Table of Contents

 

 

 

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **
| **x**                                                                                                                                                                                                                                                                                  | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                             |
| **For  the quarterly period ended March 31, 2009**                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                                                                             |
| **OR**                                                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                                                             |
| **o**                                                                                                                                                                                                                                                                                  | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                                                                                                                                                                                                                                                             | ** **                                                                                               |
| **For  the transition period  from                    to                    ** |

 

**Commission file number 0-14719**

** **

**SKYWEST, INC.**

 

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

 

**444 South River Road**

**St. George, Utah 84790**

**(435) 634-3000**

** **

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

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate web site, if any,every Interactive 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 registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller 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 x                      |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer o                        |   | Smaller reporting company o |
| (Do not check if a smaller reporting  company) |   |                             |

 

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

 

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

 
| **Class**                   | ** ** | **Outstanding at May 4, 2009** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|
| Common  stock, no par value |       | 55,639,394                                         |       |

 

 

 

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**SKYWEST, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OFCONTENTS**

 
| PART I       | FINANCIAL INFORMATION:                    |                                                                                                                  | 3      |
|-------------------|-------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|              | Item 1.                                   | Financial Statements                                                                                                  |   | 3 |
|              |                                      | Consolidated  Balance Sheets as of March 31, 2009 (unaudited) and December 31,  2008                        |   | 3 |
|              |                                      | Consolidated Statements of Income (unaudited) for the  three months ended March 31, 2009 and 2008                |   | 5 |
|              |                                      | Condensed Consolidated  Statements of Cash Flows (unaudited) for the three months ended  March 31, 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                                                           |   | 22 |
|              | Item 4.                                   | Controls and  Procedures                                                                                              |   | 22 |
|              |                                      |                                                                                                                  |   |   |
| PART II      | OTHER INFORMATION:                        |                                                                                                                  | 24     |
|              | Item 1.                                   | Legal Proceedings                                                                                                     |   | 24 |
|              | Item 1A.                                  | Risk Factors                                                                                                          |   | 24 |
|              | Item 2                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                          |   | 24 |
|              | Item 6.                                   | Exhibits                                                                                                              |   | 26 |
|              |                                      | Signature                                                                                                             |   | 27 |
|              |                                      |                                                                                                                  |   |   |
| 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 BALANCE SHEETS**

**(Dollars in Thousands)**

** **

ASSETS

 
| ** **                                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                 |       |                     |       |                        |       |
| Cash and cash equivalents                       |       | $                        | 137,326    |                        | $          | 125,892 |   |
| Marketable securities                           |       | 548,650                  |       | 568,567                     |       |
| Restricted cash                                 |       | 10,729                   |       | 10,728                      |       |
| Income tax receivable                           |       | 14,470                   |       | 14,868                      |       |
| Receivables, net                                |       | 59,514                   |       | 55,458                      |       |
| Inventories, net                                |       | 104,713                  |       | 104,383                     |       |
| Prepaid aircraft rents                          |       | 269,385                  |       | 226,474                     |       |
| Deferred tax assets                             |       | 52,710                   |       | 76,093                      |       |
| Other current assets                            |       | 37,103                   |       | 38,205                      |       |
| Total current assets                            |       | 1,234,600                |       | 1,220,668                   |       |
|                                            |       |                     |       |                        |       |
| PROPERTY AND EQUIPMENT:                         |       |                     |       |                        |       |
| Aircraft and rotable spares                     |       | 3,274,746                |       | 3,273,705                   |       |
| Deposits on aircraft                            |       | 19,312                   |       | 20,390                      |       |
| Buildings and ground equipment                  |       | 240,043                  |       | 239,573                     |       |
|                                            |       | 3,534,101                |       | 3,533,668                   |       |
| Less-accumulated depreciation and  amortization |       | (854,195                 | )          | (824,293                    | )          |
| Total property and equipment, net               |       | 2,679,906                |       | 2,709,375                   |       |
|                                            |       |                     |       |                        |       |
| OTHER ASSETS                                    |       |                     |       |                        |       |
| Intangible assets, net                          |       | 25,684                   |       | 26,247                      |       |
| Other assets                                    |       | 82,178                   |       | 58,001                      |       |
| Total other assets                              |       | 107,862                  |       | 84,248                      |       |
| Total assets                                    |       | $                        | 4,022,368  |                        | $          | 4,014,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in Thousands)**

** **

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                              |       |               |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                  | 130,688    |                  | $          | 129,783 |   |
| Accounts payable                                                                                                  |       | 142,169            |       | 110,902               |       |
| Accrued salaries, wages and benefits                                                                              |       | 61,939             |       | 66,553                |       |
| Accrued aircraft rents                                                                                            |       | 19,280             |       | 25,676                |       |
| Taxes other than income taxes                                                                                     |       | 18,856             |       | 16,651                |       |
| Other current liabilities                                                                                         |       | 43,625             |       | 37,039                |       |
| Total current liabilities                                                                                         |       | 416,557            |       | 386,604               |       |
|                                                                                                              |       |               |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 41,489             |       | 41,525                |       |
|                                                                                                              |       |               |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,666,304          |       | 1,681,705             |       |
|                                                                                                              |       |               |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 490,075            |       | 507,113               |       |
|                                                                                                              |       |               |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 125,433            |       | 121,823               |       |
|                                                                                                              |       |               |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                     |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |               |       |                  |       |
| Preferred stock, 5,000,000 shares  authorized; none issued                                                        |       | —             |       | —                |       |
| Common stock, no par value, 120,000,000  shares authorized; 74,099,951 and 73,520,292 shares issued, respectively |       | 570,851            |       | 562,395               |       |
| Retained earnings                                                                                                 |       | 984,832            |       | 977,736               |       |
| Treasury stock, at cost, 18,460,720 and  17,150,580 shares, respectively                                          |       | (273,776           | )          | (261,174              | )          |
| Accumulated other comprehensive income  (loss)                                                                    |       | 603                |       | (3,436                | )          |
| Total stockholders’ equity                                                                                   |       | 1,282,510          |       | 1,275,521             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                  | 4,022,368  |                  | $          | 4,014,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

(Dollars and Shares in Thousands, Except perShare Amounts)

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended  March  31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                               | ** ** | **2008** | ** ** |
| OPERATING REVENUES:                         |       |                                                   |       |   |   |
| Passenger                                   |       | $                                                      | 664,883    |   | $ | 859,159 |   |
| Ground handling and other                   |       | 7,759                                                  |       | 8,864 |   |
| Total operating revenues                    |       | 672,642                                                |       | 868,023 |   |
| OPERATING EXPENSES:                         |       |                                                   |       |   |   |
| Aircraft fuel                               |       | 140,629                                                |       | 292,389 |   |
| Salaries, wages and benefits                |       | 176,872                                                |       | 185,895 |   |
| Aircraft maintenance, materials and repairs |       | 92,158                                                 |       | 83,061 |   |
| Aircraft rentals                            |       | 72,782                                                 |       | 73,426 |   |
| Depreciation and amortization               |       | 54,584                                                 |       | 54,616 |   |
| Station rentals and landing fees            |       | 32,874                                                 |       | 34,887 |   |
| Ground handling services                    |       | 25,448                                                 |       | 32,018 |   |
| Other, net                                  |       | 36,471                                                 |       | 43,509 |   |
| Total operating expenses                    |       | 631,818                                                |       | 799,801 |   |
| OPERATING INCOME                            |       | 40,824                                                 |       | 68,222 |   |
| OTHER INCOME (EXPENSE):                     |       |                                                   |       |   |   |
| Interest income                             |       | 2,722                                                  |       | 6,762 |   |
| Interest expense                            |       | (22,951                                                | )          | (30,295 | ) |
| Impairment of marketable securities         |       | (7,115                                                 | )          | — |   |
| Other                                       |       | (319                                                   | )          | — |   |
| Total other expense, net                    |       | (27,663                                                | )          | (23,533 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 13,161                                                 |       | 44,689 |   |
| PROVISION FOR INCOME TAXES                  |       | 3,789                                                  |       | 15,549 |   |
| NET INCOME                                  |       | $                                                      | 9,372      |   | $ | 29,140 |   |
| BASIC EARNINGS PER SHARE                    |       | $                                                      | 0.17       |   | $ | 0.49 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                                      | 0.16       |   | $ | 0.47 |   |
| Weighted average common shares:             |       |                                                   |       |   |   |
| Basic                                       |       | 56,546                                                 |       | 60,013 |   |
| Diluted                                     |       | 57,427                                                 |       | 61,351 |   |
|                                        |       |                                                   |       |   |   |
| Dividends declared per share                |       | $                                                      | 0.04       |   | $ | 0.03 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(In Thousands)

