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**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **

**x**                              QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **

**For the quarterlyperiod ended June 30, 2008**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **

**For the transitionperiodfrom                    to                    **

 

**Commission filenumber 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 markwhether the registrant (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 markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes     o     No     x

 

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

 

| **Class**                   | ** ** | **Outstanding at August 4, 2008** |
|-----------------------------|------------|----------------------------------------|
| Common  stock, no par value |       | 57,025,604                             |

 

 

 

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**SKYWEST,INC.**

** **

**QUARTERLYREPORT ON FORM 10-Q**

 

**TABLE OFCONTENTS**

 
| PART I  | FINANCIAL  INFORMATION: |                                                                                                                     | 3      |
|--------------|-------------------------|--------------------------------------------------------------------------------------------------------------------------|--------|
|         | Item 1.                 | Consolidated  Balance Sheets as of June 30, 2008 (unaudited) and December 31,  2007                            |   | 3 |
|         |                    | Condensed  Consolidated Statements of Income (unaudited) for the three and six months  ended June 30, 2008 and 2007 |   | 5 |
|         |                    | Condensed  Consolidated Statements of Cash Flows (unaudited) for the six months ended  June 30, 2008 and 2007            |   | 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                                                              |   | 26 |
|         | Item 4.                 | Controls and  Procedures                                                                                                 |   | 27 |
|         |                    |                                                                                                                     |   |   |
| PART II | OTHER INFORMATION:      |                                                                                                                     | 28     |
|         | Item 1.                 | Legal Proceedings                                                                                                        |   | 28 |
|         | Item  1A.               | Risk  Factors                                                                                                            |   | 29 |
|         | Item 2.                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             |   | 29 |
|         | Item 4.                 | Submission of  Matters to a Vote of Security Holders                                                                     |   | 30 |
|         | Item 6.                 | Exhibits                                                                                                                 |   | 30 |
|         |                    | Signature                                                                                                                |   | 31 |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

** **

**SKYWEST, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Dollars in Thousands)**

 
| ** **                                      | ** ** | **June 30,  2008** | ** ** | **December 31   2007** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** | ** **                       | ** ** |
| ** **                                      |       |                    |       |                             |       |
| **ASSETS**                                      |       |                    |       |                             |       |
|                                            |       |                    |       |                             |       |
| CURRENT ASSETS:                                 |       |                    |       |                             |       |
| Cash and cash  equivalents                      |       | $                       | 207,399    |                             | $          | 122,802 |   |
| Marketable  securities                          |       | 451,173                 |       | 522,925                          |       |
| Restricted cash                                 |       | 10,681                  |       | 14,705                           |       |
| Income tax  receivable                          |       | 5,444                   |       | 23,114                           |       |
| Receivables, net                                |       | 101,577                 |       | 81,216                           |       |
| Inventories                                     |       | 111,454                 |       | 105,738                          |       |
| Prepaid aircraft  rents                         |       | 237,282                 |       | 223,891                          |       |
| Deferred tax  assets                            |       | 73,285                  |       | 70,523                           |       |
| Other current  assets                           |       | 26,791                  |       | 45,225                           |       |
| Total current  assets                           |       | 1,225,086               |       | 1,210,139                        |       |
|                                            |       |                    |       |                             |       |
| PROPERTY AND  EQUIPMENT:                        |       |                    |       |                             |       |
| Aircraft and  rotable spares                    |       | 3,217,887               |       | 3,146,602                        |       |
| Deposits on  aircraft                           |       | 23,622                  |       | 23,848                           |       |
| Buildings and  ground equipment                 |       | 236,683                 |       | 215,466                          |       |
|                                            |       | 3,478,192               |       | 3,385,916                        |       |
| Less-accumulated  depreciation and amortization |       | (782,786                | )          | (685,327                         | )          |
| Total property  and equipment, net              |       | 2,695,406               |       | 2,700,589                        |       |
|                                            |       |                    |       |                             |       |
| OTHER ASSETS:                                   |       |                    |       |                             |       |
| Intangible  assets, net                         |       | 27,372                  |       | 28,498                           |       |
| Other assets                                    |       | 58,076                  |       | 51,299                           |       |
| Total other  assets                             |       | 85,448                  |       | 79,797                           |       |
| Total assets                                    |       | $                       | 4,005,940  |                             | $          | 3,990,525 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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| ** **                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                         | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ** **                                                                                                         |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                      |       |              |       |                  |       |
|                                                                                                               |       |              |       |                  |       |
| CURRENT  LIABILITIES:                                                                                              |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                              |       | $                 | 124,052    |                  | $          | 118,202 |   |
| Accounts payable                                                                                                   |       | 180,934           |       | 133,728               |       |
| Accrued  salaries, wages and benefits                                                                              |       | 65,812            |       | 67,242                |       |
| Accrued aircraft  rents                                                                                            |       | 19,225            |       | 26,516                |       |
| Taxes other than  income taxes                                                                                     |       | 17,651            |       | 12,433                |       |
| Other current  liabilities                                                                                         |       | 36,456            |       | 40,098                |       |
| Total current  liabilities                                                                                         |       | 444,130           |       | 398,219               |       |
|                                                                                                               |       |              |       |                  |       |
| OTHER LONG-TERM  LIABILITIES                                                                                       |       | 41,066            |       | 40,355                |       |
|                                                                                                               |       |              |       |                  |       |
| LONG-TERM DEBT,  net of current maturities                                                                         |       | 1,686,108         |       | 1,732,748             |       |
|                                                                                                               |       |              |       |                  |       |
| DEFERRED INCOME  TAXES PAYABLE                                                                                     |       | 477,479           |       | 445,993               |       |
|                                                                                                               |       |              |       |                  |       |
| DEFERRED  AIRCRAFT CREDITS                                                                                         |       | 124,833           |       | 127,203               |       |
|                                                                                                               |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                        |       |              |       |                  |       |
| Preferred stock,  5,000,000 shares authorized; none issued                                                         |       | —            |       | —                |       |
| Common stock, no  par value, 120,000,000 shares authorized; 72,779,301 and 72,272,671 shares  issued, respectively |       | 548,972           |       | 533,545               |       |
| Retained  earnings                                                                                                 |       | 933,706           |       | 871,874               |       |
| Treasury stock,  at cost, 16,294,506 and 11,794,056 shares, respectively                                           |       | (249,349          | )          | (158,542              | )          |
| Accumulated  other comprehensive loss                                                                              |       | (1,005            | )          | (870                  | )          |
| Total  stockholders’ equity                                                                                   |       | 1,232,324         |       | 1,246,007             |       |
| Total  liabilities and stockholders’ equity                                                                   |       | $                 | 4,005,940  |                  | $          | 3,990,525 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SKYWEST,INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

(Dollars andShares in Thousands, Except per Share Amounts)

(Unaudited)

 
| ** **                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  revenues:             |       |                                            |       |                                          |       |   |   |   |   |
| Passenger                        |       | $                                               | 943,570    |                                          | $          | 846,356 |   | $ | 1,802,729 |   | $ | 1,626,923 |   |
| Ground handling  and other       |       | 7,250                                           |       | 8,692                                         |       | 16,114 |   | 17,092 |   |
|                             |       | 950,820                                         |       | 855,048                                       |       | 1,818,843 |   | 1,644,015 |   |
| Operating  expenses:             |       |                                            |       |                                          |       |   |   |   |   |
| Flying  operations               |       | 566,840                                         |       | 470,900                                       |       | 1,061,765 |   | 880,962 |   |
| Customer service                 |       | 90,245                                          |       | 107,774                                       |       | 191,692 |   | 225,226 |   |
| Maintenance                      |       | 125,172                                         |       | 96,463                                        |       | 235,497 |   | 190,952 |   |
| Depreciation and  amortization   |       | 54,931                                          |       | 52,175                                        |       | 109,546 |   | 102,453 |   |
| General and  administrative      |       | 40,681                                          |       | 38,881                                        |       | 79,169 |   | 75,993 |   |
|                             |       | 877,869                                         |       | 766,193                                       |       | 1,677,669 |   | 1,475,586 |   |
| Operating income                 |       | 72,951                                          |       | 88,855                                        |       | 141,174 |   | 168,429 |   |
| Other income  (expense):         |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                  |       | 5,009                                           |       | 8,130                                         |       | 11,771 |   | 15,241 |   |
| Interest expense                 |       | (26,221                                         | )          | (31,731                                       | )          | (56,517 | ) | (62,302 | ) |
| Other                            |       | 6,308                                           |       | 278                                           |       | 6,308 |   | 467 |   |
|                             |       | (14,904                                         | )          | (23,323                                       | )          | (38,438 | ) | (46,594 | ) |
| Income before  income taxes      |       | 58,047                                          |       | 65,532                                        |       | 102,736 |   | 121,835 |   |
| Provision for  income taxes      |       | 21,613                                          |       | 24,910                                        |       | 37,162 |   | 46,425 |   |
| Net income                       |       | $                                               | 36,434     |                                          | $          | 40,622 |   | $ | 65,574 |   | $ | 75,410 |   |
|                             |       |                                            |       |                                          |       |   |   |   |   |
| Basic earnings  per share        |       | $                                               | 0.63       |                                          | $          | 0.64 |   | $ | 1.12 |   | $ | 1.18 |   |
| Diluted earnings  per share      |       | $                                               | 0.63       |                                          | $          | 0.62 |   | $ | 1.10 |   | $ | 1.15 |   |
| Weighted average  common shares: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                            |       | 57,377                                          |       | 63,811                                        |       | 58,695 |   | 64,045 |   |
| Diluted                          |       | 58,009                                          |       | 65,245                                        |       | 59,680 |   | 65,541 |   |
|                             |       |                                            |       |                                          |       |   |   |   |   |
| Dividends  declared per share    |       | $                                               | 0.03       |                                          | $          | 0.03 |   | $ | 0.06 |   | $ | 0.06 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SKYWEST,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

(InThousands)

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                    |       |                                              |       |   |   |   |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES              |       | $                                                 | 248,587    |   | $ | 212,949 |   |
|                                                    |       |                                              |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                  |       |                                              |       |   |   |
| Purchases of  marketable securities                     |       | (657,540                                          | )          | (382,716 | ) |
| Sales of  marketable securities                         |       | 723,113                                           |       | 334,226 |   |
| Acquisition /  Disposition of property and equipment:   |       |                                              |       |   |   |
| Aircraft and  rotable spare parts                       |       | (75,668                                           | )          | (255,592 | ) |
| Deposits on  aircraft                                   |       | —                                            |       | (8,704 | ) |
| Buildings and  ground equipment                         |       | (27,946                                           | )          | (23,467 | ) |
| Proceeds from  sales of property and equipment          |       | 1,656                                             |       | 11,290 |   |
| Increase in  other assets                               |       | (1,647                                            | )          | (9,284 | ) |
|                                                    |       |                                              |       |   |   |
| NET CASH USED IN  INVESTING ACTIVITIES                  |       | (38,032                                           | )          | (334,247 | ) |
| ** **                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                  | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Tax benefit from  exercise of common stock options      |       | 170                                               |       | 199 |   |
| Proceeds from  issuance of long-term debt               |       | 17,680                                            |       | 177,792 |   |
| Return of  deposits on aircraft and rotable spare parts |       | 226                                               |       | 11,697 |   |
| Principal payments  on long-term debt                   |       | (58,470                                           | )          | (53,710 | ) |
| Purchase of  treasury stock                             |       | (90,807                                           | )          | (60,217 | ) |
| Net proceeds  from issuance of common stock             |       | 8,970                                             |       | 26,106 |   |
| Payment of cash  dividends                              |       | (3,727                                            | )          | (3,906 | ) |
|                                                    |       |                                              |       |   |   |
| NET CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES    |       | (125,958                                          | )          | 97,961 |   |
|                                                    |       |                                              |       |   |   |
| Increase  (decrease) in cash and cash equivalents       |       | 84,597                                            |       | (23,337 | ) |
| Cash and cash  equivalents at beginning of period       |       | 122,802                                           |       | 415,454 |   |
|                                                    |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD             |       | $                                                 | 207,399    |   | $ | 392,117 |   |
|                                                    |       |                                              |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:      |       |                                              |       |   |   |
|                                                    |       |                                              |       |   |   |
| Cash paid during  the year for:                         |       |                                              |       |   |   |
| Interest, net of  capitalized amounts                   |       | $                                                 | 55,990     |   | $ | 59,476 |   |
| Income taxes                                            |       | $                                                 | 15,783     |   | $ | 216 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**SKYWEST,INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Note A — Condensed Consolidated Financial Statements

 

The condensed consolidatedfinancial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and itswholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) andAtlantic Southeast Airlines, Inc. (“ASA”) included herein have beenprepared, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughSkyWest believes that the following disclosures are adequate to make theinformation presented not misleading. These condensed consolidated financialstatements reflect all adjustments that, in the opinion of management, arenecessary to present fairly the results of operations for the interim periodspresented. All adjustments are of a normal recurring nature, unless otherwisedisclosed. The Company suggests that these condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for the three and six month periods ended June 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results will differ and may differ materially fromthose estimates and assumptions.

