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**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

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

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

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

 

**For the transition period from           to**

 

**Commission file number 0-14719**

 

**SKYWEST, INC.**

 

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

 

**444 South River Road**

**St. George, Utah 84790**

**(435) 634-3000**

 

Indicateby a check mark whether the registrant (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant was torequired to submit and post such files). Yes  o  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  o  No  x

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

 

| **Class**                  | ** ** | **Outstanding at November 1, 2010** |
|----------------------------|------------|---------------------------------------------------------|
| Common stock, no par value |       | 55,041,666                                              |

 

 

 

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**SKYWEST, INC.**

 

**QUARTERLYREPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I       | FINANCIAL INFORMATION:                    | 3                                                                                                                        |
|-------------------|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|              | Item 1.                                   | Financial Statements                                                                                                     | 3 |
|              |                                      | Consolidated Balance Sheets as of  September 30, 2010 (unaudited) and December 31, 2009                        | 3 |
|              |                                      | Consolidated Statements of  Income (unaudited) for the three and nine months ended September 30,  2010 and 2009     | 5 |
|              |                                      | Condensed Consolidated  Statements of Cash Flows (unaudited) for the nine months ended  September 30, 2010 and 2009 | 6 |
|              |                                      | Notes to  Condensed Consolidated Financial Statements                                                                    | 7 |
|              | Item 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 15 |
|              | Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 26 |
|              | Item 4.                                   | Controls and  Procedures                                                                                                 | 27 |
|              |                                      |                                                                                                                     |   |
| PART II      | OTHER INFORMATION:                        | 27                                                                                                                       |
|              | Item 1.                                   | Legal Proceedings                                                                                                        | 27 |
|              | Item 1A.                                  | Risk Factors                                                                                                             | 29 |
|              | Item 2                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             | 30 |
|              | Item 6.                                   | Exhibits                                                                                                                 | 30 |
|              |                                      | Signature                                                                                                                | 31 |
|              |                                      |                                                                                                                     |   |
| Exhibit 31.1 | Certification  of Chief Executive Officer |                                                                                                                     |
| Exhibit 31.2 | Certification  of Chief Financial Officer |                                                                                                                     |
| Exhibit 32.1 | Certification  of Chief Executive Officer |                                                                                                                     |
| Exhibit 32.2 | Certification  of Chief Financial Officer |                                                                                                                     |

 

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(Dollars in Thousands)

 

**ASSETS**

 
| ** **                                     | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                |       |                         |       |                        |       |
| Cash and cash equivalents                      |       | $                            | 82,774     |                        | $          | 76,414 |   |
| Marketable securities                          |       | 793,954                      |       | 645,301                     |       |
| Restricted cash                                |       | 6,481                        |       | 10,730                      |       |
| Income tax receivable                          |       | 20,463                       |       | 12,608                      |       |
| Receivables, net                               |       | 103,429                      |       | 111,902                     |       |
| Inventories, net                               |       | 92,606                       |       | 89,876                      |       |
| Prepaid aircraft rents                         |       | 242,089                      |       | 237,350                     |       |
| Deferred tax assets                            |       | 49,235                       |       | 45,197                      |       |
| Other current assets                           |       | 24,657                       |       | 24,721                      |       |
| Total current assets                           |       | 1,415,688                    |       | 1,254,099                   |       |
|                                           |       |                         |       |                        |       |
| PROPERTY AND EQUIPMENT:                        |       |                         |       |                        |       |
| Aircraft and rotable spares                    |       | 3,726,282                    |       | 3,612,658                   |       |
| Deposits on aircraft                           |       | —                       |       | 4,247                       |       |
| Buildings and ground equipment                 |       | 247,011                      |       | 240,438                     |       |
|                                           |       | 3,973,293                    |       | 3,857,343                   |       |
| Less-accumulated depreciation and amortization |       | (1,125,175                   | )          | (977,637                    | )          |
| Total property and equipment, net              |       | 2,848,118                    |       | 2,879,706                   |       |
|                                           |       |                         |       |                        |       |
| OTHER ASSETS                                   |       |                         |       |                        |       |
| Intangible assets, net                         |       | 22,310                       |       | 23,997                      |       |
| Other assets                                   |       | 110,048                      |       | 153,000                     |       |
| Total other assets                             |       | 132,358                      |       | 176,997                     |       |
| Total assets                                   |       | $                            | 4,396,164  |                        | $          | 4,310,802 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**SKYWEST, INC.AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(Dollars in Thousands)

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

 
| ** **                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                              |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                      | 155,592    |                  | $          | 148,571 |   |
| Accounts payable                                                                                                  |       | 170,147                |       | 165,825               |       |
| Accrued salaries, wages and benefits                                                                              |       | 72,938                 |       | 67,377                |       |
| Accrued aircraft rents                                                                                            |       | 8,938                  |       | 17,661                |       |
| Taxes other than income taxes                                                                                     |       | 22,754                 |       | 17,476                |       |
| Other current liabilities                                                                                         |       | 38,011                 |       | 32,925                |       |
| Total current liabilities                                                                                         |       | 468,380                |       | 449,835               |       |
|                                                                                                              |       |                   |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 42,883                 |       | 38,540                |       |
|                                                                                                              |       |                   |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,787,439              |       | 1,816,318             |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 585,080                |       | 536,540               |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 110,268                |       | 117,350               |       |
|                                                                                                              |       |                   |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                     |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |                   |       |                  |       |
| Preferred stock, 5,000,000 shares authorized; none  issued                                                        |       | —                 |       | —                |       |
| Common stock, no par value, 120,000,000 shares  authorized; 75,242,728 and 74,626,660 shares issued, respectively |       | 588,145                |       | 578,153               |       |
| Retained earnings                                                                                                 |       | 1,104,771              |       | 1,052,375             |       |
| Treasury stock, at cost, 19,957,539 and 19,017,645  shares, respectively                                          |       | (292,137               | )          | (279,619              | )          |
| Accumulated other comprehensive income                                                                            |       | 1,335                  |       | 1,310                 |       |
| Total stockholders’ equity                                                                                   |       | 1,402,114              |       | 1,352,219             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                      | 4,396,164  |                  | $          | 4,310,802 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**SKYWEST, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

 

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| OPERATING REVENUES:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Passenger                                   |       | $                                                    | 676,932    |                                                | $          | 629,955 |   | $ | 1,942,244 |   | $ | 1,985,978 |   |
| Ground handling and other                   |       | 9,926                                                |       | 7,793                                               |       | 26,617 |   | 23,235 |   |
| Total operating revenues                    |       | 686,858                                              |       | 637,748                                             |       | 1,968,861 |   | 2,009,213 |   |
| OPERATING EXPENSES:                         |       |                                                 |       |                                                |       |   |   |   |   |
| Aircraft fuel                               |       | 87,289                                               |       | 61,842                                              |       | 246,316 |   | 331,513 |   |
| Salaries, wages and benefits                |       | 185,362                                              |       | 175,552                                             |       | 537,640 |   | 526,286 |   |
| Aircraft maintenance, materials and repairs |       | 120,863                                              |       | 119,055                                             |       | 338,984 |   | 327,604 |   |
| Aircraft rentals                            |       | 77,583                                               |       | 76,189                                              |       | 229,684 |   | 224,929 |   |
| Depreciation and amortization               |       | 58,771                                               |       | 55,461                                              |       | 175,300 |   | 164,722 |   |
| Station rentals and landing fees            |       | 31,769                                               |       | 27,500                                              |       | 91,205 |   | 90,352 |   |
| Ground handling services                    |       | 26,723                                               |       | 23,538                                              |       | 83,112 |   | 72,109 |   |
| Other airline expense                       |       | 40,216                                               |       | 35,358                                              |       | 116,629 |   | 107,852 |   |
| Total operating expenses                    |       | 628,576                                              |       | 574,495                                             |       | 1,818,870 |   | 1,845,367 |   |
| OPERATING INCOME                            |       | 58,282                                               |       | 63,253                                              |       | 149,991 |   | 163,846 |   |
| OTHER INCOME (EXPENSE):                     |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                             |       | 2,810                                                |       | 1,841                                               |       | 10,922 |   | 7,287 |   |
| Interest expense                            |       | (21,640                                              | )          | (21,149                                             | )          | (64,883 | ) | (65,216 | ) |
| Impairment on marketable securities         |       | —                                               |       | —                                              |       | — |   | (7,115 | ) |
| Other                                       |       | (203                                                 | )          | 1,582                                               |       | (1,590 | ) | 1,378 |   |
|                                        |       | (19,033                                              | )          | (17,726                                             | )          | (55,551 | ) | (63,666 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 39,249                                               |       | 45,527                                              |       | 94,440 |   | 100,180 |   |
| PROVISION FOR INCOME TAXES                  |       | 13,775                                               |       | 16,961                                              |       | 35,296 |   | 36,022 |   |
| NET INCOME                                  |       | $                                                    | 25,474     |                                                | $          | 28,566 |   | $ | 59,144 |   | $ | 64,158 |   |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                    |       | $                                                    | 0.46       |                                                | $          | 0.51 |   | $ | 1.06 |   | $ | 1.15 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                                    | 0.45       |                                                | $          | 0.50 |   | $ | 1.04 |   | $ | 1.13 |   |
| Weighted average common shares:             |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                       |       | 55,901                                               |       | 55,605                                              |       | 55,897 |   | 55,936 |   |
| Diluted                                     |       | 56,804                                               |       | 56,652                                              |       | 56,795 |   | 56,879 |   |
|                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Dividends declared per share                |       | $                                                    | 0.04       |                                                | $          | 0.04 |   | $ | 0.12 |   | $ | 0.12 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

(In Thousands)

 
| ** **                                                  | ** ** | **Nine months Ended  September 30** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                           | ** ** | **2009** | ** ** |
|                                                        |       |                                               |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                   |       | $                                                  | 280,115    |   | $ | 308,981 |   |
|                                                        |       |                                               |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                       |       |                                               |       |   |   |
| Purchases of marketable securities                          |       | (636,887                                           | )          | (684,040 | ) |
| Sales of marketable securities                              |       | 488,051                                            |       | 552,046 |   |
| Payments received on note receivable from United  Air Lines |       | 79,333                                             |       | — |   |
| Proceeds from the sale of equipment                         |       | 138                                                |       | 18,534 |   |
| Acquisition of property and equipment:                      |       |                                               |       |   |   |
| Aircraft and rotable spare parts                            |       | (137,190                                           | )          | (212,274 | ) |
| Buildings and ground equipment                              |       | (7,216                                             | )          | (2,712 | ) |
| Increase in other assets                                    |       | (27,981                                            | )          | (22,224 | ) |
|                                                        |       |                                               |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                       |       | (241,752                                           | )          | (350,670 | ) |
| ** **                                                  | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                       |       |                                               |       |   |   |
| Proceeds from issuance of long-term debt                    |       | 81,698                                             |       | 139,580 |   |
| Principal payments on long-term debt                        |       | (103,556                                           | )          | (105,785 | ) |
| Tax deficiency from exercise of common stock  options       |       | —                                             |       | (1,023 | ) |
| Return of deposits on aircraft and rotable spare  parts     |       | 4,247                                              |       | 7,748 |   |
| Net proceeds from issuance of common stock                  |       | 4,888                                              |       | 8,721 |   |
| Purchase of treasury stock                                  |       | (12,518                                            | )          | (18,445 | ) |
| Payment of cash dividends                                   |       | (6,762                                             | )          | (6,800 | ) |
|                                                        |       |                                               |       |   |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES        |       | (32,003                                            | )          | 23,996 |   |
|                                                        |       |                                               |       |   |   |
| Increase (decrease) in cash and cash equivalents            |       | 6,360                                              |       | (17,693 | ) |
| Cash and cash equivalents at beginning of period            |       | 76,414                                             |       | 125,892 |   |
|                                                        |       |                                               |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                  |       | $                                                  | 82,774     |   | $ | 108,199 |   |
|                                                        |       |                                               |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:           |       |                                               |       |   |   |
|                                                        |       |                                               |       |   |   |
| Cash paid during the year for:                              |       |                                               |       |   |   |
| Interest, net of capitalized amounts                        |       | $                                                  | 59,295     |   | $ | 63,849 |   |
| Income taxes                                                |       | $                                                  | 382        |   | $ | 2,815 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

NoteA — Condensed Consolidated Financial Statements

 

The condensed consolidatedfinancial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and itswholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) andAtlantic Southeast Airlines, Inc. (“Atlantic Southeast”) included hereinhave been prepared, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughSkyWest believes that the following disclosures are adequate to make theinformation presented not misleading. These condensed consolidated financialstatements reflect all adjustments that, in the opinion of management, arenecessary to present fairly the results of operations for the interim periodspresented. All adjustments are of a normal recurring nature, unless otherwisedisclosed. The Company suggests that these condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009. The results of operations for the three and nine month periods ended September 30,2010 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2010.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results will differ and may differ materially from those estimates andassumptions.

