**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **
| ** **                                              | **x**      | **QUARTERLY REPORT UNDER  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                               |
| **For  the quarterly period ended March 31, 2008** |
| ** **                                              | ** ** | ** **                                                                                               |
| **OR**                                                  |
| ** **                                              | ** ** | ** **                                                                                               |
| ** **                                              | **o**      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition periodfrom                    to**

** **

**Commission file number 0-14719**

** **

**SKYWEST, INC.**

 

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

 

**444 South River Road**

**St. George, Utah 84790**

**(435) 634-3000**

** **

Indicate by a check 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, a non-acceleratedfiler, or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 ofthe 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 May 2, 2008** |
|-----------------------------|------------|-------------------------------------|
| Common  stock, no par value |       | 58,352,253                          |

 

 

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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 March 31, 2008 (unaudited) and December 31,  2007                        | 3      |
|              |                                      | Consolidated  Statements of Income (unaudited) for the three months ended March 31,  2008 and 2007               | 5      |
|              |                                      | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 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                                                           | 21     |
|              | Item 4.                                   | Controls and  Procedures                                                                                              | 22     |
|              |                                      |                                                                                                                  |   |   |
| PART II      | OTHER INFORMATION:                        | 23                                                                                                                    |
|              | Item 1.                                   | Legal Proceedings                                                                                                     | 23     |
|              | Item 1A.                                  | Risk Factors                                                                                                          | 23     |
|              | Item 2                                    | Unregistered  Sales of Equity Securities and use of Proceeds                                                          | 23     |
|              | Item 6.                                   | Exhibits                                                                                                              | 24     |
|              |                                      | Signature                                                                                                             | 25     |
|              |                                      |                                                                                                                  |   |
| Exhibit 31.1 | Certification of Chief  Executive Officer |                                                                                                                  |   |
| Exhibit 31.2 | Certification of Chief  Financial Officer |                                                                                                                  |   |
| Exhibit 32.1 | Certification of Chief  Executive Officer |                                                                                                                  |   |
| Exhibit 32.2 | Certification of Chief  Financial Officer |                                                                                                                  |   |
|                   |                                           |                                                                                                                       |        |  |  |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**SKYWEST, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in Thousands)**

** **

ASSETS

 
| ** **                                      | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                 |       |                     |       |                        |       |
| Cash and cash  equivalents                      |       | $                        | 240,126    |                        | $          | 122,802 |   |
| Marketable  securities                          |       | 362,699                  |       | 522,925                     |       |
| Restricted cash                                 |       | 14,782                   |       | 14,705                      |       |
| Income tax  receivable                          |       | 8,206                    |       | 23,114                      |       |
| Receivables, net                                |       | 64,098                   |       | 81,216                      |       |
| Inventories                                     |       | 108,413                  |       | 105,738                     |       |
| Prepaid aircraft  rents                         |       | 253,986                  |       | 223,891                     |       |
| Deferred tax  assets                            |       | 74,372                   |       | 70,523                      |       |
| Other current  assets                           |       | 29,539                   |       | 45,225                      |       |
| Total current  assets                           |       | 1,156,221                |       | 1,210,139                   |       |
|                                            |       |                     |       |                        |       |
| PROPERTY AND  EQUIPMENT:                        |       |                     |       |                        |       |
| Aircraft and  rotable spares                    |       | 3,193,113                |       | 3,146,602                   |       |
| Deposits on  aircraft                           |       | 23,622                   |       | 23,848                      |       |
| Buildings and  ground equipment                 |       | 231,815                  |       | 215,466                     |       |
|                                            |       | 3,448,550                |       | 3,385,916                   |       |
| Less-accumulated  depreciation and amortization |       | (736,511                 | )          | (685,327                    | )          |
| Total property  and equipment, net              |       | 2,712,039                |       | 2,700,589                   |       |
|                                            |       |                     |       |                        |       |
| OTHER ASSETS                                    |       |                     |       |                        |       |
| Intangible  assets, net                         |       | 27,935                   |       | 28,498                      |       |
| Other assets                                    |       | 80,788                   |       | 51,299                      |       |
| Total other  assets                             |       | 108,723                  |       | 79,797                      |       |
| Total assets                                    |       | $                        | 3,976,983  |                        | $          | 3,990,525 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**SKYWEST,INC. AND SUBSIDIARIES**

 

LIABILITIES ANDSTOCKHOLDERS’ EQUITY

 
| ** **                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                         | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| CURRENT  LIABILITIES:                                                                                              |       |               |       |                  |       |
| Current  maturities of long-term debt                                                                              |       | $                  | 119,162    |                  | $          | 118,202 |   |
| Accounts payable                                                                                                   |       | 164,044            |       | 133,728               |       |
| Accrued  salaries, wages and benefits                                                                              |       | 62,968             |       | 67,242                |       |
| Accrued aircraft  rents                                                                                            |       | 14,203             |       | 26,516                |       |
| Taxes other than  income taxes                                                                                     |       | 14,896             |       | 12,433                |       |
| Other current  liabilities                                                                                         |       | 47,548             |       | 40,098                |       |
| Total current  liabilities                                                                                         |       | 422,821            |       | 398,219               |       |
|                                                                                                               |       |               |       |                  |       |
| OTHER LONG-TERM  LIABILITIES                                                                                       |       | 41,287             |       | 40,355                |       |
|                                                                                                               |       |               |       |                  |       |
| LONG-TERM DEBT,  net of current maturities                                                                         |       | 1,708,471          |       | 1,732,748             |       |
|                                                                                                               |       |               |       |                  |       |
| DEFERRED INCOME  TAXES PAYABLE                                                                                     |       | 461,501            |       | 445,993               |       |
|                                                                                                               |       |               |       |                  |       |
| DEFERRED  AIRCRAFT CREDITS                                                                                         |       | 126,020            |       | 127,203               |       |
|                                                                                                               |       |               |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                        |       |               |       |                  |       |
| Preferred stock,  5,000,000 shares authorized; none issued                                                         |       | —             |       | —                |       |
| Common stock, no  par value, 120,000,000 shares authorized; 72,774,960 and 72,272,671 shares  issued, respectively |       | 546,222            |       | 533,545               |       |
| Retained  earnings                                                                                                 |       | 899,008            |       | 871,874               |       |
| Treasury stock,  at cost, 14,924,294 and 11,794,056 shares, respectively                                           |       | (227,542           | )          | (158,542              | )          |
| Accumulated  other comprehensive loss                                                                              |       | (805               | )          | (870                  | )          |
| Total  stockholders’ equity                                                                                   |       | 1,216,883          |       | 1,246,007             |       |
| Total  liabilities and stockholders’ equity                                                                   |       | $                  | 3,976,983  |                  | $          | 3,990,525 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**SKYWEST,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(Dollarsand Shares in Thousands, Except per Share Amounts)