 

Note B — Passenger and Ground Handling Revenue

 

The Company recognizespassenger and ground handling revenues when the service is provided.  Under the Company’s contract and pro-rateflying agreements with Delta Air Lines, Inc. (“Delta”), United Air Lines, Inc.(“United”) and Midwest Airlines, Inc. (“Midwest”), revenue is consideredearned when the flight is completed. Revenue is recognized under the Company’s pro-rate flying agreementsbased upon the portion of the pro-rate passenger fare the Company anticipatesthat it will receive.  In the event theCompany has a reimbursement dispute with a major partner, the Company evaluatesthe dispute under the revenue recognition criteria and, provided the revenuerecognition criteria have been met, the Company recognizes revenue based onmanagement’s estimate of the resolution of the dispute .

 

SkyWestAirlines and ASA have each entered into a Delta Connection Agreement withDelta, pursuant to which SkyWest Airlines and ASA provide contract flightservices for Delta. Each of the Delta Connection Agreements provides for afifteen-year term, subject to early termination by Delta, SkyWest Airlines orASA, as applicable, upon the occurrence of certain events. Delta’s terminationrights include (i) cross-termination rights between the two DeltaConnection Agreements, (ii) the right to terminate each of the DeltaConnection Agreements upon the occurrence of certain force majeure events,including certain labor-related events, that prevent SkyWest Airlines or ASAfrom performance for certain periods, and (iii) the right to terminateeach of the Delta Connection Agreements if SkyWest Airlines or ASA fails tomaintain competitive base rate costs, subject to certain adjustment rights. Inaddition to the termination rights, Delta has the right to extend the term ofthe Delta Connection Agreements upon the occurrence of certain events or at theexpiration of the initial term. SkyWest Airlines and ASA have the right toterminate their respective Delta Connection Agreement upon the occurrence ofcertain breaches by Delta, including the failure to cure payment defaults.SkyWest Airlines and ASA also have cross-termination rights between the twoDelta Connection Agreements.

 

Underthe terms of the SkyWest Airlines Delta Connection Agreement, Delta has agreedto compensate SkyWest Airlines for the direct costs associated with operatingthe Delta Connection flights, plus a payment based on block hours flown. TheSkyWest Airlines Delta Connection Agreement establishes a multi-year rate resetprovision. In the SkyWest Airlines Delta Connection Agreement, the fixed-feerates are specifically defined through 2009. The parties agreed that on or after a specified date in 2010 the partiesagree to reset such rates to reflect SkyWest Airlines actual costs in 2010(with a similar process on each 5th year thereafter).  Under the terms ofthe ASA Delta Connection Agreement, Delta has agreed to compensate ASA for itsdirect costs associated with operating the Delta Connection flights, plus, ifASA completes a certain minimum percentage of its Delta Connection flights, anadditional percentage of such costs. Additionally, ASA’s Delta

 

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Connection Agreement provides for the payment of incentive compensationupon satisfaction of certain performance goals. The incentives are defined inthe ASA Delta Connection Agreement as being measured and determined on amonthly and quarterly basis.  At the endof each quarter, the Company calculates the incentives achieved during thequarter and recognizes revenue accordingly.  Under the ASA Delta Connection Agreement, excess margins over certainpercentages must be returned or shared with Delta, depending on variousconditions. The parties to the Delta Connection Agreements make customaryrepresentations, warranties and covenants, including with respect to variousoperational, marketing and administrative matters.

 

EffectiveJuly 31, 2003, SkyWest Airlines entered into a United Express Agreement,which sets forth the principal terms and conditions governing SkyWest Airlines’United Express operations. Under the terms of the United Express Agreement,SkyWest Airlines is compensated primarily on a fee-per-completed-block hour anddeparture basis and is reimbursed for fuel and other costs. Additionally,SkyWest Airlines is eligible for incentive compensation upon the achievement ofcertain performance criteria.  Theincentives are defined in the United Express Agreement as being measured anddetermined on a monthly basis.  At theend of each month, the Company calculates the incentives achieved during themonth and recognizes revenue accordingly.

 

SkyWestAirlines and Midwest are parties to an Airlines Services Agreement entered intoon December 20, 2006 (the “Midwest Services Agreement”). Under the termsof the Midwest Services Agreement, SkyWest Airlines has agreed to operate up to25 Bombardier CRJ200 Regional Jets (“CRJ200s”) under Midwest’s code. Inexchange for SkyWest Airlines’ obligation to provide the designated number offlights and performing other obligations under the Midwest Services Agreement,Midwest has agreed to pay SkyWest Airlines on a weekly basis a fixed-fee percompleted block hour, fixed-fee per completed departure, a fixed-fee foroverhead, and a reimbursement of certain direct costs when a new aircraft isdelivered. The Midwest Services Agreement provides for incentives or penaltiesbased 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,the Company was notified that Midwest was in the process of organizing afinancial restructuring.  During thethree months ended June 30, 2008, Midwest did not make scheduled weeklypayments of $3.3 million.  The Companybelieves the collectibility of these missed wire payments is not probable.  Therefore, the Company did not recognize therevenue associated with the missed payments in the Company’s CondensedConsolidated Statements of Income for the three and six months ended June 30,2008.   During July 2008, Midwestresumed making a portion of the scheduled payments applicable to the month ofJuly.

 

TheCompany’s revenues could be impacted by a number of factors, including changesto the Company’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 agreementsand Midwest’s proposed financial restructuring.

 

#### Note C — StockCompensation

####  

Thefair value of stock options granted by the Company has been estimated as of thegrant date using the Black-Scholes option pricing model. The Company accountsfor share-based compensation  inaccordance with Statement of Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”).  During the six and three-month periods ended June 30,2008, the Company granted options to purchase 356,413 and 4,976 shares ofcommon stock, respectively, under the SkyWest, Inc. Long-Term IncentivePlan (“2006 Incentive Plan”).  Thefollowing table shows the assumptions used and weighted average fair value for stockoption grants during the six months ended June 30, 2008.

 
| Expected annual  dividend rate                |   | 0.47 | %      |
|-----------------------------------------------|--------|------|--------|
| Risk-free  interest rate                      |   | 2.39 | %      |
| Average expected  life (years)                |   | 4.3  |   |
| Expected  volatility of common stock          |   | .264 |   |
| Forfeiture rate                               |   | 4.5  | %      |
| Weighted average  fair value of option grants |   | $    | 6.32   |   |
|                                               |        |      |        |  |

 

Duringthe three and six month periods ended June 30, 2008, the Company granted1,145 and 295,919 shares of restricted stock, respectively, to the Company’semployees under the 2006 Incentive Plan. The restricted stock has a 

 

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three-year vestingperiod, during which the recipient must remain employed with SkyWest or one ofSkyWest’s subsidiaries.  Additionally,during the six months ended June 30, 2008, the Company granted 13,304fully-vested shares of common stock to the Company’s directors.  The weighted average fair value of the sharesof restricted stock and stock issued to the Company’s directors on the date ofgrant was $25.74 per share.

 

Asrequired by SFAS No. 123(R), the Company records share-based compensationexpense only for those options and shares of restricted stock that are expectedto vest.  The estimated fair value of thestock options is amortized over the vesting period of the respective stockoption grants.  During the three monthsended June 30, 2008 and 2007, the Company recorded pre-tax share-basedcompensation expense of $2.6 million and $3.9 million, respectively.  During the six months ended June 30,2008 and 2007, the Company recorded pre-tax share-based compensation expense of$6.0 million and $7.6 million, respectively.

 

Note D — Net Income PerCommon Share

 

Basic net income per commonshare (“Basic EPS”) excludes dilution and is computed by dividing net income bythe weighted average number of common shares outstanding during the period.Diluted net income per common share (“Diluted EPS”) reflects the potentialdilution that could occur if stock options or other contracts to issue commonstock were exercised or converted into common stock. The computation of DilutedEPS does not assume exercise or conversion of securities that would have ananti-dilutive effect on net income per common share. During the three monthsended June 30, 2008 and 2007 options to acquire 4,267,000 and 22,000shares, respectively, were excluded from the computation of Diluted EPS astheir impact was anti-dilutive.  Duringthe six months ended June 30, 2008 and 2007 options to acquire 3,149,000and 192,000 shares, respectively, were excluded from the computation of DilutedEPS as their impact was anti-dilutive.

 

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

 
| ** **                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| **Numerator**                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Net Income                                                                 |       | $                                                   | 36,434     |                                              | $          | 40,622 |   | $ | 65,574 |   | $ | 75,410 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Denominator**                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average  number of common shares outstanding                      |       | 57,377                                              |       | 63,811                                            |       | 58,695 |   | 64,045 |   |
| Effect of  outstanding stock compensation                                  |       | 632                                                 |       | 1,434                                             |       | 985 |   | 1,496 |   |
| Weighted average  number of shares for Diluted net income per common share |       | 58,009                                              |       | 65,245                                            |       | 59,680 |   | 65,541 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings  per share                                                  |       | $                                                   | 0.63       |                                              | $          | 0.64 |   | $ | 1.12 |   | $ | 1.18 |   |
| Diluted earnings  per share                                                |       | $                                                   | 0.63       |                                              | $          | 0.62 |   | $ | 1.10 |   | $ | 1.15 |   |

 

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Note E — Comprehensive Income

 

The Company reportscomprehensive income in accordance with SFAS No. 130, *Reporting**Comprehensive Income* (“SFAS 130”). SFAS130 establishes standards for reporting and displaying comprehensive income andits components in the Company’s financial statements. Comprehensive incomeincludes charges and credits to stockholders’ equity that are not the result oftransactions with shareholders.  Also,comprehensive income consisted of net income plus changes in unrealizeddepreciation on marketable securities, net of tax, for the periods indicated(in thousands):

 
| ** **                                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                                     | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Income**                                                |       | $                                                   | 36,434     |                                              | $          | 40,622 |   | $ | 65,574 |   | $ | 75,410 |   |
| Unrealized  depreciation on marketable  securities, net of tax |       | (200                                                | )          | (345                                              | )          | (135 | ) | (283 | ) |
|                                                           |       |                                                |       |                                              |       |   |   |   |   |
| **Comprehensive  income**                                      |       | $                                                   | 36,234     |                                              | $          | 40,277 |   | $ | 65,439 |   | $ | 75,127 |   |

 

Note F — Long-term Debt

 

Long-term debt consistedof the following for the periods indicated (in thousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                    | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| Notes payable to  banks, due in semi-annual installments, variable interest based on LIBOR, or  with interest rates ranging from 3.61% to 7.13% through 2012 to 2020, secured  by aircraft                                    |       | $                       | 553,776    |                        | $          | 577,390 |   |
| Notes payable to  a financing company, due in semi-annual installments, variable interest based  on LIBOR, or with interest rates ranging from 3.19% to 7.52% through 2007 to  2021, secured by aircraft                      |       | 613,311                 |       | 611.995                     |       |
| Notes payable to  banks, due in semi-annual installments plus interest at 6.06% to 7.18%  through 2021, secured by aircraft                                                                                                   |       | 239,628                 |       | 265,706                     |       |
| Notes payable to  a financing company, due in semi-annual installments plus interest at 5.78%  to 6.23% through 2019, secured by aircraft                                                                                     |       | 95,244                  |       | 80,585                      |       |
| Notes payable to  a financing company, due in monthly installments plus interest at 6.47% to  7.90% through 2025, secured by aircraft                                                                                         |       | 267,862                 |       | 272,475                     |       |
| Notes payable to  banks, due in monthly installments plus interest of 6.05% through 2020,  secured by aircraft                                                                                                                |       | 26,797                  |       | 27,725                      |       |
| 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 |       | 7,265                   |       | 8,569                       |       |
| Notes payable to  a bank, due in monthly installments interest based on LIBOR through 2012,  interest rate at 7.9% secured by building                                                                                        |       | 6,277                   |       | 6,505                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                       | 1,810,160  |                        | $          | 1,850,950 |   |
|                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Less current  maturities                                                                                                                                                                                                      |       | (124,052                | )          | (118,202                    | )          |
|                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Long-term debt,  net of current maturities                                                                                                                                                                                    |       | $                       | 1,686,108  |                        | $          | 1,732,748 |   |

 

At June 30, 2008, the three-month and six-monthLIBOR rates were 2.78% and 3.11%, respectively.   At December 31, 2007, the three-monthand six-month LIBOR rates were 4.70% and 4.60%, respectively.