 

NoteB — Merger and Related Matters

 

OnAugust 3, 2010, the Company entered into an Agreement and Plan of Merger(the “Merger Agreement”) with ExpressJet Holdings, Inc. (“ExpressJet”) andExpress Delaware Merger Co., a wholly-owned subsidiary of Atlantic Southeast (“ExpressMerger Co.”), pursuant to which Atlantic Southeast proposes to acquireExpressJet.  The Merger Agreement provides for the merger of ExpressMerger Co. and ExpressJet, with ExpressJet becoming a wholly-owned subsidiaryof Atlantic Southeast (the “Merger”).  If the Merger is completed ascontemplated by the Merger Agreement, the ExpressJet stockholders will receive$6.75 in cash for each outstanding share of ExpressJet common stock, and thenet acquisition price for all of the issued and outstanding shares ofExpressJet common stock (after giving effect to shares of ExpressJet commonstock presently owned by Atlantic Southeast) would be approximately $133million.  In connection with the proposed transaction, the Company hasnegotiated the terms of an amended capacity purchase agreement betweenExpressJet and Continental Airlines, Inc., which the Company anticipateswill become effective if the Merger is completed.  Completion of theMerger is subject to approval by ExpressJet’s stockholders, regulatoryapprovals and other customary closing conditions, and is currently expected tooccur during the fourth quarter of 2010.

 

NoteC — New Accounting Pronouncements

 

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

 

Note D — Passenger andGround Handling Revenue

 

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

 

SkyWest Airlines and Atlantic Southeast have each entered into a DeltaConnection Agreement with Delta, pursuant to which SkyWest Airlines andAtlantic Southeast provide contract flight services for Delta.  The Delta Connection Agreements provide forfifteen-year terms, subject to early termination by Delta, SkyWest Airlines orAtlantic Southeast, as applicable, upon the occurrence of certain events. Delta’stermination rights include (i) cross-termination rights between the twoDelta Connection Agreements, (ii) the 

 

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rightto terminate each of the Delta Connection Agreements upon the occurrence ofcertain force majeure events, including certain labor-related events, thatprevent SkyWest Airlines or Atlantic Southeast from performance for certainperiods, and (iii) the right to terminate each of the Delta ConnectionAgreements if SkyWest Airlines or Atlantic Southeast fails to maintaincompetitive base rate costs, subject to certain adjustment rights. The SkyWestAirlines and Atlantic Southeast Delta Connection Agreements contain multi-yearrate reset provisions beginning in 2010 and each 5th year thereafter. In the Delta ConnectionAgreements, the fixed-fee rates are specifically defined through 2009. Theparties agreed that on or after a specified date in 2010 the parties wouldreset such rates to reflect SkyWest Airlines’ actual costs in 2010 (with asimilar process on each 5th year thereafter). In addition to thetermination rights, Delta has the right to extend the term of the DeltaConnection Agreements upon the occurrence of certain events or at theexpiration of the initial term. SkyWest Airlines and Atlantic Southeast havethe right to terminate their respective Delta Connection Agreement upon theoccurrence of certain breaches by Delta, including the failure to cure paymentdefaults. SkyWest Airlines and Atlantic Southeast also have cross-terminationrights between the two Delta Connection Agreements.

 

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

 

In the event that the contractual rates under the Delta ConnectionAgreements have not been finalized at quarterly or annual financial statementdates, the Company records revenues based on the lower of prior period’sapproved rates, as adjusted to reflect any contract negotiations and theCompany’s estimate of rates that will be implemented in accordance with revenuerecognition guidelines. Among other provisions, the Delta Connection Agreementsprovide that, beginning with the third anniversary of the execution of the agreements(September 8, 2008), Delta has the right to require that certaincontractual rates under those agreements shall not exceed the average rate ofall carriers within the Delta Connection Program. On October 23, 2009,Delta sent letters to SkyWest Airlines and Atlantic Southeast requiring them toeither adjust the rates payable under their respective Delta ConnectionAgreements or accept termination of those agreements. Delta’s letters alsonotified SkyWest Airlines and Atlantic Southeast of Delta’s estimate of theaverage rates to be applied under those agreements. On October 28, 2009,SkyWest Airlines and Atlantic Southeast notified Delta of their election toadjust the rates payable under the Delta Connection Agreements; however, theyalso notified Delta of their disagreement with Delta’s estimated rates andtheir belief that the methodology Delta used to calculate its estimated ratesis inconsistent with the terms of the Delta Connection Agreements. SkyWestAirlines and Atlantic Southeast, on one hand, and Delta, on the other hand,have exchanged subsequent correspondence, and SkyWest Airlines and AtlanticSoutheast continue to negotiate with Delta in an effort to determine anappropriate methodology for calculating the average rates of the carriers withinthe Delta Connection Program.

 

The Delta Connection Agreements also provide that, beginning with thefifth anniversary of the execution of the agreements (September 8, 2010),Delta has the right to require that certain contractual rates under those agreementsshall not exceed the second lowest of all carriers within the Delta ConnectionProgram. On September 8, 2010, Delta sent letters to SkyWest Airlines andAtlantic Southeast requiring them to either adjust the rates payable undertheir respective Delta Connection Agreements or accept termination of thoseagreements. Delta’s letters also notified SkyWest Airlines and AtlanticSoutheast of Delta’s estimate of the second lowest rates to be applied underthose agreements. On September 10, 2010, SkyWest Airlines and AtlanticSoutheast notified Delta of their election to adjust the rates payable underthe Delta Connection Agreements; however, they also notified Delta of theirdisagreement with Delta’s estimated rates and their belief that the methodologyDelta used to calculate its estimated rates is inconsistent with the terms ofthe Delta Connection Agreements. SkyWest Airlines and Atlantic Southeast, onone hand, and Delta, on the other hand, have exchanged subsequentcorrespondence, and SkyWest Airlines and Atlantic Southeast continue tonegotiate with Delta in an effort to determine an appropriate methodology forcalculating the second lowest rates of the carriers within the Delta ConnectionProgram. Because SkyWest Airlines and Atlantic Southeast have not reached anagreement with Delta regarding the final contractual rates to be establishedunder the Delta Connection Agreements, the Company has evaluated the method forcalculating the average rates and the second lowest rates of the carrierswithin the Delta Connection Program under the revenue recognition accountingguidance. The Company has recorded revenue under those agreements based onmanagement’s understanding of the applicable terms in the Delta ConnectionAgreements and management’s best estimate of the revenue that will ultimatelybe realized upon settlement of the contractual rates with Delta with respect tothe three and nine months ended September 30, 2010.

 

In the event the Company has a reimbursement dispute with a majorpartner, the Company evaluates the dispute under its established revenuerecognition criteria and, provided the revenue recognition criteria have beenmet, the Company recognizes 

 

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revenuebased on management’s estimate of the resolution of the dispute. During thequarter ended December 31, 2007, Delta notified the Company, SkyWestAirlines and Atlantic Southeast of a dispute under the Delta ConnectionAgreements executed by Delta with SkyWest Airlines and Atlantic Southeast. Thedispute relates to allocation of liability for certain irregular operations (“IROP”)expenses that are paid by SkyWest Airlines and Atlantic Southeast to theirpassengers under certain situations. As a result, Delta withheld a combinedtotal of approximately $25 million (pretax) from one of the weeklyscheduled wire payments to SkyWest Airlines and Atlantic Southeast duringDecember 2007. Delta continues to withhold a portion of the funds theCompany believes are payable as weekly scheduled wire payments to SkyWestAirlines and Atlantic Southeast (See Note M for additional details).

 

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

 

On February 10, 2010, Atlantic Southeast and United entered into aUnited Express Agreement, pursuant to which Atlantic Southeast agreed tooperate 14 Bombardier CRJ200 (“CRJ200”) regional jet aircraft  as a United Express carrier.  On February 11, 2010, Atlantic Southeastbegan operating as a United Express carrier. The Atlantic Southeast United ExpressAgreement is a capacity purchase agreement with a five-year term, and otherterms which are generally consistent with the SkyWest Airlines United ExpressAgreement.  During the three months endedSeptember 30, 2010, Atlantic Southeast agreed to add two CRJ200s to theUnited Express Agreement on a short term basis. As of September 30, 2010,Atlantic Southeast was operating 16 CRJ 200s as a United Express carrier.

 

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

 

The Company’s passenger and ground handling revenues could be impactedby a number of factors, including changes to the Company’s code-shareagreements with Delta, United or AirTran, consummation of the proposed Mergercontract modifications resulting from contract re-negotiations, the Company’sability to earn incentive payments contemplated under the Company’s code-shareagreements, settlement of reimbursement disputes with the Company’s major partnersand settlement of the Delta rates.

 

Note E — Share-Based Compensation

 

The fair value of stockoptions granted by the Company has been estimated as of the grant date usingthe Black-Scholes option pricing model. During the nine months ended September 30,2010 the Company granted options to purchase 320,458 shares of common stockunder the SkyWest, Inc. 2006 Long-Term Incentive Plan (the “2006 IncentivePlan”).  The following table shows theassumptions used and weighted average fair value for stock option grants duringthe nine months ended September 30, 2010.

 

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

 

During the nine months endedSeptember 30, 2010, the Company granted 220,779 restricted stock units toemployees of the Company and its subsidiaries under the 2006 IncentivePlan.  The restricted stock units have athree-year vesting period, during which the recipient must remain employed withthe Company or one of the Company’s subsidiaries.  Upon vesting, a restricted stock unit will bereplaced with a share of the Company’s common stock. Additionally, during the ninemonths ended September 30, 2010, the Company granted 27,605 fully-vestedshares of common stock to the Company’s directors.  The weighted average fair value of the sharesof restricted stock on the date of grant was $14.49 per share.

