, 2009 and 2008, the Company recorded pre-taxshare-based compensation expense of $1.7 million and $2.9 million,respectively.  During the nine monthsended September 30, 2009 and 2008, the Company recorded pre-taxshare-based compensation expense of $6.2 million and $8.9 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. Thecomputation of Diluted EPS for the three months ended September 30, 2009and 2008 excludes options to acquire 4,334,000 and 4,211,000 shares,respectively, as their impact was anti-dilutive.  The computation of Diluted EPS for the ninemonths ended September 30, 2009 and 2008 excludes options to acquire4,390,000 and 3,503,000 shares, respectively, as their impact wasanti-dilutive.

 

The calculation of theweighted average number of common shares outstanding for Basic EPS and DilutedEPS for the periods indicated (in thousands, except per share data) is asfollows:

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** **   | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|--------------|----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                                 | ** **   | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                                          | ** **   | **(Unaudited)**                                    | ** ** |
| **Numerator**                                                              |       |                                                     |         |                                               |       |   |   |   |   |
| Net Income                                                                 |       | $                                                        |  28,566 |                                               | $          |  26,156 |   | $ |  64,158 |   | $ |  91,731 |   |
|                                                                       |       |                                                     |         |                                               |       |   |   |   |   |
| **Denominator**                                                            |       |                                                     |         |                                               |       |   |   |   |   |
| Weighted average number of common shares  outstanding                      |       | 55,605                                                   |         | 57,027                                             |       | 55,936 |   | 58,139 |   |
| Effect of outstanding stock compensation                                   |       | 1,047                                                    |         | 655                                                |       | 943 |   | 875 |   |
| Weighted average number of shares for diluted net  income per common share |       | 56,652                                                   |         | 57,682                                             |       | 56,879 |   | 59,014 |   |
|                                                                       |       |                                                     |         |                                               |       |   |   |   |   |
| Basic earnings per share                                                   |       | $                                                        |  0.51   |                                               | $          |  0.46 |   | $ |  1.15 |   | $ |  1.58 |   |
| Diluted earnings per share                                                 |       | $                                                        |  0.50   |                                               | $          |  0.45 |   | $ |  1.13 |   | $ |  1.55 |   |

 

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Note F — ComprehensiveIncome

 

Comprehensiveincome includes charges and credits to stockholders’ equity that are not the resultof transactions with the Company’s stockholders.  Comprehensive income consisted of net incomeplus changes in unrealized appreciation (depreciation) on marketablesecurities, net of tax, for the periods indicated (in thousands):

 
| ** **                                                                  | ** ** | **Three Months Ended September 30,** | ** **   | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|--------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                                 | ** **   | **2008**                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                  | ** ** | **(Unaudited)**                                          | ** **   | **(Unaudited)**                                    | ** ** |
| ** **                                                                  | ** ** | ** **                                               | ** **   | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                              |       | $                                                        |  28,566 |                                               | $          |  26,156 |   | $ |  64,158 |   | $ |  91,731 |   |
| Unrealized appreciation (depreciation) on marketable securities, net of tax |       | 427                                                      |         | (765                                               | )          | 4,315 |   | (901 | ) |
|                                                                        |       |                                                     |         |                                               |       |   |   |   |   |
| **Comprehensive income**                                                    |       | $                                                        |  28,993 |                                               | $          |  25,391 |   | $ |  68,473 |   | $ |  90,830 |   |

 

Note G — Long-Term Debt

 

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

 
| ** **                                                                                                                                                                                                                    | ** ** | **September 30,  2009** | ** **      | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 0.97% to 3.81% through 2012 to 2020, secured by aircraft                                     |       | $                            |  487,402   |                        | $          |  529,625 |   |
| Notes payable to a financing company, due in  semi-annual installments, variable interest based on LIBOR, or with interest  rates ranging from 0.97% to 7.52% through 2021, secured by aircraft                               |       | 569,061                      |            | 594,999                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                   |       | 235,824                      |            | 248,731                     |       |
| Notes payable to a financing company, due in  semi-annual installments plus interest at 5.78% to 6.23% through 2019,  secured by aircraft                                                                                     |       | 69,365                       |            | 74,455                      |       |
| Notes payable to banks, due in monthly installments  plus interest of 3.15% to 8.18% through 2025, secured by aircraft                                                                                                        |       | 454,967                      |            | 325,834                     |       |
| Notes payable to banks, due in monthly installments  plus interest of 6.05% through 2020, secured by aircraft                                                                                                                 |       | 24,424                       |            | 25,857                      |       |
| 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 |       | 4,240                        |            | 5,936                       |       |
| Notes payable to a bank, due in monthly installments  interest based on LIBOR through 2012, interest rate at 7.9% secured by  building                                                                                        |       | —                       |            | 6,051                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                            |  1,845,283 |                        | $          |  1,811,488 |   |
|                                                                                                                                                                                                                          |       |                         |            |                        |       |
| Less current maturities                                                                                                                                                                                                       |       | (138,727                     | )               | (129,783                    | )          |
|                                                                                                                                                                                                                          |       |                         |            |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                     |       | $                            |  1,706,556 |                        | $          |  1,681,705 |   |

 

AtSeptember 30, 2009, the three-month and six-month LIBOR rates were 0.29%and 0.63%, respectively.   At December 31,2008, the three-month and six-month LIBOR rates were 1.43% and 1.75%,respectively.

 

Asof September 30, 2009, SkyWest Airlines had a $25 million line of creditwith no amount outstanding under the facility. The facility expires on March 31, 2010 and has a rate of 4.96%.

 

Note H — Change inAccounting Estimates

 

Duringthe first quarter of 2009, the Company changed its estimate of depreciablelives on ground equipment from five to seven years to five to ten years andmaintained the residual value of zero percent. The impact of this change increased the Company’s pre-tax income for thethree and nine-month periods ended September 30, 2009 by $1.0 million($.02 per share Basic EPS and Diluted EPS) and $3.1 million ($.05 per shareBasic EPS and Diluted EPS), respectively. The impact of this change, net of tax, increased the Company’s netincome for the three and nine-month periods ended September 30, 2009 by$0.6 million ($.01 per share, Basic EPS and Diluted EPS) and $1.9 million ($.03per share Basic EPS and Diluted EPS), respectively.

 

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Note I — Commitments andContingencies

 

TheCompany leases 287 aircraft, as well as airport facilities, office space, andvarious other property and equipment under non-cancelable operating leases whichare 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 September 30, 2009 (in thousands):

 
| October through December 2009 |   | $         | 87,580    |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| 2010                                    |   | 329,383   |      |
| 2011                                    |   | 320,244   |      |
| 2012                                    |   | 320,708   |      |
| 2013                                    |   | 313,120   |      |
| Thereafter                              |   | 1,608,188 |      |
|                                    |   | $         | 2,979,223 |   |

 

Note J — 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 September 30, 2009, 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 of theseinstruments failed. Therefore, quoted prices in active markets are nolonger available and the Company has estimated the fair values of thesesecurities utilizing a discounted cash flow analysis as of September 30,2009. These analyses consider, among other items, the collateralizationunderlying the security investments, the creditworthiness of the counterparty,the timing of expected future cash flows, and the expectation of the next timethe security is expected to have a successful auction.

 

As of September 30, 2009, the Company owned $4.5 million ofauction rate security instruments. The auction rate security instruments heldby the Company at September 30, 2009 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 September 30,2009. The Company has classified these securities as non current due to theCompany’s belief that the market for these securities may take in excess oftwelve months to fully recover. As of September 30, 2009, the Companycontinued to record interest on all of its auction rate security instruments.Any future fluctuations in fair value related to these instruments that theCompany deems to be temporary, including any recoveries of previous writedowns, would be recorded to accumulated other comprehensive income. If theCompany determines that any future valuation adjustment was other thantemporary, a charge would be recorded to earnings as appropriate.

 

As of September 30,2009, the Company held certain assets that are required to be measured at fairvalue on a recurring basis. Assets measured at fair value on a recurring basis are summarizedbelow (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of September 30, 2009** | ** **    |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|---------------|
| ** **                                 | ** ** | **Total**                                                                               | ** **    | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                                    |          |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | $                                                                                       |  108,199 |   | $ |  108,199 |   | $ |  — |   | $ |  — |   |
| Marketable Securities                      |       | 695,937                                                                                 |          | — |   | 695,937 |   | — |   |
| Other Assets                               |       | 4,512                                                                                   |          | — |   | — |   | 4,512 |   |
| Total Assets Measured at Fair Value        |       | $                                                                                       |  808,648 |   | $ |  108,199 |   | $ |  695,937 |   | $ |  4,512 |   |

 

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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 following table presents the Company’s assets measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)at September 30, 2009 (in thousands):

 

**Fair Value Measurements Using Significant UnobservableInputs**

**(Level 3)**

 
| ** **                                      | ** ** | **Auction Rate  Securities** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2009                 |       | $                                 | 4,686      |   |
| Total realized and unrealized gains or (losses) |       |                              |       |
| Included in earnings                            |       | —                            |       |
| Included in other comprehensive income          |       | (174                              | )          |
| Transferred out                                 |       | —                            |       |
| Settlements                                     |       | —                            |       |
| Balance at September 30, 2009              |       | $                                 | 4,512      |   |

 

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 $1,961.8million as of September 30, 2009, as compared to the carrying amount of$1,845.3 million as of September 30, 2009.