 

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Note G — Commitments and Contingencies

 

The Company leases 287aircraft, as well as airport facilities, office space, and various otherproperty and equipment under non-cancelable operating leases which aregenerally on a long-term, net rent basis where the Company pays taxes,maintenance, insurance and certain other operating expenses applicable to theleased property.  The Company expectsthat, in the normal course of business, leases that expire will be renewed orreplaced by other leases.  The following table summarizes futureminimum rental payments required under operating leases that have initial orremaining non-cancelable lease terms in excess of one year as of June 30,2008 (in thousands):

 
| July through  December 2008 |   | $         | 142,725   |   |
|---------------------------------------|--------|-----------|-----------|--------|
| 2009                                  |   | 330,766   |      |
| 2010                                  |   | 313,295   |      |
| 2011                                  |   | 301,609   |      |
| 2012                                  |   | 302,085   |      |
| Thereafter                            |   | 1,826,409 |      |
|                                  |   | $         | 3,216,889 |   |

 

Note H — Fair ValueMeasurements

 

In September 2006,the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157,*Fair Value Measurements** *(“SFAS No. 157”). SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with accounting principles generally accepted in the United States,and expands disclosures about fair value measurements. The Company adopted theprovisions of SFAS No. 157 as of January 1, 2008, for financialinstruments. Although the adoption of SFAS No. 157 did not materially impactthe Company’s financial condition, results of operations or cash flows, SFAS157 requires the presentation of the following disclosures in these notes tocondensed consolidated financial statements.

 

SFAS No. 157describes three levels of inputs that may be used to measure fair value:

 

*Level 1*- Quotedprices in active markets for identical assets or liabilities.

 

*Level 2*- Observable inputs other thanLevel 1 prices such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable orcan be corroborated by observable market data for substantially the full termof the assets or liabilities.  Some of the Company’s marketablesecurities primarily utilize broker quotes in a non-active market for valuationof these securities.

 

*Level 3*- Unobservable inputs that aresupported by little or no market activity and that are significant to the fairvalue of the assets or liabilities, therefore requiring an entity to developits own assumptions.

 

As of June 30,2008, the Company held certain assets that are required to be measured at fairvalue on a recurring basis.  The Company has invested in auction ratesecurity instruments, which are classified as available for sale securities andreflected at fair value.  However, due to recent events in creditmarkets, the auction events for some of these instruments held by the Companyfailed during the six months ended June 30, 2008.  Therefore,quoted prices in active markets are no longer available and the fair values ofthese securities are estimated utilizing a discounted cash flow analysis as of June 30,2008.  These analyses consider, among other items, thecollateralization underlying the security investments, the creditworthiness ofthe counterparty, the timing of expected future cash flows, and the expectationof the next time the security is expected to have a successful auction.

 

As aresult of the temporary declines in fair value for the Company’s auction ratesecurities, which the Company attributes to liquidity issues rather than creditissues, it has recorded an unrealized loss of $0.4 million to accumulated othercomprehensive income.  As of June 30, 2008, the Company owned$10.9 million of auction rate security instruments.  The majority of the auction rate securityinstruments held by the Company at June 30, 2008 were tax-exempt municipalbond investments, for which the market has recently had a few successfulauctions.  For the securities that haveannounced call dates (approximately $4.9 million), the Company has classifiedthese investments as current and has identified them as “Marketable Securities”on the unaudited Consolidated Balance Sheet as of June 30, 2008.  For the securities that have not announced acall date (approximately $6.0 million), the Company has classified theinvestments as non-current and has 

 

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identified them as “Other Assets” in the unaudited  Consolidated Balance Sheet as of June 30,2008. The Company has classified these securities as non current due to theCompany’s belief that the market for these securities may take in excess oftwelve months to fully recover. As of June 30, 2008, the Company continuedto earn interest on all of its auction rate securityinstruments.  Any future fluctuations in fair value related to theseinstruments that the Company deems to be temporary, including any recoveries ofprevious write-downs, would be recorded to accumulated other comprehensiveincome.  If the Company determines that any future valuationadjustment was other than temporary, it intends to record a charge to earningsas appropriate.

 

TheCompany’s assets measured at fair value on a recurring basis subject to thedisclosure requirements of SFAS No. 157 at June 30, 2008, were asfollows (in thousands):

 
| ** **                                  | ** ** | **Fair Value Measurements as of June 30, 2008** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                                          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                        |       |                                                                               |       |   |   |   |   |   |   |
| Cash, Cash Equivalents  and Restricted Cash |       | $                                                                                  | 218,080    |   | $ | 218,080 |   | $ | — |   | $ | — |   |
| Marketable  Securities                      |       | 451,173                                                                            |       | 29,441 |   | 416,870 |   | 4,862 |   |
| Other Assets                                |       | 6,044                                                                              |       | — |   | — |   | 6,044 |   |
| Total Assets  Measured at Fair Value        |       | $                                                                                  | 675,297    |   | $ | 247,521 |   | $ | 416,870 |   | $ | 10,906 |   |

 

Basedon market conditions, the Company uses a discounted cash flow valuationmethodology for auction rate securities.  Accordingly, for purposesof the foregoing condensed consolidated financial statements, these securitieswere categorized as Level 3 securities within SFAS No. 157’s hierarchy.

 

Thefollowing table presents the Company’s assets measured at fair value on arecurring basis using significant unobservable inputs (Level 3) as defined inSFAS 157 at June 30, 2008 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs(Level 3)

 

| ** **                                       | ** ** | **Auction Rate  Securities** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
|                                             |       |                              |       |
| Transferred in  during the period of adoption    |       | $                                 | 123,600    |   |
| Total realized  and unrealized gains or (losses) |       |                              |       |
| Included in  earnings                            |       | —                            |       |
| Included in  other comprehensive income          |       | (394                              | )          |
| Net purchases  and (settlements)                 |       | (112,300                          | )          |
| Balance at  June 30, 2008                   |       | $                                 | 10,906     |   |

 

Note I  — StockRepurchase

 

Since2007, the Company has been authorized by its Board of Directors to repurchaseup to 15 million shares of common stock in the public market. During thethree and six months ended June 30, 2008, the Company repurchased 1.4million and 4.5 million shares of common stock, respectively, forapproximately $21.8 million and $90.8 million, respectively, at a weightedaverage price per share of $15.91 and $20.18, respectively.

 

Note J — Other Income

 

Duringthe three months ended June 30, 2008, the Company negotiated the principalterms of a new Capacity Purchase Agreement with Continental Airlines, Inc.(“Continental”), which was intended to become effective if  the Company had successfully completed itsproposed acquisition of the outstanding shares of capital stock of ExpressJetHoldings, Inc. (“ExpressJet”). During the course of those negotiations, Continental agreed it would paythe Company a break-up fee under certain circumstances in the event the Company’sefforts to acquire ExpressJet were not successful.  In June 2008, ExpressJet reached termsdirectly with Continental on a new capacity purchase agreement, andaccordingly, the Company was precluded from completing the acquisition ofExpressJet.  As a result, the Companyreceived the break-up fee from Continental during the quarter ended June 30,2008.  The break-up fee, net of theCompany’s direct transaction costs, was $6.3 million (pre-tax) and was recordedas other income during the quarter.

 

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Note K — Legal Matters

 

TheCompany is subject to certain legal actions which it considers routine to itsbusiness activities. As of June 30, 2008, management believes, afterconsultation with legal counsel, that the ultimate outcome of such legalmatters is not likely to have a material adverse effect on the Company’sfinancial position, liquidity or results of operations.  However, the following is a significantoutstanding legal matter.

 

*ASAand SkyWest Airlines v. Delta Air Lines*

 

Duringthe quarter ended December 31, 2007, Delta notified the Company, SkyWestAirlines and ASA of a dispute under the Delta Connection Agreements executed byDelta with SkyWest Airlines and ASA. The dispute relates to allocation ofliability for certain irregular operations (“IROP”) expenses that are paid bySkyWest Airlines and ASA to their passengers under certain situations. As aresult, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest and ASAduring December 2007. Delta continues to withhold a portion of thefunds the Company believes are payable as weekly scheduled wire payments toSkyWest and ASA.  As of June 30,2008, Delta had withheld approximately $32.5 million that the Companybelieves is payable to SkyWest Airlines and ASA pursuant to the DeltaConnection Agreements. On February 1, 2008, SkyWest Airlines and ASA fileda lawsuit in Georgia state court disputing Delta’s treatment of the matter (the“Complaint”).  Delta filed an Answer to the Complaint and aCounterclaim against SkyWest Airlines and ASA on March 24, 2008.  Delta’s Counterclaim alleges that ASA andSkyWest Airlines breached the Delta Connection Agreements by invoicing Deltafor the IROP expenses that were paid pursuant to Delta’s policies, and claims onlya portion of those expenses may be invoiced to Delta.  Delta seeks unspecified damages in itsCounterclaim.

 

On March 24,2008, Delta also filed a Motion 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 and denied in part the Motion to Dismiss.  The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint.  The Court denied in part the Motion toDismiss with respect to the action for declaratory judgment contained in theComplaint, and granted in part the Motion to Dismiss to the extent theComplaint seeks to read alternative or supplemental obligations created byprior conduct into the Connection Agreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in theComplaint.  SkyWest Airlines and ASA currently intend tovigorously pursue their claims set forth in the Complaint, to the extent permittedby the Court’s ruling on the Motion to Dismiss, and their defenses toDelta’s counterclaims.

 

TheCompany has evaluated the Delta dispute in accordance with the provisions ofFinancial Accounting Standards Board No. 5 (“FASB No.5”), Accounting forContingencies. Based on the provisions of FASB No. 5, an estimated loss isaccrued if the loss is probable and reasonably estimable. Because theseconditions have not been satisfied, the Company has not recorded a loss inthe condensed consolidated financial statements as of June 30, 2008.

 

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**Cautionary Statement Concerning Forward-LookingStatements**

 

Certain of the statements contained in this Reportshould be considered “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements may beidentified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,”“estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue”and similar terms used in connection with statements regarding SkyWest’soutlook, the revenue environment, SkyWest’s contract relationships, and SkyWest’sexpected financial performance.  Thesestatements include, but are not limited to, statements about SkyWest’s futuregrowth and development plans, including SkyWest’s future financial andoperating results, SkyWest’s plans for SkyWest Airlines and ASA, SkyWest’sobjectives, expectations and intentions, and other statements that are nothistorical facts.  You should also keep in mind that allforward-looking statements are based on SkyWest’s existing beliefs aboutpresent and future events outside of SkyWest’s control and on assumptions thatmay prove to be incorrect.  If one ormore risks identified in this Report materializes, or any other underlyingassumption proves incorrect, SkyWest’s actual results will vary, and may varymaterially from those anticipated, estimated, projected, or intended.

 

There may be other factors not identified above ofwhich SkyWest is not currently aware that may affect matters discussed in theforward-looking statements, and may also cause actual results to differmaterially from those discussed.  SkyWestassumes no obligation to publicly update any forward-looking statement toreflect actual results, changes in assumptions or changes in other factorsaffecting these statements other than as required by law.