 

The Company recordsshare-based compensation expense only for those options and restricted stockunits that are expected to vest.  Theestimated fair value of the stock options and restricted stock units isamortized over the applicable vesting periods. During the three months ended September 30, 2010 and 2009, theCompany recorded pre-tax share-based compensation expense of $1.5 million and$1.7 million, respectively. During the nine months ended September 30,2010 and 2009, the Company recorded pre-tax share-based compensation expense of$5.0 million and $6.2 million, respectively.

 

NoteF — Net Income Per Common Share

 

Basic net income per commonshare (“Basic EPS”) excludes dilution and is computed by dividing net income bythe weighted average number of common shares outstanding during the period.Diluted net income per common share (“Diluted EPS”) reflects the 

 

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potential dilution thatcould occur if stock options or other contracts to issue common stock wereexercised or converted into common stock. The computation of Diluted EPS doesnot assume exercise or conversion of securities that would have ananti-dilutive effect on net income per common share. During the three monthsended September 30, 2010 and 2009 options to acquire 4,315,000 and4,334,000 shares, respectively, were excluded from the computation of DilutedEPS as their impact was anti-dilutive. During the nine months ended September 30,2010 and 2009 options to acquire 4,403,000 and 4,390,000 shares, respectively,were excluded from the computation of Diluted EPS as their impact wasanti-dilutive.

 

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

 
| ** **                                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                         | ** ** |
| **Numerator**                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Net Income                                                               |       | $                                                        | 25,474     |                                                    | $          | 28,566 |   | $ | 59,144 |   | $ | 64,158 |   |
|                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| **Denominator**                                                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding                    |       | 55,901                                                   |       | 55,605                                                  |       | 55,897 |   | 55,936 |   |
| Effect of outstanding share-based awards                                 |       | 903                                                      |       | 1,047                                                   |       | 898 |   | 943 |   |
| Weighted average number of shares for diluted  earnings per common share |       | 56,804                                                   |       | 56,652                                                  |       | 56,795 |   | 56,879 |   |
|                                                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic earnings per share                                                 |       | $                                                        | 0.46       |                                                    | $          | 0.51 |   | $ | 1.06 |   | $ | 1.15 |   |
| Diluted earnings per share                                               |       | $                                                        | 0.45       |                                                    | $          | 0.50 |   | $ | 1.04 |   | $ | 1.13 |   |

 

Note G — ComprehensiveIncome

 

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

 
| ** **                                                                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                         | ** ** |
| ** **                                                                                  | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                                              |       | $                                                        | 25,474     |                                                    | $          | 28,566 |   | $ | 59,144 |   | $ | 64,158 |   |
| Proportionate share of other companies foreign  currency translation adjustment, net of tax |       | 95                                                       |       | 934                                                     |       | 177 |   | 697 |   |
| Unrealized appreciation (depreciation) on  marketable securities, net of tax                |       | 129                                                      |       | (507                                                    | )          | (151 | ) | 3,618 |   |
|                                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Comprehensive income**                                                                    |       | $                                                        | 25,698     |                                                    | $          | 28,993 |   | $ | 59,170 |   | $ | 68,473 |   |

 

Note H — Long-Term Debt

 

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

 
| ** **                                                                                                                                                                                                                                        | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 1.35% to 3.81% through 2012 to 2020, secured by aircraft                                                         |       | $                            | 436,637    |                        | $          | 469,663 |   |
| Notes payable to a financing company, due in  semi-annual installments, variable interest based on LIBOR, or with interest  rates ranging from 0.69% to 7.52% through 2021, secured by aircraft                                                   |       | 530,383                      |       | 557,293                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                                       |       | 217,543                      |       | 231,002                     |       |
| Notes payable to a financing company, due in  semi-annual installments plus interest at 5.78% to 6.23% through 2019,  secured by aircraft                                                                                                    |       | 62,573                       |       | 67,963                      |       |
| Notes payable to banks, due in monthly  installments plus interest of 3.15% to 8.18% through 2020, secured by  aircraft                                                                                                                      |       | 671,987                      |       | 611,829                     |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                                |       | 22,467                       |       | 23,939                      |       |
| Notes payable to banks, due in semi-annual  installments, plus interest at 3.72% to 3.86%, net of the benefits  of interest rate subsidies through the Brazilian Export  financing program, through 2011, secured by aircraft |       | 1,441                        |       | 3,200                       |       |
| Long-term debt                                                                                                                                                                                                                                    |       | $                            | 1,943,031  |                        | $          | 1,964,889 |   |
|                                                                                                                                                                                                                                              |       |                         |       |                        |       |
| Less current maturities                                                                                                                                                                                                                           |       | (155,592                     | )          | (148,571                    | )          |
|                                                                                                                                                                                                                                              |       |                         |       |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                                         |       | $                            | 1,787,439  |                        | $          | 1,816,318 |   |

 

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At September 30, 2010,the three-month and six-month LIBOR rates were 0.29% and 0.46%,respectively.   At December 31,2009, the three-month and six-month LIBOR rates were 0.25% and 0.43%,respectively.

 

Note I — Commitments andContingencies

 

As of September 30,2010, the Company leased 293 aircraft, as well as airport facilities, officespace, and various other property and equipment under non-cancelable operatingleases which are generally on a long-term net rent basis where the Company paystaxes, maintenance, insurance and certain other operating expenses applicableto the leased property.  The Companyexpects that, in the normal course of business, leases that expire will berenewed or replaced by other leases.  Thefollowing table summarizes future minimum rental payments required underoperating leases that had initial or remaining non-cancelable lease terms inexcess of one year as of September 30, 2010 (in thousands):

 

| October through December 2010 |   | $         | 85,625    |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| 2011                                    |   | 348,336   |      |
| 2012                                    |   | 341,329   |      |
| 2013                                    |   | 328,746   |      |
| 2014                                    |   | 316,141   |      |
| Thereafter                              |   | 1,368,105 |      |
|                                    |   | $         | 2,788,282 |   |

 

NoteJ — Fair Value Measurements

 

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

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

 

As of September 30, 2010, the Company held certain assets that arerequired to be measured at fair value on a recurring basis. The Company hasinvested in auction rate security instruments, which are classified asavailable for sale securities and reflected at fair value. However, dueprimarily to credit market events beginning during the first quarter of 2008,the auction events for most of these instruments failed. Therefore, quotedprices in active markets are no longer available and the Company has estimatedthe fair values of these securities utilizing a discounted cash flow analysisas of September 30, 2010. 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 of September 30, 2010, the Company owned $4.3 million ofauction rate security instruments. The auction rate security instruments heldby the Company at September 30, 2010 were tax-exempt municipal bondinvestments, for which the market has experienced some successful auctions. TheCompany has classified the investments as non-current and has identified themas “Other assets” in its unaudited Condensed Consolidated Balance Sheet as of September 30,2010. The Company has classified these securities

 

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asnon-current due to the Company’s belief that the market for these securitiesmay take in excess of twelve months to fully recover. As of September 30,2010, the Company continued to record interest on all of its auction ratesecurity instruments. 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 valuation adjustment wasother than temporary, a charge would be recorded to earnings as appropriate.

 

Asof September 30, 2010, the Company held certain assets that are requiredto be measured at fair value on a recurring basis. Assets measured at fairvalue on a recurring basis are summarized below (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of September 30, 2010** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                                    |       |   |   |   |   |   |   |
| Marketable Securities                      |       |                                                                                    |       |   |   |   |   |   |   |
| Bond                                       |       | $                                                                                       | 790,652    |   | $ | — |   | $ | 790,652 |   | $ | — |   |
| Commercial paper                           |       | 2,500                                                                                   |       | — |   | 2,500 |   | — |   |
| Asset backed securities                    |       | 802                                                                                     |       | — |   | 802 |   | — |   |
|                                       |       | 793,954                                                                                 |       | — |   | 793,954 |   | — |   |
|                                       |       |                                                                                    |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | 89,255                                                                                  |       | 89,255 |   | — |   | — |   |
| Other Assets (a)                           |       | 4,289                                                                                   |       | — |   | — |   | 4,289 |   |
| Total Assets Measured at Fair Value        |       | $                                                                                       | 887,498    |   | $ | 89,255 |   | $ | 793,954 |   | $ | 4,289 |   |

 

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

 

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

 

No significant transfers between Level 1, Level 2 and Level 3 occurredduring the three and nine months ended September 30, 2010.  TheCompany’s policy regarding the recording of transfers between levels is torecord any such transfers at the end of the reporting period.

 

The following table presents the Company’s assets measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)at September 30, 2010 (in thousands):

 

**Fair ValueMeasurements Using Significant Unobservable Inputs**

**(Level 3)**

 
| ** **                                      | ** ** | **Auction Rate  Securities** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2010                 |       | $                                 | 4,259      |   |
| Total realized and unrealized gains or (losses) |       |                              |       |
| Included in earnings                            |       | —                            |       |
| Included in other comprehensive income          |       | 30                                |       |
| Transferred out                                 |       | —                            |       |
| Settlements                                     |       | —                            |       |
| Balance at September 30, 2010              |       | $                                 | 4,289      |   |

 

The fair value of theCompany’s long-term debt is estimated based on current rates offered to theCompany for similar debt and was estimated to be $2,105.0 million as of September 30,2010, as compared to the carrying amount of $1,943.0 million as of September 30,2010.

 

Note K — Investment in Other Companies

 

InSeptember  2008, the Company entered into an agreement to acquire a 20%interest in Trip. During the nine months ended September 30, 2010, theCompany invested an additional $10 million in Trip. As of September 30,2010, the Company’s investment balance in Trip was $32.1 million, whichrepresents a 20% ownership interest and is recorded as an “Other asset” on theCompany’s consolidated balance sheet. The Company accounts for its interest inTrip using the equity method of accounting. The Company records its equity inTrip’s earnings on a one-quarter lag. The Company’s portion of Trip’s loss forthe three and nine months ended September 30, 2010 was $0.2 million and$1.6 million, respectively.

 

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OnSeptember 29, 2010, the Company invested $7 million for a 30% ownershipinterest in Mekong Aviation Joint Stock Company, an airline operating inVietnam (“Air Mekong”). The Company’s investment in Air Mekong  is recorded as an “Other asset” on theCompany’s consolidated balance sheet.  The Company anticipates accountingfor the investment using the equity method of accounting and intends to reflectits equity interest in Air Mekong’s earnings on a one-quarter lag.

 

NoteL — Note Receivable

 

On October 16, 2009, SkyWest Airlines extended to United a securedterm loan in the amount of $80 million. The term loan bore interest at a rateof 11%, with a ten-year amortization period. The loan was secured by certainground equipment and airport slot rights held by United. On August 11,2010, United repaid the $80 million term loan.

 

Note M — Legal Matters

 

TheCompany is subject to certain legal actions which it considers routine to itsbusiness activities. As of September 30, 2010, management believes, afterconsultation with legal counsel, that the ultimate outcome of such legalmatters is not likely to have a material adverse effect on the Company’sfinancial position, liquidity or results of operations. However, the followingare significant outstanding legal matters, which, if not resolved consistentwith the position taken by the Company, would negatively impact the Company’sfinancial results.