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                    |       |                                             |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES               |       | $                                                | 67,344     |   | $ | 136,474 |   |
|                                                    |       |                                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                   |       |                                             |       |   |   |
| Purchases of marketable securities                      |       | (130,781                                         | )          | (363,221 | ) |
| Sales of marketable securities                          |       | 145,555                                          |       | 502,684 |   |
| Proceeds from the sale of equipment                     |       | 16,142                                           |       | 187 |   |
| Acquisition of property and equipment:                  |       |                                             |       |   |   |
| Aircraft and rotable spare parts                        |       | (40,715                                          | )          | (48,064 | ) |
| Buildings and ground equipment                          |       | (470                                             | )          | (17,101 | ) |
| Increase in other assets                                |       | (23,242                                          | )          | (8,540 | ) |
|                                                    |       |                                             |       |   |   |
| NET CASH PROVIDED BY (USED) IN INVESTING  ACTIVITIES    |       | (33,511                                          | )          | 65,945 |   |
| ** **                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                   |       |                                             |       |   |   |
| Proceeds from issuance of long-term debt                |       | 20,986                                           |       | — |   |
| Principal payments on long-term debt                    |       | (35,482                                          | )          | (23,317 | ) |
| Tax benefit from exercise of common stock  options      |       | —                                           |       | 170 |   |
| Return of deposits on aircraft and rotable  spare parts |       | 1,078                                            |       | 226 |   |
| Net proceeds from issuance of common stock              |       | 5,905                                            |       | 8,817 |   |
| Purchase of treasury stock                              |       | (12,602                                          | )          | (69,000 | ) |
| Payment of cash dividends                               |       | (2,284                                           | )          | (1,991 | ) |
|                                                    |       |                                             |       |   |   |
| NET CASH USED IN FINANCING ACTIVITIES                   |       | (22,399                                          | )          | (85,095 | ) |
|                                                    |       |                                             |       |   |   |
| Increase in cash and cash equivalents                   |       | 11,434                                           |       | 117,324 |   |
| Cash and cash equivalents at beginning of  period       |       | 125,892                                          |       | 122,802 |   |
|                                                    |       |                                             |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD              |       | $                                                | 137,326    |   | $ | 240,126 |   |
|                                                    |       |                                             |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:      |       |                                             |       |   |   |
|                                                    |       |                                             |       |   |   |
| Cash paid during the year for:                          |       |                                             |       |   |   |
| Interest, net of capitalized amounts                    |       | $                                                | 17,396     |   | $ | 23,840 |   |
| Income taxes                                            |       | $                                                | 110        |   | $ | 13,924 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST,INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

Note A —Condensed Consolidated Financial Statements

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest”or the “Company”) and its wholly-owned subsidiaries, SkyWest Airlines, Inc.(“SkyWest Airlines”) and Atlantic Southeast Airlines, Inc. (“ASA”)included herein have been prepared, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information anddisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations,although SkyWest believes that the following disclosures are adequate to makethe information presented not misleading. These condensed consolidatedfinancial statements reflect all adjustments that, in the opinion ofmanagement, are necessary to present fairly the results of operations for theinterim periods presented. All adjustments are of a normal recurring nature,unless otherwise disclosed. The Company suggests that these condensedconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2008.  The results of operations for the three monthperiod ended March 31, 2009 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2009.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results will differ and maydiffer materially from those estimates and assumptions.

 

Certain reclassifications have been made tothe three months ended March 31, 2008 condensed consolidated financialstatements to conform to current year presentation.

 

NoteB — New Accounting Pronouncements

 

InApril 2009, the Financial Accounting Standards Board (the “FASB”) releasedStaff Position Statement of Financial Accounting Standards No. 157-4, *Determining Whether a Market Is Not Active and a Transaction Is NotDistressed* (“SFAS 157-4”).  SFAS 157-4 provides additionalguidance in determining whether a market for a financial asset is not activeand a transaction is not distressed for fair value measurement purposes asdefined in SFAS 157, *Fair Value Measurements*.  SFAS157-4 is effective for interim periods ending after June 15, 2009, butearly adoption is permitted for interim periods ending after March 15,2009.  The Company plans to adopt the provisions of SFAS 157-4 duringsecond quarter 2009, but does not believe this guidance will have a significantimpact on the Company’s consolidated financial statements.

 

InApril 2009, the FASB issued Staff Position No. FAS 115-2 and FAS124-2, *Recognition and Presentation ofOther-Than-Temporary Impairments* (“FSP FAS 115-2”), which providesnew guidance on the recognition of other-than-temporary impairments ofinvestments in debt securities and provides new presentation and disclosurerequirements for other-than-temporary impairments of investments in debt andequity securities.  FSP FAS 115-2 is effective for the three monthsending June 30, 2009.  The Company is currently evaluating therequirements of this pronouncement and has not determined the impact, if any,that adoption will have on the Company’s consolidated financial statements.

 

InApril 2009, the FASB issued Staff Position No. FAS 107-1 and APB28-1, *Interim Disclosures about Fair Value of FinancialInstruments* (“FSP FAS 107-1”).  FSP FAS 107-1 amends SFAS No. 107,*Disclosures about Fair Value of FinancialInstruments* (“SFAS 107”) to require disclosures about fair value offinancial instruments in interim reporting periods.  Such disclosureswere previously required only in annual financial statements.  FSPFAS 107-1 is effective for the three months ending June 30,2009.  Because FSP FAS 107-1 applies only to financial statementdisclosures, the Company’s management believes adoption will not have amaterial effect on the Company’s consolidated financial statements.

 

Note C —Passenger and Ground Handling Revenue

 

The Company recognizes passenger and groundhandling revenues when the service is provided. Under the Company’s contractand pro-rate flying agreements with Delta Air Lines, Inc. (“Delta”),United Air Lines, Inc. (“United”) and Midwest Airlines, 

 

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Inc. (“Midwest”), revenue is considered earned when the flight iscompleted. Revenue is recognized under the Company’s pro-rate flying agreementsbased upon the portion of the pro-rate passenger fare the Company anticipatesthat it will receive.

 

SkyWest Airlines and ASA have each enteredinto a Delta Connection Agreement with Delta, pursuant to which SkyWestAirlines and ASA provide contract flight services for Delta. Among otherprovisions, those Delta Connection Agreements provide that, upon the thirdanniversary of the execution of the agreements (September 8, 2008), thecontractual rates under those agreements shall not exceed the average rate ofall carriers within the Delta Connection Program. In the event that thecontractual rates have not been finalized at quarterly or annual financialstatement dates, the Company records revenues based on the prior period’sapproved rates adjusted for the current contract negotiations. As of March 31,2009, SkyWest Airlines and ASA had not finalized the contractual rates withDelta.  Accordingly, the Company hasprimarily used Delta’s preliminary rate estimate as the basis for recordingrevenue during the three months ended March 31, 2009.

 

In the event the Company has a reimbursementdispute with a major partner, the Company evaluates the dispute under itsestablished revenue recognition criteria and, provided the revenue recognitioncriteria have been met, the Company recognizes revenue based on management’sestimate of the resolution of the dispute. 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 certain irregularoperations (“IROP”) expenses that are paid by SkyWest Airlines and ASA to theirpassengers under certain situations. As a result, Delta withheld a combinedtotal of approximately $25 million (pretax) from one of the weeklyscheduled wire payments to SkyWest and ASA during December 2007. Deltacontinues to withhold a portion of the funds the Company believes are payableas weekly scheduled wire payments to SkyWest and ASA (See Note O foradditional details).

 

The Delta Connection Agreements executed bySkyWest Airlines and ASA provide for fifteen-year terms, subject to earlytermination by Delta, SkyWest Airlines or ASA, as applicable, upon theoccurrence of certain events. Delta’s termination rights include (i) cross-terminationrights between the two Delta Connection Agreements, (ii) the right toterminate each of the Delta Connection Agreements upon the occurrence ofcertain force majeure events, including certain labor-related events, thatprevent SkyWest Airlines or ASA from performance for certain periods, and (iii) theright to terminate each of the Delta Connection Agreements if SkyWest Airlinesor ASA fails to maintain competitive base rate costs, subject to certainadjustment rights. The SkyWest Airlines and ASA Delta Connection Agreementscontain multi-year rate reset provisions. In the Delta Connection Agreements,the fixed-fee rates are specifically defined through 2009. The parties agreedthat on or after a specified date in 2010 the parties would reset such rates toreflect SkyWest Airlines’ actual costs in 2010 (with a similar process on each5th year thereafter). In addition to the termination rights, Delta has theright to extend the term of the Delta Connection Agreements upon the occurrenceof certain events or at the expiration of the initial term. SkyWest Airlinesand ASA 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 DeltaConnection Agreement, Delta has agreed to compensate SkyWest Airlines for thedirect costs associated with operating the Delta Connection flights, plus apayment based on block hours flown. Under the terms of the ASA Delta ConnectionAgreement, Delta has agreed to compensate ASA for its direct costs associatedwith operating the Delta Connection flights, plus, if ASA completes a certainminimum percentage of its Delta Connection flights, an additional percentage ofsuch costs. Additionally, ASA’s Delta Connection Agreement provides for thepayment of incentive compensation upon satisfaction of certain performancegoals. The incentives are defined in the ASA Delta Connection Agreement asbeing measured and determined on a monthly and quarterly basis. At the end ofeach quarter, the Company calculates the incentives achieved during the quarterand recognizes revenue accordingly. The parties to the Delta ConnectionAgreements make customary representations, warranties and covenants, includingwith respect to various operational, marketing and administrative matters.

 

SkyWest Airlines and United have entered intoa United Express Agreement, which sets forth the principal terms and conditionsgoverning SkyWest Airlines’ United Express operations. Under the terms of theUnited Express 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.