(Unaudited)

 
| ** **                       | ** ** | **Three Months Ended  March  31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Operating  revenues:             |       |                                                   |       |   |   |
| Passenger                        |       | $                                                      | 859,159    |   | $ | 780,567 |   |
| Ground handling  and other       |       | 8,864                                                  |       | 8,401 |   |
|                             |       | 868,023                                                |       | 788,968 |   |
| Operating  expenses:             |       |                                                   |       |   |   |
| Flying  operations               |       | 494,925                                                |       | 410,061 |   |
| Customer service                 |       | 101,446                                                |       | 117,453 |   |
| Maintenance                      |       | 110,325                                                |       | 94,489 |   |
| Depreciation and  amortization   |       | 54,616                                                 |       | 50,278 |   |
| General and  administrative      |       | 38,489                                                 |       | 37,112 |   |
|                             |       | 799,801                                                |       | 709,393 |   |
| Operating income                 |       | 68,222                                                 |       | 79,575 |   |
| Other income  (expense):         |       |                                                   |       |   |   |
| Interest income                  |       | 6,762                                                  |       | 7,110 |   |
| Interest  expense, net           |       | (30,295                                                | )          | (30,571 | ) |
| Other                            |       | —                                                 |       | 189 |   |
|                             |       | (23,533                                                | )          | (23,272 | ) |
| Income before  income taxes      |       | 44,689                                                 |       | 56,303 |   |
| Provision for  income taxes      |       | 15,549                                                 |       | 21,515 |   |
| Net income                       |       | $                                                      | 29,140     |   | $ | 34,788 |   |
|                             |       |                                                   |       |   |   |
| Basic earnings  per share        |       | $                                                      | 0.49       |   | $ | 0.54 |   |
| Diluted earnings  per share      |       | $                                                      | 0.47       |   | $ | 0.53 |   |
| Weighted average  common shares: |       |                                                   |       |   |   |
| Basic                            |       | 60,013                                                 |       | 64,279 |   |
| Diluted                          |       | 61,351                                                 |       | 65,837 |   |
|                             |       |                                                   |       |   |   |
| Dividends  declared per share    |       | $                                                      | 0.03       |   | $ | 0.03 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**SKYWEST,INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

(InThousands)

 
| ** **                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                    |       |                                             |       |   |   |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES              |       | $                                                | 136,474    |   | $ | 100,715 |   |
|                                                    |       |                                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                  |       |                                             |       |   |   |
| Purchases of  marketable securities                     |       | (363,221                                         | )          | (135,099 | ) |
| Sales of  marketable securities                         |       | 502,684                                          |       | 130,409 |   |
| Proceeds from  the sale of equipment                    |       | 187                                              |       | 1,829 |   |
| Acquisition of  property and equipment:                 |       |                                             |       |   |   |
| Aircraft and  rotable spare parts                       |       | (48,064                                          | )          | (166,351 | ) |
| Deposits on  aircraft                                   |       | —                                           |       | (8,704 | ) |
| Buildings and  ground equipment                         |       | (17,101                                          | )          | (10,943 | ) |
| Increase in  other assets                               |       | (8,540                                           | )          | (11,940 | ) |
|                                                    |       |                                             |       |   |   |
| NET CASH  PROVIDED BY (USED) IN INVESTING ACTIVITIES    |       | 65,945                                           |       | (200,799 | ) |
| ** **                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                  |       |                                             |       |   |   |
| Proceeds from issuance  of long-term debt               |       | —                                           |       | 132,906 |   |
| Principal  payments on long-term debt                   |       | (23,317                                          | )          | (20,685 | ) |
| Tax benefit from  exercise of common stock options      |       | 170                                              |       | 68 |   |
| Return of  deposits on aircraft and rotable spare parts |       | 226                                              |       | 7,245 |   |
| Net proceeds  from issuance of common stock             |       | 8,817                                            |       | 9,066 |   |
| Purchase of  treasury stock                             |       | (69,000                                          | )          | — |   |
| Payment of cash  dividends                              |       | (1,991                                           | )          | (1,946 | ) |
|                                                    |       |                                             |       |   |   |
| NET CASH  PROVIDED BY (USED) IN FINANCING ACTIVITIES    |       | (85,095                                          | )          | 126,654 |   |
|                                                    |       |                                             |       |   |   |
| Increase in cash  and cash equivalents                  |       | 117,324                                          |       | 26,570 |   |
| Cash and cash  equivalents at beginning of period       |       | 122,802                                          |       | 415,454 |   |
|                                                    |       |                                             |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD             |       | $                                                | 240,126    |   | $ | 442,024 |   |
|                                                    |       |                                             |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:      |       |                                             |       |   |   |
|                                                    |       |                                             |       |   |   |
| Cash paid during  the year for:                         |       |                                             |       |   |   |
| Interest, net of  capitalized amounts                   |       | $                                                | 23,840     |   | $ | 17,398 |   |
| Income taxes                                            |       | $                                                | 13,924     |   | $ | 115 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**SKYWEST, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Note A — Condensed Consolidated Financial Statements

 

The condensedconsolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”)and its wholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWestAirlines”) and Atlantic Southeast Airlines, Inc. (“ASA”) included hereinhave been prepared, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughSkyWest believes that the following disclosures are adequate to make theinformation presented not misleading. These condensed consolidated financialstatements reflect all adjustments that, in the opinion of management, arenecessary to present fairly the results of operations for the interim periodspresented. All adjustments are of a normal recurring nature, unless otherwisedisclosed. The Company suggests that these condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for the three month period ended March 31,2008 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. Some of the Company’s agreements have established a multi-year ratereset provision. Under the SkyWest Airlines United Express Agreement, there isa provision in the agreement that specifies the contractual rate will be reseton January 1, 2008.  As of March 31,2008, the Company has not been able to finalize the reset contractual rateswith United. In the event that the contractual rates have not been finalized atquarterly or annual financial statement dates, the Company records revenuesbased on a prior period’s approved rates plus any applicable contractual annualadjustment factors.