 

*Atlantic Southeast and SkyWest Airlines v. Delta*

 

During the quarter endedDecember 31, 2007, Delta notified the Company, SkyWest Airlines andAtlantic Southeast of a dispute under the Delta Connection Agreements executedby Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates toallocation of liability for IROP expenses that are paid by SkyWest Airlines andAtlantic Southeast to their passengers and vendors under certain situations. Asa result, Delta withheld a combined total of approximately $25 million (pretax)from one of the weekly scheduled wire payments to SkyWest Airlines and AtlanticSoutheast during December 2007. Delta continues to withhold a portion ofthe funds the Company believes are payable as weekly scheduled wire payments toSkyWest Airlines and Atlantic Southeast. As of June 30, 2008, the Companyhad recognized a cumulative total of $31.7 million of revenue associatedwith the funds withheld by Delta. Since July 1, 2008, the Company has notrecognized revenue related to IROP expense reimbursements withheld by Deltabecause collection of those reimbursements is the subject of litigation(summarized below) and is therefore not reasonably assured. On February 1,2008, SkyWest Airlines and Atlantic Southeast filed a lawsuit in Georgia statecourt disputing Delta’s treatment of the matter (the “Complaint”). Delta filedan Answer to the Complaint and a Counterclaim against SkyWest Airlines andAtlantic Southeast on March 24, 2008. Delta’s Counterclaim alleges thatAtlantic Southeast and SkyWest Airlines breached the Delta ConnectionAgreements by invoicing Delta for the IROP expenses that were paid pursuant toDelta’s policies, and claims only a portion of those expenses may be invoicedto Delta. Delta seeks unspecified damages in its counterclaim.

 

OnMarch 24, 2008, Delta filed a Motion to Dismiss the Complaint (the “Motionto Dismiss”). A hearing on the Motion to Dismiss was held September 5,2008. In an order entered September 13, 2008, the Court granted in partand denied in part the Motion to Dismiss. The Court denied the Motion toDismiss with respect to the breach of contract claim contained in theComplaint. The Court denied in part the Motion to Dismiss with respect to theaction for declaratory judgment contained in the Complaint, and granted in partthe Motion to Dismiss to the extent the Complaint seeks to read alternative orsupplemental obligations created by prior conduct into the Delta ConnectionAgreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in the Complaint.The breach of contract claims and declaratory relief claims were not dismissed.

 

OnJuly 31, 2009, SkyWest Airlines and Atlantic Southeast filed an AmendedComplaint in the lawsuit adding claims under Georgia law for voluntary paymentand mutual departure from the strict terms of the Delta Connection Agreements.Under those claims, SkyWest Airlines and Atlantic Southeast seek recovery ofall of the approximately $25 million withheld by Delta duringDecember 2007. SkyWest Airlines and Atlantic Southeast are also seekingrecovery of additional amounts withheld by Delta subsequent toDecember 2007. Discovery on SkyWest Airlines’ and Atlantic Southeast’sclaims and defenses has not yet been completed. On September 4, 2009,Delta filed a motion to dismiss the Amended Complaint in part. Delta assertedthat the claims added by SkyWest Airlines and Atlantic Southeast in the AmendedComplaint should be dismissed based on legal arguments set forth in Delta’smemorandum in support of its motion. SkyWest Airlines and Atlantic Southeastopposed the motion.  On January 22,2010, the Court granted Delta’s motion in part, dismissing the claims underGeorgia law for voluntary payment and mutual departure from the strict terms ofthe Connection Agreements. SkyWest Airlines and Atlantic Southeast continue tovigorously pursue their claims set forth in the Amended Complaint, to theextent permitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.  TheCourt’s rulings affect the current posture of the case, but do not precludepursuit of the claims for breach of contract or for declaratory relief, underwhich SkyWest Airlines and Atlantic Southeast continue to seek recovery of themajority of the amounts withheld by Delta.

 

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*ExpressJetStockholder Litigation*

 

BetweenAugust 5, 2010 and August 25, 2010, nine substantially similarputative shareholder class action suits (collectively, the “Texas State Actions”)were filed by individual ExpressJet stockholders in the District Court ofHarris County, Texas against ExpressJet and its directors.  Many of the petitions also name the Company,Atlantic Southeast and/or Express Merger Co. (together, the “SkyWest Defendants”)as defendants in the litigation.

 

Thepetitions filed in the Texas State Actions generally allege that the ExpressJetdirector defendants breached their fiduciary duties in connection with thenegotiations and approval of the Merger Agreement and that the SkyWestDefendants aided and abetted such alleged breaches of fiduciary duties.  The Texas State Actions seek, among otherthings, an injunction enjoining the Merger and the transactions contemplated bythe Merger Agreement and rescission of any transactions contemplated by theMerger Agreement which may be completed. On August 18, 2010, plaintiff Rayside filed a motion to consolidatethe Texas State Actions into Case No. 2010-48784 in the first-filed court(the “189th District Court).  On August 20, 2010, plaintiffs Levine,Tejeda, Doraiswamy and Swanepoel filed a similar motion in the 189th District Court.  On September 10, 2010, the 189th District Court ordered the consolidation ofthe Texas State Actions with and into Case No. 2010-48784 (theconsolidated action is referred to herein as the “Consolidated Texas StateAction”).

 

OnSeptember 20, 2010, a putative stockholder class action (the “TexasFederal Action” and, together with the Consolidated Texas State Action, the “Actions”)was commenced in the United States District Court for the Southern District ofTexas, Houston Division.  The complaintfiled in the Texas Federal Action includes substantially identical allegationsto and requests substantially the same relief as the petitions in the TexasState Actions, but also includes allegations related to the ExpressJetpreliminary proxy statement filed with the U. S. Securities and ExchangeCommission on September 3, 2010.

 

OnOctober 8, 2010, counsel for the defendants in the Actions, counsel forthe plaintiff class in the Consolidated Texas State Action and counsel forplaintiff in the Texas Federal Action agreed to and executed a memorandum ofunderstanding (the “MOU”) containing the terms of an agreement in principle toresolve the Actions.  The MOU providesthat, in consideration for the settlement of the Actions, ExpressJet will makecertain disclosures in the definitive proxy statement to be sent to theExpressJet stockholders soliciting approval of the Merger.  In the MOU, the defendants in the Actionsacknowledge that they considered the claims raised by the plaintiffs in the Actionsin connection with the disclosures contemplated by the MOU.  In exchange, the parties to the MOU haveagreed to use their best efforts to draft and execute a definitive stipulationof settlement that includes a plaintiff class consisting of all record andbeneficial holders of ExpressJet stock, other than defendants in theConsolidated Texas State Action and any firm, trust, corporation or otherentity controlled by any such defendant, during the period beginning on andincluding December 2, 2009, through and including the date of the consummationof the merger.  If approved by theparties and the 189th District Court, the settlement will result inthe dismissal with prejudice of the Consolidated Texas State Action and releaseby the plaintiff class of all claims under federal and state law that were orcould have been asserted in the Actions or which arise out of or relate to thetransactions contemplated by the Merger. The MOU further provides that, in the event the Consolidated Texas StateAction is dismissed in accordance with the settlement stipulation, the partiesto the MOU will use their best efforts to obtain the dismissal with prejudiceof the Texas Federal Action.  Thesettlement of the Consolidated Texas State Action is subject to numerous conditionsset forth in the MOU and to be contained in any stipulation of settlement,including the completion of the Merger.

 

Forfinancial reporting purposes the Company accrues an estimated loss if the lossis probable and reasonably estimable. Because these conditions have not beensatisfied with respect to the matter**s** describedabove, the Company did not record a loss related such matters as of September 30,2010.

 

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**ITEM 2:****        ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion and analysis presents factors that had amaterial effect on the results of operations of SkyWest, Inc. (“SkyWest” “we”or “us”) during the three and nine-month periods ended September 30, 2010and 2009. Also discussed is our financial position as of September 30,2010 and December 31, 2009. You should read this discussion in conjunctionwith our condensed consolidated financial statements for the three andnine-month periods ended September 30, 2010, including the notes thereto,appearing elsewhere in this Report.  Thisdiscussion and analysis contains forward-looking statements. Please refer tothe sections of this Report entitled “Cautionary Statement ConcerningForward-Looking Statements” and “Risk Factors” for discussion of theuncertainties, risks and assumptions associated with these statements.*

 

**Cautionary Statement Concerning Forward-Looking Statements**

 

Certain of the statements contained in this Report should be considered“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Theseforward-looking statements may be identified by words such as “may,” “will,” “expect,”“intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,”“hope,” “likely,” and “continue” and similar terms used in connection withstatements regarding our outlook, the revenue environment, our contractrelationships, and our expected financial performance.  These statements include, but are not limitedto, statements about our future growth and development plans, including ourproposed acquisition of ExpressJet Holdings, Inc. (“ExpressJet”) pursuantto the terms of an Agreement and Plan of Merger, dated August 3, 2010,among SkyWest, Express Delaware Merger Co. (“Express Merger Co.”) andExpressJet (the “Merger Agreement”), our future financial and operatingresults, our plans for SkyWest Airlines, Inc. (“SkyWest Airlines”) andAtlantic Southeast Airlines, Inc. (“Atlantic Southeast”), our objectives,expectations and intentions, and other statements that are not historicalfacts.  You should also keep in mind that all forward-looking statements arebased on our existing beliefs about present and future events outside of ourcontrol 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, ouractual results will vary, and may vary materially, from those anticipated,estimated, projected, or intended.

 

There may be other factors not identified above of which we are notcurrently aware that may affect matters discussed in the forward-lookingstatements, and may also cause actual results to differ materially from thosediscussed.  We assume no obligation topublicly update any forward-looking statement to reflect actual results,changes in assumptions or changes in other factors affecting these statementsother than as required by law.

 

**Overview**

 

Through SkyWest Airlines and Atlantic Southeast, we operate the largestregional airline in the United States. As of September 30, 2010, SkyWestAirlines and Atlantic Southeast offered scheduled passenger and air freightservice with more than 2,800 total daily departures to 225 destinations in theUnited States, Canada, Mexico and the Caribbean. Additionally, as of September 30,2010, we provided ground handling services for approximately 11 other airlinesthroughout our system. As of September 30, 2010, we had a combined fleetof 466 aircraft consisting of 258 50-seat Bombardier Aerospace (“Bombardier”)CRJ 200 Regional Jets (the “CRJ200”) (99 assigned to United AirLines, Inc. (“United”), 150 assigned to Delta Air Lines, Inc. (“Delta”),four assigned to Air Tran Airways, Inc. (“AirTran”), three  used by SkyWest Airlines as additionalmaintenance spare aircraft  and twosubleased to an un-affiliated entity) 125 70-seat Bombardier CRJ700 RegionalJets (the “CRJ700”)  (70 assigned toUnited and 55 assigned to Delta), 35 76-seat Bombardier CRJ900 Regional Jets(the “CRJ900”) (31 assigned to Delta and four subleased to an affiliatedentity) and 48 30-seat Embraer Brasilia EMB-120 turboprop aircraft (the “Brasiliaturboprop”) (35 assigned to United and 13 assigned to Delta). We believe oursuccess in attracting multiple contractual relationships with our major airlinepartners is attributable to our delivery of high-quality customer service withan all cabin-class fleet at a competitive cost structure. For the three monthsended September 30, 2010, approximately 49.7% of our aggregate capacitywas operated under the United code, approximately 49.5% was operated under theDelta code and approximately 0.8% under the AirTran code.