 

SkyWest Airlines and Midwest are parties toan Airlines Services Agreement entered into on December 20, 2006 (the “MidwestServices Agreement”). Under the terms of the Midwest Services Agreement, SkyWestAirlines has agreed to operate up to 25 Bombardier CRJ200s under Midwest’scode. In exchange for SkyWest Airlines’ obligation to provide the designatednumber of flights and performing other obligations under the Midwest ServicesAgreement, Midwest has agreed to pay SkyWest Airlines on a weekly basis a fixedfee per completed block hour, fixed fee per completed departure, a fixed feefor overhead, and a reimbursement of certain direct costs when a new aircraftis delivered. The Midwest Services Agreement provides for incentives orpenalties based 

 

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upon SkyWest Airlines’ performance, including on-time arrival performanceand completion percentage rates. Additionally, Midwest has agreed to reimbursecertain of SkyWest Airlines’ operating costs, including costs related to fuel,landing fees, and catering. In June 2008, SkyWest Airlines was notifiedthat Midwest was in the process of organizing a financial restructuring.SkyWest Airlines subsequently reached agreement with Midwest to reduce thenumber of aircraft operating under the Midwest Services Agreement from 21aircraft to 12 aircraft.  As part of themodified terms, SkyWest Airlines agreed to defer a portion of Midwest’s weeklypayment obligations from July 1, 2008 through November 30, 2008. Theamount SkyWest Airlines agreed to defer plus certain amounts Midwest owed toSkyWest Airlines at June 30, 2008, will be payable, with interest byMidwest in four equal quarterly payments starting on August 31, 2009. Thetotal amount SkyWest Airlines has agreed to defer through November 30,2008 is $9.0 million. Because of the unique modified payment termsassociated with the deferred amounts, the Company did not recognize the revenueassociated with the deferred payments. Because of the uncertainty associated with Midwest’s financial restructuring,there is no assurance that Midwest will make payments as scheduled under theterms of the modified Midwest Services Agreement.

 

The Company’s passenger and ground handlingrevenues could be impacted by a number of factors, including changes to theCompany’s code-share agreements with Delta, United or Midwest, contractmodifications resulting from contract re-negotiations, the Company’s ability toearn incentive payments contemplated under the Company’s code-share agreements,Midwest’s proposed financial restructuring and settlement of  reimbursement disputes with the Company’s majorpartners.

 

#### Note D — Share-Based Compensation

####  

The fair value of stock options granted bythe Company has been estimated as of the grant date using the Black-Scholesoption pricing model. The Company accounts for share-based compensation inaccordance with SFAS No. 123(R), *Share-Based Payment*(“SFASNo. 123(R)”).  During the threemonths ended March 31, 2009 the Company granted options to purchase457,397 shares of common stock under the SkyWest, Inc. 2006 Long-TermIncentive Plan (the “2006 Incentive Plan”) . The following table shows the assumptions used and weighted average fairvalue for stock option grants during the three months ended March 31,2009.

 
| 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 three months ended March 31,2009, 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 thatthree-month period, the Company granted 26,247 fully-vested shares of commonstock to the Company’s directors.  Theweighted average fair value of the shares of restricted stock on the date ofgrant was $15.24 per share.

 

As required by SFAS No. 123(R), theCompany records share-based compensation expense only for those options andshares of restricted stock that are expected to vest.  The estimated fair value of the stock optionsand shares of restricted stock is amortized over the applicable vestingperiods.  During the three months ended March 31,2009 and 2008, the Company recorded pre-tax share-based compensation expense of$2.6 million and $3.4 million, respectively.

 

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Note E — Net Income Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution andis computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted net income per common share (“DilutedEPS”) reflects the potential dilution that could occur if stock options orother contracts to issue common stock were exercised or converted into commonstock. The computation of Diluted EPS does not assume exercise or conversion ofsecurities that would have an anti-dilutive effect on net income per commonshare. During the three months ended March 31, 2009 and 2008 options toacquire 1,353,000 and 2,030,000 shares, respectively, were excluded from thecomputation of Diluted EPS as their impact was anti-dilutive.

 

The calculation of the weighted average number of common sharesoutstanding for Basic EPS and Diluted EPS for the periods indicated (inthousands, except per share data) is as follows:

 
| ** **                                                                 | ** ** | **Three months ended March  31,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                                   | ** ** | **2008** | ** ** |
| **Numerator**                                                              | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Net Income                                                                 |       | $                                                          | 9,372      |   | $ | 29,140 |   |
| ** **                                                                 | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| **Denominator**                                                            | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Weighted average number of common shares  outstanding                      |       | 56,546                                                     |       | 60,013 |   |
| Effect of outstanding share-based  compensation                            |       | 881                                                        |       | 1,338 |   |
| Weighted average number of shares for  diluted net income per common share |       | 57,427                                                     |       | 61,351 |   |
|                                                                       |       |                                                       |       |   |   |
| Basic earnings per share                                                   |       | $                                                          | 0.17       |   | $ | 0.49 |   |
| Diluted earnings per share                                                 |       | $                                                          | 0.16       |   | $ | 0.47 |   |

 

Note F —Comprehensive Income

 

The Company reports comprehensive income in accordance with SFAS No. 130,*Reporting**Comprehensive*Income**(“SFAS 130”). SFAS 130establishes standards for reporting and displaying comprehensive income and itscomponents in financial statements. Comprehensive income includes charges andcredits to stockholders’ equity that are not the result of transactions withshareholders.  Comprehensive incomeconsisted of net income plus changes in unrealized appreciation on marketablesecurities, net of tax, for the periods indicated (in thousands):

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Net Income**                                               |       | $                                                    | 9,372      |   | $ | 29,140 |   |
| Unrealized appreciation on marketable securities, net of tax |       | 4,039                                                |       | 65 |   |
|                                                         |       |                                                 |       |   |   |
| **Comprehensive income**                                     |       | $                                                    | 13,411     |   | $ | 29,205 |   |

 

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Note G —Long-Term Debt

 

Long-term debt of the Company consisted of the following for theperiods indicated (in thousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 1.87% to 5.48% through 2012 to 2020, secured by aircraft                                     |       | $                        | 511,658    |                        | $          | 529,625 |   |
| Notes payable to a financing company, due  in semi-annual installments, variable interest based on LIBOR, or with  interest rates ranging from 2.05% to 7.52% through 2021, secured by aircraft                               |       | 587,845                  |       | 594,999                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 6.51% through 2021, secured by  aircraft                                                                                                   |       | 244,651                  |       | 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                                                                                     |       | 72,617                   |       | 74,455                      |       |
| Notes payable to banks, due in monthly  installments plus interest of 3.15% to 8.18% through 2020, secured by  aircraft                                                                                                       |       | 343,302                  |       | 325,834                     |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                 |       | 25,380                   |       | 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 |       | 5,602                    |       | 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                                                                                        |       | 5,937                    |       | 6,051                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                        | 1,796,992  |                        | $          | 1,811,488 |   |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Less current maturities                                                                                                                                                                                                       |       | (130,688                 | )          | (129,783                    | )          |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                     |       | $                        | 1,666,304  |                        | $          | 1,681,705 |   |

 

At March 31, 2009, the three-month and six-month LIBOR rates were1.19% and 1.74%, respectively.   At December 31,2008, the three-month and six-month LIBOR rates were 1.43% and 1.75%,respectively.

 

As of March 31, 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 in Accounting Estimates

 

During the first quarter of 2009, the Company changed its estimate ofdepreciable lives on ground equipment from five to seven years to five to tenyears and maintained the residual value of zero percent.  The impact of this change increased theCompany’s pre-tax income for the three months ended March 31, 2009 by $1.2million ($.02 per share Basic EPS and Diluted EPS).  The impact of this change, net of tax,increased the Company’s net income for the three months ended March 31,2009 by $826,000 ($.01 per share, Basic EPS and Diluted EPS).

 

NoteI — Investment Securities

 

TheCompany reviews investment securities on an ongoing basis for the presence ofother-than-temporary-impairment (“OTTI”) with formal reviews performedquarterly. OTTI losses on individual equity investment securities arerecognized as a realized loss through earnings when fair value is significantlybelow cost, the decline in fair value has existed for an extended period oftime, and recovery is not expected in the near term. OTTI losses on individualperpetual preferred securities are recognized as a realized loss throughearnings when a decline in the cash flows has occurred or the rating of thesecurity has been downgraded below investment grade.

 

TheCompany’s OTTI evaluation process follows the guidance of SFAS No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*, EITF Issue No. 99-20, *Recognition of Interest Income and Impairment on Purchased and RetainedBeneficial Interests in Securitized Financial Assets*, and FSP No. EITF99-20-1, *Amendments to the Impairment andInterest Income Measurement Guidance of EITF Issue No. 99-20.*Thisguidance requires the Company to take into consideration current marketconditions, fair value in relationship to cost, extent and nature of change infair value, issuer rating changes and trends, volatility of earnings, currentanalysts’ evaluations, all available information relevant to the securities,the Company’s ability and intent to hold investments until a recovery of fairvalue, which may be maturity, and other factors when evaluating for theexistence of OTTI in the Company’s securities portfolio.