 

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 Agreement, the fixed-fee rates arespecifically defined through 2009.  Theparties agreed that on or after a specified date in 2010 the parties agree toreset such rates to reflect SkyWest Airlines actual costs in 2010 (with asimilar process on each 5th year thereafter).  Under the terms of the ASADelta Connection Agreement, Delta has agreed to compensate ASA for its directcosts associated with operating the Delta Connection flights, plus, if ASAcompletes a certain minimum percentage of its Delta Connection flights, anadditional percentage of such costs. Additionally, ASA’s Delta Connection 

 

7

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Agreement provides forthe payment of incentive compensation upon satisfaction of certain performancegoals. The incentives are defined in the ASA Delta agreement as being measuredand determined on a monthly and quarterly basis.  At the end of each quarter, the Companycalculates the incentives achieved during the quarter and recognizes revenueaccordingly.   Under the ASA DeltaConnection Agreement, excess margins over certain percentages must be returnedor shared with Delta, depending on various conditions. The parties to the DeltaConnection Agreements make customary representations, warranties and covenants,including with respect to various operational, marketing and administrativematters.

 

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 one-time start-up payment for each aircraft delivered. TheMidwest Services Agreement provides for incentives or penalties based uponSkyWest Airlines’ performance, including on-time arrival performance andcompletion percentage rates. Additionally, Midwest has agreed to reimbursecertain of SkyWest Airlines’ operating costs, including costs related to fuel,landing fees, and catering.

 

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 and the Company’s abilityto earn incentive payments contemplated under the Company’s code-shareagreements.

 

#### Note C — Share-Based Compensation

####  

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 SFAS No. 123(R), *Share-Based Payment*(“SFASNo. 123(R)”).  During the threemonths ended March 31, 2008 the Company granted options to purchase351,437 shares of common stock under the SkyWest, Inc. Long-Term IncentivePlan (“2006 Incentive Plan”) .  Thefollowing table shows the assumptions used and weighted average fair value forstock option grants during the three months ended March 31, 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 |   | $    | 6.34   |   |
|                                               |        |      |        |  |

 

Duringthe three months ended March 31, 2008, the Company granted 294,774 sharesof restricted stock to the Company’s employees under the 2006 IncentivePlan.  The restricted stock has athree-year vesting period, during which the recipient must remain employed withSkyWest or one of SkyWest’s subsidiaries. Additionally, the Company granted 13,304 fully-vested shares of commonstock to the Company’s directors.  Theweighted average fair value of the shares of restricted stock on the date ofgrant was $25.80 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 March 31, 2008 and 2007, the Company recorded pre-tax share-basedcompensation expense of $3.4 million and $3.6 million, respectively.

 

8

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Note D — Net Income PerCommon Share

 

Basic net income percommon share (“Basic EPS”) excludes dilution and is computed by dividing netincome by the weighted average number of common shares outstanding during theperiod. Diluted net income per common share (“Diluted EPS”) reflects thepotential dilution that could occur if stock options or other contracts toissue common stock were exercised or converted into common stock. Thecomputation of Diluted EPS does not assume exercise or conversion of securitiesthat would have an anti-dilutive effect on net income per common share. Duringthe three months ended March 31, 2008 and 2007 options to acquire2,030,000 and 362,000 shares, respectively, were excluded from the computationof Diluted EPS 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 March  31,  (unaudited)** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                                | ** ** | **2007** | ** ** |
| **Numerator**                                                              | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| Net Income                                                                 |       | $                                                                       | 29,140     |   | $ | 34,788 |   |
| ** **                                                                 | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| **Denominator**                                                            | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
| Weighted average  number of common shares outstanding                      |       | 60,013                                                                  |       | 64,279 |   |
| Effect of  outstanding share-based compensation                            |       | 1,338                                                                   |       | 1,558 |   |
| Weighted average  number of shares for diluted net income per common share |       | 61,351                                                                  |       | 65,837 |   |
|                                                                       |       |                                                                    |       |   |   |
| Basic earnings  per share                                                  |       | $                                                                       | 0.49       |   | $ | 0.54 |   |
| Diluted earnings  per share                                                |       | $                                                                       | 0.47       |   | $ | 0.53 |   |

 

Note E — Comprehensive Income

 

The Company reportscomprehensive income in accordance with SFAS No. 130, *Reporting**Comprehensive Income* establishesstandards for reporting and displaying comprehensive income and its componentsin the financial statements. Comprehensive income includes charges and creditsto stockholders’ equity that are not the result of transactions withshareholders.  Also, comprehensive incomeconsisted of net income plus changes in unrealized appreciation on marketablesecurities, net of tax, for the periods indicated (in thousands):

 
| ** **                                                     | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **(unaudited)**                                      | ** ** |
| ** **                                                     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Net  Income**                                                |       | $                                                    | 29,140     |   | $ | 34,788 |   |
| Unrealized  appreciation on marketable  securities, net of tax |       | 65                                                   |       | 62 |   |
|                                                           |       |                                                 |       |   |   |
| **Comprehensive  income**                                      |       | $                                                    | 29,205     |   | $ | 34,850 |   |

 

9

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Note F — Long-Term Debt

 

Long-term debt of theCompany consisted of the following for the periods indicated (in thousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **March 31,  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                                    |       | $                        | 570,958    |                        | $          | 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% to7.52% through 2021, secured  by aircraft                               |       | 605,051                  |       | 611,995                     |       |
| Notes payable to  banks, due in semi-annual installments plus interest at 6.06% to 7.18%  through 2021, secured by aircraft                                                                                                   |       | 261,804                  |       | 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                                                                                     |       | 78,848                   |       | 80,585                      |       |
| Notes payable to  banks, due in monthly installments plus interest of 6.47% to 7.90% through  2020, secured by aircraft                                                                                                       |       | 269,072                  |       | 272,475                     |       |
| Notes payable to  banks, due in monthly installments plus interest of 6.05% through 2020,  secured by aircraft                                                                                                                |       | 27,262                   |       | 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 |       | 8,248                    |       | 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                                                                                        |       | 6,390                    |       | 6,505                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                        | 1,827,633  |                        | $          | 1,850,950 |   |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Less current  maturities                                                                                                                                                                                                      |       | (119,162                 | )          | (118,202                    | )          |
|                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Long-term debt,  net of current maturities                                                                                                                                                                                    |       | $                        | 1,708,471  |                        | $          | 1,732,748 |   |

 

At March 31, 2008,the three-month and six-month LIBOR rates were 2.69% and 2.61%,respectively.   At December 31,2007, the three-month and six-month LIBOR rates were 4.70% and 4.60%,respectively.