 

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

 

As of September 30, 2010, SkyWest Airlines operated as a DeltaConnection carrier in Salt Lake City, a United Express carrier in Los Angeles,San Francisco, Denver, Chicago and the Pacific Northwest, and an AirTrancarrier in Milwaukee, operating more than 1,750 total daily flights.

 

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Atlantic Southeast has been a code-share partner with Delta in Atlantasince 1984 and United since February 2010. As of September 30, 2010,Atlantic Southeast operated as a Delta Connection carrier in Atlanta andCincinnati and a United Express carrier in Chicago and Washington, D.C.  (Dulles International Airport), operatingapproximately 900 daily flights.

 

We provide a substantial majority of the regional airline service forDelta in Atlanta and Salt Lake City. In connection with our acquisition ofAtlantic Southeast in September 2005, we established new, separate, butsubstantially similar, long-term fixed-fee Delta Connection Agreements withDelta for both SkyWest Airlines and Atlantic Southeast. We also obtained theright to use 29 gates in the Hartsfield-Jackson International Airport locatedin Atlanta, from which we currently provide service to Delta. Pursuant to theterms of the Delta Connection Agreement executed by Atlantic Southeast andDelta, Delta has also agreed that if Delta solicits requests for proposals tofly Delta Connection regional aircraft, Atlantic Southeast will be permitted tobid to maintain the same percentage of total Delta Connection regional jetflights that it operated during 2007, and, if Atlantic Southeast does notachieve the winning bid for the proposed flying, Atlantic Southeast will bepermitted to match the terms of the winning bid to the extent necessary forAtlantic Southeast to maintain the same percentage of Delta Connection regionaljet flights that it operated during 2007.

 

On February 10, 2010, Atlantic Southeast and United entered into aUnited Express Agreement, pursuant to which Atlantic Southeast agreed tooperate 14 CRJ200 aircraft as a United Express carrier. As of September 30,2010, 16 CRJ200s were operating under the Atlantic Southeast United ExpressAgreement.  The Atlantic Southeast UnitedExpress Agreement is a capacity purchase agreement with a five-year term, andother terms which are generally consistent with the SkyWest Airlines UnitedExpress Agreement.

 

Historically, multiple contractual relationships have enabled us toreduce reliance on any single major airline code and to enhance and stabilizeoperating results through a mix of contract flying and our controlled or “pro-rate”flying. For the three months ended September 30, 2010, contract flyingrevenue and pro-rate revenue represented approximately 88% and 12%, respectively,of our total passenger revenues. On contract routes, the major airline partnercontrols scheduling, ticketing, pricing and seat inventories and we arecompensated by the major airline partner at contracted rates based on thecompleted block hours, flight departures and other operating measures. Onpro-rate flights, we control scheduling, ticketing, pricing and seatinventories and receive a pro-rated portion of passenger fares. For the threemonths ended September 30, 2010, essentially all of our Brasiliaturboprops flown for Delta were flown under pro-rate arrangements, whileapproximately 36% of our Brasilia turboprops flown in the United system wereflown under contractual arrangements, with the remaining 64% flown underpro-rate arrangements. For the three months ended September 30, 2010,approximately 89% of our CRJ200s flown in the United system were flown undercontractual arrangements, with the remaining 11% flown under pro-ratearrangements. On November 4, 2009, SkyWest Airlines entered into a code-shareagreement with AirTran. Under the terms of the AirTran code-share agreement,SkyWest Airlines has agreed to operate four CRJ200s for AirTran under apro-rate arrangement.

 

**Third Quarter Summary**

 

We had revenues of $686.9 million for the three months ended September 30,2010, a 7.7% increase, compared to revenues of $637.7 million for thethree months ended September 30, 2009. We had net income of$25.5 million, or $0.45 per diluted share, for the three months ended September 30,2010, a decrease of 10.8%, compared to $28.6 million of net income, or$0.50 per diluted share, for the three months ended September 30, 2009.

 

The significant items affecting our financial performance during thethree months ended September 30, 2010 are summarized below:

 

Under the Delta Connection Agreements, Delta has the right to requirethat certain contractual rates under those agreements shall not exceed theaverage rate of all carriers within the Delta Connection Program. OnOctober 23, 2009, Delta sent letters to SkyWest Airlines and AtlanticSoutheast requiring them to either adjust the rates payable under theirrespective Delta Connection Agreements or accept termination of thoseagreements. Delta’s letters also notified SkyWest Airlines and AtlanticSoutheast of Delta’s estimate of the average rates to be applied under thoseagreements. On October 28, 2009, SkyWest Airlines and Atlantic Southeastnotified Delta of their election to adjust the rates payable under the DeltaConnection Agreements; however, they also notified Delta of their disagreementwith Delta’s estimated rates and their belief that the methodology Delta usedto calculate its estimated rates is inconsistent with the terms of the DeltaConnection Agreements. SkyWest Airlines and Atlantic Southeast, on one hand,and Delta, on the other hand, have exchanged subsequent correspondence, andSkyWest Airlines and Atlantic Southeast continue to negotiate with Delta in aneffort to determine an appropriate methodology for calculating the averagerates of the carriers within the Delta Connection Program.

 

The Delta Connection Agreements also provide that, beginning with thefifth anniversary of the execution of the agreements (which isSeptember 8, 2010), Delta has the right to require that certaincontractual rates under those agreements shall not exceed the second lowestrates of all carriers within the Delta Connection Program. On September 8,2010, Delta sent letters to SkyWest Airlines and Atlantic Southeast requiringthem to either adjust the rates payable under their respective Delta ConnectionAgreements or accept

 

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terminationof those agreements. Delta’s letters also notified SkyWest Airlines andAtlantic Southeast of Delta’s estimate of the second lowest rates to be appliedunder those agreements. On September 10, 2010, SkyWest Airlines andAtlantic Southeast notified Delta of their election to adjust the rates payableunder the Delta Connection Agreements; however, they also notified Delta oftheir disagreement with Delta’s estimated rates and their belief that themethodology Delta used to calculate its estimated rates is inconsistent withthe terms of the Delta Connection Agreements. SkyWest Airlines and AtlanticSoutheast, on one hand, and Delta, on the other hand, have exchanged subsequentcorrespondence, and SkyWest Airlines and Atlantic Southeast continue tonegotiate with Delta in an effort to determine an appropriate methodology forcalculating the second lowest rates of the carriers within the Delta Connectionprogram. Because SkyWest Airlines and Atlantic Southeast have not reached anagreement with Delta regarding the final contractual rates to be establishedunder the Delta Connection Agreements, we have evaluated the method forcalculating the average rates and the second lowest rates of the carrierswithin the Delta Connection Program under the revenue recognition accountingguidance. We have recorded revenue under those agreements based on ourmanagement’s understanding of the applicable terms in the Delta ConnectionAgreements and our management’s best estimate of the revenue that willultimately be realized upon settlement of the contractual rates with Delta withrespect to the three months ended September 30, 2010.  As a result of the average rate and secondlowest rate provisions, our passenger revenues decreased $4.9 million duringthe three months ended September 30, 2010, compared to the three monthsended September 30, 2009.

 

Underthe SkyWest Airlines and Atlantic Southeast United Express Agreements, werecognize revenue in our condensed consolidated statement of income at a fixedhourly rate for mature engine maintenance on regional jet engines and werecognize engine maintenance expense on our CRJ200 regional jet engines in ourcondensed consolidated statement of income on an as-incurred basis asmaintenance expense. During the three months ended September 30, 2010, ourCRJ200 engine expense under our SkyWest Airlines and Atlantic Southeast UnitedExpress Agreements and our Airtran code-share agreement increased$2.1 million compared to the three months ended September 30,2009.  The increase in CRJ 200 engineoverhauls reimbursed at a fixed hourly rate was principally due to scheduledengine maintenance events.  We anticipatethe average quarterly number of scheduled engine maintenance events weexperienced during the three months ended September 30, 2010 will likelycontinue each quarter through 2010, 2011 and the first quarter of 2012.

 

Total available seat miles (“ASMs”) for the three months ended September 30,2010 increased 6.4%, compared to the three months ended September 30,2009, primarily due to SkyWest Airlines’ acceptance of 18 new CRJ700s sinceApril 1, 2009 and its incremental placement of those aircraft into serviceover that period.  During the threemonths ended September 30, 2010, we generated 6.3 billion ASMs,compared to 5.9 billion ASMs during the three months ended September 30,2009.

 

OnAugust 3, 2010, we entered into the Merger Agreement with ExpressJet andExpress Merger Co., a wholly-owned subsidiary of Atlantic Southeast.  The Merger Agreement provides for the mergerof Express Merger Co. and ExpressJet, with ExpressJet becoming a wholly-ownedsubsidiary of Atlantic Southeast (the “Merger”).  If the Merger iscompleted as contemplated by the Merger Agreement, the ExpressJet stockholderswill receive $6.75 in cash for each outstanding share of ExpressJet commonstock, and the net acquisition price for all of the issued and outstandingshares of ExpressJet common stock (after giving effect to shares of ExpressJetcommon stock presently owned by Atlantic Southeast) would be approximately $133million.  In connection with the proposed transaction, we have negotiatedthe terms of an amended capacity purchase agreement between ExpressJet andContinental Airlines, Inc., which we anticipate will become effective ifthe Merger is completed.  Completion of the Merger is subject to approvalby ExpressJet’s stockholders, regulatory approvals and other customary closingconditions, and is currently expected to occur during the fourth quarter of2010.

 

On October 16, 2009, SkyWest Airlines extended to United a securedterm loan in the amount of $80 million. The term loan bore interest at a rateof 11%, with a ten-year amortization period. The loan was secured by certainground equipment and airport slot rights held by United. On August 11,2010, United repaid the $80 million term loan.

 

OnSeptember 29, 2010, we invested $7 million for a 30% ownership interest inMekong Aviation Joint Stock Company, an airline operating in Vietnam (“AirMekong”).  We anticipate accounting forthe investment using the equity method of accounting and intend to reflect ourequity interest in Air Mekong’s earnings on a one-quarter lag.