 

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Asa result of an ongoing valuation review of the Company’s marketable securitiesportfolio, the Company recognized a pre-tax charge of approximately $7.1million during the three months ended March 31, 2009 for certainmarketable securities deemed to have other-than-temporary impairment.

 

Note J —Commitments and Contingencies

 

The Company leases 285 aircraft, as well as airport facilities, officespace, and various other property and equipment under non-cancelable operatingleases which are generally on a long-term net rent basis where the Company paystaxes, maintenance, insurance and certain other operating expenses applicableto the leased property.  The Companyexpects that, in the normal course of business, leases that expire will berenewed or replaced by other leases.  Thefollowing table summarizes future minimum rental payments required underoperating leases that had initial or remaining non-cancelable lease terms inexcess of one year as of March 31, 2009 (in thousands):

 
| April through December 2009 |   | $         | 201,853   |   |
|---------------------------------------|--------|-----------|-----------|--------|
| 2010                                  |   | 323,808   |      |
| 2011                                  |   | 314,529   |      |
| 2012                                  |   | 315,422   |      |
| 2013                                  |   | 307,912   |      |
| Thereafter                            |   | 1,614,842 |      |
|                                  |   | $         | 3,078,366 |   |

 

Note K — Fair Value Measurements

 

As of March 31, 2009, the Company heldcertain assets that are required to be measured at fair value on a recurringbasis. Assets measured at fair value on a recurring basis are summarizedbelow (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of March 31, 2009** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                           | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                                |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | $                                                                                   | 148,055    |   | $ | 148,055 |   | $ | — |   | $ | — |   |
| Marketable Securities                      |       | 548,650                                                                             |       | 26,446 |   | 522,204 |   | — |   |
| Other Assets                               |       | 4,481                                                                               |       | — |   | — |   | 4,481 |   |
| Total Assets Measured at Fair Value        |       | $                                                                                   | 701,186    |   | $ | 174,501 |   | $ | 522,204 |   | $ | 4,481 |   |

 

Based on market conditions, the Company usesa discounted cash flow valuation methodology for auction rate securities.Accordingly, for purposes of the foregoing condensed consolidated financialstatements, these securities were categorized as Level 3 securities withinthe hierarchy established pursuant to SFAS No. 157, *Fair Value Measurements* (“SFAS No. 157”).

 

The following table presents the Company’sassets measured at fair value on a recurring basis using significantunobservable inputs (Level 3) as defined in SFAS No. 157 at March 31,2009 (in thousands):

 

**Fair Value Measurements Using SignificantUnobservable Inputs**

**(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           |       | (205                              | )          |
| Transferred out                                  |       | —                            |       |
| Settlements                                      |       | —                            |       |
| Balance at March 31, 2009                   |       | $                                 | 4,481      |   |

 

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Note L  — Stock Repurchase

 

The Company’s Board of Directors has authorizedthe repurchase of up to 15,000,000 shares of the Company’s common stock in thepublic market. During the three months ended March 31, 2009, the Companyrepurchased 1.3 million shares of common stock for approximately$12.6 million at a weighted average price per share of $9.62.

 

Note M — Investment in Other Companies

 

On September 4, 2008, the Companyannounced its intention to acquire a 20% interest in a Brazilian regionalairline, Trip Linhas Aereas (“Trip”), for $30 million.  As of March 31, 2009, the Company’stotal investment in Trip was $20 million for a 16.4% interest, which isrecorded as “Other assets” on the Company’s consolidated balance sheet. If Tripmeets or exceeds certain financial targets, the Company is scheduled to make anadditional $10 million investment in Trip on or before March 1, 2010.The Company accounts for its interest in Trip using the equity method ofaccounting in accordance with APB Opinion No. 18, *the Equity Method of Accounting for investment in Common Stock*(“APB 18”). The Company records its equity in Trip’s earnings on aone-quarter lag. The differencebetween the cost basis of the investment and the amount of underlying equity inthe net assets of Trip totaled $2.9 million as of March 31, 2009 and isrecognized as equity method goodwill. During the three months ended March 31,2009, the Company’s proportionate share of Trip’s net loss was $250,000 and isincluded in “Other” in the Company’s consolidated statement of income.

 

NoteN —   Tax Rate

 

TheCompany’s effective tax rate was 28.8 % and 34.8 % for the three months ended March 31,2009 and 2008, respectively.  Inconjunction with the quarter-end evaluation of the Company’s FIN 48 liability,the Company reduced its income tax provision by approximately $757,000 for thethree months ended March 31, 2009.

 

Note O — LegalMatters

 

*Legal Matters*

 

The Company is subject to certain legalactions which it considers routine to its business activities. As of March 31,2009, the Company’s management believed, after consultation with legal counsel,that the ultimate outcome of such legal matters was not likely to have amaterial adverse effect on the Company’s financial position, liquidity orresults of operations. However, the following is a significant outstandinglegal matter.

 

*ASA and SkyWest 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 certain IROP expensesthat are paid by SkyWest Airlines and ASA to their passengers under certainsituations. 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 March 31, 2009, the Company had recognizeda cumulative total of $32.4 million of revenue associated with the fundswithheld by Delta. On February 1, 2008, SkyWest Airlines and ASA filed alawsuit in Georgia 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 invoicing Deltafor the IROP expenses that were paid pursuant to Delta’s policies, and claimsonly a portion of those expenses may be invoiced to Delta. Delta seeksunspecified damages in its counterclaim.

 

On March 24, 2008, Delta also filed aMotion to Dismiss the Complaint. A hearing on the Motion was held June 5,2008. In an order entered June 13, 2008, the Court granted in part anddenied in part the Motion to Dismiss. The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint. TheCourt denied in part the Motion to Dismiss with respect to the action fordeclaratory judgment contained in the Complaint, and granted in part the Motionto Dismiss to the extent the Complaint seeks to read alternative orsupplemental obligations created by prior conduct into the Delta ConnectionAgreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in the Complaint.SkyWest Airlines and ASA currently intend to vigorously pursue their claims setforth in the Complaint, to the extent permitted by the Court’s ruling on theMotion to Dismiss, and their defenses to Delta’s counterclaims.

 

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The Company has evaluated the Delta disputein accordance with the provisions of SFAS No. 5, *Accounting for Contingencies* (“SFAS No.5”).Based on the provisions of SFAS No. 5, an estimated loss is accrued if theloss is probable and reasonably estimable. Because these conditions have notbeen satisfied, the Company has not recorded a loss related to the precedingdispute in the condensed consolidated financial statements as of March 31,2009.

 

**CautionaryStatement Concerning Forward-Looking Statements**

 

Certain of thestatements contained in this Report should be considered “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements may be identified by words such as “may,” “will,” “expect,” “intend,”“anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,”“likely,” and “continue” and similar terms used in connection with statements 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 beother factors not identified above of which SkyWest is not currently aware thatmay affect matters discussed in the forward-looking statements, and may alsocause actual results to differ materially from those discussed.  SkyWest assumes no obligation to publiclyupdate any forward-looking statement to reflect actual results, changes inassumptions or changes in other factors affecting these statements other thanas required by law.

 

**ITEM 2:**               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

*The following discussion and analysispresents factors that had a material effect on the results of operations ofSkyWest, Inc. (“SkyWest” “we” or “us”) during the three months ended March 31,2009 and 2008. Also discussed is our financial position as of March 31,2009 and December 31, 2008. You should read this discussion in conjunctionwith our condensed consolidated financial statements for the three months endedMarch 31, 2009, including the notes thereto, appearing elsewhere in thisReport.  This discussion and analysiscontains forward-looking statements. Please refer to the sections of thisReport entitled “Cautionary Statement Concerning Forward-Looking Statements”and “Risk Factors” for discussion of the uncertainties, risks and assumptionsassociated with these statements.*

 

**Overview**

 

Through SkyWest Airlines, Inc. (“SkyWestAirlines”) and Atlantic Southeast Airlines, Inc. (“ASA”), we operate thelargest regional airline in the United States. As of March 31, 2009,SkyWest Airlines and ASA offered scheduled passenger and air freight servicewith more than 2,421 total daily departures to 211 destinations in the UnitedStates, Canada, Mexico and the Caribbean. Additionally, as of March 31,2009, we provided ground handling services for approximately eight otherairlines throughout our system. As of March 31, 2009, we operated a combinedfleet of 438 aircraft consisting of 250 50-seat Bombardier Aerospace (“Bombardier”)CRJ 200 Regional Jets (the “CRJ200”) (67 assigned to United, 164 assigned toDelta, 12 assigned to Midwest and seven used by SkyWest Airlines as additionalmaintenance spare aircraft) 103 70-seat Bombardier CRJ700 Regional Jets (the “CRJ700”)  (52 assigned to United and 51 assigned toDelta), 27 CRJ900s (all assigned to Delta), 54 30-seat Embraer Brasilia EMB-120turboprop aircraft (the “Brasilia turboprop”) (42 assigned to United and 12assigned to Delta), and four 66-seat Avions de Transport 72-210 turbopropaircraft (the “ATR-72 turboprops) (all assigned to Delta). As of March 31,2009, the four ATR-72 turboprops were no longer in revenue service. We believeour success in attracting multiple contractual relationships with our majorairline partners is attributable to our delivery of high-quality customerservice with an all cabin-class fleet at a competitive cost structure. For thethree months ended March 31, 2009, approximately 56.4% of our aggregatecapacity was operated under the Delta code, approximately 41.2% was operatedunder the United code and approximately 2.4% was operated under the Midwestcode.