 

Note K — Stock Repurchase

 

The Company’s Board of Directors has authorized the repurchase of up to15,000,000 shares of the Company’s common stock in the public market. Duringthe three months ended September 30, 2009, the Company repurchased93,545 shares of common stock for approximately $1.0 million at aweighted average price per share of $10.46.

 

Note L — Legal Matters

 

*Legal Matters*

 

The Company is subject tocertain legal actions which it considers routine to its business activities. Asof September 30, 2009, the Company’s management believed, afterconsultation with legal counsel, that the ultimate outcome of such legalmatters was not likely to have a material adverse effect on the Company’sfinancial position, liquidity or results of operations. However, the followingis a significant outstanding legal matter.

 

*ASA andSkyWest Airlines v. Delta*

 

During the quarter ended December 31,2007, Delta notified the Company, SkyWest Airlines and ASA of a dispute underthe Delta Connection Agreements executed by Delta with SkyWest Airlines andASA. The dispute relates to allocation of liability for IROP expenses that arepaid by SkyWest Airlines and ASA to their passengers under certain situations.As a result, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest Airlines andASA during December 2007. Delta continues to withhold a portion of thefunds the Company believes are payable as weekly scheduled wire payments toSkyWest Airlines and ASA. As of September 30, 2009, the Company hadrecognized a cumulative total of $32.4 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”). Ahearing 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 

 

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conduct into the DeltaConnection Agreements. The Court granted the Motion to Dismiss with respect toclaims for estoppel, unilateral mistake, and mutual mistake contained in theComplaint. The Court’s ruling affects the current posture of the case, but doesnot preclude pursuit of the claim for breach of contract or the claim fordeclaratory relief, under which SkyWest Airlines and ASA continue to seekrecovery of all amounts withheld by Delta.

 

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,SkyWest Airlines 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 all of SkyWest’s Airlines’ and ASA’s claims and defenses is inprocess.   On September 4, 2009, Delta filed a motion todismiss the Amended Complaint in part.  Delta asserts that the claimsadded by SkyWest Airlines and ASA in the Amended Complaint should be dismissedbased on legal arguments set forth in Delta’s memorandum in support of itsmotion.  SkyWest Airlines and ASA filed an opposition to the motion on October 9,2009.  The motion has not yet been scheduled for oral argument.  Thecourt has not yet ruled on the motion.

 

SkyWest Airlines and ASAcontinue to vigorously pursue their claims set forth in the Complaint, to theextent permitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.

 

For financial reportingpurposes the Company accrues an estimated loss if the loss is probable andreasonably estimable. Because these conditions have not been satisfied, theCompany has not recorded a loss related to the preceding dispute in thecondensed consolidated financial statements as of September 30, 2009

 

Note M — Subsequent Events

 

On October 16, 2009, SkyWest Airlines entered into a series oftransactions with United that provide operational funding to United, extendSkyWest Airlines’ existing rights to operate 40 regional jet aircraft under theUnited Express Agreement until the end of their current lease terms (on average8.4 years) and create an opportunity for ASA to operate 13 regional jetaircraft as a United Express carrier. The Company anticipates that ASA willbegin operating as a United Express carrier starting in the first quarter of2010, and the 13 United Express regional jets to be flown by ASA will be inoperation by May of 2010. The Company also anticipates that ASA willoperate these aircraft under a capacity purchase agreement with a five-yearterm, and other terms which are generally consistent with the existing SkyWestAirlines United Express Agreement.

 

Also on October 16, 2009, SkyWest Airlines extended to United asecured term loan in the amount of $80 million. The term loan bears interest ata rate of 11%, with a ten-year amortization period. The loan is secured bycertain ground equipment and airport slot rights held by United. SkyWestAirlines also agreed to defer certain amounts otherwise payable to SkyWestAirlines under the existing United Express Agreement. The maximum deferralamount is $49 million and any amounts deferred accrue a deferral fee of 8%,payable weekly. United’s right to defer such payments is scheduled to terminatein ten years.

 

On November 4,2009,  SkyWest Airlines entered into acode-share agreement with AirTran Airways, Inc. (“AirTran”).  Underthe terms of the code-share agreement, SkyWest Airlines has agreed to operatefive CRJ200s for AirTran under a pro-rate arrangement.  The Company anticipates that SkyWest Airlineswill commence AirTran service with two aircraft in December 2009 and willadd three additional aircraft in early 2010.  The code-share agreement hasa three-year term; however, after May 15, 2010, either party may terminatethe agreement upon 120 days written notice.

 

**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 

 

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obligation to publicly update any forward-lookingstatement to reflect actual results, changes in assumptions or changes in otherfactors affecting these statements other than as required by law.

 

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

** **

*The following discussionand analysis presents factors that had a material effect on the results ofoperations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three andnine months ended September 30, 2009 and 2008. Also discussed is ourfinancial position as of September 30, 2009 and December 31, 2008.You should read this discussion in conjunction with our condensed consolidatedfinancial statements for the three and nine months ended September 30,2009, including the 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.*

 

**Overview**

 

Through SkyWest Airlines, Inc. (“SkyWest Airlines”) and AtlanticSoutheast Airlines, Inc. (“ASA”), we operate the largest regional airlinein the United States. As of September 30, 2009, SkyWest Airlines and ASAoffered scheduled passenger and air freight service with more than 2,400 totaldaily departures to 209 destinations in the United States, Canada, Mexico andthe Caribbean. Additionally, as of September 30, 2009, we provided groundhandling services for approximately 10 other airlines throughout our system. Asof September 30, 2009, we operated a combined fleet of 444 aircraftconsisting of 250 50-seat Bombardier Aerospace (“Bombardier”) CRJ 200 RegionalJets (the “CRJ200”) (75 assigned to United Air Lines Inc. (“United”), 164assigned to Delta Air Lines, Inc. (“Delta”), 10 assigned to MidwestAirlines, Inc. (“Midwest”) and one used by SkyWest Airlines as additionalmaintenance spare aircraft) 109 70-seat Bombardier CRJ700 Regional Jets (the “CRJ700”)  (58 assigned to United and 51 assigned toDelta), 31 CRJ900s Regional Jets (the “CRJ900”) (all assigned to Delta), 5130-seat Embraer Brasilia EMB-120 turboprop aircraft (the “Brasilia turboprop”)(40 assigned to United and 11 assigned to Delta), and three 66-seat Avions deTransport 72-210 turboprop aircraft (the “ATR-72 turboprops) (all assigned toDelta). As of September 30, 2009, the three ATR-72 turboprops were no longerin revenue service. We believe our success in attracting multiple contractualrelationships with our major airline partners is attributable to our deliveryof high-quality customer service with an all cabin-class fleet at a competitivecost structure. For the three months ended September 30, 2009,approximately 56.0% of our aggregate capacity was operated under the Deltacode, approximately 42.2% was operated under the United code and approximately1.8% was operated under the Midwest 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 June 10,2009, SkyWest Airlines and Midwest mutually agreed to terminate the serviceSkyWest Airlines currently provides to Midwest under an Airline ServicesAgreement executed by SkyWest and Midwest (the “Midwest Services Agreement”).As a result, SkyWest Airlines has agreed to remove its remaining 12 CRJ200sfrom Midwest service based on the following schedule: one aircraft was removedin each of June 2009 and July 2009, three aircraft were removed in October 2009,two aircraft are scheduled to be removed in November 2009, two aircraftare scheduled to be removed in December 2009 and the last three aircraftare scheduled to be removed in January 2010. As of September 30,2009, SkyWest Airlines operated as a Delta Connection carrier in Salt LakeCity, a United Express carrier in Los Angeles, San Francisco, Denver, Chicagoand the Pacific Northwest, and a Midwest Connect carrier in Milwaukee,operating more than 1,600 total daily flights.

 

ASA has been a code-share partner with Delta in Atlanta since 1984. Asof September 30, 2009, ASA operated as a Delta Connection carrier inAtlanta and Cincinnati. ASA operates approximately 800 daily flights, all inthe Delta Connection system.

 

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.

 

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 

 

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endedSeptember 30, 2009, contract flying revenue and pro-rate revenuerepresented approximately 93% and 7%, respectively, of our total passengerrevenues. On contract routes, the major airline partner controls scheduling,ticketing, pricing and seat inventories and we are compensated by the majorairline partner at contracted rates based on the completed block hours, flightdepartures and other operating measures. On pro-rate flights, we controlscheduling, ticketing, pricing and seat inventories and receive a pro-ratedportion of passenger fares. As of September 30, 2009, essentially all ofour Brasilia turboprops flown for Delta were flown under pro-rate arrangements,while approximately 55% of our Brasilia turboprops flown in the United systemwere flown under contractual arrangements, with the remaining 45% flown underpro-rate arrangements.  During June 2009,we began flying seven CRJ200s for United under a pro-rate arrangement.

 

**ThirdQuarter Summary**

 

We had revenues of $637.7 million for the three months ended September 30,2009, a 31.7% decrease, compared to revenues of $934.1 million for thethree months ended September 30, 2008. We had net income of$28.6 million, or $0.50 per diluted share, for the three months ended September 30,2009, a 9.2% increase in net income, compared to $26.2 million of netincome, or $0.45 per diluted share, for the three months ended September 30,2008.