 

**CriticalAccounting Policies**

 

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

 

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**Results of Operations**

 

**Three Months Ended September 30,2010 and 2009**

 

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

 
| ** **                                    | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 5,110,239                                                                  |       | 4,835,887 |   | 5.7 |   |
| Available seat miles (“ASMs”) (000) |       | 6,327,561                                                                  |       | 5,945,686 |   | 6.4 |   |
| Block hours                                   |       | 379,129                                                                    |       | 359,573 |   | 5.4 |   |
| Departures                                    |       | 249,783                                                                    |       | 230,823 |   | 8.2 |   |
| Passengers carried                            |       | 10,261,536                                                                 |       | 9,477,672 |   | 8.3 |   |
| Passenger load factor                         |       | 80.8                                                                       | %          | 81.3 | % | (0.5 | ) Pts |
| Revenue per available seat mile               |       | 10.9                                                                       | ¢     | 10.7 | ¢ | 1.9 |   |
| Cost per available seat mile                  |       | 10.3                                                                       | ¢     | 10.0 | ¢ | 3 .0 |   |
| Cost per available seat mile excluding fuel   |       | 8.9                                                                        | ¢     | 9.0 | ¢ | (1.1 | ) |
| Fuel cost per available seat mile             |       | 1.4                                                                        | ¢     | 1.0 | ¢ | 40.0 |   |
| Average passenger trip length (miles)         |       | 498                                                                        |       | 510 |   | (2.4 | ) |

 

*Revenues.*  Operating revenues increased$49.1 million, or 7.7%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements. For financial reporting purposes, we record thesereimbursements as operating revenue. Under the SkyWest Airlines and AtlanticSoutheast Delta Connection Agreements, we are reimbursed for our engineoverhaul expenses as incurred. We also record those engine overhaulreimbursements as operating revenue. The following table summarizes the amountof fuel and engine overhaul reimbursements included in our passenger revenuesfor the periods indicated (dollar amounts in thousands).

 
| ** **                                                                 | ** ** | **For the three months ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                         |       | $                                                                          | 676,932    |   | $ | 629,955 |   | $ | 46,977 |   | 7.5 | % |
| Less: Fuel reimbursement from major partners                               |       | 66,166                                                                     |       | 51,599 |   | 14,567 |   | 28.2 | % |
| Less: Engine overhaul reimbursement from major  partners                   |       | 28,729                                                                     |       | 32,952 |   | (4,223 | ) | (12.8 | )% |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                          | 582,037    |   | $ | 545,404 |   | $ | 36,633 |   | 6.7 | % |

 

*Passenger revenues.*  Passenger revenues increased$47.0 million, or 7.5%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The increasein passenger revenues was due to an increase in fuel reimbursements from ourmajor partners. The fuel reimbursement from our major partners increased$14.6 million or 28.2%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. Our passengerrevenues, excluding fuel and engine overhaul reimbursements from majorpartners, increased $36.6 million, or 6.7%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The increasein passenger revenues, excluding fuel and engine overhaul reimbursements, wasgenerally consistent with the increase in ASMs. The increase in ASMs wasprimarily due to SkyWest Airlines acceptance of 18 new CRJ 700s sinceApril 1, 2009 and its incremental placement of those aircraft into serviceover that period.

 

*Ground handling and other.*  Total ground handling and other revenues increased$2.1 million, or 27.4%, during the three months ended September 30,2010, compared to the three  months endedSeptember 30, 2009. The increase is primarily related to aircraft rentalrevenue to other airlines.  During thethree months ended September 30, 2010, we obtained leases for four CRJ900s and subleased the aircraft to AirMekong.

 

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

 

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| ** **                                  | ** ** | **For the three months ended September 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                                 | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                          | 87,289     |   | $ | 61,842 |   | $ | 25,447 |   | 41.1 | % | 1.4 |   | 1.0 |   |
| Salaries, wages and benefits                |       | 185,362                                                                    |       | 175,552 |   | 9,810 |   | 5.6 | % | 2.9 |   | 2.9 |   |
| Aircraft maintenance, materials and repairs |       | 120,863                                                                    |       | 119,055 |   | 1,808 |   | 1.5 | % | 1.9 |   | 2.0 |   |
| Aircraft rentals                            |       | 77,583                                                                     |       | 76,189 |   | 1,394 |   | 1.8 | % | 1.3 |   | 1.3 |   |
| Depreciation and amortization               |       | 58,771                                                                     |       | 55,461 |   | 3,310 |   | 6.0 | % | 0.9 |   | 0.9 |   |
| Station rentals and landing fees            |       | 31,769                                                                     |       | 27,500 |   | 4,269 |   | 15.5 | % | 0.5 |   | 0.5 |   |
| Ground handling services                    |       | 26,723                                                                     |       | 23,538 |   | 3,185 |   | 13.5 | % | 0.4 |   | 0.4 |   |
| Other                                       |       | 40,216                                                                     |       | 35,358 |   | 4,858 |   | 13.7 | % | 0.6 |   | 0.6 |   |
| Total operating expenses                    |       | 628,576                                                                    |       | 574,495 |   | 54,081 |   | 9.4 | % | 9.9 |   | 9.6 |   |
| Interest                                    |       | 21,640                                                                     |       | 21,149 |   | 491 |   | 2.3 | % | 0.4 |   | 0.4 |   |
| Total airline expenses                      |       | $                                                                          | 650,216    |   | $ | 595,644 |   | 54,572 |   | 9.2 | % | 10.3 |   | 10.0 |   |
|                                             |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs increased $25.4 million, or41.1%, during the three months ended September 30, 2010, compared to thethree months ended September 30, 2009. The average cost per gallon of fuelincreased to $2.55 per gallon during the three months ended September 30,2010, from $2.23 per gallon during the three months ended September 30,2009. Commencing on June 1, 2009, Delta purchased the majority of the fuelfor our Delta Connection aircraft. United also purchased fuel directly from a fuel vendor for our UnitedExpress aircraft under contract flying operated out of Chicago, San Francisco,Los Angeles and Denver. The following table summarizes the gallons of fuel wepurchased directly, and the change in fuel price per gallon on our fuelexpense, for the periods indicated:

 

| ** **                                                             | ** ** | **For the three months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 34,211                                                                     |       | 27,754 |   | 23.3 | % |
| Average price per gallon                                               |       | $                                                                          | 2.55       |   | $ | 2.23 |   | 14.3 | % |
| Fuel expense                                                           |       | $                                                                          | 87,289     |   | $ | 61,842 |   | 41.1 | % |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsincreased $9.8 million, or 5.6%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The averagenumber of full-time equivalent employees increased 3.9% to 12,704 for the threemonths ended September 30, 2010, from 12,227 for the three months endedSeptember 30, 2009.  The increase inthe number of employees, and corresponding increase in crew-related salaries,wages and employee benefits, was primarily due to the increase in block hoursand ASMs.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$1.8 million, or 1.5%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The followingtable summarizes the amount of engine overhauls and engine overhaulreimbursements included in our aircraft maintenance expense for the periodsindicated (dollar amounts in thousands).

 
| ** **                                                                                                                          | ** ** | **For the three months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                                                                                         |       | $                                                                          | 120,863    |   | $ | 119,055 |   | $ | 1,808 |   | 1.5 | % |
| Less: Engine overhaul reimbursed from major  partners                                                                               |       | 28,729                                                                     |       | 32,952 |   | (4,223 | ) | (12.8 | )% |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                                     |       | 17,470                                                                     |       | 15,346 |   | 2,124 |   | 13.8 | % |
| Aircraft maintenance excluding reimbursed  engine overhauls and CRJ 200 engine overhauls reimbursed at fixed  hourly rate |       | $                                                                          | 74,664     |   | $ | 70,757 |   | $ | 3,907 |   | 5.5 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls andCRJ 200 engine overhauls reimbursed at fixed hourly rates, increased$3.9 million, or 5.5%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The increasein maintenance expense excluding engine overhaul costs, was principally due tothe increase in block hours.

 

Underthe SkyWest Airlines and Atlantic Southeast United Express Agreements, werecognize revenue in our condensed consolidated statement of income at a fixedhourly rate for mature engine maintenance on regional jet engines and werecognize engine maintenance expense on our CRJ200 regional jet engines in ourcondensed consolidated statement of income on an as-incurred basis asmaintenance expense. During the three months ended September 30, 2010, ourCRJ200 engine expense under our SkyWest Airlines and Atlantic Southeast UnitedExpress Agreements and our AirTran code-share agreement increased$2.1 million compared to the three months ended September 30, 2009.  The increase in CRJ 200 engine overhaulsreimbursed at a fixed hourly rate was principally due to scheduled enginemaintenance events.  We anticipate theaverage quarterly number of scheduled engine

 

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maintenanceevents we experienced during the three months ended September 30, 2010will likely continue each quarter through 2010 and 2011 and the first quarter of2012.

 

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

 

*Aircraft rentals.*  Aircraft rentals increased $1.4 million, or1.8%, during the three months ended September 30, 2010, compared to thethree months ended September 30, 2009. During the three months ended September 30, 2010, we obtainedleases for four CRJ900s and subleased the aircraft to Air Mekong.

 

*Depreciation and amortization.*  Depreciation and amortization expenseincreased $3.3 million, or 6.0%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009.  The increase in depreciation expense wasprimarily due to SkyWest Airlines taking delivery of 18 new CRJ700s sinceApril 1, 2009. These aircraft were financed through long-term debt.

 

*Station rentals and landing fees.*  Station rentals and landing fees expense increased$4.3 million, or 15.5%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The increasein station rentals and landing fees expense was primarily due to an increase inthe number of departures during the three months ended September 30, 2010compared to the corresponding period of 2009.

 

*Ground handling service.*  Ground handling service expense increased$3.2 million, or 13.5%, during the three months ended September 30,2010, compared to the three months ended September 30, 2009. The increasein ground handling expense was due primarily to the expense SkyWest Airlinesincurred in connection with outsourcing ten new pro-rate stations to other ground handlers since October 1,2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, increased $4.9 million, or 13.7%, during the three monthsended September 30, 2010, compared to the three months ended September 30,2009. The increase in other expenses was primarily due to the increase in ASMsduring the three months ended September 30, 2010.

 

*Interest.*  Interest expense increased $0.5 million,or 2.3%, during the three months ended September 30, 2010 compared to thethree months ended September 30, 2009. The increase in interest expensewas primarily due to SkyWest Airlines taking incremental delivery of 18 newCRJ700s since April 1, 2009. These aircraft were financed throughlong-term debt.

 

*Interest Income.* Interest income increased $1.0 million,or 52.6% during the three months ended September 30, 2010, compared to thethree months ended September 30, 2009. The increase in interest income wasdue primarily to the secured term loan SkyWest Airlines extended to Unitedduring the fourth quarter of 2009 in the amount of $80 million. The termloan bore interest at a rate of 11%, with a ten-year amortization period.SkyWest Airlines also agreed to defer $49 million otherwise payable by Unitedto SkyWest Airlines under the SkyWest Airlines United Express Agreement.  This amount accrued a deferral fee of 8%which was included in interest income. On August 11, 2010, United repaid the $80 million term loan.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) increased $54.6 million, or 9.2%, duringthe three months ended September 30, 2010, compared to the three monthsended September 30, 2009. We are reimbursed for our actual fuel costs byour major partners under our contract flying arrangements. We record the amountof those reimbursements as revenue. Under the SkyWest Airlines and AtlanticSoutheast Delta Connection Agreements, we are reimbursed for our engineoverhaul expense, which we record as revenue. The following table summarizesthe amount of fuel and engine overhaul expenses which are included in our totalairline expenses for the periods indicated (dollar amounts in thousands).

 
| ** **                                                                                                              | ** ** | **For the three months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2010**                                                                   | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                                                                                   |       | $                                                                          | 650,216    |   | $ | 595,644 |   | $ | 54,572 |   | 9.2 | % |
| Less: Fuel expense                                                                                                      |       | 87,289                                                                     |       | 61,842 |   | 25,447 |   | 41.1 | % |
| Less: Engine overhaul reimbursement from  major partners                                                           |       | 28,729                                                                     |       | 32,952 |   | (4,223 | ) | (12.8 | )% |
| Less: CRJ 200 engine overhauls reimbursed at fixed hourly  rate                                                    |       | 17,470                                                                     |       | 15,346 |   | 2,124 |   | 13.8 | % |
| Total airline expense excluding fuel and engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                                                          | 516,728    |   | $ | 485,504 |   | $ | 31,224 |   | 6.4 | % |

 

Excluding fuel and engine overhaul costs and CRJ 200 engine overhaulsreimbursed at fixed hourly rates, our total airline expenses increased$31.2 million, or 6.4%, during the three months ended September 30,2010, compared to the three months ended

 

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September 30,2009. The percentage increase in total airline expenses, excluding fuel andengine overhauls, is generally consistent with the percentage increase in ASMs.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $25.5 million, or $0.45 per diluted share, for thethree months ended September 30, 2010, compared to $28.6 million, or$0.50 per diluted share, for the three months ended September 30, 2009.