 

SkyWest Airlines has been a code-sharepartner with Delta in Salt Lake City and United in Los Angeles since 1987 and1997, respectively. In 1998, SkyWest Airlines expanded its relationship withUnited to provide service in Portland, Seattle/Tacoma, San Francisco andadditional Los Angeles markets. In 2004, SkyWest Airlines expanded its UnitedExpress operations to provide service in Chicago. In December 2006,SkyWest Airlines and Midwest entered into an Airline Services Agreement (the “MidwestServices Agreement”). SkyWest Airlines serves markets from Midwest’s hub inMilwaukee. As of March 31, 2009, SkyWest Airlines operated 

 

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as a Delta Connection carrier in Salt Lake City, a United Expresscarrier in Los Angeles, San Francisco, Denver, Chicago and the PacificNorthwest, and a Midwest Connect carrier in Milwaukee, operating more than1,550 total daily flights.

 

ASA has been a code-share partner with Deltain Atlanta since 1984. ASA expanded its operations as a Delta Connectioncarrier to also include Cincinnati and Salt Lake City in September 2002and April 2003, respectively. ASA operates approximately 825 dailyflights, all in the Delta Connection system.

 

We provide a substantial majority of theregional airline service for Delta in Atlanta and Salt Lake City. In connectionwith our acquisition of ASA in September 2005, we established new,separate, but substantially similar, long-term fixed-fee Delta ConnectionAgreements with Delta for both SkyWest Airlines and ASA. We also obtained theright to use 29 gates in the Hartsfield-Jackson International Airport locatedin Atlanta, from which we currently provide service to Delta. Delta has alsoagreed that if Delta solicits requests for proposals to fly Delta Connectionregional aircraft, ASA will be permitted to bid to maintain the same percentageof total Delta Connection regional jet flights that it operated during 2007,and, if ASA does not achieve the winning bid for the proposed flying, ASA willbe permitted to match the terms of the winning bid to the extent necessary forASA to maintain its percentage of Delta Connection regional jet flying that itoperated during 2007.

 

Historically, multiple contractualrelationships have enabled us to reduce reliance on any single major airlinecode and to enhance and stabilize operating results through a mix of contractflying and our controlled or “pro-rate” flying. For the three months ended March 31,2009, contract flying revenue and pro-rate revenue represented approximately96% and 4%, respectively, of our total passenger revenues. On contract routes,the major airline partner controls scheduling, ticketing, pricing and seatinventories and we are compensated by the major airline partner at contractedrates based on the completed block hours, flight departures and other operatingmeasures. On pro-rate flights, we control scheduling, ticketing, pricing andseat inventories and receive a pro-rated portion of passenger fares. As of March 31,2009, essentially all of our Brasilia turboprops flown for Delta were flownunder pro-rate arrangements, while approximately 55% of our Brasilia turbopropsflown in the United system were flown under contractual arrangements, with theremaining 45% flown under pro-rate arrangements.

 

**FirstQuarter Summary**

 

We had revenues of $672.6 million for thethree months ended March 31, 2009, a 22.5% decrease, compared to revenuesof $868.0 million for the three months ended March 31, 2008. We hadnet income of $9.4 million, or $0.16 per diluted share, for the threemonths ended March 31, 2009, a decrease in net income of 67.8%, comparedto $29.1 million of net income, or $0.47 per diluted share, for the threemonths ended March 31, 2008.

 

The significant items affecting our financialperformance during three months ended March 31, 2009 are outlined below:

 

In June 2008, SkyWest Airlines wasnotified that Midwest was in the process of organizing a financialrestructuring. Subsequently, SkyWest Airlines reached an agreement with Midwestto reduce the number of aircraft operating under the Midwest Services Agreementfrom 21 aircraft to 12 aircraft. As part of the modified terms, SkyWestAirlines agreed to defer a portion of Midwest’s weekly payment obligations fromJuly 1, 2008 through November 30, 2008. The amount SkyWest Airlinesagreed to defer plus certain amounts Midwest owed to SkyWest Airlines at June 30,2008, will be payable, with interest by Midwest in four equal quarterlypayments starting on August 31, 2009. The total amount SkyWest Airlineshas agreed to defer through November 30, 2008 is $9.0 million.Because of the unique modified payment terms associated with the deferredamounts, we have not recognized the revenue associated with the deferredpayments.  Because of the uncertaintyassociated with Midwest’s financial restructuring, there is no assurance thatMidwest will make payments as scheduled under the terms of the modified MidwestServices Agreement.

 

We review our investment securities on an ongoingbasis for the presence of other-than-temporary-impairment (“OTTI”) with formalreviews performed quarterly. OTTI losses on individual equity investmentsecurities are recognized as a realized loss through earnings when fair valueis significantly below cost, the decline in fair value has existed for anextended period of time, and recovery is not expected in the near term. OTTIlosses on individual perpetual preferred securities are recognized as arealized loss through earnings when a decline in the cash flows has occurred orthe rating of the security has been downgraded below investment grade. As aresult of an ongoing valuation review of our investment securities portfolio,we recognized a pre-tax charge of approximately $7.1 million during the threemonths ended March 31, 2009 for certain investment securities deemed tohave other-than-temporary impairment.

 

ASA experienced significant weather-relatedcancellations in its Atlanta hub during the three months ended March 31,2009. Additionally, on March 31, 2009, as a result of an internal audit,ASA grounded 60 CRJ200 regional jet aircraft in order to perform engine safetyinspections in accordance with the manufacturer’s recommendations. ASAcancelled approximately 750 flights more 

 

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than normal as a result of the severe weather and aircraft groundingduring the quarter. As a result, ASA experienced a negative impact on revenuesof approximately $7.6 million.

 

Our maintenance costs increased$9.1 million, or 11.0%, during the three months ended March 31, 2009,compared to the three months ended March 31, 2008. The increase inmaintenance costs was principally due to scheduled maintenance events on ouraging CRJ200 and CRJ700 aircraft.

 

Total available seat miles (“ASMs”) for thethree months ended March 31, 2009 decreased 8.0%, compared to the threemonths ended March 31, 2008, primarily as a result of our major partnersdecreasing the utilization of our aircraft and a reduction in the number ofaircraft we operated for Midwest. During the three months ended March 31,2009, we generated 5.1 billion ASMs, compared to 5.6 billionASMs during the three months ended March 31, 2008.

 

**Outlook**

 

On October 12, 2007, we announcedSkyWest Airlines’ plans to acquire 22 additional regional jet aircraft through2010, 18 of which SkyWest Airlines intends to operate for United Express, aspart of an aircraft transition plan. We believe this transition plan will allowUnited Express to remove 23 30-seat Brasilia turboprops from operation underthe United Express Agreement and add 66-seat regional jet aircraft for UnitedExpress flying. Generally, the turboprop removals are intended to occur inconjunction with deliveries of new regional jet aircraft in an effort tofacilitate a smooth transition in existing markets. Additionally, SkyWestAirlines exchanged four 50-seat CRJ200s for four CRJ900s configured with 76seats in its Delta Connection operations. On November 30, 2007, weannounced that SkyWest Airlines placed a firm order for 22 aircraft withBombardier. As of March 31, 2009, SkyWest Airlines had taken delivery offour CRJ900s under that order. SkyWest Airlines is scheduled to take deliveryof the remaining 18 aircraft during the remainder of 2009 and the first quarterof 2010.

 

On January 9, 2009, we announced thatASA reached an agreement with Delta to operate an additional ten CRJ900regional jet aircraft. The aircraft were previously ordered by Delta and arenow being contracted for flying with ASA. As of March 31, 2009, ASA hadtaken delivery of six of these aircraft and expects to take delivery of theremaining four aircraft during April and May of 2009. ASA intends touse the aircraft as replacements for 20, 50-seat CRJ200s that are scheduled forremoval from contract service between April and August 2010, which isearlier than the existing scheduled termination dates as contained in the DeltaConnection Agreement.

 

**Critical Accounting Policies**

 

Our significant accounting policies aresummarized in Note 1 to our consolidated financial statements for the yearended December 31, 2008, which are presented in our Annual Report on Form 10-Kfor the year ended December 31, 2008. Critical accounting policies are those policies that are most importantto the preparation of our consolidated financial statements and requiremanagement’s subjective and complex judgments due to the need to make estimatesabout the effect of matters that are inherently uncertain. Our criticalaccounting policies relate to revenue recognition, aircraft maintenance,aircraft leases, impairment of long-lived assets and intangibles, stock-basedcompensation expense and fair value. The application of these accountingpolicies involves the exercise of judgment and the use of assumptions as tofuture uncertainties and, as a result, actual results will differ, and coulddiffer materially, from such estimates.