 

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 March 31,2008 (in thousands):

 
| April through  December 2008 |   | $         | 191,813   |   |
|----------------------------------------|--------|-----------|-----------|--------|
| 2009                                   |   | 328,013   |      |
| 2010                                   |   | 310,730   |      |
| 2011                                   |   | 299,146   |      |
| 2012                                   |   | 299,609   |      |
| Thereafter                             |   | 1,768,006 |      |
|                                   |   | $         | 3,197,317 |   |

 

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Note H – Fair ValueMeasurements

 

In September 2006,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 157, *Fair Value Measurements** *(“SFAS No. 157”).SFAS No. 157 defines fair value, establishes a framework for measuringfair value in accordance with accounting principles generally accepted in theUnited States, and expands disclosures about fair value measurements. TheCompany has adopted the provisions of SFAS No. 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS No. 157 didnot materially impact its financial condition, results of operations, or cashflows, the following disclosures are required under SFAS No. 157.

 

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 March 31,2008, 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 first quarter 2008.  Therefore, quoted prices in activemarkets are no longer available and the fair values of these securities areestimated utilizing a discounted cash flow analysis as of March 31,2008.  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 $0.7 million to accumulated othercomprehensive income.  As of March 31, 2008, the Company owned$34.9 million of auction rate security instruments.  The majority of the auction rate securityinstruments held by the Company at March 31, 2008 were tax-exemptmunicipal bond investments, for which the market has recently had a fewsuccessful auctions.  For the securitiesthat have announced call dates (approximately $14.1 million), the Company hasclassified these investments as current and has included them in MarketableSecurities on the unaudited Consolidated Balance Sheet as of March 31,2008.  For the securities that have notannounced a call date (approximately $20.8 million), the Company has classifiedthe investments as non current and has included them in Other Assets in theaccompanying  Consolidated Balance Sheetas of March 31, 2008. The Company has classified these securities as noncurrent due to the Company’s belief that the market for these securities maytake in excess of twelve months to fully recover. As of March 31, 2008,the Company continued to 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.

 

11

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TheCompany’s assets measured at fair value on a recurring basis subject to thedisclosure requirements of SFAS No. 157 at March 31, 2008, were asfollows (in thousands):

 
| ** **                                  | ** ** | **Fair Value Measurements as of March 31, 2008** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                                                           | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                        |       |                                                                                |       |   |   |   |   |   |   |
| Cash, Cash  Equivalents and Restricted Cash |       | $                                                                                   | 254,908    |   | $ | 254,908 |   | $ | — |   | $ | — |   |
| Marketable  Securities                      |       | 362,699                                                                             |       | 29,355 |   | 319,283 |   | 14,061 |   |
| Other Assets                                |       | 20,829                                                                              |       | — |   | — |   | 20,829 |   |
| Total Assets  Measured at Fair Value        |       | $                                                                                   | 638,436    |   | $ | 284,263 |   | $ | 319,283 |   | $ | 34,890 |   |

 

Basedon market conditions, the Company changed its valuation methodology for auctionrate securities to a discounted cash flow analysis during first quarter2008.  Accordingly, these securities changed from Level 1 to Level 3within SFAS No. 157’s hierarchy since the Company’s initial adoption ofSFAS No. 157 at January 1, 2008.

 

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 March 31, 2008(in thousands):

 
| Fair Value Measurements Using Significant Unobservable Inputs  (Level 3) |
|-------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                  | ** ** | **Auction Rate  Securities** | ** ** |
|                                                                                                        |   |   |   |
| Balance at  January 1, 2008                                                                            |   | $ | 123,600 |   |
| Total realized  and unrealized gains or (losses)                                                            |   |   |   |
| Included in  earnings                                                                                       |   | — |   |
| Included in  other comprehensive income                                                                     |   | (685 | ) |
| Net purchases  and (settlements)                                                                            |   | (88,025 | ) |
| Balance at  March 31, 2008                                                                             |   | $ | 34,890 |   |

 

Note I  — StockRepurchase

 

During2007, the Company announced that is has been authorized by its Board ofDirectors to repurchase up to 10 million shares of common stock in thepublic market. During the three months ended March 31, 2008, the Companyrepurchased 3.1 million shares of common stock for approximately$69.0 million at a weighted average price per share of $22.04.

 

Note J — Legal Matters

 

TheCompany is subject to certain legal actions which it considers routine to itsbusiness activities. As of March 31, 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.

 

*ASAand SkyWest Airlines v. Delta Air Lines*

 

Duringthe quarter ended December 31, 2007, Delta notified SkyWest, 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 cash from the weeklyscheduled wire payments to SkyWest and ASA. As of March 31, 2008, Delta has withheld approximately $28.5million we believe 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

 

12

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Company has evaluated theDelta dispute in accordance with the provisions of Financial AccountingStandards Board No. 5 (“FASB No.5”), *Accountingfor Contingencies*. Based on the provisions of FASB No. 5, anestimated loss is accrued if the loss is probable and reasonably estimable.Because these conditions have not been satisfied, the Company has not recordeda loss in the condensed consolidated financial statements as of March 31,2008.

 

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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, SkyWest’s potential acquisition ofExpress Jet Holdings, Inc. and other statements that are not historical facts.  Youshould also keep in mind that all forward-looking statements are based onSkyWest’s existing beliefs about present and future events outside of SkyWest’scontrol and on assumptions that may prove to be incorrect.  If one or more risks identified in thisReport materializes, or any other underlying assumption proves incorrect,SkyWest’s actual results will vary, and may vary materially from thoseanticipated, 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 months ended March 31, 2008 and 2007. Also discussed isour financial position as of March 31, 2008 and December 31, 2007.You should read this discussion in conjunction with ourcondensed consolidatedfinancial statements for the three months ended March 31, 2008,, includingthe notes thereto, appearing elsewhere in this Report.  This discussion and analysis containsforward-looking statements. Please refer to the sections of this Reportentitled “Cautionary Statement Concerning Forward-Looking Statements” and “RiskFactors” for discussion of the uncertainties, risks and assumptions associatedwith these statements.*

 

**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 March 31, 2008, SkyWestAirlines and ASA offered scheduled passenger and air freight service withapproximately 2,600 total daily departures to 229 destinations in the UnitedStates, Canada, Mexico and the Caribbean.  Additionally, we provide groundhandling services for approximately ten other airlines.  As of March 31, 2008, our consolidatedfleet consisted of 440 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”)), 102 Bombardier CRJ700 Regional Jets (“CRJ700s”)(52 assigned to United and 50 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 three months ended March 31,2008, approximately 57.5% of our aggregate capacity was operated under theDelta code, approximately 38.8% was operated under the United code andapproximately 3.7% was operated under the Midwest code.

 

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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.We serve markets from Midwest’s current hubs in Milwaukee and Kansas City. Asof March 31, 2008, SkyWest Airlines operated as a Delta Connection carrierin Salt Lake City, a United Express carrier in Los Angeles, San Francisco,Denver, Chicago and the Pacific Northwest, and a Midwest Connect carrier inMilwaukee and Kansas City operating more than 1,750 total daily flights.