 

**Nine months Ended September 30,2010 and 2009**

 

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

 
| ** **                                  | ** ** | **For the nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)               |       | 14,255,267                                                                |       | 13,160,338 |   | 8.3 |   |
| Available seat miles (000)                  |       | 17,909,594                                                                |       | 16,663,270 |   | 7.5 |   |
| Block hours                                 |       | 1,080,926                                                                 |       | 1,027,483 |   | 5.2 |   |
| Departures                                  |       | 708,849                                                                   |       | 657,308 |   | 7.8 |   |
| Passengers carried                          |       | 28,680,837                                                                |       | 25,996,245 |   | 10.3 |   |
| Passenger load factor                       |       | 79.6                                                                      | %          | 79.0 | % | 0.6 |  Pts |
| Revenue per available seat mile             |       | 11.0                                                                      | ¢     | 12.1 | ¢ | (9.1 | ) |
| Cost per available seat mile                |       | 10.5                                                                      | ¢     | 11.5 | ¢ | (8.7 | ) |
| Cost per available seat mile excluding fuel |       | 9.1                                                                       | ¢     | 9.5 | ¢ | (4.2 | ) |
| Fuel cost per available seat mile           |       | 1.4                                                                       | ¢     | 2.0 | ¢ | (30.0 | ) |
| Average passenger trip length (miles)       |       | 497                                                                       |       | 506 |   | (1.8 | ) |

 

*Revenues.*  Operating revenues decreased$40.4 million, or 2.0%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. We arereimbursed for our actual fuel costs by our major partners under our contractflying arrangements. For financial reporting purposes, we record thesereimbursements as operating revenue. Under the SkyWest Airlines and AtlanticSoutheast Delta Connection Agreements, we are reimbursed for our engineoverhaul expenses as incurred. We also record those engine overhaulreimbursements as operating revenue. The following table summarizes the amountof fuel and engine overhaul reimbursements included in our passenger revenuesfor the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                         | 1,942,244  |   | $ | 1,985,978 |   | $ | (43,734 | ) | (2.2 | )% |
| Less: Fuel reimbursement from major partners                          |       | 186,630                                                                   |       | 311,735 |   | (125,105 | ) | (40.1 | )% |
| Less: Engine overhaul reimbursement from major  partners              |       | 69,563                                                                    |       | 88,737 |   | (19,174 | ) | (21.6 | )% |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                         | 1,686,051  |   | $ | 1,585,506 |   | $ | 100,545 |   | 6.3 | % |

 

*Passenger revenues.*  Passenger revenues decreased$43.7 million, or 2.2%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The decreasein passenger revenues was primarily due to a decrease in fuel reimbursementsfrom our major partners. The fuel reimbursement from our major partnersdecreased $125.1 million, or 40.1%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. Our passengerrevenues, excluding fuel and engine overhaul reimbursements from majorpartners, increased $100.5 million, or 6.3%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The increasein passenger revenues, excluding fuel and engine overhaul reimbursements, wasprimarily due to two factors. First, Atlantic Southeast experienced anabnormally high number of flight cancellations, primarily due to weatherproblems in its Atlanta hub, during the nine months ended September 30,2009.  Additionally, on March 31,2009, as a result of an internal audit, Atlantic Southeast grounded 60 CRJ200aircraft in order to perform engine safety inspections in accordance with themanufacturer’s recommendations. Consequently, Atlantic Southeast cancelledapproximately 750 more flights than normal as a result of the severe weatherand the aircraft grounding during the three months ended March 31, 2009,which contributed to a decline in passenger revenue of approximately $7.6million for the nine months ended September 30, 2010, compared to thecorresponding period of 2009. Second, our block hour production increased 5.2%during the nine months end September 30, 2010, compared to the nine monthsended September 30, 2009.The increase in block hours was primarily due toSkyWest Airlines taking incremental delivery of 18 CRJ 700s since April 1,2009.

 

*Ground handling and other.*  Total ground handling and other revenuesincreased $3.4 million, or 14.6%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The increasewas primarily related to aircraft rental revenue to other airlines.  During the nine months ended September 30,2010, we obtained leases for four CRJ900s and subleased the aircraft to AirMekong.

 

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

 
| ** **                                  | ** ** | **For the nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                                | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                         | 246,316    |   | $ | 331,513 |   | $ | (85,197 | ) | (25.7 | )% | 1.4 |   | 2.0 |   |
| Salaries, wages and benefits                |       | 537,640                                                                   |       | 526,286 |   | 11,354 |   | 2.2 | % | 3.0 |   | 3.2 |   |
| Aircraft maintenance, materials and repairs |       | 338,984                                                                   |       | 327,604 |   | 11,380 |   | 3.5 | % | 1.9 |   | 2.0 |   |
| Aircraft rentals                            |       | 229,684                                                                   |       | 224,929 |   | 4,755 |   | 2.1 | % | 1.3 |   | 1.3 |   |
| Depreciation and amortization               |       | 175,300                                                                   |       | 164,722 |   | 10,578 |   | 6.4 | % | 1.0 |   | 1.0 |   |
| Station rentals and landing fees            |       | 91,205                                                                    |       | 90,352 |   | 853 |   | 0.9 | % | 0.5 |   | 0.5 |   |
| Ground handling services                    |       | 83,112                                                                    |       | 72,109 |   | 11,003 |   | 15.3 | % | 0.4 |   | 0.4 |   |
| Other                                       |       | 116,629                                                                   |       | 107,852 |   | 8,777 |   | 8.1 | % | 0.6 |   | 0.7 |   |
| Total operating expenses                    |       | 1,818,870                                                                 |       | 1,845,367 |   | (26,497 | ) | (1.4 | )% | 10.1 |   | 11.1 |   |
| Interest                                    |       | 64,883                                                                    |       | 65,216 |   | (333 | ) | (0.5 | )% | 0.4 |   | 0.4 |   |
| Total airline expenses                      |       | $                                                                         | 1,883,753  |   | $ | 1,910,583 |   | (26,830 | ) | (1.4 | )% | 10.5 |   | 11.5 |   |
|                                             |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $85.2 million, or25.7%, during the nine months ended September 30, 2010, compared to thenine months ended September 30, 2009. The average cost per gallon of fuelincreased to $2.55 per gallon during the nine months ended September 30,2010, from $1.79 during the nine months ended September 30, 2009. Theincrease in the average cost per gallon was offset by Delta purchasing themajority of the fuel for our Delta Connection aircraft, commencing onJune 1, 2009.  United also purchasedfuel directly from a fuel vendor for our United Express aircraft under contractflying operated out of Chicago, San Francisco, Los Angeles and Denver. Thefollowing table summarizes the gallons of fuel we purchased directly, and thechange in fuel price per gallon on our fuel expense, for the periods indicated:

 

| ** **                                                             | ** ** | **For the nine  months ended September  30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2010**                                                                              | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 96,592                                                                                |       | 184,937 |   | (47.8 | )% |
| Average price per gallon                                               |       | $                                                                                     | 2.55       |   | $ | 1.79 |   | 42.5 | % |
| Fuel expense                                                           |       | $                                                                                     | 246,316    |   | $ | 331,513 |   | (25.7 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsincreased $11.4 million, or 2.2%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The averagenumber of full-time equivalent employees decreased 1.5% to 12,562 for the ninemonths ended September 30, 2010, from 12,748 for the nine months endedSeptember 30, 2009. The decrease in number of employees was primarily dueto a reduction in our customer service employees resulting from Deltatransitioning 23 stations from SkyWest Airlines and Atlantic Southeast to otherground handlers during the second quarter of 2009.  Although our decrease in full-time equivalentemployees was primarily due to a reduction in customer service agents, weexperienced an increase of 5.2% in block hours, which contributed to anincrease in crew-related salaries, wages and employee benefits.  The net impact resulted in a 2.2% increase insalaries, wages and employee benefits for the nine months ended September 30,2010 compared to the nine months ended September 30, 2009.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$11.4 million, or 3.5%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The followingtable summarizes the amount of engine overhauls and engine overhaulreimbursements included in our aircraft maintenance expense for the periodsindicated (dollar amounts in thousands).

 
| ** **                                                                                                                               | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                                                                                              |       | $                                                                         | 338,984    |   | $ | 327,604 |   | $ | 11,380 |   | 3.5 | % |
| Less: Engine overhaul reimbursed from major  partners                                                                                    |       | 69,563                                                                    |       | 88,737 |   | (19,174 | ) | (21.6 | )% |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                                          |       | 54,457                                                                    |       | 24,425 |   | 30,032 |   | 123.0 | % |
| Aircraft maintenance excluding reimbursed  engine overhauls and CRJ 200 engine overhauls reimbursed at  fixed hourly rate |       | $                                                                         | 214,964    |   | $ | 214,442 |   | $ | 522 |   | 0.2 | % |

 

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Aircraft maintenance expense excluding reimbursed engine overhauls andCRJ 200 engine overhauls reimbursed at fixed hourly rates, increased$0.5 million, or 0.2%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The increasein maintenance excluding engine overhaul costs was principally due to anincrease in block hours offset by the timing of scheduled maintenance events.

 

Underthe SkyWest Airlines and Atlantic Southeast United Express Agreements, werecognize revenue in our condensed consolidated statement of income at a fixedhourly rate for mature engine maintenance on regional jet engines and werecognize engine maintenance expense on our CRJ200 regional jet engines in ourcondensed consolidated statement of income on an as-incurred basis asmaintenance expense. During the nine months ended September 30, 2010, ourCRJ200 engine expense under our SkyWest Airlines and Atlantic Southeast UnitedExpress Agreements and our AirTran code-share agreement increased$30.0 million compared to the nine months ended September 30,2009.  The increase in CRJ 200 engineoverhauls reimbursed at a fixed hourly rate was principally due to scheduledengine maintenance events.  We anticipatethe average quarterly number of scheduled engine maintenance events experiencedduring the quarter ended March 31, 2010, June 30, 2010 and September 30,2010 will likely continue each quarter through 2010 and 2011 and the firstquarter of 2012.

 

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

 

*Aircraft rentals.*  Aircraft rentals increased $4.8 million, or2.1%, during the nine months ended September 30, 2010, compared to thenine months ended September 30, 2009. The increase in aircraft rents wasprimarily due to Atlantic Southeast taking delivery of ten CRJ900s during 2009.These aircraft were financed through long-term leases.

 

*Depreciation and amortization.*  Depreciation and amortization expenseincreased $10.6 million, or 6.4%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009.  The increase in depreciation expense wasprimarily due to SkyWest Airlines taking incremental delivery of 18 new CRJ700ssince April 1, 2009. These aircraft were financed through long-term debt.

 

*Ground handling service.*  Ground handling service expense increased$11.0 million, or 15.3%, during the nine months ended September 30, 2010,compared to the nine months ended September 30, 2009. The increase inground handling expense was due primarily to 16 new pro-rate stations SkyWestAirlines outsourced to other ground handlers since January 1, 2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, increased $8.8 million, or 8.1%, during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009. The increasein other expenses was primarily due to the increase in ASMs during the nine-monthperiod.