 

The significant items affecting our financial performance during thethree months ended September 30, 2009 are outlined below:

 

On June 10, 2009, SkyWest Airlines reached a mutual understandingwith Midwest to terminate the service SkyWest Airlines currently provides underthe Midwest Services Agreement. As a result, SkyWest Airlines agreed to removeits remaining 12 CRJ200s from Midwest service based on the following schedule:one aircraft was removed in each of June 2009 and July 2009, threeaircraft were removed in October 2009, two aircraft are scheduled to beremoved in November 2009, two aircraft are scheduled to be removed in December 2009and the last three aircraft are scheduled to be removed in January 2010.Additionally, SkyWest Airlines agreed to cancel an unsecured note from Midwestin the amount of approximately $9.3 million in exchange for a $4.0 million paymentfrom Midwest that is guaranteed by Republic Airways Holdings, Inc. Theunsecured note related to certain deferred payments Midwest owed SkyWestAirlines from services provided under the Midwest Services Agreement.  Because of the unique modified payment termsassociated with the termination of the Midwest Service Agreement, we have notrecognized revenue associated with the deferred amount.  The deferred amount is scheduled to be paidto SkyWest Airlines at the rate of $400,000 per aircraft as each applicableaircraft is removed from service starting with the aircraft that were removedin October 2009. Midwest has agreed to continue to pay existing rates andcharges to SkyWest Airlines as agreed to under the Midwest Services Agreement,as previously amended, until the Midwest Express aircraft are removed fromservice.

 

Our maintenance costs increased $19.8 million, or 19.9%, duringthe three months ended September 30, 2009, compared to the three monthsended September 30, 2008. The increase in maintenance costs wasprincipally due to scheduled maintenance and engine events on our aging CRJ200and CRJ700 aircraft.

 

Total available seat miles (“ASMs”) for the three months ended September 30,2009 increased 5.6%, compared to the three months ended September 30, 2008,primarily as a result of delivery of 14 CRJ900s and six CRJ700s since September 30,2008. During the three months ended September 30, 2009, we generatedapproximately 5.9 billion ASMs, compared to approximately 5.6 billionASMs during the three months ended September 30, 2008.

 

**Outlook**

 

On October 12, 2007, we announced SkyWest Airlines’ plans toacquire 22 additional regional jet aircraft through 2010, 18 of which SkyWestAirlines intends to operate for United Express, as part of an aircraft transitionplan. We believe this transition plan will allow United Express to remove 2330-seat Brasilia turboprops from operation under the United Express Agreementand add 66-seat regional jet aircraft for United Express flying. Generally, theturboprop removals are intended to occur in conjunction with deliveries of newregional jet aircraft in an effort to facilitate a smooth transition inexisting markets. Additionally, SkyWest Airlines exchanged four 50-seat CRJ200sfor four 76-seat CRJ900s in its Delta Connection operations. On November 30,2007, we announced that SkyWest Airlines placed a firm order for 22 aircraftwith Bombardier. As of September 30, 2009, SkyWest Airlines had takendelivery of four CRJ900s and six CRJ700s under that order. SkyWest Airlines isscheduled to take delivery of the remaining 12 aircraft during the remainder of2009 and the first quarter of 2010.

 

On January 9, 2009, we announced that ASA reached an agreementwith Delta to operate an additional ten CRJ900s. The aircraft were previouslyordered by Delta and are now being contracted for flying with ASA. As of September 30,2009, ASA had taken delivery of all of these aircraft. ASA intends to use theaircraft as replacements for 20, 50-seat CRJ200s that are scheduled for removalfrom contract service between April and August 2010, which is earlierthan the existing scheduled termination dates as contained in the DeltaConnection Agreement.

 

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On June 10, 2009, we announced the wind down of the MidwestServices Agreement. As a result, SkyWest Airlines agreed to remove theremaining 12 CRJ200s from Midwest service based on the following schedule:  one aircraft was removed in each of June 2009and July 2009, three aircraft were removed in October 2009, twoaircraft are scheduled to be removed in November 2009, two aircraft arescheduled to be removed in December 2009 and the last three aircraft arescheduled to be removed in January 2010. We are pursuing opportunities to place these 12 aircraft into servicewith other major airline carriers.

 

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. Among other provisions, those DeltaConnection Agreements provide that, beginning with the third anniversary of theexecution of the agreements (September 8, 2008), Delta has the right torequire that certain of the contractual rates under those agreements shall notexceed the average rate of all carriers within the Delta Connection Program. Inthe event that the contractual rates under those agreements have not beenfinalized at quarterly or annual financial statement dates, we record revenuesbased on the prior period’s approved rates, as adjusted to reflect any contractnegotiations which are then ongoing. As of September 30, 2009, SkyWestAirlines and ASA had not finalized the contractual rates under their respectiveDelta Connection Agreements.  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, and notifying SkyWest Airlines and ASAof Delta’s estimate of the average rates to be applied under theagreements.  On October 28, 2009,SkyWest Airlines and ASA notified Delta of their election to adjust the ratespayable under the Delta Connection Agreements; however, they also notifiedDelta of their disagreement with Delta’s estimated rates and their belief thatthe methodology Delta used to calculate its estimated rates is inconsistentwith the terms of the Delta Connection Agreements.  SkyWest Airlines and ASA continue tonegotiate with Delta in an effort to determine an appropriate methodology forcalculating the average rates of the carriers within the Delta ConnectionProgram.  Because SkyWest Airlines andASA have not reached an agreement with Delta regarding the final contractualrates to be established under the Delta Connection Agreements, we continue torecord revenue under those agreements based on management’s best estimate ofthe revenue that will ultimately be realized upon settlement of the contractualrates with Delta with respect to the three and nine-month periods ended September 30,2009.

 

On October 16, 2009, SkyWest Airlines entered into a series oftransactions with United that provide operational funding to United, extendSkyWest Airlines’ existing rights to operate 40 regional jet aircraft under theUnited Express Agreement until the end of their current lease terms (on average8.4 years) and create an opportunity for ASA to operate 13 regional jetaircraft as a United Express carrier. We anticipate that ASA will beginoperating as a United Express carrier starting in the first quarter of 2010,and the 13 United Express regional jets to be flown by ASA will be in operationby May of 2010. We also anticipate that ASA will operate these aircraftunder a capacity purchase agreement with a five-year term, and other termswhich are generally consistent with the existing SkyWest Airlines UnitedExpress Agreement.

 

Also on October 16, 2009, SkyWest Airlines extended to United asecured term loan in the amount of $80 million. The term loan bears interest ata rate of 11%, with a ten-year amortization period. The loan is secured bycertain ground equipment and airport slot rights held by United. SkyWestAirlines also agreed to defer certain amounts otherwise payable to SkyWestAirlines under the existing United Express Agreement. The maximum deferralamount is $49 million and any amounts deferred accrue a deferral fee of 8%,payable weekly. United’s right to defer such payments is scheduled to terminatein ten years.

 

On November 4,2009,  SkyWest Airlines entered into acode-share agreement with AirTran Airways, Inc. (“AirTran”).  Underthe terms of the code-share agreement, SkyWest Airlines has agreed to operatefive CRJ200s for AirTran under a pro-rate arrangement.  We anticipate that SkyWest Airlines willcommence AirTran service with two aircraft in December 2009 and will addthree additional aircraft in early 2010.  The code-share agreement has athree-year term; however, after May 15, 2010, either party may terminatethe agreement upon 120 days written notice.

 

**Critical Accounting Policies**

 

Our significant accounting policies are summarizedin Note 1 to our consolidated financial statements, which are presented in ourAnnual Report on Form 10-K for the year ended December 31, 2008.  Critical accounting policies are thosepolicies that are most important to the preparation of our consolidatedfinancial statements and require management’s subjective and complex judgmentsdue to the need to make estimates about the effect of matters that areinherently uncertain. Our critical accounting policies relate to revenuerecognition, aircraft maintenance, aircraft leases, impairment of long-livedassets and intangibles, stock-based compensation expense and fair value. Theapplication of these accounting policies involves the exercise of judgment andthe use of assumptions as to future uncertainties and, as a result, actualresults will differ, and could differ materially, from such estimates.

 

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** **

**Results of Operations**

 

**Three Months Ended September 30,2009 and 2008**

* *

*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 September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                                   | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 4,835,887                                                                  |       | 4,435,755 |   | 9.0 |   |
| Available seat miles (“ASMs”) (000) |       | 5,945,686                                                                  |       | 5,629,121 |   | 5.6 |   |
| Block hours                                   |       | 359,573                                                                    |       | 348,522 |   | 3.2 |   |
| Departures                                    |       | 230,823                                                                    |       | 225,253 |   | 2.5 |   |
| Passengers carried                            |       | 9,477,672                                                                  |       | 8,738,704 |   | 8.5 |   |
| Passenger load factor                         |       | 81.3                                                                       | %          | 78.8 | % | 2.5 | pts |
| Revenue per available seat mile               |       | 10.7                                                                       | ¢     | 16.6 | ¢ | (35.5 | ) |
| Cost per available seat mile                  |       | 10.0                                                                       | ¢     | 15.9 | ¢ | (37.1 | ) |
| Fuel cost per available seat mile             |       | 1.0                                                                        | ¢     | 6.5 | ¢ | (84.6 | ) |
| Average passenger trip length (miles)         |       | 510                                                                        |       | 508 |   | 0.4 |   |

 