 

ASA hasbeen a code-share partner with Delta in Atlanta since 1984. ASA expanded itsoperations as a Delta Connection carrier to also include Cincinnati and SaltLake City in September 2002 and April 2003, respectively. ASAoperates approximately 800 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, starting in 2008, if Delta solicits requests forproposals to fly Delta Connection regional aircraft, ASA will be permitted tobid to maintain the same percentage of total Delta Connection regional jetflights that it flies during 2007, and, if ASA does not achieve the winning bidfor the proposed flying, ASA will be permitted to match the terms of thewinning bid to the extent necessary for ASA to maintain its percentage of DeltaConnection regional 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 three months ended March 31, 2008, contract flying revenue andpro-rate revenue represented approximately 95% and 5%, respectively, of ourtotal passenger revenues. On contract routes, the major airline partnercontrols scheduling, ticketing, pricing and seat inventories and we arecompensated by the major airline partner at contracted rates based on thecompleted block hours, flight departures and other operating measures. Onpro-rate flights, we control scheduling, ticketing, pricing and seatinventories and receive a pro-rated portion of passenger fares. As of March 31,2008, essentially all of our Brasilia turboprops flown for Delta were flownunder pro-rate arrangements, while approximately 59% of our Brasilia turbopropsflown in the United system were flown under contractual arrangements, with theremaining 41% flown under pro-rate arrangements.

 

**First Quarter Highlights**

 

We hadrevenues of $868.0 million for the three months ended March 31, 2008, a10.0% increase, compared to $789.0 million for the three months ended March 31,2007.  We had net income of $29.1 millionfor the three months ended March 31, 2008, a decrease of 16.2%, or $0.47per diluted share compared to $34.8 million of net income or $0.53 per dilutedshare, for the three months ended March 31, 2007.

 

Totalavailable seat miles or ASMs for the first quarter of 2008 increased 5.4% fromthe first quarter of 2007, primarily as a result of an increase in our fleetsize to 440 aircraft as of March 31, 2008, from 425 aircraft as of March 31,2007.  During the first quarter of 2008,we took delivery of four used CRJ200 regional jet aircraft from anotheroperator.  Also during the first quarterof 2008, we generated 5.6 billion ASMs, compared to 5.3 billion ASMs during thesame period of 2007.

 

At March 31,2008, we had approximately $617.6 million in cash and marketable securities,compared to approximately $660.4 million as of December 31, 2007.  The four used CRJ200 regional jet aircraft weacquired during the three months ended March 31, 2008, were purchased withcash.

 

**Outlook**

 

On October 12,2007, we announced that SkyWest Airlines plans to acquire 22 additionalregional jet aircraft through 2010, 18 of which we intend to operate for UnitedExpress, as part of an aircraft transition plan, allowing United Express toremove 23 EMB-120 30 seat turboprop aircraft from the contract reimbursementmodel in the United Express Agreement and add 66 seat regional jet aircraft forUnited Express flying. Generally, the turboprop removals are intended to occurin conjunction with deliveries of new regional jet aircraft in order to ensurea smooth transition in existing markets. 

 

15

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Additionally, SkyWestAirlines intends to exchange four 50-seat CRJ200s for four CRJ900s configuredwith 76 seats in its Delta Connection operations. On November 30, 2007, weannounced that we placed a firm order for 22 aircraft with BombardierAerospace. We are scheduled to take delivery of these aircraft beginning in late2008 and continue through the first quarter of 2010.

 

**CriticalAccounting 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*

 

TheCompany has adopted Financial Accounting Standard No. 157 “Fair ValueMeasurements” (SFAS 157) as it applies to financial assets and liabilitieseffective January 1, 2008.  SFAS 157 defines fair value,establishes a framework for measuring fair value under generally acceptedaccounting 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, the Company utilizes several valuation techniques in order to assessthe fair value of the Company’s financial assets and liabilities. The Company’scash and cash equivalents primarily utilize quoted prices in active markets foridentical assets or liabilities.  The nonauction rate  marketable securities arevalued using quoted prices in active markets for identical assets or liabilities.  If a quoted price is not available, theCompany utilizes broker quotes in a non-active market for valuation of thesesecurities.   For auction rate securityinstruments a quoted price in active markets are no longer available and thefair values of these securities are estimated utilizing a discounted cash flow.

 

**Results of Operations**

 

**Three Months Ended March 31, 2008 and 2007**

 

*OperatingStatistics. * The following table sets forth our majoroperational statistics and the percentage-of-change for the three months ended March 31,2008 and 2007.

 
| ** **                                     | ** ** | **For the three months ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                               | ** ** | **2007** | ** ** | **% Change** | ** ** |
| ** **                                     | ** ** | ** **                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue  passenger miles (000)                 |       | 4,194,329                                                              |       | 4,024,556 |   | 4.2 | % |
| Available seat  miles (“ASMs”) (000) |       | 5,578,579                                                              |       | 5,293,902 |   | 5.4 | % |
| Block hours                                    |       | 353,637                                                                |       | 338,992 |   | 4.3 | % |
| Departures                                     |       | 217,510                                                                |       | 214,286 |   | 1.5 | % |
| Passengers  carried                            |       | 8,076,331                                                              |       | 7,823,106 |   | 3.2 | % |
| Passenger load  factor                         |       | 75.2                                                                   | %          | 76.0 | % | (0.8 | )pts |
| Revenue per  available seat mile               |       | 15.6                                                                   | ¢     | 14.9 | ¢ | 4.7 | % |
| Cost per  available seat mile                  |       | 14.9                                                                   | ¢     | 14.0 | ¢ | 6.4 | % |
| Fuel cost per  available seat mile             |       | 5.3                                                                    | ¢     | 4.1 | ¢ | 26.8 | % |
| Average  passenger trip length (miles)         |       | 519                                                                    |       | 514 |   | 1.0 | % |

 

*Revenues.*  Operating revenues increased 10.0% to $868.0million for the three months ended March 31, 2008, compared 

 

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to $789.0 million for the three months ended March 31,2007.  Passenger revenues, whichrepresented 99.0% of consolidated operating revenues for the three months endedMarch 31, 2008, increased 10.1% to $859.2 million for the three monthsended March 31, 2008, from $780.6 million, or 99.0% of consolidatedoperating revenues, for the three months ended March 31, 2007.  Our passenger revenues, excluding fuelreimbursements from major partners of $283.5 million and $211.4 million for the three months ended March 31,2008 and 2007, respectively, increased 1.1% for the three months ended March 31,2008 compared to the three months ended March 31, 2007.  The increase in passenger revenues excludingfuel was primarily due to a 5.4% increase in ASMs, principally as a result ofour increase in operating aircraft to 440 aircraft as of March 31, 2007,from 425 aircraft as of March 31, 2007. Revenue earned under our groundhandling contracts for services related to our aircraft is recorded inPassenger Revenue.  In June 2007,Delta took over the ground handling services in Atlanta for ASA flights thatwere previously handled by ASA. Accordingly, primarily driven by Atlanta transition, our customerservice costs decreased by $16.0 million for the three months ended March 31,2008 compared to the three months ended March 31, 2007.  Passenger revenues decreased by a similaramount due to the transition of ground handling services in Atlanta toDelta.   The percentage increase inpassenger revenues excluding fuel was less than the percentage increase inASMs, primarily due to the transition of ground handling services provided forour aircraft in Atlanta and operating efficiencies obtained from addingincremental aircraft under contract that is factored into our contractualrates.