 

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

** **

*Thefollowing discussion and analysis presents factors that had a material effecton the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”)during the three and six months ended June 30, 2008 and 2007. Alsodiscussed is our financial position as of June 30, 2008 and December 31,2007. You should read this discussion in conjunction with our condensedconsolidated financial statements for the three and six months ended June 30,2008, including the notes thereto, appearing elsewhere in this Report.  This discussion and analysis containsforward-looking statements. Please refer to the sections of this Reportentitled “Cautionary Statement Concerning Forward-Looking Statements” and “RiskFactors” for discussion of the uncertainties, risks and assumptions associatedwith these statements.*

 

**Overview**

 

Throughour wholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”)and Atlantic Southeast Airlines, Inc. (“ASA”), we operate the largestregional airline in the United States.  As of June 30, 2008, SkyWestAirlines and ASA offered scheduled passenger and air freight service withapproximately 2,600 total daily departures to 238 destinations in the UnitedStates, Canada, Mexico and the Caribbean.  Additionally, we provide groundhandling services for approximately ten other airlines.  As of June 30, 2008, our consolidatedfleet consisted of 442 aircraft, including 250 Bombardier CRJ200 Regional Jets(“CRJ200s”) (67 assigned to United Air Lines, Inc. (“United”), 162assigned to Delta Air Lines, Inc. (“Delta”) and 21 assigned to MidwestAirlines, Inc. (“Midwest”)), 104 Bombardier CRJ700 Regional Jets (“CRJ700s”)(52 assigned to United and 52 assigned to Delta), 17 Bombardier CRJ900 RegionalJets (“CRJ900s”) (all assigned to Delta), 59 Embraer EMB-120 Brasiliaturboprops (“Brasilia turboprops”) (46 assigned to United and 13 assigned toDelta), and 12 Avions de Transport 72-210 turboprops (“ATR-72 turboprops”) (allassigned to Delta).  We believe oursuccess in attracting multiple contractual relationships with major airlinepartners is attributable to our delivery of high-quality customer service withan all cabin-class fleet at a competitive cost structure.  For the six months ended June 30, 2008,approximately 56.9% of our aggregate capacity was operated under the Deltacode, approximately 39.2% was operated under the United code and approximately3.9% was operated under the Midwest code.

 

SkyWestAirlines has been a partner with Delta in Salt Lake City and United in LosAngeles since 1987 and 1997, respectively. In 1998, SkyWest Airlines expandedits relationship with United to provide service in Portland, Seattle/Tacoma,San Francisco and additional Los Angeles markets. In 2004, SkyWest Airlinesexpanded its United Express operations to provide service in Chicago. SkyWestAirlines and Midwest entered into the Midwest Services Agreement in December 2006.SkyWest Airlines serves markets from Midwest’s hubs in Milwaukee and KansasCity. As of June 30, 2008, SkyWest Airlines operated as a Delta Connectioncarrier in Salt Lake City, a United Express carrier in Los Angeles, SanFrancisco, Denver, Chicago and the Pacific Northwest, and a Midwest Connectcarrier in Milwaukee and Kansas City operating more 

 

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than 1,800 total daily flights.

 

ASAhas been a code-share partner with Delta in Atlanta since 1984. ASA expandedits operations as a Delta Connection carrier to also include Cincinnati andSalt Lake City in September 2002 and April 2003, respectively. ASAoperates approximately 850 daily flights, all in the Delta Connection system.

 

Weprovide a substantial majority of the regional airline service for Delta inAtlanta and Salt Lake City. In connection with our acquisition of ASA in September 2005,we established new, separate, but substantially similar, long-term fixed-feeDelta Connection Agreements with Delta for both SkyWest Airlines and ASA. Wealso obtained the right to use 29 gates in the Hartsfield-Jackson InternationalAirport located in Atlanta, from which we currently provide service to Delta.Delta has also agreed that if Delta solicits requests for proposals to flyDelta Connection regional aircraft, ASA will be permitted to bid to maintainthe same percentage of total Delta Connection regional jet flights that itoperated during 2007, and, if ASA does not achieve the winning bid for theproposed flying, ASA will be permitted to match the terms of the winning bid tothe extent necessary for ASA to maintain its percentage of Delta Connectionregional jet flying that it operated during 2007.

 

Historically,multiple contractual relationships have enabled us to reduce reliance on anysingle major airline code and to enhance and stabilize operating resultsthrough a mix of contract flying and our controlled or “pro-rate” flying. Forthe six months ended June 30, 2008, contract flying revenue and pro-raterevenue represented approximately 97% and 3%, respectively, of our totalpassenger revenues. On contract routes, the major airline partner controlsscheduling, ticketing, pricing and seat inventories and we are compensated bythe major airline partner at contracted rates based on the completed blockhours, flight departures and other operating measures. On pro-rate flights, wecontrol scheduling, ticketing, pricing and seat inventories and receive apro-rated portion of passenger fares. As of June 30, 2008, essentially allof our Brasilia turboprops flown for Delta were flown under pro-ratearrangements, while approximately 58% of our Brasilia turboprops flown in theUnited system were flown under contractual arrangements, with the remaining 42%flown under pro-rate arrangements.

 

**FinancialHighlights**

 

We had revenues of $950.8 million for the three monthsended June 30, 2008, an 11.2% increase, compared to revenues of $855.0million for the three months ended June 30, 2007.  We had net income of $36.4 million for thethree months ended June 30, 2008, a decrease of 10.3%, or $0.63 perdiluted share compared to $40.6 million of net income or $0.62 per dilutedshare, for the three months ended June 30, 2007.

 

Thesignificant items affecting our financial performance during the second quarterof 2008 are outlined below:

 

Duringthe three months ended June 30, 2008, we negotiated the principal terms ofa new Capacity Purchase Agreement with Continental Airlines, Inc. (“Continental”),which was intended to become effective if we had successfully completed ourproposed acquisition of the outstanding shares of capital stock of ExpressJetHoldings, Inc. (“ExpressJet”). During the course of those negotiations, Continental agreed it would payus a break-up fee under certain circumstances in the event our efforts toacquire ExpressJet were not successful. In June 2008, ExpressJet reached terms directly with Continental ona new capacity purchase agreement, and accordingly, we were precluded fromcompleting the acquisition of ExpressJet. As a result, we received the break-up fee from Continental during thequarter ended June 30, 2008.  Thebreak-up fee, net of our direct transaction costs, was $6.3 million (pre-tax)and was recorded as other income during the quarter.

 

We were notified in June thatMidwest was in the process of working through a financial restructuring.  As of June 30, 2008, we had a receivableof $3.3 million due from Midwest.  Basedon the uncertain financial position of Midwest, we recorded a full reserveagainst the $3.3 Midwest receivable, which was reflected as a reduction torevenue during the quarter.

 

Weare at risk for the increase in fuel prices on our pro-rate flying operations,whereby we receive a pro-rated portion of the passenger fare as revenue.  As of June 30, 2008, we operated a totalof 35 Brasilia turboprops under separate pro-rate agreements with Delta andUnited. During the quarter ended June 30, 2008, the cost of fuel associatedwith the pro-rate operations increased approximately $4.4 million (pre-tax)compared to the prior period.

 

We had revenues of $1.82 billion for the six monthsended June 30, 2008, a 10.6% increase, compared to revenues of $1.64billion for the six months ended June 30, 2007.  We had net income of $65.6 million for thesix months ended June 

 

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30, 2008, a decrease of 13.0%, or $1.10 per diluted share compared to$75.4 million of net income or $1.15 per diluted share, for the six monthsended June 30, 2007.

 

Total ASMs for the six months ended June 30,2008  increased 1.8%, compared to the sixmonths ended June 30, 2007, primarily as a result of an increase in ourfleet size to 442 aircraft as of June 30, 2008, from 434 aircraft as of June 30,2007.  During the six months ended June 30,2008, we acquired two used CRJ700s and 4 used CRJ 200s from anotheroperator.  During the six months ended June 30,2008, we generated 11.3 billion ASMs, compared to 11.1 billion ASMs during thesame period of 2007.

 

At June 30, 2008, we had approximately $669.3million in cash and cash equivalents, restricted cash and marketablesecurities, compared to approximately $660.4 million as of December 31,2007.  The two CRJ700s we acquired duringthe six months ended June 30, 2007 were acquired under subleasearrangements with a major partner at nominal monthly amounts. The four CRJ200swere financed with long-term debt.

 

**Outlook**

 

On October 12,2007, we announced that SkyWest Airlines plans to acquire 22 additionalregional jet aircraft through 2010, 18 of which SkyWest Airlines intends tooperate for United Express, as part of an aircraft transition plan, allowingUnited Express to remove 23 30-seat Brasilia turboprops from the contractreimbursement model in the United Express Agreement and add 66 seat regionaljet aircraft for United Express flying. Generally, the turboprop removals areintended to occur in conjunction with deliveries of new regional jet aircraftin order to ensure a smooth transition in existing markets. Additionally,SkyWest Airlines intends to exchange four 50-seat CRJ200s for four CRJ900sconfigured with 76 seats in its Delta Connection operations. On November 30,2007, we announced that we placed a firm order for 22 aircraft with BombardierAerospace (“Bombardier”). We are scheduled to take delivery of these aircraftbeginning in late 2008 and continue through the first quarter of 2010.

 

In June 2008,we were notified that Midwest was in the process of organizing a financialrestructuring.  In the event of a Midwestbankruptcy filing, Midwest may reject our contract in the bankruptcyproceedings. The Airline Services Agreement we executed with Midwest on December 20,2006 (the”Midwest Services Agreement”) currently provides for the operation of21of our CRJ200s. For the six months ended June 30, 2008 approximately3.9% of our ASMs were generated under the Midwest code.

 

**Critical Accounting Policies**

 

Oursignificant accounting policies are summarized in Note 1 to our consolidatedfinancial statements for the year ended December 31, 2007, which arepresented in our Annual Report on Form 10-K filed with the SEC on February 26,2008, except as updated below.  Criticalaccounting policies are those policies that are most important to thepreparation of our consolidated financial statements and require management’ssubjective and complex judgments due to the need to make estimates about theeffect of matters that are inherently uncertain. Our critical accountingpolicies relate to revenue recognition, aircraft maintenance, aircraft leases,impairment of long-lived assets and intangibles and stock-based compensationexpense. The application of these accounting policies involves the exercise ofjudgment and the use of assumptions as to future uncertainties and, as aresult, actual results will differ, and could differ materially from suchestimates.

 

*Fair value*

 

We haveadopted Statement of Financial Accounting Standard (“SFAS”) No. 157 “FairValue Measurements” (SFAS 157) as it applies to financial assets andliabilities effective January 1, 2008.  SFAS 157 defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles (GAAP) and enhances disclosures about fair valuemeasurements. Fair value is defined under SFAS 157 as the exchange price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurementdate.   For additional information on the fair value of certainfinancial assets and liabilities, see Note H to the condensed consolidatedfinancial statements for additional information.

 

UnderSFAS 157, we utilize several valuation techniques in order to assess the fairvalue of our financial assets and liabilities. Our cash and cash equivalentsprimarily utilize quoted prices in active markets for identical assets orliabilities.

 

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The non auction rate  marketablesecurities are valued using quoted prices in active markets for identicalassets or liabilities.  If a quoted priceis not available, we utilize broker quotes in a non-active market for valuationof these securities.   For auction ratesecurity instruments a quoted price in active markets are no longer availableand the fair values of these securities are estimated utilizing a discountedcash flow.