*Revenues.*  Operating revenues decreased$296.4 million, or 31.7%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements. For financial reporting purposes, we record thesereimbursements as operating revenue. Under the SkyWest Airlines and ASA DeltaConnection Agreements, we are reimbursed for our engine overhaul expenses. Wealso record those engine overhaul reimbursements as operating revenue. Thefollowing table summarizes the amount of fuel and engine overhaulreimbursements included in our passenger revenues for the periods indicated(dollar amounts in thousands).

 
| ** **                                                           | ** ** | **For the three months ended September 30,** | ** **    |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------|---------------|
| ** **                                                           | ** ** | **2009**                                                                   | ** **    | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                   |       | $                                                                          |  629,955 |   | $ |  926,193 |   | $ |  (296,238 | ) | (32.0 | )% |
| Less: Fuel reimbursement from major partners                         |       | 51,599                                                                     |          | 353,154 |   | (301,555 | ) | (85.4 | )% |
| Less: Engine overhaul reimbursement from  major partners        |       | 32,952                                                                     |          | 32,632 |   | 320 |   | 1.0 | % |
| Passenger revenue excluding fuel and engine  overhaul reimbursements |       | $                                                                          |  545,404 |   | $ |  540,407 |   | $ |  4,997 |   | 0.9 | % |

 

*Passenger revenues.*  Passenger revenues decreased$296.2 million, or 32.0%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. The decreasein passenger revenues was primarily due to a decrease in fuel reimbursementsfrom our major partners. The fuel reimbursement from our major partnersdecreased $301.6 million or 85.4%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. Our passengerrevenues, excluding fuel and engine overhaul reimbursements from majorpartners, increased $5.0 million, or 0.9%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. The increasein passenger revenues, excluding fuel and engine overhaul reimbursements, wasless than the corresponding percentage increase in ASMs, primarily due to twofactors. First, Delta transitioned 23 stations from SkyWest Airlines and ASA toother ground handlers during the second quarter of 2009 which decreased ourpassenger revenues. Second, operating efficiencies obtained by adding incremental aircraft underour contract flying arrangements, were factored into our contractual rates andour passenger revenues, which resulted in a reduction to our revenue per ASM..

 

*Ground handling and other.*  Total ground handling and other revenuesdecreased $0.1 million, or 1.6%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. Revenueearned under other ground handling contracts where we provide ground handlingservices for other airlines is presented in the “Ground handling and other”line in our condensed consolidated statements of income.

 

Individual expense components are expressed in the following table onthe basis of cents per ASM. ASM is a common metric used in the airline industryto measure an airline’s passenger capacity. ASMs reflect both the numberof aircraft in an airline’s fleet and the seat capacity for the aircraft in thefleet. As the size of our fleet is the underlying driver of our operatingcosts, presentation of information on a cost per ASM basis is intended toidentify significant changes in our costs not proportionate to the relativechanges in our fleet size (dollar amounts in thousands).

 
| ** **                                       | ** ** | **For the three months ended September 30,** | ** **    |
|--------------------------------------------------|------------|----------------------------------------------------------------------------|---------------|
| ** **                                       | ** ** | ** **                                                                 | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **2009**                                                                   | ** **    | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                       | ** ** | **Amount**                                                                 | ** **    | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                                    |       | $                                                                          |  61,842  |   | $ |  363,735 |   | $ |  (301,893 | ) | (83.0 | )% | 1.0 |   | 6.5 |   |
| Salaries, wages and benefits                     |       | 175,552                                                                    |          | 182,103 |   | (6,551 | ) | (3.6 | )% | 2.9 |   | 3.2 |   |
| Aircraft maintenance, materials and repairs |       | 119,055                                                                    |          | 99,294 |   | 19,761 |   | 19.9 | % | 2.0 |   | 1.8 |   |
| Aircraft rentals                                 |       | 76,189                                                                     |          | 74,318 |   | 1,871 |   | 2.5 | % | 1.3 |   | 1.3 |   |
| Depreciation and amortization                    |       | 55,461                                                                     |          | 55,141 |   | 320 |   | 0.6 | % | 0.9 |   | 1.0 |   |
| Station rentals and landing fees                 |       | 27,500                                                                     |          | 33,923 |   | (6,423 | ) | (18.9 | )% | 0.5 |   | 0.6 |   |
| Ground handling services                         |       | 23,538                                                                     |          | 25,107 |   | (1,569 | ) | (6.2 | )% | 0.4 |   | 0.4 |   |
| Other airline expense                            |       | 35,358                                                                     |          | 40,232 |   | (4,874 | ) | (12.1 | )% | 0.6 |   | 0.7 |   |
| Total operating expenses                         |       | 574,495                                                                    |          | 873,853 |   | (299,358 | ) | (34.3 | )% | 9.6 |   | 15.5 |   |
| Interest expense                                 |       | 21,149                                                                     |          | 23,872 |   | (2,723 | ) | (11.4 | )% | 0.4 |   | 0.4 |   |
| Total airline expenses                           |       | $                                                                          |  595,644 |   | $ |  897,725 |   | (302,081 | ) | (33.6 | )% | 10.0 |   | 15.9 |   |
|                                                  |            |                                                                            |               |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*Fuel.*  Fuel costs decreased $301.9 million, or83.0%, during the three months ended September 30, 2009, compared to thethree months ended September 30, 2008. The average cost of fuel decreasedto $2.23 per gallon during the three months ended September 30, 2009 from$3.92 per gallon during the three months ended September 30, 2008. Inaddition to the decrease in the average cost per gallon of fuel, during thethree months ended September 30, 2009 United purchased fuel directly froma fuel vendor for our United Express aircraft under contract operated out ofChicago, San Francisco, Los Angeles and Denver; Midwest purchased all of thefuel for our Midwest aircraft directly from Midwest’s fuel vendors and Deltapurchased the majority of the fuel for our Delta aircraft under contractdirectly from its fuel vendors. These modifications reduced our total fuelcosts, as well as our passenger revenues for the three months ended September 30,2009. During the three months ended September 30, 2008, we purchased thefuel for all of our Delta Connection flights. The following table summarizesthe gallons of fuel we purchased directly, and the percentage change in fuelprice per gallon on our fuel expense, for the periods indicated:

 
| ** **                                                             | ** ** | **For the three months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2009**                                                                   | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 27,754                                                                     |       | 92,903 |   | (70.1 | )% |
| Average price per gallon                                               |       | $                                                                          | 2.23       |   | $ | 3.92 |   | (43.1 | )% |
| Fuel expense                                                           |       | $                                                                          | 61,842     |   | $ | 363,735 |   | (83.0 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $6.6 million, or 3.6%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. The averagenumber of full-time equivalent employees decreased 11.3% to 12,227 for thethree months ended September 30, 2009, from 13,784 for the three monthsended September 30, 2008. The decrease in number of employees wassignificantly due to a reduction in our customer service employees resultingfrom Delta transitioning 23 stations from SkyWest Airlines and ASA to otherground handlers during the second quarter of 2009.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$19.8 million, or 19.9%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. 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 September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2009**                                                                   | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                                                                              |       | $                                                                          | 119,055    |   | $ | 99,294 |   | $ | 19,761 |   | 19.9 | % |
| Less: Engine overhaul reimbursed from major  partners                                                                    |       | 32,952                                                                     |       | 32,632 |   | 320 |   | 1.0 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                          |       | 15,346                                                                     |       | 2,123 |   | 13,223 |   | 622.8 | % |
| Aircraft maintenance excluding reimbursed engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                                                          | 70,757     |   | $ | 64,539 |   | $ | 6,218 |   | 9.6 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls and CRJ 200 engineoverhauls reimbursed at fixed hourly rate, increased $6.2 million, or9.6%, during the three months ended September 30, 2009, compared to thethree months ended September 30, 2008. The increase in aircraft maintenance expenses excluding engine overhaulsreimbursed from major partners was principally due to scheduled maintenanceevents on our aging CRJ200 and CRJ700 aircraft.

 

Under the United Express and Midwest Services Agreements, we recognizerevenue in our condensed consolidated statement of income at a fixed hourlyrate for mature engine maintenance on regional jet engines and we recognizeengine maintenance expense on our CRJ200 regional jet engines in our condensedconsolidated statement of income on an as-incurred basis. During the threemonths ended September 30, 2009, our CRJ200 engine expense under ourUnited Express and Midwest Services Agreements increased $13.2 million. Underour Delta Connection Agreements we were reimbursed for engine overhaul costs byDelta. Such reimbursements are reflected as passenger revenue in ourconsolidated statements of income.

 

*Aircraft rentals.*  Aircraft rentals increased $1.9 million, or2.5%, during the three months ended September 30, 2009, compared to thethree months ended September 30, 2008. The increase in aircraft rentalexpense was primarily due to ASA taking delivery of ten CRJ900s during2009.  These aircraft were financedthrough long-term leases with Delta. This increase was partially offset by ASAreturning nine ATR-72 turboprops to the lessor and terminating the associatedleases.

 

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*Depreciation and amortization.*  Depreciation and amortization expenseincreased $320,000, or 0.6%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008.  This increase was due primarily to theaddition of four CRJ900s and six CRJ700s that were financed using long-termdebt. This increase was partially offset by a decrease resulting from a changein depreciable lives on ground equipment from a range of five to seven years toa range of five to ten years. For purposes of the foregoing calculations, theground equipment was deemed to maintain a residual value of zero.  The impact of this change increased our pretax income for the three months ended September 30, 2009 by $1.0 million.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $6.4 million, or 18.9%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. The decreasein station rentals and landing fees expense was primarily due to our majorpartners paying for certain station rentals and landing fees directly to theairport.