 

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**Results ofOperations**

 

**ThreeMonths Ended March 31, 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 March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 3,849,527                                                              |       | 4,194,329 |   | (8.2 | ) |
| Available seat miles (“ASMs”) (000) |       | 5,134,723                                                              |       | 5,578,579 |   | (8.0 | ) |
| Block hours                                   |       | 324,797                                                                |       | 353,637 |   | (8.2 | ) |
| Departures                                    |       | 205,880                                                                |       | 217,510 |   | (5.3 | ) |
| Passengers carried                            |       | 7,633,909                                                              |       | 8,076,331 |   | (5.5 | ) |
| Passenger load factor                         |       | 75.0                                                                   | %          | 75.2 | % | (0.2 | )pts |
| Revenue per available seat mile               |       | 13.1                                                                   | ¢     | 15.6 | ¢ | (16.0 | ) |
| Cost per available seat mile                  |       | 12.8                                                                   | ¢     | 14.9 | ¢ | (14.1 | ) |
| Fuel cost per available seat mile             |       | 2.8                                                                    | ¢     | 5.3 | ¢ | (47.2 | ) |
| Average passenger trip length (miles)         |       | 504                                                                    |       | 519 |   | (2.9 | ) |

 

*Revenues.*  Operating revenues decreased$195.4 million, or 22.5%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. We are reimbursedfor our actual fuel costs by our major partners under our contract flyingarrangements. For financial reporting purposes, we record these reimbursementsas operating revenue. Under the SkyWest Airlines and ASA Delta ConnectionAgreements, we are reimbursed for our engine overhaul expenses. We also recordthose engine overhaul reimbursements as operating revenue. The following tablesummarizes the amount of fuel and engine overhaul reimbursements included inour passenger revenues for the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                      | 664,883    |   | $ | 859,159 |   | $ | (194,276 | ) | (22.6 | )% |
| Less: Fuel reimbursement from major  partners                         |       | 136,552                                                                |       | 283,548 |   | (146,996 | ) | (51.8 | )% |
| Less: Engine overhaul reimbursement from  major partners              |       | 16,444                                                                 |       | 16,002 |   | 442 |   | 2.8 | % |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                      | 511,887    |   | $ | 559,609 |   | $ | (47,722 | ) | (8.5 | )% |

 

*Passenger revenues.*  Passenger revenues decreased$194.3 million, or 22.6%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. The decrease inpassenger revenues was primarily due to a decrease in fuel reimbursements fromour major partners. The fuel reimbursement from our major partners decreased$147.0 million or 51.8%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. Our passengerrevenues, excluding fuel and engine overhaul reimbursements from majorpartners, decreased $47.7 million, or 8.5%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. The decrease inpassenger revenues, excluding fuel and engine overhaul reimbursements, was morethan the corresponding decrease in ASMs, primarily due to two factors. First,ASA experienced an abnormally high number of flight cancellations during thethree months ended March 31, 2009. ASA incurred significant weather related cancellations in its Atlantahub during the three months ended March 31, 2009. Additionally, on March 31,2009, as a result of an internal audit, ASA grounded 60 CRJ200 aircraft inorder to perform engine safety inspections in accordance with the manufacturer’srecommendations. ASA cancelled approximately 750 flights more than normal as aresult of the severe weather and the aircraft grounding during the quarter. Asa result of the abnormally high number of cancellations, ASA experienced anegative impact on passenger revenues of approximately $7.6 million. Second, the percentage decrease in passenger revenuesexcluding fuel and engine overhaul reimbursements was more than the percentagedecrease in ASMs, primarily due operating efficiencies we obtained by addingincremental aircraft under our contract flying arrangements, which are factoredinto our contractual rates.

 

*Ground handling and other.*  Total ground handling and other revenuesdecreased $1.1 million, or 12.5%, during the three months ended March 31,2009, compared to the three months ended March 31, 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 ourconsolidated statements of income. The decrease was primarily related to thelower volume of flights serviced under ground handling contracts with Unitedand Delta, whereby we perform ground handling services for several otherregional airlines.

 

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Individual expense components are alsoexpressed in the following table on the basis of cents per ASM. ASM is a commonmetric used in the airline industry to measure an airline’s passenger capacity.ASMs reflect both the number of aircraft in an airline’s fleet and theseat capacity for the aircraft in the fleet. As the size of our fleet is theunderlying driver of our operating costs, the primary basis for ourpresentation in MD&A is on a cost per ASM basis to discuss significantchanges in our costs not proportionate to the relative changes in our fleetsize (dollar amounts in thousands).

 
| ** **                                  | ** ** | **For the three months ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                             | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                      | 140,629    |   | $ | 292,389 |   | $ | (151,760 | ) | (51.9 | )% | 2.8 |   | 5.3 |   |
| Salaries, wages and benefits                |       | 176,872                                                                |       | 185,895 |   | (9,023 | ) | (4.9 | )% | 3.4 |   | 3.3 |   |
| Aircraft maintenance, materials and repairs |       | 92,158                                                                 |       | 83,061 |   | 9,097 |   | 11.0 | % | 1.8 |   | 1.5 |   |
| Aircraft rentals                            |       | 72,782                                                                 |       | 73,426 |   | (644 | ) | (0.9 | )% | 1.4 |   | 1.3 |   |
| Depreciation and amortization               |       | 54,584                                                                 |       | 54,616 |   | (32 | ) | (0.1 | )% | 1.1 |   | 1.0 |   |
| Station rentals and landing fees            |       | 32,874                                                                 |       | 34,887 |   | (2,013 | ) | (5.8 | )% | 0.6 |   | 0.6 |   |
| Ground handling services                    |       | 25,448                                                                 |       | 32,018 |   | (6,570 | ) | (20.5 | )% | 0.5 |   | 0.6 |   |
| Other                                       |       | 36,471                                                                 |       | 43,509 |   | (7,038 | ) | (16.2 | )% | 0.7 |   | 0.8 |   |
| Total operating expenses                    |       | 631,818                                                                |       | 799,801 |   | (167,983 | ) | (21.0 | )% | 12.3 |   | 14.4 |   |
| Interest                                    |       | 22,951                                                                 |       | 30,295 |   | (7,344 | ) | (24.2 | )% | 0.5 |   | 0.5 |   |
| Total airline expenses                      |       | $                                                                      | 654,769    |   | $ | 830,096 |   | 175,327 |   | (21.1 | )% | 12.8 |   | 14.9 |   |
|                                             |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $151.8 million, or51.9%, during the three months ended March 31, 2009, compared to the threemonths ended March 31, 2008. The average cost per gallon of fuel decreasedto $1.65 per gallon during the three months ended March 31, 2009 from$3.08 during the three months ended March 31, 2008. In addition to thedecrease in the average cost per gallon during the three months ended March 31,2009, United purchased fuel directly from a fuel vendor for our United Expressaircraft operated out of Chicago, San Francisco, Los Angeles and Denver.Midwest also purchased all of its fuel directly from fuel vendors during thethree months ended March 31, 2009, which reduced our total fuel costs andrelated passenger revenue. The following table summarizes the gallons of fuelwe purchased directly, and the change in fuel price per gallon on our fuelexpense, for the periods indicated:

 
| ** **                                                             | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 85,311                                                                 |       | 94,956 |   | (10.2 | )% |
| Average price per gallon                                               |       | $                                                                      | 1.65       |   | $ | 3.08 |   | (46.4 | )% |
| Fuel expense                                                           |       | $                                                                      | 140,629    |   | $ | 292,389 |   | (51.9 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $9.0 million, or 4.9%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. The averagenumber of full-time equivalent employees decreased 9.3% to 13,224 for the threemonths ended March 31, 2009, from 14,578 for the three months ended March 31,2008. The decrease in number of employees was significantly due to Unitedtransitioning 16 stations from SkyWest Airlines to other ground handlers duringthe second quarter of 2008 and reductions in personnel due to the decreasedutilization of our aircraft.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$9.1 million, or 11.0%, during the three months ended March 31, 2009,compared to the three months ended March 31, 2008. The following tablesummarizes the amount of engine overhauls and engine overhaul reimbursementsincluded in our aircraft maintenance expense for the periods indicated (dollaramounts in thousands).

 
| ** **                                                  | ** ** | **For the three months ended March 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                 |       | $                                                                      | 92,158     |   | $ | 83,061 |   | $ | 9,097 |   | 11.0 | % |
| Less: Engine overhaul reimbursed from major  partners       |       | 16,444                                                                 |       | 16,002 |   | 442 |   | 2.8 | % |
| Aircraft maintenance excluding reimbursed  engine overhauls |       | $                                                                      | 75,714     |   | $ | 67,059 |   | $ | 8,655 |   | 12.9 | % |

 

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Aircraft maintenance expense excludingreimbursed engine overhauls, increased $8.7 million, or 12.9%, during the threemonths ended March 31, 2009, compared to the three months ended March 31, 2008.  The increase in maintenance excluding engineoverhaul costs was principally due to scheduled maintenance events on our agingCRJ200 and CRJ700 aircraft and repairs incurred on aircraft damaged during thenormal course of business.

 

Under the United Express and Midwest ServicesAgreements, we recognize revenue at a fixed hourly rate for mature enginemaintenance on regional jet engines. We record the gross amount of thatmaintenance as revenue in our consolidated statements of income, and werecognize engine maintenance expense on our CRJ200 regional jet engines on anas incurred basis as maintenance expense in our consolidated statements ofincome. As a result, during the three months ended March 31, 2009, wecollected and recorded $3.7 million (pretax) of revenue in excess of ourmaintenance expense under the United Express Agreement and the Midwest ServicesAgreement, which is intended to compensate us for the expense of future enginemaintenance overhauls. Under our Delta Connection Agreements we were reimbursedfor engine overhaul costs by Delta. Such reimbursements are reflected aspassenger revenue in our consolidated statements of income.