 

**Results of Operations**

 

**Three Months Ended June 30, 2008 and 2007**

 

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

 
| ** **                                     | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue  passenger miles (000)                 |       | 4,496,464                                                             |       | 4,661,303 |   | (3.5 | )% |
| Available seat  miles (“ASMs”) (000) |       | 5,717,958                                                             |       | 5,803,018 |   | (1.5 | )% |
| Block hours                                    |       | 353,723                                                               |       | 358,286 |   | (1.3 | )% |
| Departures                                     |       | 226,176                                                               |       | 227,414 |   | (0.5 | )% |
| Passengers  carried                            |       | 8,794,735                                                             |       | 8,932,439 |   | (1.5 | )% |
| Passenger load  factor                         |       | 78.6                                                                  | %          | 80.3 | % | (1.7 | )pts |
| Revenue per  available seat mile               |       | 16.6                                                                  | ¢     | 14.7 | ¢ | 12.9 | % |
| Cost per  available seat mile                  |       | 15.8                                                                  | ¢     | 13.8 | ¢ | 14.5 | % |
| Fuel cost per  available seat mile             |       | 6.4                                                                   | ¢     | 4.8 | ¢ | 33.3 | % |
| Average  passenger trip length (miles)         |       | 511                                                                   |       | 522 |   | (2.1 | )% |

 

*Revenues.*  Operating revenues increased $95.8 million,or 11.2% during the three months ended June 30, 2008, compared to threemonths ended June 30, 2007.  We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements, which we record as revenue. Under the Delta ConnectionAgreements which SkyWest Airlines and ASA have entered into with Delta (the”DeltaConnection Agreements”), we are reimbursed for our engine overhaul expense,which we record as revenue. The following table summarizes the amount of fueland engine overhaul reimbursements included in our passenger revenue (dollaramounts in thousands).

 
| ** **                                                            | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger  revenues                                                   |       | $                                                   | 943,570    |   | $ | 846,356 |   | $ | 97,214 |   | 11.5 | % |
| Less: Fuel  reimbursement from major partners                         |       | 356,445                                             |       | 272,375 |   | 84,070 |   | 30.9 | % |
| Less: Engine  overhaul reimbursement from major partners              |       | 36,057                                              |       | 15,304 |   | 20,753 |   | 135.6 | % |
| Passenger  revenue excluding fuel and engine overhauls reimbursements |       | $                                                   | 551,068    |   | $ | 558,677 |   | $ | (7,609 | ) | (1.4 | )% |

 

*Passenger revenues.*Passenger revenues increased $97.2 million, or 11.5% during the three months ended June 30, 2008 compared to thethree months ended June 30, 2007. The increase in passenger revenue was primarily due to the increase inour fuel and engine overhaul reimbursements from our major partners. The fuelreimbursement from our major partners increased $84.1 million, or 30.9%,  during the three months ended June 30,2008, compared to the three months ended June 30, 2007.  Our passenger revenues, excluding fuel andengine overhaul reimbursements from major partners decreased $7.6 million, or1.4%, during the three months ended June 30, 2008, compared to the threemonths ended June 30, 2007. During the three months ended June 30,2008, Midwest did not make scheduled weekly payments of $3.3 million.  We believe the collectibility of these missedwire payments is not probable. Therefore, we did not recognize the revenue associated with the missedpayments in our Condensed Consolidated Statements of Income for the three andsix months ended June 30, 2008.   DuringJuly 2008, Midwest resumed making a portion of the scheduled paymentsapplicable to the month of July. The decrease in passenger revenues excludingfuel and engine overhauls is generally consistent with the reduction in ASMs weexperienced during the three-month period.

 

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*Ground handling and other.*Total ground handling and other revenues for the three months ended June 30,2008 decreased $1.4 million, or  16.6%during the three months ended June 30, 2008, compared to the three monthsended June 30, 2007. Revenue earned under other ground handling contractswhere we provide ground handling services for other airlines is presented inthe “Ground handling and other” line in our consolidated statements ofincome.  The decrease was primarily relatedto lower volume of flights serviced under ground handling contracts with Unitedand Delta, whereby we perform ground handling services for several otherregional airlines.

 

The following table setsforth information regarding our operating expense components for the threemonths ended June 30, 2008 and 2007. We recognize that it is common in the airline industry to classifystatements of income and present MD&A by major expense category rather thanby functional work group.  The followingtable is intended to facilitate comparison of our operating expenses to theoperating expenses reported by other carriers. The line items presented in the following table are drawn from thefollowing line items on our consolidated statements of income included in this Report:.

 

·                  “Salary, wages and employee benefits”presented in the table below includes the salaries, wages and employee benefitspresented in the “Flying Operations,” “Customer Service,” “Maintenance” and “Generaland Administrative” lines in our consolidated statements of income.

 

·                  “Aircraft costs” presented in thetable below includes aircraft rentals presented in the “Flying Operations,” and“Depreciation and Amortization” lines in our consolidated statements of income.

 

·                  “Maintenance” presented in the tablebelow includes our direct maintenance costs and maintenance overhead costs(except for maintenance-related salaries, wages and employee benefits), whichare presented in the “Maintenance” line in our consolidated statements ofincome.

 

·                  “Fuel” presented in the table belowincludes the “Flying Operations” line in our consolidated statements of income.

 

·                  “Other airline expenses” presented inthe table below includes other non-labor flight operation costs, customerservice costs and general and administrative costs presented in the “FlyingOperations,” “Customer Service” and “General and Administrative” lines in ourconsolidated statements of income.  Theprimary items include property tax, hull and passenger insurance, crewsimulator training, crew hotels, stations rents and  landing fees.

 

Individual expense components are also expressed inthe following table on the basis of  “Centsper ASM.”  ASMs are a common metric usedin the airline industry to measure an airline’s passenger capacity.  ASMs reflect both the number of aircraft inan airline’s fleet and the seat capacity for the aircraft in the fleet.  As the size of our fleet is the underlyingdriver of our operating costs, the primary basis for our MD&A presentationis on a cost per ASM basis to discuss significant changes in our costs notproportionate to the relative changes in our fleet size (dollar amounts inthousands).

 

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| ** **                             | ** ** | **Three months ended June 30,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **Amount**                                          | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Cents  per  ASM** | ** ** | **Cents  Per  ASM** | ** ** |
| ** **                             | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages  and employee benefits |       | $                                                   | 180,677    |   | $ | 183,589 |   | $ | (2,912 | ) | (1.6 | )% | 3.1 |   | 3.2 |   |
| Aircraft costs                         |       | 128,824                                             |       | 125,000 |   | 3,824 |   | 3.1 | % | 2.3 |   | 2.2 |   |
| Maintenance                            |       | 98,307                                              |       | 71,635 |   | 26,672 |   | 37.2 | % | 1.7 |   | 1.2 |   |
| Fuel                                   |       | 366,467                                             |       | 276,155 |   | 90,312 |   | 32.7 | % | 6.4 |   | 4.8 |   |
| Other airline  expenses                |       | 103,594                                             |       | 109,814 |   | (6,220 | ) | (5.7 | )% | 1.8 |   | 1.9 |   |
| Total operating  expenses              |       | 877,869                                             |       | 766,193 |   | 111,676 |   | 14.6 | % | 15.3 |   | 13.3 |   |
| Interest                               |       | 26,221                                              |       | 31,731 |   | (5,510 | ) | (17.4 | )% | 0.5 |   | 0.5 |   |
| Total airline  expenses                |       | $                                                   | 904,090    |   | $ | 797,924 |   | $ | 106,166 |   | 13.3 | % | 15.8 |   | 13.8 |   |

 

*SalaryWages and Employee Benefits. *Salaries,wages and employee benefits decreased $2.9 million, or 1.6%, during the threemonths ended June 30, 2008, compared to the three months ended June 30,2007. The average number of full-time equivalent employees decreased 2.6% to14,510 for the three months ended June 30, 2008, from 14,892 for the threemonths ended June 30, 2007.  The decrease in number of employees andthe decrease in the cost per ASM was significantly due to Delta assumingresponsibility from ASA in June 2007 for the performance of customerservice functions in Atlanta .

 

*AircraftCosts.* Aircraft costs increased $3.8 million or 3.1% duringthe three months ended June 30, 2008 compared to the three months ended June 30,2007. The increase is due to the depreciation of seven used CRJ200s acquiredsince June 30, 2007.

 

*Maintenance.*Maintenance costs increased $26.7 million, or 37.2%, during the three monthsended June 30, 2008, compared to the three months ended June 30,2007.  The increase was primarily relatedto the timing of engine overhaul events. Our engine overhaul expense increasedapproximately $20.8 million during the three months ended June 30, 2008compared to the three months ended June 30, 2007.  The majority of the engine overhauls relatedto aircraft operated under our Delta Connection Agreements and we werereimbursed for such engine overhaul costs by Delta.  Such reimbursements are reflected aspassenger revenue in our condensed consolidated statements of income.    The increase in maintenance excludingengine overhaul cost was due to other scheduled maintenance events.Additionally, since June 30, 2007, we added seven used CRJ200s to ourfleet. Compared to new aircraft, used aircraft typically experience highermaintenance costs during the first year of service. Under our United ExpressAgreement and our Midwest Agreement, we recognize revenue at a fixed hourlyrate for mature engine maintenance on regional jet engines, which we record atthe gross amount as revenue in our consolidated statements of  income, and we recognize engine maintenanceexpense on our CRJ 200 regional jet engines on an as incurred basis asmaintenance expense in our consolidated statements of income. As a result,during the three months ended June 30, 2008, we collected and recorded$9.4 million (pretax) of revenue in excess of our maintenance expenseunder the United Express Agreement and Midwest Services Agreement, which isintended to compensate us for future engine maintenance overhauls.

 

*Fuel*.  Fuel increased $90.3 million, or 32.7% duringthe three months ended June 30, 2008, compared to the three months ended June 30,2007. The average cost per gallon of fuel increased to $3.89 per gallon duringthe three months ended June 30, 2008 from $2.37 during the three monthsended June 30, 2007. However, despite the increase in the average cost pergallon, during the three months ended June 30, 2008, United purchased fueldirectly from a fuel vendor for our United Express aircraft operated out ofChicago, San Francisco, Los Angeles and Denver.   Midwest purchased all of its fuel directlyfrom fuel vendors, which reduced our total fuel costs and related passengerrevenue.   The following table summarizesthe gallons purchased directly by the Company and the change in fuel price pergallon on our fuel expense for the periods indicated:

 

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| ** **                                     | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(in  thousands, except per gallon amounts)** | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Fuel gallons  consumed                         |       | 94,301                                                                |       | 116,657 |   | (19.2 | )% |
| Price per gallon                               |       | $                                                                     | 3.89       |   | $ | 2.37 |   | 64.2 | % |
| Fuel expense                                   |       | $                                                                     | 366,467    |   | $ | 276,155 |   | 32.7 | % |

 

Weare at risk for the increase in fuel prices on our pro-rate flying operations,whereby we receive a pro-rated portion of the passenger fare as revenue.  As of June 30, 2008, we operated a totalof 35 Brasilia turboprops under separate pro-rate agreements with Delta andUnited. During the three months ended June 30, 2008, the cost of fuelassociated with the pro-rate operations increased approximately $4.4 million(pre-tax) compared to the three months ended June 30, 2007.

 

*Otherairline expenses.* Other airline expense, primarily consisting of property tax, hull andliability insurance, crew simulator training, crew hotel costs, landing fees,station rentals and non employee station costs, decreased $6.2 million , or 5.7% during the three months ended June 30,2008 compared to the three months ended June 30, 2007. The decrease inother airline expense was primarily due to a decrease in non-employee stationcosts due to Delta assuming responsibility from ASA in June 2007 for theperformance of customer service functions in Atlanta and partially due to ourmajor partners paying for certain station costs directly.

 

*Interest.*  Interest decreased $5.5 million, or 17.4%,during the three months ended June 30, 2008, compared to the three monthsended June 30, 2007.  The decreasein interest expense was substantially due to a decrease in interest rates. At June 30,2008, we had variable rate notes representing 48.7% of our total long-term debt..  The majority of our variable ratenotes are based on the three-month and six month LIBOR rate.  At June 30, 2008, the three-month andsix-month LIBOR rates were 2.78% and 3.11%, respectively.   At June 30, 2007, the three-month andsix-month LIBOR rates were 5.36% and 5.39%, respectively.