 

Total ground handling andother revenues for the three months ended March 31, 2008 increasedapproximately 5.5% from the three months ended March 31, 2007. Revenueearned under other ground handling contracts where we provide ground handlingservices for other airlines is recorded in Ground handling and otherrevenue.  The increase was primarilyrelated to higher volume of flights serviced under ground handling contractswith United and Delta, whereby we perform ground handling services for severalother regional airlines.

 

The following table setsforth information regarding our operating expense components for the threemonths ended March 31, 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 groups.  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 statement of income included in thisReport:.

 

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

 

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

 

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

 

·                  The “Fuel”expenses presented in the table below is include in the “Flying Operations”line in our consolidated statement of income.

 

·                  The “Otherairline expenses” presented in the table below include 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 statement 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 as Cents per ASM. ASMs is a common metric used in the airline industry to measure anairline’s size in terms of passenger capacity. ASMs factors both the number of aircraft in an airline’s fleet and theseat capacity for the aircraft in the fleet. As the size of our fleet is the underlying driver of our operatingcosts, the primary basis for our MD&A presentation is on a cost per ASMbasis to discuss significant changes in our costs not proportionate to therelative changes in our fleet size.

 

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| ** **                             | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **Amount**                                           | ** ** | **Percentage  of  Revenue** | ** ** | **Cents  per  ASM** | ** ** | **Amount** | ** ** | **Percentage  of  Revenue** | ** ** | **Cents  Per  ASM** | ** ** |
| ** **                             | ** ** | **(in thousands)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages  and employee benefits |       | $185,895                                             |       | 21.4 | % | 3.3 |   | $185,140 |   | 23.5 | % | 3.6 |   |
| Aircraft costs                         |       | 128,042                                              |       | 14.8 | % | 2.3 |   | 122,494 |   | 15.5 | % | 2.3 |   |
| Maintenance                            |       | 83,061                                               |       | 9.6 | % | 1.5 |   | 69,923 |   | 8.9 | % | 1.3 |   |
| Fuel                                   |       | 292,389                                              |       | 33.7 | % | 5.3 |   | 218,052 |   | 27.6 | % | 4.1 |   |
| Other airline  expenses                |       | 110,414                                              |       | 12.7 | % | 2.0 |   | 113,784 |   | 14.4 | % | 2.1 |   |
| Total operating  expenses              |       | 799,801                                              |       |   |   | 14.4 |   | 709,393 |   |   |   | 13.4 |   |
| Interest                               |       | 30,295                                               |       | 3.5 | % | 0.5 |   | 30,571 |   | 3.9 | % | 0.6 |   |
| Total airline  expenses                |       | $830,096                                             |       |   |   | 14.9 |   | $739,964 |   |   |   | 14.0 |   |

 

*SalaryWages and Employee Benefits. *Thecost per ASM for salaries, wages and employee benefits decreased to 3.3¢ forthe three months ended March 31, 2008, compared to 3.6¢ for the threemonths ended March 31, 2007.  Theaverage number of full-time equivalent employees decreased 4.0% to 14,578 forthe three months ended March 31, 2008, from 15,184 for the three monthsended March 31, 2007.  The decrease in number of employees and thedecrease in the cost per ASM was significantly due to Delta asummingresponsibility for performance of customer service functions in Atlanta fromASA in June 2007.

 

*AircraftCosts.*  The cost perASM for aircraft costs, including aircraft rent and depreciation, remainedconstant at 2.3¢ for the three months ended March 31, 2008 and 2007, asexpected.

 

*Maintenance.*  The cost per ASM for maintenance expenseincreased to 1.5¢ for the three months ended March 31, 2008, compared to1.3¢ for the three months ended March 31, 2007. The increase was primarilyrelated to the timing of engine overhaul events on aircraft operated under ourDelta Connection Agreements and other scheduled direct maintenance eventsduring the three months ended March 31, 2008.  Additionally, since March 31, 2007, weadded 15 used aircraft to our fleet, which typically results in highermaintenance costs in the first year of service than new aircraft. Under ourUnited Express Agreement and our Midwest Agreement, specific amounts areincluded in the rates and charges for mature maintenance on regional jetengines that we record as revenue. However, consistent with the direct expensemaintenance policy, we record maintenance expense on our CRJ200 engines as itis incurred. As a result, during the three months ended March 31, 2008, wecollected and recorded as revenue $8.1 million (pretax) under the UnitedExpress Agreement and Midwest Services Agreement to compensate us for futureengine maintenance overhauls.

 

*Fuel*.  The cost per ASM for fuel increased 29.3% to5.3¢ for the three months ended March 31, 2008, from 4.1¢ for the threemonths ended March 31, 2007. The average cost per gallon of fuel increasedto $3.08 per gallon during the three months ended March 31, 2008 from$2.01 during the three months ended March 31, 2007. However, despite the increasein the average cost per gallon, during the three months ended March 31,2008, United purchased fuel directly from a fuel vendor for our United Expressaircraft operated out of Chicago, San Francisco, Los Angeles and Denver, whichreduced our total fuel costs and related passenger revenue compared to thethree months ended March 31, 2007 by approximately $55.7 million

 

*Otherairline expenses.*  Thecost per ASM for other airline expenses, primarily consisting of property tax,hull and liability insurance, crew simulator training, crew hotel costs,landing fees and station rentals decreased 4.8% to 2.0¢ for the three monthsended March 31, 2008, from 2.1¢ for the quarter ended March 31,2007.  The decrease in cost per ASM wasprimarily due to the increased operating efficiencies obtained from increasedstage lengths we flew with our regional jets.