 

*Ground handling service.*  Ground handling service expense decreased$1.6 million, or 6.2%, during the three months ended September 30,2009, compared to the three months ended September 30, 2008. The decreasein ground handling service expense was due primarily to Delta transitioning 23stations from SkyWest Airlines and ASA to other ground handlers during thesecond quarter of 2009.

 

*Other airline expenses.*  Other airline expenses, primarily consistingof property taxes, hull and liability insurance, crew simulator training andcrew hotel costs, decreased $4.9 million, or 12.1%, during the threemonths ended September 30, 2009, compared to the three months ended September 30,2008. The decrease in other expenses was primarily due to the decrease in crewsimulator training and crew hotel costs. These decreases were due primarily tofewer training events during the three months ended September 30, 2009compared to the three months ended September 30, 2009.

 

*Interest.*  Interest expense decreased $2.7 million,or 11.4%, during the three months ended September 30, 2009 compared to thethree months ended September 30, 2008. The decrease in interest expensewas substantially due to a decrease in interest rates. At September 30,2009, we had variable rate notes representing 42.4% of our total long-termdebt. The majority of our variable rate notes are based on the three-month andsix-month LIBOR rates. At September 30, 2009, the three-month andsix-month LIBOR rates were 0.29% and 0.63%, respectively. At September 30,2008, the three-month and six-month LIBOR rates were 4.05% and 3.98%,respectively.

 

*Interest Income.* Interest income decreased $2.8 million,or 60.2% during the three months ended September 30, 2009, compared to thethree months ended September 30, 2008. The decrease in interest income wassubstantially due to the decrease in interest rates discussed in the precedingparagraph.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $302.1 million, or 33.6%,during the three months ended September 30, 2009, compared to the threemonths ended September 30, 2008. We are reimbursed for our actual fuelcosts by our major partners under our contract flying arrangements. We recordthe amount of those reimbursements as revenue. Under the SkyWest Airlines andASA Delta Connection Agreements, we are reimbursed for our engine overhaulexpense, which we record as revenue. The following table summarizes the amountof fuel and engine overhaul expenses which are included in our total airlineexpenses for the periods indicated (dollar amounts in thousands).

 
| ** **                                                                                                               | ** ** | **For the three months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2009**                                                                   | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                                                                                    |       | $                                                                          | 595,644    |   | $ | 897,725 |   | $ | (302,081 | ) | (33.6 | )% |
| Less: Fuel expense                                                                                                       |       | 61,842                                                                     |       | 363,735 |   | (301,893 | ) | (83.0 | )% |
| Less: Engine overhaul reimbursement from  major partners                                                            |       | 32,952                                                                     |       | 32,632 |   | 320 |   | 1.0 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                          |       | 15,346                                                                     |       | 2,123 |   | 13,223 |   | 622.9 | % |
| Total airline expense excluding fuel and engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed  hourly rate |       | $                                                                          | 485,504    |   | $ | 499,235 |   | $ | (13,731 | ) | (2.8 | )% |

 

Excluding fuel, engine overhaul costs that were reimbursed from majorpartners and CRJ 200 engine overhauls reimbursed at fixed hourlyrate, our total airline expenses decreased $13.7 million, or 2.8%, duringthe three months ended September 30, 2009, compared to the three monthsended September 30, 2008. The percentage decrease in total airlineexpenses excluding fuel and engine overhauls, was less than the percentageincrease in ASMs, which was primarily due to the increased operatingefficiencies obtained from increased stage lengths flown by our regional jets.

 

*Net Income.*  Primarily due to the factors described above,net income increased to $28.6 million, or $0.50 per diluted share, for thethree months ended September 30, 2009, compared to $26.2 million, or$0.45 per diluted share, for the three months ended September 30, 2008.

 

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**Nine months Ended September 30,2009 and 2008**

 

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

 
| ** **                                    | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                             | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 13,160,338                                                           |       | 13,126,547 |   | 0.3 |   |
| Available seat miles (“ASMs”) (000) |       | 16,663,270                                                           |       | 16,925,658 |   | (1.6 | ) |
| Block hours                                   |       | 1,027,483                                                            |       | 1,055,884 |   | (2.7 | ) |
| Departures                                    |       | 657,308                                                              |       | 668,939 |   | (1.7 | ) |
| Passengers carried                            |       | 25,996,245                                                           |       | 25,609,770 |   | 1.5 |   |
| Passenger load factor                         |       | 79.0                                                                 | %          | 77.6 | % | 1.4 | pts |
| Revenue per available seat mile               |       | 12.1                                                                 | ¢     | 16.3 | ¢ | (25.8 | ) |
| Cost per available seat mile                  |       | 11.5                                                                 | ¢     | 15.5 | ¢ | (25.8 | ) |
| Fuel cost per available seat mile             |       | 2.0                                                                  | ¢     | 6.0 | ¢ | (66.7 | ) |
| Average passenger trip length (miles)         |       | 506                                                                  |       | 513 |   | (1.4 | ) |

 

*Revenues.*  Operating revenues decreased$743.7 million, or 27.0%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements. For financial reporting purposes, we record thesereimbursements as operating revenue. Under the SkyWest Airlines and ASA DeltaConnection Agreements, we are reimbursed for our engine overhaul expenses. Wealso record those engine overhaul reimbursements as operating revenue. Thefollowing table summarizes the amount of fuel and engine overhaul reimbursementsincluded in our passenger revenues for the periods indicated (dollar amounts inthousands).

 
| ** **                                                           | ** ** | **For the nine months ended September 30,** | ** **      |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|-----------------|
| ** **                                                           | ** ** | **2009**                                                             | ** **      | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                   |       | $                                                                    |  1,985,978 |   | $ |  2,728,922 |   | $ |  (742,944 | ) | (27.2 | )% |
| Less: Fuel reimbursement from major partners                         |       | 311,735                                                              |            | 993,148 |   | (681,413 | ) | (68.6 | )% |
| Less: Engine overhaul reimbursement from  major partners        |       | 88,737                                                               |            | 84,517 |   | 4,220 |   | 5.0 | % |
| Passenger revenue excluding fuel and engine  overhaul reimbursements |       | $                                                                    |  1,585,506 |   | $ |  1,651,257 |   | $ |  (65,751 | ) | (4.0 | )% |

 

*Passenger revenues.*  Passenger revenues decreased$742.9 million, or 27.2%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. The decreasein passenger revenues was primarily due to a decrease in fuel reimbursementsfrom our major partners. The fuel reimbursement from our major partnersdecreased $681.4 million or 68.6%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. Our passengerrevenues, excluding fuel and engine overhaul reimbursements from majorpartners, decreased $65.8 million, or 4.0%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. The decreasein passenger revenues, excluding fuel and engine overhaul reimbursements, wasmore than the corresponding decrease in ASMs, primarily due to three factors.First, ASA experienced an abnormally high number of flight cancellations inpart due to significant weather related cancellations in its Atlanta hub duringthe three months ended March 31, 2009. Additionally, on March 31, 2009, as a result of an internal audit,ASA grounded 60 CRJ200s in order to perform engine safety inspections inaccordance with the manufacturer’s recommendations. ASA cancelled approximately750 flights more than normal as a result of the severe weather and aircraftgrounding during the first quarter of 2009. As a result, ASA experienced anegative impact on passenger revenues of approximately $7.6 million. Second,Delta transitioned 23 stations from SkyWest Airlines and ASA to other groundhandlers during the second quarter of 2009. Third, operating efficiencies obtained by adding incrementalaircraft under our contract flying arrangements, were factored into ourcontractual rates and our passenger revenues.

 

*Ground handling and other.*  Total ground handling and other revenuesdecreased $0.8 million, or 3.3%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. Revenue earnedunder other ground handling contracts where we provide ground handling servicesfor other airlines is presented in the “Ground handling and other” line in ourcondensed consolidated statements of income. The decrease was primarily relatedto the lower volume of flights serviced under ground handling contracts withUnited and Delta, whereby we perform ground handling services for several otherregional airlines.

 

Individual expense components are expressed in the following table onthe basis of cents per ASM.