 

*TotalAirline Expenses.*Total airline expenses (consisting of totaloperating and interest expenses) increased $106.2 million, or 13.3%, during thethree months ended June 30, 2008, compared to the three months ended June 30,2007.  We are reimbursed for our actualfuel costs by our major partners under our contract flying arrangements, whichwe record as revenue. Under the SkyWest Airlines and ASA Delta ConnectionAgreements, we are reimbursed for our engine overhaul expense, which we recordas revenue. The following table summarizes the amount of fuel and engineoverhaul expense which is included in our total airline expense (dollar amountsin thousands).

 
| ** **                                                 | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                       |       |                                                                  |       |   |   |   |   |   |   |
| Total airline  expense                                     |       | $                                                                     | 904,090    |   | $ | 797,925 |   | $ | 106,165 |   | 13.3 | % |
| Less: Fuel  expense                                        |       | 366,467                                                               |       | 276,155 |   | 90,312 |   | 32.7 | % |
| Less: Engine  overhaul expense                             |       | 36,057                                                                |       | 15,304 |   | 20,753 |   | 135.6 | % |
| Total airline  expense excluding fuel and engine overhauls |       | $                                                                     | 501,566    |   | $ | 506,466 |   | $ | (4,900 | ) | (1.0 | )% |

 

Excluding fuel and engineoverhaul costs, our total airline expense decreased $4.9 million, or 1.0%,during the three months ended June 30, 2008, compared to the three monthsended June 30, 2007.  The decreasein total airline expense  excluding fueland engine overhauls is generally consistent with the decrease in ASMs weexperienced during those months.

 

*OtherIncome.* During thethree months ended June 30, 2008, we negotiated the principal terms of anew Capacity Purchase Agreement with Continental, which was intended to becomeeffective if we had successfully completed our proposed acquisition of theoutstanding shares of capital stock of ExpressJet.  During the course of those negotiations,Continental agreed it would pay us a break-up fee under certain circumstancesin the event our efforts to acquire ExpressJet were not successful.  In June 2008, ExpressJet reached termsdirectly with Continental on a new capacity purchase agreement, andaccordingly, we were precluded from completing the acquisition ofExpressJet.  As a result, we received thebreak-up fee from Continental during the quarter ended June 30, 2008.  The break-up fee, net of our directtransaction costs, was $6.3 million (pre-tax) and was recorded as other incomeduring the quarter.

 

*NetIncome. *Net incomedecreased to $36.4 million, or $0.63 per diluted share, for the three monthsended June 30, 2008,  compared to$40.6 million, or $0.62 per diluted share, for the three months ended June 30,2007.

 

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** **

**Six Months Ended June 30, 2008 and 2007**

 

*OperatingStatistics.  *The following table sets forth our major operationalstatistics and the associated percentage-of-change for the periods identifiedbelow.

 
| ** **                                     | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue  passenger miles (000)                 |       | 8,690,793                                                           |       | 8,685,859 |   | 0.1 | % |
| Available seat  miles (“ASMs”) (000) |       | 11,296,537                                                          |       | 11,096,920 |   | 1.8 | % |
| Block hours                                    |       | 707,362                                                             |       | 697,278 |   | 1.4 | % |
| Departures                                     |       | 443,686                                                             |       | 441,700 |   | 0.4 | % |
| Passengers  carried                            |       | 16,871,066                                                          |       | 16,755,545 |   | 0.7 | % |
| Passenger load  factor                         |       | 76.9                                                                | %          | 78.3 | % | (1.4 | )pts |
| Revenue per  available seat mile               |       | 16.1                                                                | ¢     | 14.8 | ¢ | 8.8 | % |
| Cost per  available seat mile                  |       | 15.4                                                                | ¢     | 13.9 | ¢ | 10.8 | % |
| Fuel cost per  available seat mile             |       | 5.8                                                                 | ¢     | 4.5 | ¢ | 28.9 | % |
| Average  passenger trip length (miles)         |       | 515                                                                 |       | 518 |   | (0.6 | )% |

 

*Revenues.*  Operating revenues increased $174.8 million,or 10.6%, during the six months ended June 30, 2008, compared to the sixmonths ended June 30, 2007.  We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements, which we record as revenue. Under the SkyWest Airlines andASA Delta Connection Agreements, we are reimbursed for our engine overhaulexpense, which we record as revenue. The following table summarizes the amountof fuel and engine overhaul reimbursements included in our passenger revenue(dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                            | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger  revenues                                                   |       | $                                                                   | 1,802,729  |   | $ | 1,626,923 |   | $ | 175,806 |   | 10.8 | % |
| Less: Fuel  reimbursement from major partners                         |       | 639,994                                                             |       | 483,799 |   | 156,195 |   | 32.3 | % |
| Less: Engine  overhaul reimbursement from major partners              |       | 53,669                                                              |       | 31,142 |   | 22,527 |   | 72.3 | % |
| Passenger  revenue excluding fuel and engine overhauls reimbursements |       | $                                                                   | 1,109,066  |   | $ | 1,111,982 |   | $ | (2,916 | ) | (0.3 | )% |

 

*Passenger revenues.*Passenger revenues increased $175.8 million, or 10.8%, during the six months ended June 30, 2008, compared to thesix months ended June 30, 2007.  Theincrease in passenger revenue was primarily due to an increase in fuel andengine overhaul reimbursements from our major partners. The fuel reimbursementfrom our major partners increased $156.2 million or 32.3%,  during the six months ended June 30,2008, compared to the six months ended June 30, 2007.  Our passenger revenues, excluding fuel andengine overhaul reimbursements from major partners, decreased $2.9 million, or0.3%, during the six months ended June 30, 2008, compared to the sixmonths ended June 30, 2007. During the three months ended June 30,2008, Midwest did not make scheduled weekly payments of $3.3 million.  We believe the collectibility of these missedwire payments is not probable. Therefore, we did not recognize the revenue associated with the missedpayments which was reflected as a reduction to revenue in our CondensedConsolidated Statements of Income for the three and six months ended June 30,2008.  During July 2008, Midwest resumedmaking a portion of the scheduled payments applicable to the month of July.  The decrease in passenger revenues, excludingfuel and engine overhauls was less than the increase in ASMs, primarily due tooperating efficiencies obtained from increased stage lengths flown by ourregional jets.

 

*Ground handling and other.*Total ground handling and other revenues for the six months ended June 30,2008 decreased $1.0 million, or  5.7%,during the six months ended June 30, 2008, compared to the six monthsended June 30, 2007. Revenue earned under other ground handling contractswhere we provide ground handling services for other airlines is presented inthe “Ground handling and other” line in our consolidated statements ofincome.  The decrease was primarilyrelated to the lower volume of flights serviced under ground handling contractswith United and Delta, whereby we perform ground handling services for severalother regional airlines.

 

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The following table setsforth information regarding our operating expense components for the six monthsended June 30, 2008 and 2007.  Werecognize that it is common in the airline industry to classify statements ofincome and present MD&A by major expense category rather than by functionalwork group.  The following table isintended to facilitate comparison of our operating expenses to the operatingexpenses reported by other carriers.  Theline items presented in the following table are drawn from the following lineitems on our consolidated statements of income included in this Report:.

 

·                  “Salary, wagesand employee benefits” presented in the table below includes the salaries,wages and employee benefits presented in the “Flying Operations,” “CustomerService,” “Maintenance” and “General and Administrative” lines in ourconsolidated statements of income.

 

·                  “Aircraft costs”presented in the table below includes aircraft rentals presented in the “FlyingOperations,” and “Depreciation and Amortization” lines in our consolidatedstatements of income.

 

·                  “Maintenance”presented in the table below includes our direct maintenance costs andmaintenance overhead costs (except for maintenance-related salaries, wages andemployee benefits), which are presented in the “Maintenance” line in ourconsolidated statements of income.

 

·                  “Fuel” presentedin the table below includes the “Flying Operations” line in our consolidatedstatements of income.

 

·                  “Other airlineexpenses” presented in the table below includes other non-labor flightoperation costs, customer service costs and general and administrative costspresented in the “Flying Operations,” “Customer Service” and “General andAdministrative” lines in our consolidated statements of income.  The primary items include property tax, hulland passenger insurance, crew simulator training, crew hotels, stations rentsand  landing fees.

 

Individual expense components are also expressed inthe following table on the basis of cents per ASM.  ASMs is a common metric used in the airlineindustry to measure an airline’s passenger capacity.  ASMs reflect both the number of aircraft inan airline’s fleet and the seat capacity for the aircraft in the fleet.  As the size of our fleet is the underlyingdriver of our operating costs, the primary basis for our MD&A presentationis on a cost per ASM basis to discuss significant changes in our costs notproportionate to the relative changes in our fleet size (dollar amounts inthousands).

 
| ** **                             | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents** | ** ** | **Cents** | ** ** |
| ** **                             | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Per** | ** ** | **Per** | ** ** |
| ** **                             | ** ** | **Amount**                                        | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| ** **                             | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages  and employee benefits |       | $                                                 | 366,573    |   | $ | 368,787 |   | $ | (2,214 | ) | (0.6 | )% | 3.3 |   | 3.3 |   |
| Aircraft costs                         |       | 256,866                                           |       | 247,493 |   | 9,373 |   | 3.8 | % | 2.3 |   | 2.2 |   |
| Maintenance                            |       | 181,368                                           |       | 141,558 |   | 39,810 |   | 28.1 | % | 1.6 |   | 1.3 |   |
| Fuel                                   |       | 658,855                                           |       | 494,207 |   | 164,648 |   | 33.3 | % | 5.8 |   | 4.5 |   |
| Other airline  expenses                |       | 214,007                                           |       | 223,541 |   | (9,534 | ) | (4.3 | )% | 1.9 |   | 2.0 |   |
| Total operating  expenses              |       | 1,677,669                                         |       | 1,475,586 |   | 202,083 |   | 13.7 | % | 14.9 |   | 13.3 |   |
| Interest                               |       | 56,517                                            |       | 62,302 |   | (5,785 | ) | (9.3 | )% | 0.5 |   | 0.6 |   |
| Total airline  expenses                |       | $                                                 | 1,734,186  |   | $ | 1,537,888 |   | 196,298 |   | 12.8 | % | 15.4 |   | 13.9 |   |
|                                        |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*SalaryWages and Employee Benefits. *Salaries,wages and employee benefits decreased $2.2 million, or 0.6%, during the sixmonths ended June 30, 2008, compared to the six months ended June 30,2007. The average number of full-time equivalent employees decreased 1.3% to14,847 for the six months ended June 30, 2008, from 15,038 for the sixmonths ended June 30, 2007.  The decrease in number of employees andthe decrease in the cost per ASM was significantly due to Delta assumingresponsibility from ASA in June 2007 for the performance of customerservice functions in Atlanta.

 

*AircraftCosts.* Aircraft costs increased $9.4 million or 3.8% duringthe six months ended June 30, 2008, compared to the six months ended June 30,2007. The increase was primarily due to the depreciation of seven used CRJ200sacquired since June 30, 2007.

 

*Maintenance.*Maintenance costs increased $39.8 million, or 28.1%, during the six monthsended June 30, 2008, 

 

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compared to the sixmonths ended June 30, 2007.  Theincrease was primarily related to the timing of engine overhaul events. Ourengine overhaul expense increased approximately $22.5 million during the sixmonths ended June 30, 2008 compared to the six months ended June 30,2007.  The majority of the engineoverhauls related to aircraft operated under our Delta Connection Agreementsand we were reimbursed for such engine overhaul costs by Delta.  Such reimbursements are reflected aspassenger revenue in our condensed consolidated statements of income.  The increase in maintenance excluding engineoverhaul cost was due to other scheduled maintenance events. Additionally,since June 30, 2007, we added seven used CRJ200s to our fleet. Compared tonew aircraft, used aircraft typically experience higher maintenance costsduring the first year of service. Under our United Express Agreement and ourMidwest Agreement, we recognize revenue at a fixed hourly rate for matureengine maintenance on regional jet engines, which we record at the gross amountas revenue in our consolidated statements of income, and we recognize engine maintenance expense on our on our CRJ200 regional jet engines on an as incurred basis as maintenance expense in ourconsolidated statements of income. As a result, during the six months ended June 30,2008, we collected and recorded $17.5 million (pretax) of revenue inexcess of our maintenance expense under the United Express Agreement andMidwest Services Agreement, which is intended to compensate us for futureengine maintenance overhauls.