 

*Interest.*  The cost per ASM for interest expensedecreased 16.7% to 0.5¢ for the three months ended March 31, 2008, from0.6¢ for the three months ended March 31, 2007.  The decrease in cost per ASM was primarilydue to the addition of  two new CRJ900sto our fleet between March 31, 2007 and March 31, 2008 and theacquisition of 15 used CRJ 200s during the same period. The new CRJ 900s andthe used CRJ 200s have lower ownership costs per ASM than the CRJ200s andturboprop fleets. Five of the 15 used CRJ 200s were purchased without debtfinancing.

 

*TotalAirline Expenses.*Total airline expenses (consisting of totaloperating and interest expenses) increased 12.2% to $830.1 million for thethree months ended March 31, 2008, compared to $740.0 million for thethree months ended March 31, 2007. Excluding fuel costs, our total airlineexpense cost per ASM decreased to 9.6¢ for the three months ended March 

 

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31, 2008 from 9.9¢ forthe three months ended March 31, 2007. The decrease in our total airline expenses excluding fuel was primarilydue to the reduction in ground handling costs in Atlanta that was transition toDelta in June 2007.   As apercentage of total operating revenues, total airline expenses increased to95.6% for the three months ended March 31, 2008, from 93.8% for the threemonths ended March 31, 2007.  Theincrease in total airline expenses as a percentage of consolidated operatingrevenues was primarily due to increases in fuel and maintenance costs asdescribed above.

 

*NetIncome. *Net incomedecreased to $29.1 million, or $0.47 per diluted share, for the three monthsended March 31, 2008,  compared to$34.8 million, or $0.53 per diluted share, for the three months ended March 31,2007.  The principal factors whichcontributed to the change in net income are discussed above.

 

## **Liquidity and Capital Resources**

##  

We hadworking capital of $733.4 million and a current ratio of 2.7:1 at March 31,2008, compared to working capital of $811.9 million and a current ratio of3.0:1 at December 31, 2007. The decrease in working capital wasprincipally attributable to the repurchase of $69.0 million of  outstanding shares of our common stock andthe investment of $48.1 million in flight equipment, which included thepurchase of four used CRJ200s with cash.

 

Theprincipal sources of cash during the three months ended March 31, 2008were $136.5 million provided by operating activities, net sales of $139.5million of marketable securities, the sale of $8.8 million of common stock inconnection with the exercise of stock options under our stock option andemployee stock purchase plans, $0.2 million from returns on aircraft deposits,$0.2 million of proceeds from the sale of equipment and $0.2 million in taxbenefit from the exercise of options to purchase shares of common stock.  We invested $48.1 million in flightequipment, made principal payments on long-term debt of $23.3 million,purchased $8.5 million in other assets, repurchased $69.0 million ofoutstanding shares of our common stock, spent $17.1 million for buildings andground equipment and paid $2.0 million in cash dividends.  These factors resulted in a $117.3 millionincrease in cash and cash equivalents during the three months ended March 31,2008.

 

Webelieve that in the absence of unusual circumstances, the working capitalcurrently available to us will be sufficient to meet our present financialrequirements, including expansion, planned capital expenditures, and scheduledlease payments and debt service obligations for at least the next 12 months.

 

Ourposition in marketable securities, consisting primarily of bonds, bond fundsand commercial paper, decreased to $362.7 million at March 31, 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 March 31,2008, our total capital mix was 41.6% equity and 58.4% long-term debt, comparedto 41.8% equity and 58.2% long-term debt at December 31, 2007.

 

On April 7,2008, we made a proposal to acquire all of the outstanding shares of ExpressJetHoldings, Inc. common stock for $3.50 per share in cash.  Ourproposal was not subject to a financing condition, but was subject to thecompletion of due diligence, certain clarification or amendments to thecollective bargaining agreement between ExpressJet and its pilots and certainother customary approvals and conditions.  We have negotiated theprincipal terms of a new Capacity Purchase Agreement with Continental Airlines,which is intended to become effective upon satisfactory completion of duediligence and consummation of the proposed transaction. On April 25,2008, ExpressJet’s Special Committee rejected our proposal. We intend to reviewour alternatives with respect to our proposal to acquire ExpressJet, whichcould include, among other things, altering or withdrawing its proposal and/ornot participating in any formal process established by the Special Committeeand its advisors.  We believe that in theabsence of unusual circumstances, the working capital currently available to uswill be sufficient to meet the current proposal to acquire all of theoutstanding shares of ExpressJet Holdings, Inc.

 

**Significant Commitments and Obligations**

 

*General*

 

Thefollowing table summarizes our commitments and obligations stated in calendaryears except as noted for each of the next five years and thereafter (inthousands):

 

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| ** **                                                      | ** ** | **Total**  | ** ** | **Apr-Dec  2008** | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft  commitments                                      |       | $          | 529,030    |              | $          | 98,780     |       | $          | 332,239    |       | $          | 98,011     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease  payments for aircraft and facility obligations |       | 3,197,317  |       | 191,813           |       | 328,013    |       | 310,730    |       | 299,146    |       | 299,609    |       | 1,768,006      |       |
| Interest  commitments                                           |       | 853,357    |       | 93,052            |       | 107,155    |       | 99,530     |       | 91,577     |       | 82,369     |       | 379,674        |       |
| Principal  maturities on long-term debt                         |       | 1,827,633  |       | 94,885            |       | 123,395    |       | 128,832    |       | 132,188    |       | 182,270    |       | 1,166,063      |       |
| Total  commitments and obligations                              |       | $          | 6,407,337  |              | $          | 478,530    |       | $          | 890,802    |       | $          | 637,103    |       | $              | 522,911    |   | $ | 564,248 |   | $ | 3,313,743 |   |

 

*PurchaseCommitments and Options*

 

On November 21,2006, we announced that SkyWest Airlines had been selected by Delta to operate12 new CRJ700s previously operated by Comair Inc. Ten of the 12 CRJ700swere delivered as of December 31, 2007 and the remaining two CRJ700s arescheduled to be delivered by June 2008. As of March 31, 2008, we hadtotal firm aircraft orders and commitments to operate two CRJ700’s to besubleased from Delta. Total expenditures for these aircraft and related flightequipment are estimated to be approximately $1 million.