 

*Aircraft rentals.*  Aircraft rentals decreased $644,000, or 0.9%,during the three months ended March 31, 2009, compared to the three monthsended March 31, 2008. The decrease in aircraft rents was primarily due tothe lease return of eight ATR-72 turboprops.

 

*Depreciation and amortization.*  Depreciation and amortization expensedecreased $32,000, or 0.1%, during the three months ended March 31, 2009,compared to the three months ended March 31, 2008.  The decrease was primarily due to the 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 percent.  The impact of this change decreased our pretax income for the three months ended March 31, 2009 by $1.2 million.  This decease was partially offset by theincrease in depreciation due to the addition of four CRJ900s that were financedusing long-term debt.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $2.0 million, or 5.8%, during the three months ended March 31,2009, compared to the three months ended March 31, 2008. Our station rentsand landing fee costs can be impacted based upon the volume of passengerscarried and the number of departures. The decrease in station rentals and landingfees expense was primarily due to a 5.5% decrease in passengers carried and a5.3% decrease in departures during the three months ended March 31, 2009.

 

*Ground handling service.*  Ground handling service expense decreased$6.6 million, or 20.5%, during the three months ended March 31, 2009,compared to the three months ended March 31, 2008. The decrease in groundhandling was due primarily to United transitioning 16 stations from SkyWestAirlines to other ground handlers during the second quarter of 2008 and a 5.3%decrease in departures during the three months ended March 31, 2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, decreased $7.0 million, or 16.2%, during the three monthsended March 31, 2009, compared to the three months ended March 31,2008. 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 March 31, 2009.

 

*Interest.*  Interest expense decreased $7.3 million,or 24.2%, during the three months ended March 31, 2009 compared to thethree months ended March 31, 2008. The decrease in interest expense wassubstantially due to a decrease in interest rates. At March 31, 2009, wehad variable rate notes representing 45.6% of our total long-term debt . Themajority of our variable rate notes are based on the three-month and six-monthLIBOR rates. At March 31, 2009, the three-month and six-month LIBOR rateswere 1.19% and 1.74%, respectively. At March 31, 2008, the three-month andsix-month LIBOR rates were 2.69% and 2.61%, respectively.

 

*Interest Income.*Interest income decreased $4.0 million, or 59.7% during the three monthsended March 31, 2009, compared to the three months ended March 31,2008. The decrease in interest income was substantially due to a decrease ininterest rates. At March 31, 2009, the three-month and six-month LIBORrates were 1.19% and 1.74%, respectively. At March 31, 2008, thethree-month and six-month LIBOR rates were 2.69% and 2.61%, respectively.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $175.3 million, or 21.1%,during the three months ended March 31, 2009, compared to the three monthsended March 31, 2008. We are reimbursed for our actual fuel costs by ourmajor partners under our contract flying arrangements. We record the amount ofthose reimbursements as revenue. Under the SkyWest Airlines and ASA DeltaConnection Agreements, we are reimbursed for our engine overhaul expense, whichwe record as revenue. The following table summarizes the amount of fuel andengine overhaul expenses which are included in our total airline expenses forthe periods indicated (dollar amounts in thousands).

 

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| ** **                                                 | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                                               | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                      |       | $                                                                      | 654,769    |   | $ | 830,096 |   | $ | (175,327 | ) | (21.1 | )% |
| Less: Fuel expense                                         |       | 140,629                                                                |       | 292,389 |   | (151,760 | ) | (51.9 | )% |
| Less: Engine overhaul reimbursement from  major partners   |       | 16,444                                                                 |       | 16,002 |   | 442 |   | 2.8 | % |
| Total airline expense excluding fuel and  engine overhauls |       | $                                                                      | 497,696    |   | $ | 521,705 |   | $ | (24,009 | ) | (4.6 | )% |

 

Excluding fuel and engine overhaul costs, ourtotal airline expenses decreased $24.0 million, or 4.6%, during the threemonths ended March 31, 2009, compared to the three months ended March 31,2008. The percentage decrease in total airline expenses excluding fuel andengine overhauls, was less than the percentage decrease in ASMs, which isprimarily due to increases in non-engine overhaul maintenance expensesattributable to the increasing age of our fleet.

 

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

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $9.4 million, or $0.16 per diluted share, for the threemonths ended March 31, 2009, compared to $29.1 million, or $0.47 perdiluted share, for the three months ended March 31, 2008.

 

## **Liquidity and Capital Resources**

##  

We had working capital of $818.0 million anda current ratio of 3.0:1 at March 31, 2009, compared to working capital of$733.4 million and a current ratio of 2.7:1 at December 31, 2008. Theincrease in working capital was principally attributable to the $67.3 millionof cash provided by operating activities.

 

The principal sources of cash during thethree months ended March 31, 2009 were $67.3 million provided by operatingactivities, $21.0 million from the proceeds of long-term debt, $16.1 million ofproceeds from the sale of equipment, net sales of $14.8 million of marketablesecurities, the sale of $5.9 million of common stock in connection with theexercise of stock options under our stock option and employee stock purchaseplans and $1.1 million from returns on aircraft deposits.  We invested $40.7 million in flightequipment, made principal payments on long-term debt of $35.5 million,purchased $23.2 million in other assets, repurchased $12.6 million ofoutstanding shares of our common stock, paid $2.3 million in cash dividends andspent $0.5 million for buildings and ground equipment.  These factors resulted in a $11.4 millionincrease in cash and cash equivalents during the three months ended March 31,2009.

 

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

 

Our position in marketable securities,consisting primarily of bonds, bond funds and commercial paper, decreased to$548.7 million at March 31, 2009, compared to $568.6 million at December 31,2008.  The decrease in marketablesecurities was due primarily to the sale of marketable securities and thepurchase of cash equivalent securities.

 

At March 31, 2009, our total capital mixwas 43.5% equity and 56.5% long-term debt, compared to 41.6% equity and 58.4%long-term debt at December 31, 2008.

 

**SignificantCommitments and Obligations**

 

*General*

 

The following table summarizes ourcommitments and obligations stated in calendar years except as noted for eachof the next five years and thereafter (in thousands):

 

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| ** **                                                      | ** ** | **Total**  | ** ** | **Apr-Dec  2009** | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft commitments                                       |       | $          | 531,208    |              | $          | 433,197    |       | $          | 98,011     |       | $          | —     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease payments for aircraft and  facility obligations |       | 3,078,366  |       | 201,853           |       | 323,808    |       | 314,529    |       | 315,422    |       | 307,912    |       | 1,614,842      |       |
| Interest commitments                                            |       | 667,054    |       | 76,002            |       | 85,294     |       | 78,865     |       | 71,623     |       | 63,695     |       | 291,575        |       |
| Principal maturities on long-term debt                          |       | 1,796,992  |       | 104,836           |       | 135,314    |       | 138,899    |       | 189,217    |       | 137,555    |       | 1,091,171      |       |
| Total commitments and obligations                               |       | $          | 6,073,620  |              | $          | 815,888    |       | $          | 642,427    |       | $          | 532,293    |       | $              | 576,262    |   | $ | 509,162 |   | $ | 2,997,588 |   |

 

*Purchase Commitments and Options*

 

On October 12, 2007, we announcedSkyWest Airlines’ plans to acquire 22 additional regional jet aircraft through2010, 18 of which SkyWest Airlines intends to operate under its United ExpressAgreement as part of an aircraft transition plan, allowing United to remove 2330-seat Brasilia turboprops from the contract reimbursement model contemplatedby the United Express Agreement and add 66-seat regional jet aircraft forUnited Express flying. Generally, we anticipate that the Brasilia turbopropremovals under the United Express Agreement are intended to occur in conjunctionwith deliveries of new regional jet aircraft in order to facilitate a smoothtransition in existing markets. Additionally, SkyWest Airlines exchanged fourCRJ200s for four CRJ900s in its Delta Connection operations. These four 50-seatCRJ200s were placed into service under other capacity purchase agreements. In November 2007,SkyWest Airlines placed a firm order with Bombardier for the 22 new aircraft.As of March 31, 2009, SkyWest Airlines has taken delivery of four CRJ900s.SkyWest Airlines is scheduled to take delivery of the remaining 18 aircraftduring 2009 and the first quarter of 2010.

 

On January 9, 2009, we announced thatASA reached an agreement with Delta to operate 10 additional CRJ900 regionaljet aircraft. The aircraft were previously ordered by Delta and are now beingcontracted for flying with ASA. ASA expects to take delivery of these aircraftbetween February and May 2009. As of March 31, 2009, ASA hadtaken delivery of six CRJ900s. ASA intends to use the aircraft as replacementsfor 20 CRJ200s that are scheduled for removal from contract service between April 2010and August 2010, which is earlier than the existing scheduled terminationdates contemplated by the Delta Connection Agreement.