 

*Fuel*.  Fuel increased $164.6 million, or 33.3%during the six months ended June 30, 2008, compared to the six monthsended June 30, 2007.  The averagecost per gallon of fuel increased to $3.48 per gallon during the six monthsended June 30, 2008 from $2.20 during the six months ended June 30,2007. However, despite the increase in the average cost per gallon, during thesix months ended June 30, 2008, United purchased fuel directly from a fuelvendor for our United Express aircraft operated out of Chicago, San Francisco,Los Angeles and Denver.   Midwestpurchased all of its fuel directly from fuel vendors, which reduced our totalfuel costs and related passenger revenue.  The following table summarizes the gallons purchased directly by theCompany and the change in fuel price per gallon on our fuel expense:

 
| ** **                                     | ** ** | **For the Six months ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in  thousands, except per gallon amounts)** | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Fuel gallons  consumed                         |       | 189,256                                                             |       | 224,942 |   | (15.9 | )% |
| Price per gallon                               |       | $                                                                   | 3.48       |   | $ | 2.20 |   | 58.5 | % |
| Fuel expense                                   |       | $                                                                   | 658,855    |   | $ | 494,207 |   | 33.3 | % |

 

Weare at risk for the increase in fuel prices on our pro-rate flying operations,whereby we receive a pro-rated portion of the passenger fare as revenue.  As of June 30, 2008, we operated a totalof 35 Brasilia turboprops under separate pro-rate agreements with Delta andUnited. During the six months ended June 30, 2008, the cost of fuelassociated with the pro-rate operations increased approximately $6.9 million(pre-tax) compared to the six months ended June 30, 2007.

 

*Otherairline expenses.* Other airline expense, primarily consisting of property tax, hull andliability insurance, crew simulator training, crew hotel costs, landing feesand station rentals,  decreased $9.5million , or 4.3%, during the six months ended June 30, 2008, compared tothe six months ended June 30, 2007. The decrease other airline expense isprimarily due to the decrease in non-employee station costs due to Deltaassuming responsibility from ASA for the performance of customer servicefunctions in Atlanta and partially due to our major partners paying for certainstation costs directly.

 

*Interest.*  Interest decreased $5.8 million, or 9.3%during the six months ended June 30, 2008 compared to the six months endedJune 30, 2007.  The decrease ininterest expense was substantially due to a decrease in  interest rates. At June 30, 2008, we hadvariable rate notes representing 48.7% of our total long-term debt .  The majority of our variable rate notes arebased on the three-month and six month LIBOR rate.  At June 30, 2008, the three-month andsix-month LIBOR rates were 2.78% and 3.11%, respectively.   At June 30, 2007, the three-month andsix-month LIBOR rates were 5.36% and 5.39%, respectively.

 

*TotalAirline Expenses.*Total airline expenses (consisting of totaloperating and interest expenses) increased $196.3 million, or 12.8%, during thesix months ended June 30, 2008, compared to the six months ended June 30,2007.   We are reimbursed for our actualfuel costs by our major partners under our contract flying arrangements, whichwe record as revenue. Under the SkyWest Airlines and ASA Delta ConnectionAgreements, we are reimbursed for our engine overhaul expense, which we recordas revenue. The following table summarizes the amount of fuel and engineoverhaul expense which is included in our total airline expense (dollar amountsin thousands).

 

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| ** **                                                 | ** ** | **For the Six months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                       |       |                                                                |       |   |   |   |   |   |   |
| Total airline  expense                                     |       | $                                                                   | 1,734,186  |   | $ | 1,537,888 |   | $ | 196,298 |   | 12.8 | % |
| Less: Fuel                                                 |       | 658,855                                                             |       | 494,207 |   | 164,648 |   | 33.3 | % |
| Less: Engine  overhaul expense                             |       | 53,669                                                              |       | 31,142 |   | 22,527 |   | 72.3 | % |
| Total airline  expense excluding fuel and engine overhauls |       | $                                                                   | 1,021,662  |   | $ | 1,012,539 |   | $ | 9,123 |   | 0.9 | % |

 

Excluding fuel and engineoverhaul costs, our total airline expense increased $9.1 million, or 0.9%,during the six months ended June 30, 2008, compared to the six monthsended June 30, 2007.  The increasein total airline expense, excluding fuel and engine overhauls was less than theincrease in ASMs, primarily due to operating efficiencies obtained fromincreased stage lengths flown by our regional jets.

 

*OtherIncome.* During thethree months ended June 30, 2008, we negotiated the principal terms of anew Capacity Purchase Agreement with Continental, which was intended to becomeeffective if we had successfully completed our proposed acquisition of theoutstanding shares of capital stock of ExpressJet.  During the course of those negotiations,Continental agreed it would pay us a break-up fee under certain circumstancesin the event our efforts to acquire ExpressJet were not successful.  In June 2008, ExpressJet reached termsdirectly with Continental on a new capacity purchase agreement, andaccordingly, we were precluded from completing the acquisition ofExpressJet.  As a result, we received thebreak-up fee from Continental in June 2008.  The break-up fee, net of our directtransaction costs, was $6.3 million (pre-tax) and was recorded as other incomeduring the six months ended June 30, 2008.

 

*NetIncome. *Net incomedecreased to $65.6 million, or $1.10 per diluted share, for the six monthsended June 30, 2008,  compared to$75.4 million, or $1.15 per diluted share, for the six months ended June 30,2007.

 

## **Liquidityand Capital Resources**

##  

We hadworking capital of $781.0 million and a current ratio of 2.8:1 at June 30,2008, compared to working capital of $811.9 million and a current ratio of3.0:1 at December 31, 2007. The decrease in working capital and thecurrent ratio was principally attributable to the repurchase of $90.8 millionof  outstanding shares of our commonstock.

 

Ourprincipal sources of cash during the six months ended June 30, 2008 were$248.6 million provided by operating activities, net sales of $50.8 million ofmarketable securities, issuance of $17.7 million of long-term debt, sale of$9.0 million of common stock in connection with the exercise of stock optionsunder our stock option and employee stock purchase plans, $1.7 million ofproceeds from the sale of equipment, $0.2 million from returns on aircraftdeposits, and $0.2 million in tax benefit from the exercise of options topurchase shares of common stock.  Werepurchased $90.8 million of outstanding shares of our common stock,  invested $75.7 million in flight equipment,made principal payments on long-term debt of $58.8 million, spent $27.9 millionfor buildings and ground equipment, sold $13.1 million in other assets and paid$3.7 million in cash dividends.  Thesefactors resulted in a $84.6 million increase in cash and cash equivalentsduring the six months ended June 30, 2008.

 

Duringthe three months ended June 30, 2008, Midwest did not make scheduledweekly payments of $3.3 million.  During July 2008,Midwest resumed making a portion of the scheduled payments applicable to themonth of July. We believe that in the absence of any other unusualcircumstances, the working capital currently available to us will be sufficientto meet our present financial requirements, including expansion, plannedcapital expenditures, and scheduled lease payments and debt service obligationsfor at least the next 12 months.

 

Ourposition in marketable securities, consisting primarily of bonds, bond fundsand commercial paper, decreased to $451.2 million at June 30, 2008,compared to $522.9 million at December 31, 2007.  The decrease in marketable securities was dueprimarily to the sale of marketable securities and the purchase of cashequivalent securities.

 

At June 30,2008, our total capital mix was 42.2% equity and 57.8% long-term debt, comparedto 41.8% equity and 58.2% long-term debt at December 31, 2007.

 

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** **

**Significant Commitments and Obligations**

 

*General*

 

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

 
| ** **                                                      | ** ** | **Total**  | ** ** | **July-Dec  2008** | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft  commitments                                      |       | $          | 528,030    |               | $          | 97,780     |       | $          | 332,239    |       | $          | 98,011     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease  payments for aircraft and facility obligations |       | 3,216,889  |       | 142,725            |       | 330,766    |       | 313,295    |       | 301,609    |       | 302,085    |       | 1,826,409      |       |
| Interest  commitments                                           |       | 762,305    |       | 51,149             |       | 97,590     |       | 90,882     |       | 83,886     |       | 75,725     |       | 363,073        |       |
| Principal  maturities on long-term debt                         |       | 1,810,161  |       | 61,354             |       | 126,731    |       | 132,297    |       | 135,787    |       | 186,006    |       | 1,167,986      |       |
| Total  commitments and obligations                              |       | $          | 6,317,385  |               | $          | 353,008    |       | $          | 887,326    |       | $          | 634,485    |       | $              | 521,282    |   | $ | 563,816 |   | $ | 3,357,468 |   |

 

*PurchaseCommitments and Options*

 

On October 12,2007, we announced that SkyWest Airlines plans to acquire 22 additionalregional jet aircraft through 2010, 18 of which SkyWest Airlines intends tooperate for United Express, as part of an aircraft transition plan, allowingUnited Express to remove 23 30-seat Brasilia turboprops from the contractreimbursement model contemplated by the United Express Agreement and add66-seat regional jet aircraft for United Express flying. Generally, theturboprop removals under the United Express Agreement are intended to occur inconjunction with deliveries of new regional jet aircraft in order to facilitatea smooth transition in existing markets. Additionally, SkyWest Airlines intendsto exchange four 50-seat CRJ200s for four CRJ900s configured with 76 seats inits Delta Connection operations. These four 50-seat CRJ200s are scheduled to beplaced into service under other capacity purchase agreements. On November 30,2007, we announced that we placed a firm order with Bombardier. We arescheduled to take delivery of these aircraft beginning in late 2008 andcontinuing through the first quarter of 2010. Total expenditures for theseaircraft and related flight equipment, including amounts for contractual priceescalations are estimated to be approximately $528.0 million through thefirst quarter of 2010. Additionally, our 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.

 

Wehave not historically funded a substantial portion of our aircraft acquisitionswith working capital.  Rather, we havegenerally funded our aircraft acquisitions through a combination of operatingleases and long-term debt financing.  Atthe time of each aircraft acquisition, we evaluate the financing alternativesavailable to us, and select one or more of these methods to fund theacquisition.  In the event thatalternative financing cannot be arranged at the time of delivery, Bombardierhas financed aircraft acquisitions until more permanent arrangements can bemade.  Subsequent to this initialacquisition of an aircraft, we may also refinance the aircraft or convert oneform of financing to another (e.g., replacing debt financing with leveragedlease financing).

 

Atpresent, we intend to satisfy our 2008 firm aircraft purchase commitment, aswell as our acquisition of any additional aircraft, through a combination ofoperating leases and debt financing, consistent with our historicalpractices.  Based on current marketconditions and 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.

 

*AircraftLease and Facility Obligations*

 

Wealso have significant long-term lease obligations primarily relating to ouraircraft fleet.  At June 30, 2008,we had 

 

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287 aircraft under leasewith remaining terms ranging from one to 18 years.  Future minimum lease payments due under alllong-term operating leases were approximately $3.2 billion at June 30,2008.  Assuming a 7.4% discount rate,which is the rate used to approximate the implicit rates within the applicableaircraft leases, the present value of these lease obligations would have beenequal to approximately $2.0 billion at June 30, 2008.

 

*Long-termDebt Obligations*

 

Our total long-term debtat June 30, 2008 was $1,810.2 million, of which $1,803.9 million relatedto the acquisition of Brasilia turboprop, CRJ200, CRJ700 and CRJ900 aircraftand $6.3 million related to our corporate office building.   The average effective rate on the debtrelated to the Brasilia turboprop, CRJ200, CRJ700 and CRJ900 aircraft wasapproximately 5.58% at June 30, 2008.

 

*Fair Value Measurements*

 

Asdiscussed in Note H to our unaudited condensed consolidated financialstatements, we adopted the provisions of SFAS No. 157 effective January 1, 2008.  We havedetermined that we utilize unobservable (Level 3) inputs in determining thefair value of our auction rate security investments, which totaled $10.9million as of June 30, 2008.

 

Ourauction rate security investments are classified as available for salesecurities and reflected at fair value.  In prior periods, due to theauction process which took place every 30-35 days for most securities, quotedmarket prices were readily available, which would qualify as Level 1 under SFASNo. 157.  However, due to events in credit markets during thesix months ended June 30, 2008, the auction events for most of theseinvestments failed, and, therefore, we determined the estimated fair values ofthese securities utilizing a discounted cash flow analysis as of June 30,2008.  These analyses consider, among other items, thecollateralization underlying the security investments, the expected future cashflows, including the final maturity, associated with the securities, and theexpectation of the next time the security is anticipated to have a successfulauction.   Due to these events, we reclassified these instruments asLevel 3 during the first quarter of 2008 and recorded a temporary unrealizeddecline in fair value of $0.4 million, with a reduction to accumulated othercomprehensive income.   We currently believe that this temporarydecline in fair value is due entirely to liquidity issues.  Inaddition, our holdings of auction rate securities represented less than tenpercent of our total cash, cash equivalent, and marketable securities balanceat June 30, 2008.  Because we believe that the current declinein fair value is temporary and based only on liquidity issues in the creditmarkets, any difference between our estimate and an estimate that would bearrived at by another party would have no impact on our earnings, since suchdifference would also be recorded to accumulated other comprehensive income.  Weintend to re-evaluate each of these factors as market conditions change insubsequent periods.