 

On October 12,2007, we announced that SkyWest Airlines plans to acquire 22 additionalregional jet aircraft through 2010, 18 of which we intend to operate for UnitedExpress, as part of an aircraft transition plan, allowing United Express toremove 23 EMB-120 30-seat turboprop aircraft from the contract reimbursementmodel contemplated by the United Express Agreement and add 66-seat regional jetaircraft for United Express flying. Generally, the turboprop removals under theUnited Express Agreement are intended to occur in conjunction with deliveriesof new regional jet aircraft in order to facilitate a smooth transition inexisting markets. Additionally, SkyWest Airlines intends to exchange four50-seat CRJ200s for four CRJ900s configured with 76 seats in its DeltaConnection operations. These four 50-seat CRJ200s are scheduled to be placedinto service under other capacity purchase agreements. On November 30,2007, we announced that we placed a firm order with Bombardier Aerospace. Weare scheduled to take deliver of these aircraft beginning in late 2008 andcontinue 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 agreed 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 March 31, 2008,we had 287 aircraft under lease with remaining terms ranging from one to 18years.  Future minimum lease payments dueunder all long-term operating leases were approximately $3.2 billion at March 31,2008.  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 March 31, 2008.

 

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*Long-termDebt Obligations*

 

Our total long-term debtat March 31, 2008 was $1,827.6 million, of which $1,821.2 million relatedto the acquisition of Brasilia turboprop, CRJ200, CRJ700 and CRJ900 aircraftand $6.4 million related to our corporate office building.   The average effective rate on the debtrelated to the Brasilia turboprop, CRJ200, CRJ700 and CRJ900 aircraft wasapproximately 6.24% at March 31, 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 $34.9million as of March 31, 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 firstquarter 2008, the auction events for most of these investments failed, and,therefore, we determined the estimated fair values of these securitiesutilizing a discounted cash flow analysis as of March 31,2008.  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 $0.7 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 March 31, 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 comprehensiveincome.  We intend to re-evaluate each of these factors as marketconditions change in subsequent 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.

 

****ITEM 3:********                   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 March 31, 2008, essentially all of our Brasilia turbopropsflown for Delta were flown under pro-rate arrangements while, approximately 41%of our Brasilia turboprops flown in the United system were flown under pro-ratearrangements. The average price per gallon of aircraft fuel increased 52.9% to$3.08 for the three months ended March 31, 2008, from $2.01 for the threemonths ended March 31, 2007.  For illustrative purposes only, we haveestimated the impact of the market risk of fuel on our pro-rate operationsusing a hypothetical increase of twenty five percent in the price per gallon wepurchase. Based on this hypothetical assumption, we would have incurred anadditional $2.3 million in fuel expense for the three months ended March 31,2008.

 

Interest Rates

 

Our earnings are affectedby changes in interest rates based on the amounts of variable rate long-termdebt and the amount 

 

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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 March 31, 2008, we had variable ratenotes representing 49.5% 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 $2.3 million in interest expense and received$1.6 million additional interest income for the three months ended March 31,2008.

 

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 first quarter 2008 with investments valued at a total of $34.9 million,of which $14.1 million were classified as Marketable Securities and $20.8million were classified as Other Assets in our unaudited condensed consolidatedbalance sheet as of March 31, 2008.  Auction rate securitiesheld at December 31, 2007, were $124 million, all of which were classifiedas Marketable Securities.  For a complete discussion on auction ratesecurities, including our methodology for estimating their fair value, see NoteH to our unaudited condensed consolidated financial statements for the threemonths ended March 31, 2008, appearing elsewhere in the Report.

 

**ITEM 4.**                    CONTROLS AND PROCEDURES

** **

a)   Evaluationof disclosure controls and procedures

 

 Our management, with the participation of ourchief executive officer and chief financial officer, evaluated theeffectiveness of our disclosure controls and procedures pursuant to Rule 13a-15under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), asof March 31, 2008.  In designing andevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives.In addition, the design of disclosure controls and procedures must reflect thefact that there are resource constraints and that management is required toapply its judgment in evaluating the benefits of possible controls andprocedures relative to their costs.

 

Basedon that evaluation, our chief executive officer and chief financial officerconcluded that our disclosure controls and procedures are designed at areasonable assurance level and are effective to provide reasonable assurancethat information we are required to disclose in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms, and that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer,as appropriate, to allow timely decisions regarding required disclosure.

 

b)  Changesin Internal Control Over Financial Reporting

 

Therewere no significant changes (including corrective actions with regard tomaterial weaknesses) in our internal control over financial reporting thatoccurred during the period covered by this Report that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II. OTHER INFORMATION**

** **

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

** **

TheCompany is subject to certain legal actions which it considers routine to itsbusiness activities. As of March 31, 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.

 

*ASAand SkyWest Airlines v. Delta Air Lines*

 

Duringthe quarter ended December 31, 2007, Delta notified SkyWest, 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 cash from the weeklyscheduled wire payments to SkyWest and ASA. As of March 31, 2008, Delta has withheld approximately $28.5million we believe 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. Wehave evaluated the Delta dispute in accordance with the provisions of FinancialAccounting Standards Board No. 5 (“FASB No.5”), *Accounting for Contingencies*. Based on the provisions ofFASB No. 5, an estimated loss is accrued if the loss is probable andreasonably estimable. Because these conditions have not been satisfied, we havenot recorded a loss in our condensed consolidated financial statements as of March 31,2008.

 

**ITEM 1A.  RISKFACTORS**

** **

Therehave been no material changes to the factors disclosed in Item 1A. Risk Factorsin our Annual Report on Form 10-K for the year ended December 31,2007.

 

**ITEM2.  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 authorizes therepurchase of up to 10 million shares of our common stock. The followingtable summarizes our purchases under the stock repurchase program for the threemonths ended March 31, 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** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| January 1 -  January 31, 2008   |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                | 5,000,000  |   |
| February 1 -  February 29, 2008 |       | 1,172,868                                            |       | 23.34                                            |       | 1,172,868                                                                                                                  |       | 3,827,132                                                                                                           |       |
| March 1 -  March 31, 2008       |       | 1,957,370                                            |       | 21.27                                            |       | 1,957,370                                                                                                                  |       | 1,869,762                                                                                                           |       |
| Total                                          |       | 3,130,238                                            |       | $                                                | 22.04      |                                                                                                                       | 3,130,238  |                                                                                                                | 1,869,762  |   |

 

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(1)                                 Underresolutions adopted in February 2007 and November 2007, our Board ofDirectors authorized the repurchase of 10,000,000 shares of our common stock.Purchases are made at management’s discretion based on market conditions andthe Company’s financial resources. As of March 31, 2008, we had spentapproximately $195.0 million to purchase and retire approximately8,130,238 shares of common stock. The authorization of Board of Directors doesnot have an expiration date.

 

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**ITEM 6:**                   EXHIBITS

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, the Registrant has duly caused this QuarterlyReport on Form 10-Q for the quarter ended March 31, 2008, to besigned on its behalf by the undersigned, thereunto duly authorized, on May 9,2008.

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

 

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