 

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| ** **                                  | ** ** | **For the nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **2009**                                                             | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                           | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                    | 331,513    |   | $ | 1,022,590 |   | $ |  (691,077 | ) | (67.6 | )% | 2.0 |   | 6.0 |   |
| Salaries, wages and benefits                |       | 526,286                                                              |       | 548,675 |   | (22,389 | ) | (4.1 | )% | 3.2 |   | 3.2 |   |
| Aircraft maintenance, materials and repairs |       | 327,604                                                              |       | 280,662 |   | 46,942 |   | 16.7 | % | 2.0 |   | 1.7 |   |
| Aircraft rentals                            |       | 224,929                                                              |       | 221,638 |   | 3,291 |   | 1.5 | % | 1.3 |   | 1.3 |   |
| Depreciation and amortization               |       | 164,722                                                              |       | 164,687 |   | 35 |   | 0.0 | % | 1.0 |   | 1.0 |   |
| Station rentals and landing fees            |       | 90,352                                                               |       | 102,149 |   | (11,797 | ) | (11.5 | )% | 0.5 |   | 0.6 |   |
| Ground handling services                    |       | 72,109                                                               |       | 83,994 |   | (11,885 | ) | (14.1 | )% | 0.4 |   | 0.5 |   |
| Other airline expense                       |       | 107,852                                                              |       | 127,126 |   | (19,275 | ) | (15.2 | )% | 0.7 |   | 0.7 |   |
| Total operating expenses                    |       | 1,845,367                                                            |       | 2,551,521 |   | (706,154 | ) | (27.7 | )% | 11.1 |   | 15.0 |   |
| Interest                                    |       | 65,216                                                               |       | 80,389 |   | (15,173 | ) | (18.9 | )% | 0.4 |   | 0.5 |   |
| Total airline expenses                      |       | $                                                                    | 1,910,583  |   | $ | 2,631,910 |   | (721,327 | ) | (27.4 | )% | 11.5 |   | 15.5 |   |
|                                             |            |                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $691.1 million, or67.6%, during the nine months ended September 30, 2009, compared to thenine months ended September 30, 2008. The average cost of fuel decreasedto $1.79 per gallon during the nine months ended September 30, 2009 from$3.62 during the nine months ended September 30, 2008. In addition to thedecrease in the average cost per gallon of fuel during the nine months ended September 30,2009 United purchased fuel directly from a fuel vendor for our United Expressaircraft under contract operated out of Chicago, San Francisco, Los Angeles andDenver; Midwest purchased all of the fuel for our Midwest aircraft directlyfrom Midwest’s fuel vendors and Delta purchased the majority of the fuel forour Delta aircraft under contract directly from its fuel vendors. Thesemodifications reduced our total fuel costs, as well as our passenger revenuesfor the nine months ended September 30, 2009. During the nine months endedSeptember 30, 2008, we purchased the fuel for all of our Delta Connectionflights. The following table summarizes the gallons of fuel we purchaseddirectly, and the percentage change in fuel price per gallon on our fuelexpense, for the periods indicated:

 
| ** **                                                             | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2009**                                                             | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 184,937                                                              |       | 282,160 |   | (34.5 | )% |
| Average price per gallon                                               |       | $                                                                    | 1.79       |   | $ | 3.62 |   | (50.6 | )% |
| Fuel expense                                                           |       | $                                                                    | 331,513    |   | $ | 1,022,590 |   | (67.6 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $22.4 million, or 4.1%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. The averagenumber of full-time equivalent employees decreased 12.0% to 12,748 for the ninemonths ended September 30, 2009, from 14,493 for the nine months ended September 30,2008. The decrease in number of employees was significantly due to a reductionin our customer service employees resulting from United transitioning 16stations from SkyWest Airlines to other ground handlers during the secondquarter of 2008 and Delta transitioning 23 stations from SkyWest Airlines andASA to other ground handlers during the second quarter of 2009.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$46.9 million, or 16.7%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. 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 nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2009**                                                             | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                                                                              |       | $                                                                    | 327,604    |   | $ | 280,662 |   | $ | 46,942 |   | 16.7 | % |
| Less: Engine overhaul reimbursed from major  partners                                                                    |       | 88,737                                                               |       | 84,517 |   | 4,220 |   | 5.0 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                          |       | 24,425                                                               |       | 3,636 |   | 20,789 |   | 571.8 | % |
| Aircraft maintenance excluding reimbursed engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                                                    | 214,442    |   | $ | 192,509 |   | $ | 21,933 |   | 11.4 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls and CRJ 200 engineoverhauls reimbursed at fixed hourly rate, increased $21.9 million,or 11.4%, during the nine months ended September 30, 2009, compared to thenine months ended September 30, 2008. The increase in maintenance excluding engine overhaul costs wasprincipally due to scheduled maintenance events on our aging CRJ200 and CRJ700aircraft.

 

Under the United Express and Midwest Services Agreements, we recognizerevenue in our condensed consolidated statement of income at a fixed hourlyrate for mature engine maintenance on regional jet engines and we recognizeengine maintenance expense on our CRJ200 regional jet engines in our condensedconsolidated statement of income on an as-incurred basis as maintenance expense.During the nine months ended September 30, 2009, our CRJ200 engine expenseunder our United Express and Midwest 

 

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ServicesAgreements increased $20.8 million. Under our Delta Connection Agreements wewere reimbursed for engine overhaul costs by Delta. Such reimbursements arereflected as passenger revenue in our consolidated statements of income.

 

*Aircraft rentals.*  Aircraft rentals increased $3.3 million, or1.5%, during the nine months ended September 30, 2009, compared to thenine months ended September 30, 2008. The increase in aircraft rents wasprimarily due to ASA taking delivery of ten CRJ900s during 2009.  These aircraft were financed throughlong-term leases. This increase was partially offset by ASA returning nineATR-72 turboprops to the lessor and terminating the associated leases.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $11.8 million, or 11.5%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. The decreasein station rentals and landing fees expense was primarily due to our majorpartners paying for certain station rents and landing fees directly to theairport.

 

*Ground handling service.*  Ground handling service expense decreased$11.9 million, or 14.1%, during the nine months ended September 30,2009, compared to the nine months ended September 30, 2008. The decreasein ground handling was due primarily to United transitioning 16 stations fromSkyWest Airlines to other ground handlers during the second quarter of 2008 andDelta transitioning 23 stations from SkyWest Airlines and ASA to other ground handlersduring the second quarter of 2009.

 

*Other airline expenses.*  Other airline expenses, primarily consistingof property taxes, hull and liability insurance, crew simulator training andcrew hotel costs, decreased $19.3 million, or 15.2%, during the ninemonths ended September 30, 2009, compared to the nine months ended September 30,2008. The decrease in other airline expenses was primarily due to the decreasein crew simulator training and crew hotel costs. These decreases were dueprimarily to fewer training events during the nine months ended September 30,2009.

 

*Interest.*  Interest expense decreased$15.2 million, or 18.9%, during the nine months ended September 30,2009 compared to the nine months ended September 30, 2008. The decrease ininterest expense was substantially due to a decrease in interest rates.  At September 30, 2009, we had variablerate notes representing 42.4% of our total long-term debt. The majority of ourvariable rate notes are based on the three-month and six-month LIBOR rates. At September 30,2009, the three-month and six-month LIBOR rates were 0.29% and 0.63%,respectively. At September 30, 2008, the three-month and six-month LIBORrates were 4.05% and 3.98%, respectively.

 

*Interest Income.* Interest income decreased $9.1 million,or 55.6% during the nine months ended September 30, 2009, compared to thenine months ended September 30, 2008. The decrease in interest income wassubstantially due to the decrease in interest rates discussed in the precedingparagraph.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $721.3 million, or 27.4%,during the nine months ended September 30, 2009, compared to the ninemonths ended September 30, 2008. We are reimbursed for our actual fuelcosts by our major partners under our contract flying arrangements. We recordthe amount of those reimbursements as revenue. Under the SkyWest Airlines andASA Delta Connection Agreements, we are reimbursed for our engine overhaulexpense, which we record as revenue. The following table summarizes the amountof fuel and engine overhaul expenses which are included in our total airlineexpenses for the periods indicated (dollar amounts in thousands).

 
| ** **                                                                                                               | ** ** | **For the nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2009**                                                             | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                                                                                    |       | $                                                                    | 1,910,583  |   | $ | 2,631,910 |   | $ | (721,327 | ) | (27.4 | )% |
| Less: Fuel expense                                                                                                       |       | 331,513                                                              |       | 1,022,590 |   | (691,077 | ) | (67.6 | )% |
| Less: Engine overhaul reimbursement from major  partners                                                                 |       | 88,737                                                               |       | 84,517 |   | 4,220 |   | 5.0 | % |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                          |       | 24,425                                                               |       | 3,636 |   | 20,789 |   | 571.8 | % |
| Total airline expense excluding fuel and engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed  hourly rate |       | $                                                                    | 1,465,908  |   | $ | 1,521,167 |   | $ | (55,259 | ) | (3.6 | )% |

 

*Excluding fuel and engineoverhaul costs and*CRJ 200 engine overhauls reimbursed at fixed hourly rate, our total airline expenses decreased $55.3 million,or 3.6%, during the nine months ended September 30, 2009, compared to thenine months ended September 30, 2008. The percentage decrease in totalairline expenses excluding fuel and engine overhauls, was more than thepercentage decrease in ASMs, which was primarily due to the increased operatingefficiencies obtained from increased stage lengths flown by our 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 nine months ended September 30, 2009for certain marketable securities deemed to have other-than-temporaryimpairment.

 

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*Other Income.* During the nine months ended September 30,2008, we negotiated the principal terms of a prospective capacity purchaseagreement with Continental, which was intended to become effective if we hadsuccessfully completed our proposed acquisition of the outstanding shares ofcapital stock of ExpressJet.  During thecourse of those negotiations, Continental agreed it would pay us a break-up feeunder certain circumstances in the event our efforts to acquire ExpressJet werenot successful.  In September 2008,ExpressJet reached terms directly with Continental on a new capacity purchaseagreement, and accordingly, we were precluded from completing the acquisitionof ExpressJet.  As a result, we receivedthe break-up fee from Continental in September 2008.  The break-up fee, net of our directtransaction costs, was $6.3 million (pre-tax) and was recorded as other incomeduring the nine months ended September 30, 2008.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $64.2 million, or $1.13 per diluted share, for thenine months ended September 30, 2009, compared to $91.7 million, or$1.55 per diluted share, for the nine months ended September 30, 2008.