 

Total expenditures for these aircraft andrelated flight equipment, including amounts for contractual price escalations,are estimated to be approximately $531.2 million through the first quarterof 2010. Additionally, SkyWest Airlines’ agreement with Bombardier includesoptions for another 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 substantialportion of our aircraft acquisitions with working capital. Rather, we havegenerally funded our aircraft acquisitions through a combination of operatingleases and long-term debt financing. At the time of each aircraft acquisition,we evaluate the financing alternatives available to us, and select one or moreof these methods to fund the acquisition. In the event that alternativefinancing cannot be arranged at the time of delivery, Bombardier has typicallyfinanced our aircraft acquisitions until more permanent arrangements can bemade. Subsequent to this initial acquisition of an aircraft, we may alsorefinance the aircraft or convert one form of financing to another(e.g., replacing debt financing with leveraged lease financing).

 

At present, we intend to satisfy our 2009firm aircraft purchase commitment, as well as our acquisition of any additionalaircraft, through a combination of operating leases and debt financing,consistent with our historical practices. Based on current market conditionsand discussions with prospective leasing organizations and financialinstitutions, we currently believe that we will be able to obtain financing forour committed acquisitions, as well as additional aircraft, without materiallyreducing the amount of working capital available for our operating activities.Nonetheless, recent disruptions in the credit markets have resulted in greatervolatility, decreased liquidity and limited availability of capital, and thereis no assurance that we will be able to obtain necessary funding or that, if weare able to obtain necessary capital, the corresponding terms will be favorableor acceptable to us.

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term leaseobligations primarily relating to our aircraft fleet. At March 31, 2009,we had 285 aircraft under lease with remaining terms ranging from one to17 years. Future minimum lease payments due under all long-term operatingleases were approximately $3.1 billion at March 31, 2009. Assuming a6.2% discount rate, which is the average rate used to approximate the implicitrates within the applicable aircraft leases, the present value of these leaseobligations would have been equal to approximately $2.1 billion at March 31,2009.

 

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*Long-term Debt Obligations*

 

Our total long-term debt at March 31, 2009 was$1,797.0 million, of which $1,791.1 million related to theacquisition of Brasilia turboprop, CRJ200, CRJ700 and CRJ900 aircraft and$5.9 million related to our corporate office building. The averageeffective interest rate on the debt related to the Brasilia turboprop and CRJaircraft was approximately 5.2% at March 31, 2009.

 

**Seasonality**

 

Our results of operations for any interimperiod are not necessarily indicative of those for the entire period, since theairline industry 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 experienceddifficulties with fuel availability and we currently expect to be able toobtain fuel at prevailing prices in quantities sufficient to meet our futureneeds. Pursuant to our contract flying arrangements, United has agreed to bearthe economic risk of fuel price fluctuations on our contracted United Expressflights. On our Delta Connection regional jet flights, Delta has agreed to bearthe economic risk of fuel price fluctuations. We bear the economic risk of fuelprice fluctuations on our pro-rate operations. As of March 31, 2009,essentially all of our Brasilia turboprops flown for Delta were flown underpro-rate arrangements while, approximately 45% of our Brasilia turboprops flownin the United system were flown under pro-rate arrangements. The average priceper gallon of aircraft fuel decreased 46.5% to $1.65 for the three months endedMarch 31, 2009, from $3.08 for the three months ended March 31, 2008.For illustrative purposes only, we have estimated the impact of the market riskof fuel on our pro-rate operations using a hypothetical increase of 25% in theprice per gallon we purchase. Based on this hypothetical assumption, we wouldhave incurred an additional $1.0 million in fuel expense for the threemonths ended March 31, 2009.

 

Interest Rates

 

Our earnings are affected by changes ininterest rates based on the amounts of variable rate long-term debt and theamount of cash and securities we hold during any given period.  The interest rates applicable to variablerate notes may rise and increase the amount of interest expense.  We would also receive higher amounts ofinterest income on cash and securities held at the time; however, the marketvalue of our available-for-sale securities would likely decline.  At March 31, 2009, we had variable ratenotes representing 45.6% of our total long-term debt compared to 46.6% of ourtotal long-term debt at December 31, 2008. For illustrative purposes only, we have estimated the impact of marketrisk using a hypothetical increase in interest rates of one percentage pointfor both variable rate long-term debt and cash and securities.  Based on this hypothetical assumption, wewould have incurred an additional $2.1 million in interest expense and received$1.8 million additional interest income for the three months ended March 31,2009. However, under our contractual arrangement with our major partners, themajority of the increase in interest expense would be passed through andrecorded as passenger revenue in the consolidated statement of income.

 

We currently intend to finance theacquisition of aircraft through manufacturer financing, third-party leases orlong-term borrowings. Changes in interest rates may impact the actual cost tous to acquire these aircraft. To the extent we place these aircraft in serviceunder our code-share agreements with Delta and United, our code-shareagreements currently provide that reimbursement rates will be adjusted higheror lower to reflect changes in our aircraft rental rates.

 

**ITEM 4.**                    CONTROLS AND PROCEDURES

** **

a)   Evaluation of disclosurecontrols and procedures

 

 Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 under the Securities Exchange Act of1934, as amended (the “Exchange Act”), as of March 31, 2009.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. In addition,the design of disclosure controls and procedures must reflect the fact thatthere are resource constraints and that management is required to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

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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 Internal Control OverFinancial 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.

 

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**PART II. OTHER INFORMATION**

** **

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

** **

We are subject to certain legal actions whichwe consider routine to our business activities. As of March 31, 2009, ourmanagement believed, after consultation with legal counsel, that the ultimateoutcome of such legal matters is not likely to have a material adverse effecton our financial position, liquidity or results of operations. However, thefollowing is 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 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 we believe are payable as weekly scheduled wirepayments to SkyWest and ASA. As of March 31, 2009, we had recognized acumulative total of $32.4 million of revenue associated with fundswithheld by Delta. On February 1, 2008, SkyWest Airlines and ASA filed alawsuit in Georgia 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, and claimsonly a portion of those expenses may be invoiced to Delta. Delta seeksunspecified damages in its Counterclaim.

 

On March 24, 2008, Delta also filed aMotion to Dismiss the Complaint. A hearing on the Motion was held June 5,2008. In an order entered June 13, 2008, the Court granted in part anddenied in part the Motion to Dismiss. The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint. TheCourt denied in part the Motion to Dismiss with respect to the action fordeclaratory judgment contained in the Complaint, and granted in part the Motionto Dismiss to the extent the Complaint seeks to read alternative orsupplemental obligations created by prior conduct into the ConnectionAgreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in the Complaint.SkyWest Airlines and ASA currently intend to vigorously pursue their claims setforth in the Complaint, to the extent permitted by the Court’s ruling on theMotion to Dismiss, and their defenses to Delta’s counterclaims.

 

We have evaluated the Delta dispute inaccordance with the provisions of Statement of Financial Accounting Standard (“SFASNo.5”), Accounting for Contingencies. Based on the provisions of SFAS No. 5,an estimated loss is accrued if the loss is probable and reasonably estimable.Because these conditions have not been satisfied, we have not recorded a lossin our condensed consolidated financial statements as of March 31, 2009.

 

**ITEM 1A.  RISKFACTORS**

** **

There have been no material changes to thefactors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS**

 

Our Board of Directors has adopted a stockrepurchase program which authorizes us to repurchase shares of our common stockin the public market, from time to time, at prevailing prices. The stockrepurchase program currently authorizes the repurchase of up to 15,000,000shares of our common stock. The following table summarizes our purchases underthe stock repurchase program for the three months ended March 31, 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** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| January 1 - January 31, 2009    |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                | 4,643,476  |   |
| February 1 - February 28,  2009 |       | 49,000                                               |       | 10.67                                            |       | 49,000                                                                                                                     |       | 4,594,476                                                                                                           |       |
| March 1 - March 31, 2009        |       | 1,261,140                                            |       | 9.58                                             |       | 1,261,140                                                                                                                  |       | 3,333,336                                                                                                           |       |
| Total                                          |       | 1,310,140                                            |       | $                                                | 9.62       |                                                                                                                       | 1,310,140  |                                                                                                                | 3,333,336  |   |

 

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(1)                                Underresolutions adopted in February 2007, November 2007 and May 2008,our Board of Directors authorized the repurchase of up to 15,000,000 shares ofour common stock. Purchases are made at management’s discretion based on marketconditions and our financial resources.  In addition, effective March 13,2009, we entered into the SkyWest, Inc.Stock Repurchase Plan (the “Stock Repurchase Plan”).  The StockRepurchase Plan provides for the repurchase of up to 3,400,000 shares of ourcommon stock (which are included within, and are not in addition to, the15,000,000 shares of common stock described above) by an independent thirdparty pursuant to trading parameters contemplated by the Stock RepurchasePlan.  As of March 31, 2009, we had spent approximately$241.2 million to purchase and retire approximately 11,666,664 sharesof the 15,000,000 shares of common stock designated for repurchase by ourBoard of Directors. The authorization of our Board of Directors does nothave an expiration date.  The Stock Repurchase Plan expires on March 13,2011.

 

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**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 tothe requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this Quarterly Report on Form 10-Q for thequarter ended March 31, 2009, to be signed on its behalf by theundersigned, thereunto duly authorized, on May 7, 2009.

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

 

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