 

**Seasonality**

 

Ourresults of operations for any interim period are not necessarily indicative ofthose for the entire period, since the airline industry is subject to seasonalfluctuations and general economic conditions. Our operations are somewhat favorably affected by increased travel onour pro-rate routes, historically occurring during the summer months, andunfavorably affected by decreased travel during the months November throughFebruary and by inclement weather which occasionally results in cancelledflights during the winter months.

 

****ITEM3:********                   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK****

** **

Aircraft Fuel

 

In the past, we have notexperienced difficulties with fuel availability and we currently expect to beable to obtain fuel at prevailing prices in quantities sufficient to meet ourfuture needs.  Pursuant to our contractflying arrangements, United has agreed to bear the economic risk of fuel pricefluctuations on our contracted United Express flights.  On our Delta Connection regional jet flights,Delta has agreed to bear the economic risk of fuel price fluctuations.  We bear the economic risk of fuel pricefluctuations on our pro-rate operations. As of June 30, 2008, essentially all of our Brasilia turbopropsflown for Delta were flown under pro-rate arrangements while, approximately 42%of our Brasilia turboprops flown in the United system were flown under pro-ratearrangements. The average price per gallon of aircraft fuel increased 64.2% to$3.89 for the three months ended June 30, 2008, from $2.37 for the threemonths ended June 30, 2007.  For illustrative purposes only, we haveestimated the impact of the market risk of fuel on our pro-rate operationsusing a hypothetical increase of 25% in the price per gallon we purchase. Basedon this hypothetical assumption, we would have incurred an additional $2.6million in fuel expense for the three months ended June 30, 2008.

 

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Interest Rates

 

Our earnings are affectedby changes in interest rates based on the amounts of variable rate long-termdebt and the amount of cash and securities we hold during any givenperiod.  The interest rates applicable tovariable rate 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 June 30, 2008, we had variable ratenotes representing 48.7% of our total long-term debt compared to 49.6% of ourtotal long-term debt at December 31, 2007. 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 $2.2 million in interest expense and received$1.6 million additional interest income for the three months ended June 30,2008.  Based on this same hypotheticalassumption, we would have incurred an additional $4.5 million in interestexpense and received $3.2 million additional interest income for the six monthsended June 30, 2008.

 

Wecurrently intend to finance the acquisition of aircraft through manufacturerfinancing, third-party leases or long-term borrowings. Changes in interestrates may impact the actual cost to us to acquire these aircraft. To the extentwe place these aircraft in service under our code-share agreements with Deltaand Midwest, our code-share agreements currently provide that reimbursementrates will be adjusted higher or lower to reflect changes in our aircraftrental rates.

 

Auction Rate Securities

 

Wehave investments in auction rate securities, which are classified as availablefor sale securities and reflected at fair value.  Due primarily toinstability in credit markets, we sold a portion of these investments, andended second quarter 2008 with investments valued at a total of $10.9 million,of which $4.9 million were classified as Marketable Securities and $6.0 millionwere classified as Other Assets in our unaudited condensed consolidated balancesheet as of June 30, 2008.  Auction rate securities held at December 31,2007, were $124 million, all of which were classified as MarketableSecurities.  For a more detailed discussion on auction ratesecurities, including our methodology for estimating their fair value, see NoteH to our unaudited condensed consolidated financial statements for the threeand six months ended June 30, 2008, appearing elsewhere in this Report.

 

**ITEM 4.**                    CONTROLS ANDPROCEDURES

** **

(a) Evaluation of disclosure controls andprocedures

 

Our management, with theparticipation of our chief executive officer and chief financial officer,performed an evaluation of our disclosure controls and procedures as of June 30,2008.  Our disclosure controls andprocedures have been designed to provide reasonable assurance that theinformation we are required to disclose in the reports we file or submit underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), isaccumulated and communicated to our management to allow timely decisionsregarding required disclosure, and recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securitiesand Exchange Commission.  Our chiefexecutive officer and chief financial officer have concluded that the controlsand procedures were effective as of June 30, 2008 to reasonably ensure theachievement of these objectives. While our disclosure controls and proceduresprovide reasonable assurance that material information will be available on atimely basis, this assurance is subject to limitations inherent in any controlsystem, no matter how well it is designed or administered, including, withoutlimitation, resource constraints and the need for management to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

(b) Changes inInternal Control Over Financial Reporting

 

There were no significant changes (including correctiveactions with regard to material weaknesses) in our internal control overfinancial reporting that occurred during the period covered by this Report thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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*** ***

**PART II. OTHERINFORMATION**

** **

**ITEM 1.**                    LEGALPROCEEDINGS

** **

We aresubject to certain legal actions which we considers routine to our businessactivities. As of June 30, 2008, our management believed, afterconsultation with legal counsel, that the ultimate outcome of such legalmatters is not likely to have a material adverse effect on our financialposition, liquidity or results of operations.  However, the following is a significant outstanding legal matter.

 

*ASAand SkyWest Airlines v. Delta Air Lines*

 

Duringthe quarter ended December 31, 2007, Delta notified SkyWest, SkyWest Airlinesand ASA of a dispute under the Delta Connection Agreements executed by Deltawith SkyWest Airlines and ASA. The dispute relates to allocation of liabilityfor certain irregular operations (“IROP”) expenses that are paid by SkyWestAirlines and ASA to their passengers under certain situations. As a result,Delta withheld a combined total of approximately $25 million (pretax) fromone of the weekly scheduled wire payments to SkyWest and ASA during December 2007.Delta continues to withhold a portion of the funds we believe are payableas weekly scheduled wire payments to SkyWest and ASA.  As of June 30, 2008, Delta had withheldfunds equal to approximately $32.5 million that we believe are payable toSkyWest Airlines and ASA pursuant to the Delta Connection Agreements. On February 1,2008, SkyWest Airlines and ASA filed a lawsuit in Georgia state court disputingDelta’s treatment of the matter (the “Complaint”).  Deltafiled an Answer to the Complaint and a Counterclaim against SkyWestAirlines and ASA on March 24, 2008. Delta’s Counterclaim alleges that ASA and SkyWest Airlines breached theDelta Connection Agreements by invoicing Delta for the IROP expenses that werepaid pursuant to Delta’s policies, and claims only a portion of those expensesmay be invoiced to Delta.  Delta seeksunspecified damages in its Counterclaim.

 

On March 24,2008, Delta also filed a Motion 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 and denied in part the Motion to Dismiss.  The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint.  The Court denied in part the Motion toDismiss with respect to the action for declaratory judgment contained in theComplaint, and granted in part the Motion to Dismiss to the extent theComplaint seeks to read alternative or supplemental obligations created byprior conduct into the Connection Agreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in theComplaint.  SkyWest Airlines and ASA currently intend tovigorously pursue their claims set forth in the Complaint, to the extentpermitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.

 

Wehave evaluated the Delta dispute in accordance with the provisions of FinancialAccounting Standards Board No. 5 (“FASB No.5”), Accounting forContingencies. Based on the provisions of FASB No. 5, an estimated loss isaccrued if the loss is probable and reasonably estimable. Because theseconditions have not been satisfied, we have not recorded a loss in ourcondensed consolidated financial statements as of June 30, 2008.

 

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**ITEM 1A.**           RISK FACTORS

** **

Part I, Item 1A, “RiskFactors,” of our Annual Report on Form 10-K for the Year Ended December 31,2007 includes a detailed discussion of risks and uncertainties which couldadversely affect our future results. The risk factors presented below reflectmaterial changes to the risk factors in our Annual Report on Form 10-K forthe Year Ended December 31, 2007. The risk factors below modify and supplement, and should be read inconjunction with, the risk factors and information disclosed in our AnnualReport on  Form 10-K for the YearEnded December 31, 2007.

 

**We maybe negatively impacted by the troubled financial condition and restructuring ofMidwest**

 

In June 2008,we were notified that Midwest was in the process of organizing an out-of-courtfinancial restructuring.  In the event ofa Midwest bankruptcy filing, Midwest may reject our contract in the bankruptcyproceedings that  currently includes theoperation of  21 of our CRJ200s. For thesix months ended June 30, 2008 approximately 3.9% of our ASMs weregenerated by Midwest.  Midwest iscurrently working on a restructuring plan; however, there is no assurance thatMidwest will ultimately succeed in its reorganization efforts or will remain agoing concern over the long term. In the event of a Midwest bankruptcy filingor in the event of a re-negotiated contract in an out-of-court financialrestructuring arrangement, we have the residual aircraft ownership risk.  Under such circumstances if we are unable tooperate the aircraft under alternative arrangements, such events wouldadversely affect our financial results.

 

**ITEM 2.**                    UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

** **

OurBoard of Directors has adopted a stock repurchase program which authorizes usto repurchase shares of our common stock in the public market, from time totime, at prevailing prices. The stock repurchase program currently authorizesthe repurchase of up to 15 million shares of our common stock. Thefollowing table summarizes our purchases under the stock repurchase program forthe three months ended June 30, 2008:

 
| **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** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| April 1 –  April 30, 2008 |       | 245,766                                              |       | $                                                | 17.72      |                                                                                                                       | 245,766    |                                                                                                                | 6,623,996  |   |
| May 1 –  May 31, 2008     |       | 179,000                                              |       | 19.21                                            |       | 424,766                                                                                                                    |       | 6,444,996                                                                                                           |       |
| June 1 –  June 30, 2008   |       | 945,446                                              |       | 14.82                                            |       | 1,370,212                                                                                                                  |       | 5,499,550                                                                                                           |       |
| Total                                         |       | 1,370,212                                            |       | $                                                | 15.91      |                                                                                                                       | 1,370,212  |                                                                                                                | 5,499,550  |   |

 

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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 the Company’s financial resources. As of June 30, 2008, wehad spent approximately $216.8 million to purchase and retire approximately9,500,450 shares of common stock. The authorization of Board of Directors doesnot have an expiration date.

 

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**ITEM 4.**                    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

** **

On May 6, 2008, weheld our 2008 Annual Meeting of Shareholders at which our shareholdersconsidered and voted on the items described below:

 

(a)             Theshareholders considered whether to elect the following persons as directors,each to serve until the next annual meeting of shareholders and until his orher respective successor shall have been duly elected and shall qualify:

 
| **Name of Nominee** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------|------------|--------------------|------------|-------------------------|------------|
| W. Steve  Albrecht            |       | 53,002,703         |       | 1,595,265               |       |
| Jerry C. Atkin                |       | 50,729,715         |       | 3,868,253               |       |
| J. Ralph Atkin                |       | 27,540,364         |       | 27,057,604              |       |
| Margeret S.  Billson          |       | 53,575,619         |       | 1,022,348               |       |
| Ian M. Cumming                |       | 39,634,583         |       | 14,963,385              |       |
| Henry J. Eyring               |       | 53,570,055         |       | 1,027,912               |       |
| Steven F.  Udvar-Hazy         |       | 53,477,990         |       | 1,119,978               |       |
| Robert G. Sarver              |       | 53,378,225         |       | 1,219,743               |       |
| James Welch                   |       | 53,570,284         |       | 1,027,684               |       |

 

(b)            Theshareholders also considered a proposal to ratify the appointment by our Boardof Directors of Ernst & Young, LLP as our independent publicaccountants for the fiscal year ending December 31, 2008.  There were 53,894,809 votes cast in favor ofthe proposal, 695,140 votes cast against the proposal and 8,018 votes withheld.

 

**ITEM 6:**                   EXHIBITS

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this Quarterly Report on Form 10-Q for the quarter ended June 30,2008, to be signed on its behalf by the undersigned, thereunto duly authorized,on August 8, 2008.

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

 

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