 

## **Liquidity and Capital Resources**

##  

We had working capital of $876.7 million and acurrent ratio of 3.0:1 at September 30, 2009, compared to working capitalof $834.1 million and a current ratio of 3.2:1 at December 31, 2008. Theincrease in working capital was principally attributable to net incomegenerated during the nine months ended September 30, 2009 less cash usedto repurchase shares of our common stock and payment of dividends.

 

The principal sources of cash during the nine monthsended September 30, 2009 were $309.0 million provided by operatingactivities, $139.6 million from the proceeds of long-term debt, $18.5 millionof proceeds from the sale of equipment, $8.7 million of proceeds from the saleof common stock in connection with the exercise of stock options under ourstock option and employee stock purchase plans and $7.7 million from returns onaircraft deposits.  We invested $212.3million in flight equipment, completed net purchases of $132.0 million ofmarketable securities, made principal payments on long-term debt of $105.8million, purchased $22.2 million in other assets, repurchased $18.4 million ofoutstanding shares of our common stock, paid $6.8 million in cash dividends,spent $2.7 million for buildings and ground equipment and incurred a taxdeficiency of $1.0 million from exercise of common stock options.  These factors resulted in a $17.7 milliondecrease in cash and cash equivalents during the nine months ended September 30,2009.

 

On October 16, 2009, SkyWest Airlines enteredinto a secured term loan in amount of $80 million with United. The term loanbears interest at a rate of 11%, with a ten-year amortization period. The termloan is secured by certain ground equipment and airport slot rights held byUnited. SkyWest Airlines also agreed to defer certain amounts otherwise payableto SkyWest Airlines under the existing United Express Agreement. The maximumdeferral amount is $49 million and any deferred amounts accrue a deferral feeof 8%, payable weekly. United’s right to defer such payments is scheduled toterminate in ten years. We believe that in the absence of unusual circumstances,the working capital currently available to us will be sufficient to meet ourpresent financial requirements, including anticipated expansion, plannedcapital expenditures, and scheduled lease payments and debt service obligationsfor at least the next 12 months.

 

Our position in marketable securities, consistingprimarily of bonds, bond funds and commercial paper, increased to $695.9million at September 30, 2009, compared to $568.6 million at December 31,2008.  The increase in marketable securitieswas due primarily to cash provided by operating activities.

 

At September 30, 2009, our total capital mixwas 43.8% equity and 56.2% long-term debt, compared to 43.1% equity and 56.9%long-term debt at December 31, 2008.

 

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**Significant Commitments and Obligations**

 

*General*

 

The following tablesummarizes our commitments and obligations stated in calendar years except asnoted for each of the next five years and thereafter (in thousands):

 
| ** **                                                          | ** ** | **Total**  | ** ** | **Oct-Dec  2009** | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft commitments                                           |       | $          | 287,862    |              | $          | 189,851    |       | $          | 98,011     |       | $          | —     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease payments for aircraft and facility obligations |       | 2,979,223  |       | 87,580            |       | 329,383    |       | 320,244    |       | 320,708    |       | 313,120    |       | 1,608,188      |       |
| Interest commitments                                                |       | 621,642    |       | 26,718            |       | 81,537     |       | 75,864     |       | 69,599     |       | 62,557     |       | 305,367        |       |
| Principal maturities on long-term debt                              |       | 1,845,283  |       | 41,531            |       | 140,634    |       | 144,478    |       | 190,831    |       | 144,142    |       | 1,183,667      |       |
| Total commitments and obligations                                   |       | $          | 5,734,010  |              | $          | 345,680    |       | $          | 649,565    |       | $          | 540,586    |       | $              | 581,138    |   | $ | 519,819 |   | $ | 3,097,222 |   |

 

*Purchase Commitments and Options*

 

On October 12, 2007, we announced SkyWest Airlines’ plans to acquire22 additional regional jet aircraft through 2010, 18 of which SkyWest Airlinesintends to operate under its United Express Agreement as part of an aircrafttransition plan, allowing United to remove 23 30-seat Brasilia turboprops fromthe contract reimbursement model contemplated by the United Express Agreementand add 66-seat regional jet aircraft for United Express flying. Generally, weanticipate that the Brasilia turboprop removals under the United ExpressAgreement will occur in conjunction with deliveries of new regional jetaircraft in order to facilitate a smooth transition in existing markets.Additionally, SkyWest Airlines exchanged four CRJ200s for four CRJ900s in itsDelta Connection operations. These four 50-seat CRJ200s were placed into serviceunder other capacity purchase agreements. In November 2007, SkyWestAirlines placed a firm order with Bombardier for the 22 new aircraft. As of September 30,2009, SkyWest Airlines had taken delivery of four CRJ900s and six CRJ700spursuant to that order. SkyWest Airlines is scheduled to take delivery of theremaining 12 aircraft during 2009 and the first quarter of 2010.

 

Total expenditures for these aircraft and related flight equipment,including amounts for contractual price escalations, are estimated to beapproximately $287.9 million through the first quarter of 2010.Additionally, SkyWest Airlines’ agreement with Bombardier includes options foranother 22 aircraft that can be delivered in either 70 or 90-seatconfigurations. Delivery dates for these aircraft remain subject to finaldetermination as we agree upon with our major partners.

 

We have not historically funded a substantial portion of our aircraftacquisitions with working capital. Rather, we have generally funded ouraircraft acquisitions through a combination of operating leases and long-termdebt financing. At the time of each aircraft acquisition, we evaluate thefinancing alternatives available to us, and select one or more of these methodsto fund the acquisition. In the event that alternative financing cannot bearranged at the time of delivery, Bombardier has typically financed ouraircraft acquisitions until more permanent arrangements can be made. Subsequentto this initial acquisition of an aircraft, we may also refinance the aircraftor convert one form of financing to another (e.g., replacing debtfinancing with leveraged lease financing).

 

At present, we intend to satisfy our 2009 firm aircraft purchasecommitment, as well as our acquisition of any additional aircraft, through acombination of operating leases and debt financing, consistent with ourhistorical practices. Based on current market conditions and discussions withprospective leasing organizations and financial institutions, we currentlybelieve that we will be able to obtain financing for our committedacquisitions, as well as additional aircraft, without materially reducing theamount of working capital available for our operating activities. Nonetheless,recent disruptions in the credit markets have resulted in greater volatility,decreased liquidity and limited availability of capital, and there is noassurance that we will be able to obtain necessary funding or that, if we areable to obtain necessary capital, the corresponding terms will be favorable oracceptable to us.

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term lease obligations primarily relatingto our aircraft fleet. At September 30, 2009, we had 287 aircraft underlease with remaining terms ranging from one to 17 years. Future minimumlease payments due under all long-term operating leases were approximately$3.0 billion at September 30, 2009. Assuming a 6.2% discount rate,which is the average rate 

 

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usedto approximate the implicit rates within the applicable aircraft leases, thepresent value of these lease obligations would have been equal to approximately$2.0 billion at September 30, 2009.

 

*Long-term Debt Obligations*

 

Asof September 30, 2009, we had $1,845.3 million of long term debtobligations related to the acquisition of Brasilia turboprop, CRJ200, CRJ700and CRJ900 aircraft. The average effective interest rate on the debt related tothe Brasilia turboprop and CRJ aircraft was approximately 4.5% at September 30,2009.

 

**Seasonality**

 

Our results of operations for any interim period arenot necessarily indicative of those for the entire period, 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 of fuelprice 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. As of September 30, 2009, essentially all ofour Brasilia turboprops flown for Delta were flown under pro-rate arrangementswhile, approximately 45% of our Brasilia turboprops flown in the United systemwere flown under pro-rate arrangements. During June 2009, we started tofly seven CRJ200s for United under a pro-rate agreement.  The average price per gallon of aircraft fueldecreased 43.1% to $2.23 for the three months ended September 30, 2009,from $3.92 for the three months ended September 30, 2008. For illustrativepurposes only, we have estimated the impact of the market risk of fuel on ourpro-rate operations using a hypothetical increase of 25% in the price pergallon we purchase. Based on this hypothetical assumption, we would haveincurred an additional $2.4 million and $4.9 million in fuel expense forthe three months and nine months ended September 30, 2009, respectively.

 

Interest Rates

 

Our earnings are affected by changes in interest rates based on theamounts of variable rate long-term debt and the amount of cash and securitieswe hold during any given period.  Theinterest rates applicable to variable rate notes may rise and increase theamount of interest expense.  We wouldalso receive higher amounts of interest income on cash and securities held atthe time; however, the market value of our available-for-sale securities wouldlikely decline.  At September 30,2009, we had variable rate notes representing 42.4% of our total long-term debtcompared to 46.6% of our total long-term debt at December 31, 2008.  For illustrative purposes only, we haveestimated the impact of market risk using a hypothetical increase in interestrates of one percentage point for both variable rate long-term debt and cashand securities.  Based on this hypotheticalassumption, we would have incurred an additional $2.0 million in interestexpense and received $1.9 million additional interest income for the threemonths ended September 30, 2009. Based on this same hypotheticalassumption, we would have incurred an additional $6.1 million in interestexpense and received $5.5 million additional interest income for the ninemonths ended September 30, 2009. However, under our contractualarrangement with our major partners, the majority of the increase in interestexpense would be passed through and recorded as passenger revenue in theconsolidated statement of income.

 

We currently intend to finance the acquisition ofaircraft through manufacturer financing, third-party leases or long-termborrowings. Changes in interest rates may impact the actual cost to us toacquire these aircraft. To the extent we place these aircraft in service underour code-share agreements with Delta and United, our code-share agreementscurrently provide that reimbursement rates will be adjusted higher or lower toreflect changes in our aircraft rental rates.

 

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**ITEM 4.**                    CONTROLS AND PROCEDURES

** **

a) Evaluation of disclosure controls and procedures

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures pursuantto Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of September 30, 2009.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. In addition, the design of disclosure controls andprocedures must reflect the fact that there are resource constraints and thatmanagement is required to apply its judgment in evaluating the benefits ofpossible controls and procedures relative 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.

 

b) 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 to certain legal actions which we consider routine toour business activities. As of September 30, 2009, our managementbelieved, after consultation with legal counsel, that the ultimate outcome ofsuch legal matters is not likely to have a material adverse effect on ourfinancial position, liquidity or results of operations. However, the followingis a significant outstanding legal matter.

 

*ASA and SkyWest Airlines v. Delta Air Lines*

 

During the quarter ended December 31,2007, Delta notified SkyWest, 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 IROP expenses that are paidby SkyWest Airlines and ASA to their passengers under certain situations. As aresult, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest Airlines andASA during December 2007. Delta continues to withhold a portion of thefunds we believe are payable as weekly scheduled wire payments to SkyWestAirlines and ASA. As of September 30, 2009, we had recognized a cumulativetotal of $32.4 million of revenue associated with the funds withheld byDelta. On February 1, 2008, SkyWest Airlines and ASA filed a lawsuit inGeorgia state court disputing Delta’s treatment of the matter (the “Complaint”).Delta filed an Answer to the Complaint and a Counterclaim against SkyWestAirlines and ASA on March 24, 2008. Delta’s counterclaim alleges that ASAand SkyWest Airlines breached the Delta Connection Agreements by invoicingDelta for the IROP expenses that were paid pursuant to Delta’s policies, andclaims only a portion of those expenses may be invoiced to Delta. Delta seeksunspecified damages in its counterclaim.

 

On March 24, 2008,Delta filed a Motion to Dismiss the Complaint (the “Motion to Dismiss”) Ahearing 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 Court’s rulingaffects the current posture of the case, but does not preclude pursuit of theclaim for breach of contract or the claim for declaratory relief, under whichSkyWest Airlines and ASA continue to seek recovery of all amounts withheld byDelta.

 

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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 Connection Agreements.  Under those theories, SkyWestAirlines and ASA seek recovery of all of the approximately $25 million withheldby Delta during December 2007. SkyWest Airlines and ASA are also seekingrecovery of additional amounts withheld by Delta subsequent to December 2007. Discovery on all of SkyWest’s Airlines’ and ASA’s claims and defenses are inprocess.   On September 4, 2009, Delta filed a motion todismiss the Amended Complaint in part.  Delta asserts that the claimsadded by SkyWest Airlines and ASA in the Amended Complaint should be dismissedbased on legal arguments set forth in Delta’s memorandum in support of itsmotion.  An opposition to the motion was filed on October 9,2009.  The motion has not yet been scheduled for oral argument.  Thecourt has not yet ruled on the motion.

 

SkyWest Airlines and ASAcontinue to vigorously pursue their claims set forth in the Complaint, to theextent permitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.

 

An estimated loss isaccrued if the loss is probable and reasonably estimable. Because theseconditions have not been satisfied, the Company has not recorded a loss relatedto the preceding dispute in the condensed consolidated financial statements asof September 30, 2009

 

**ITEM 1A.  RISKFACTORS**

** **

Part I, Item 1A, “Risk Factors,” of our AnnualReport on Form 10-K for the Year Ended December 31, 2008 includes adetailed discussion of risks and uncertainties which could adversely affect ourfuture results. The risk factors presented below reflect material changes tothe risk factors in our Annual Report on Form 10-K for the Year Ended December 31,2008.  The risk factors below modify andsupplement, and should be read in conjunction with, the risk factors andinformation disclosed in our Annual Report on Form 10-K for the Year EndedDecember 31, 2008.

 

***We may be negatively impacted by thetroubled financial condition of Delta and United.***

 

For the three months ended September 30, 2009 approximately 98.2%of our ASMs were attributable to our code-share agreements with Delta andUnited. Both Delta and United have incurred significant losses in recent years,which materially weakened their financial condition. Because of their weakenedfinancial condition, there is no assurance that either United or Delta willultimately succeed or will remain a going concern over the long term.Volatility in fuel prices may negatively impact both Delta’s and United’sresults of operations and financial condition. Among other risks, Delta andUnited are vulnerable both to unexpected events (such as additional terroristattacks or additional spikes in jet fuel prices) and to deterioration of theoperating environment (such as a recession or significant increasedcompetition). There is no assurance that Delta or United will be able tooperate successfully under these financial conditions.

 

In light of the importance of our code-share agreements with Delta andUnited to our business, the termination of these agreements could jeopardizeour operations. Such events could leave us unable to operate much of ourcurrent aircraft fleet and the additional aircraft we are obligated to purchase,which would likely result, in a material adverse effect on our operations andfinancial condition.

 

The financial condition of Delta and United will continue to pose risksfor our operations. Serial bankruptcies are not unprecedented in the commercialairline industry, and Delta and/or United could file for bankruptcy again, inwhich case our code-share agreements could be subject to termination under theU.S. Bankruptcy Code. Regardless of whether subsequent bankruptcy filings proveto be necessary, Delta and United have required, and will likely continue torequire, our participation in efforts to reduce costs and improve theirrespective financial positions. These efforts could result in lower utilizationrates of our aircraft, lower departure rates on the contract flying portion ofour business, more volatile operating margins and more aggressive contractualpositions, which could result in additional litigation. We believe that any ofthese developments could have a negative effect on many aspects of ouroperations and financial performance.

 

On October 16, 2009, SkyWest Airlines entered into a series oftransactions with United that provide operational funding to United, extendSkyWest Airlines’ existing rights to operate 40 regional jet aircraft under theUnited Express Agreement until the end of their current lease terms and createan opportunity for ASA to operate 13 regional jet aircraft as a United Expresscarrier. We anticipate that ASA will begin operating as a United Expresscarrier starting in the first quarter of 2010, and the 13 United Expressregional jets to be flown by ASA will be in operation by May of 2010. Wealso anticipate that ASA will operate these aircraft under a capacity purchaseagreement with a five-year term, and other terms which are generally consistentwith the existing SkyWest Airlines United Express Agreement.

 

Also on October 16, 2009, SkyWest Airlines extended to United asecured term loan in the amount of $80 million. The term loan bears interest ata rate of 11%, with a ten-year amortization period. The loan is secured bycertain ground equipment and airport slot rights held by United. SkyWestAirlines also agreed to defer certain amounts otherwise payable to SkyWestAirlines under the 

 

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existingUnited Express Agreement. The maximum deferral amount is $49 million and anyamounts deferred accrue a deferral fee of 8%, payable weekly. United’s right todefer such payments is scheduled to terminate in ten years.

 

A default by United under the existing United ExpressAgreement, the United Express Agreement which we anticipate will be executedbetween United and ASA or the term loan extended by SkyWest Airlines to Unitedcould have a material adverse effect on our financial condition, results ofoperations, liquidity and the price of our common stock.

 

***We could be adversely affected by anoutbreak of a disease that affects travel behavior.***

 

In the second quarter of2009, there was an outbreak of the H1N1 flu virus which had an adverse impactthroughout our network. In 2003, there was an outbreak of Severe AcuteRespiratory Syndrome (“SARS”), which had an adverse impact on travel behavior.In addition, in the past there have been concerns about outbreaks or potentialoutbreaks of other diseases, such as avian flu. Any outbreak of a disease(including a worsening of the outbreak of the H1N1 flu virus) that affectstravel behavior could have a material adverse impact on our operating resultsand financial condition. In addition, outbreaks of disease could result inquarantines of our personnel or an inability to access facilities or ouraircraft, which could adversely affect our operating results and financialcondition.

 

**ITEM2.  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 September 30, 2009:

 
| **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** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| July 1 – July 31, 2009           |       | 93,545                                               |       | $                                                | 10.46      |                                                                                                                       | 93,545     |                                                                                                                | 2,776,411  |   |
| August 1 – August 31, 2009       |       | —                                               |       | —                                           |       | —                                                                                                                     |       | 2,776,411                                                                                                           |       |
| September 1 – September 30, 2009 |       | —                                               |       | —                                           |       | —                                                                                                                     |       | 2,776,411                                                                                                           |       |
| Total                                                |       | 93,545                                               |       | $                                                | 10.46      |                                                                                                                       | 93,545     |                                                                                                                | 2,776,411  |   |

 

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(1)        Under resolutions adopted inFebruary 2007, November 2007 and May 2008, our Board ofDirectors authorized the repurchase of up to 15,000,000 shares of our commonstock. Purchases are made at management’s discretion based on market conditionsand our financial resources.  In addition, effective March 13, 2009, weentered into 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 September 30, 2009,we had spent approximately $247.1 million to purchase and retireapproximately 12,223,589 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.

 

**ITEM 6:**                  EXHIBITS

 
| 31.1 | Certification of Chief Executive Officer |
|------|------------------------------------------|
| 31.2 | Certification of Chief Financial Officer |
| 32.1 | Certification of Chief Executive Officer |
| 32.2 | Certification of Chief Financial Officer |

 

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**SIGNATURES**

 

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 September 30,2009, to be signed on its behalf by the undersigned, thereunto duly authorized,on November 6, 2009.

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

 

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