 

*Interest.*  Interest expense decreased $0.3 million, or0.5%, during the nine months ended September 30, 2010 compared to the ninemonths ended September 30, 2009. The decrease in interest expense wassubstantially due to a decrease in interest rates. At September 30, 2010,we had variable rate notes representing 36.3% of our total long-term debt . Themajority of our variable rate notes are based on the three-month and six-monthLIBOR rates. At September 30, 2010, the three-month and six-month LIBORrates were 0.29% and 0.46%, respectively. At December 31, 2008, thethree-month and six-month LIBOR rates were 1.43% and 1.75%, respectively. Thedecrease in interest rates was partly offset by SkyWest Airlines takingincremental delivery of 18 new CRJ700s since April 1, 2009. These aircraftwere financed through long-term debt.

 

*Interest Income.* Interest income increased $3.6 million, or49.9% during the nine months ended September 30, 2010, compared to thenine months ended September 30, 2009. The increase in interest income wasdue primarily to the secured term loan SkyWest Airlines extended to Unitedduring the fourth quarter of 2009 in the amount of $80 million. The term loanbore interest at a rate of 11%, with a ten-year amortization period. SkyWestAirlines also agreed to defer $49 million otherwise payable by United toSkyWest Airlines under the SkyWest Airlines United Express Agreement.  This amount accrued a deferral fee of 8%which was included in interest income. On August 11, 2010, United repaidthe $80 million term loan.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $26.8 million, or 1.4%, during thenine months ended September 30, 2010, compared to the nine months ended September 30,2009. We are reimbursed for our actual fuel costs by our major partners underour contract flying arrangements. We record the amount of those reimbursementsas revenue. Under the SkyWest Airlines and Atlantic Southeast Delta ConnectionAgreements, we are reimbursed for our engine overhaul expense, which we recordas revenue. The following table summarizes the amount of fuel and engineoverhaul expenses which are included in our total airline expenses for theperiods indicated (dollar amounts in thousands).

 

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| ** **                                                                                                              | ** ** | **For the nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                                                                                   |       | $                                                                         | 1,883,753  |   | $ | 1,910,583 |   | $ | (26,830 | ) | (1.4 | )% |
| Less: Fuel expense                                                                                                      |       | 246,316                                                                   |       | 331,513 |   | (85,197 | ) | (25.7 | )% |
| Less: Engine overhaul reimbursement from  major partners                                                           |       | 69,563                                                                    |       | 88,737 |   | (19,174 | ) | (21.6 | )% |
| Less: CRJ 200 engine overhauls reimbursed at fixed  hourly rate                                                         |       | 54,457                                                                    |       | 24,425 |   | 30,032 |   | 123.0 | % |
| Total airline expense excluding fuel and engine  overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate |       | $                                                                         | 1,513,417  |   | $ | 1,465,908 |   | $ | 47,509 |   | 3.2 | % |

 

Excluding fuel and engine overhaul costs and CRJ 200 engine overhaulsreimbursed at fixed hourly rates, our total airline expenses increased $47.5million, or 3.2%, during the nine months ended September 30, 2010,compared to the nine months ended September 30, 2009. The percentageincrease in total airline expenses excluding fuel and engine overhauls, wasless than the percentage increase in ASMs, which was primarily due to theincreased operating efficiencies obtained from operating larger regional jets.

 

*Impairment of marketable securities.*  As a result of an ongoing valuation review ofour marketable securities portfolio, we recognized a pre-tax charge ofapproximately $7.1 million during the nine months ended September 30, 2009for certain marketable securities deemed to have other-than-temporary impairment.We did not experience a corresponding charge during the nine months ended September 30,2010.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $59.1 million, or $1.04 per diluted share, for the ninemonths ended September 30, 2010, compared to $64.2 million, or $1.13 perdiluted share, for the nine months ended September 30, 2009.

 

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**Liquidity and CapitalResources**

 

***Sources and Uses of Cash***

 

***Cash Position and Liquidity.***The followingtable provides a summary of the net cash provided by (used in) operating,investing and financing activities for the nine months ended September 30,2010 and 2009 and total cash  andmarketable securities position as of September 30, 2010 and December 31,2009 (in thousands).

 
| ** **                                           | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                                                  | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Net cash provided by operating activities            |       | $                                                                         | 280,115    |   | $ | 308,981 |   | $ | (28,866 | ) | (9.3 | )% |
| Net cash used in investing activities                |       | (241,752                                                                  | )          | (350,670 | ) | 108,918 |   | 31.1 | % |
| Net cash provided by (used in) financing  activities |       | (32,003                                                                   | )          | 23,996 |   | (55,999 | ) | (233.4 | )% |
|                                                      |            |                                                                           |            |  |  |  |  |  |  |  |  |  |

 
| ** **                | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|---------------------------|------------|------------------------------|------------|-----------------------------|------------|-------------------|------------|-------------------|------------|
| * *                  | * *   | * *                     | * *   | * *                    | * *   | * *          | * *   | * *          | * *   |
| Cash and cash equivalents |       | $                            | 82,774     |                        | $          | 76,414            |       | $                 | 6,360      |   | 8.3 | % |
| Restricted cash           |       | 6,481                        |       | 10,730                      |       | (4,249            | )          | (39.6             | )%         |
| Marketable securities     |       | 793,954                      |       | 645,301                     |       | 148,653           |       | 23.0              | %          |
| Total                     |       | $                            | 883,209    |                        | $          | 732,445           |       | $                 | 150,764    |   | 20.6 | % |

 

***Cash Flows from Operating Activities.***

 

Netcash provided by operating activities decreased $28.9 million or 9.3%, duringthe nine months ended September 30, 2010, compared to the nine monthsended September 30, 2009.  Thedecrease was primarily due to changes in accounts payable.  During the nine month ended September 30,2010 accounts payable increased $4.3 million as compared to an increase inaccounts payable of $38.9 million during the nine months ended September 30,2009. The increase in the change in accounts payable was due primarily to thetiming of our payments of engine overhaul expenses.

 

***Cash Flows from Investing Activities.***

 

Netcash used in investing activities decreased $108.9 million or 31.1%, during thenine months ended September 30, 2010, compared to the nine months ended September 30,2009. The majority of the decrease was due to the collection of scheduledpayments and full repayment of our term loan to United.  During the nine months ended September 30,2010, we collected $79.3 million in outstanding principal payments from United.Second, our aircraft and rotable spare parts purchased decreased $75.1 millionduring the nine months ended September 30, 2010 as compared to the ninemonths ended September 30, 2009. The decrease in aircraft and rotablespares was primarily due to the acquisition of seven CRJ 700s during the ninemonths ended September 30, 2009 compared to the acquisition of four CRJ700s during the nine months September 30, 2010. The increase in aircraftand rotable spare parts was offset by net purchases of marketablesecurities.  During the nine months endedSeptember 30, 2010 we made net purchases of marketable securities of$148.8 million as compared to net purchases of marketable securities of $132.0million during the nine months ended September 30, 2009. The proceeds fromthe sale of equipment decreased $18.4 million during the nine months ended September 30,2010, compared to the nine months ended September 30, 2009.  The decrease in proceeds from the sale ofequipment was principally due to the sale of three aircraft during the ninemonths ended September 30, 2009.

 

***Cash Flows from Financing Activities.***

 

Netcash provided by (used in) financing activities decreased $56.0 million or233.4%, during the nine months ended September 30, 2010, compared to thenine months ended September 30, 2009. The decrease was primarily relatedto a decrease in proceeds from the issuance of long-term debt.  During the nine months ended September 30,2010 we received proceeds from long-term debt of $81.7 million, as compared tothe proceeds of $139.6  million duringthe nine months ended September 30, 2009. During the nine months ended September 30,2010, we financed four CRJ 700s with long-term debt.  During the nine months ended September 30,2009, we financed seven CRJ 700s with long-term debt.

 

***Liquidity and Capital Resources***

 

Webelieve that in the absence of unusual circumstances, the working capitalcurrently available to us will be sufficient to meet our present financialrequirements, including anticipated expansion, planned capital expenditures,and scheduled lease payments and debt service obligations for at least the next12 months.

 

AtSeptember 30, 2010, our total capital mix was 44.0% equity and 56.0%long-term debt, compared to 42.7% equity and 57.3% long-term debt at December 31,2009.

 

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**Significant Commitments andObligations**

 

*General*

 

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

 
| ** **                                                      | ** ** | **Total**  | ** ** | **October-Dec  2010** | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Operating lease payments for aircraft and facility  obligations |       | $          | 2,788,282  |                  | $          | 85,625     |       | $          | 348,336    |       | $          | 341,329    |       | $              | 328,746    |   | $ | 316,141 |   | $ | 1,368,105 |   |
| Interest commitments                                            |       | 608,187    |       | 26,121                |       | 82,415     |       | 76,170     |       | 69,237     |       | 62,959     |       | 291,285        |       |
| Principal maturities on long-term debt                          |       | 1,943,031  |       | 47,445                |       | 156,650    |       | 202,991    |       | 157,413    |       | 163,256    |       | 1,215,276      |       |
| Total commitments and obligations                               |       | $          | 5,339,500  |                  | $          | 159,191    |       | $          | 587,401    |       | $          | 620,490    |       | $              | 555,396    |   | $ | 542,356 |   | $ | 2,874,666 |   |

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term lease obligations primarily relatingto our aircraft fleet. At September 30, 2010, we had 293 aircraft underlease with remaining terms ranging from one to 17 years. Future minimum leasepayments due under all long-term operating leases were approximately $2.8billion at September 30, 2010. Assuming a 5.8% discount rate, which is theaverage 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 September 30, 2010.

 

*Long-term Debt Obligations*

 

As of September 30, 2010, we had $1,943.0 million of long termdebt obligations related to the acquisition of Brasilia turboprop, CRJ200,CRJ700 and CRJ900 aircraft. The average effective interest rate on the debtrelated to the Brasilia turboprop and CRJ aircraft was approximately 4.4% at September 30,2010.

 

**Seasonality**

 

Ourresults of operations for any interim period are not necessarily indicative ofthose for an entire year, 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 not experienced difficulties with fuelavailability and we currently expect to be able to obtain fuel at prevailingprices in quantities sufficient to meet our future needs. Pursuant to ourcontract flying arrangements, United has agreed to bear the economic risk offuel price fluctuations on our contracted United Express flights. On our DeltaConnection regional jet flights, Delta has agreed to bear the economic risk offuel price fluctuations. We bear the economic risk of fuel price fluctuationson our pro-rate operations. As of September 30, 2010, essentially all ofour Brasilia turboprops flown for Delta were flown under pro-rate arrangementswhile, approximately 64% of our Brasilia turboprops flown in the United systemwere flown under pro-rate arrangements. As of September 30, 2010, weoperated 18 CRJ200s for United under a pro-rate agreement and four CRJ200sunder a pro-rate agreement with AirTran. The average price per gallon of aircraft fuel increased 14.3% to $2.55for the three months ended September 30, 2010, from $2.23 for the threemonths ended September 30, 2009. The average price per gallon of aircraft fuel increased 42.5% to $2.55for the nine months ended September 30, 2010, from $1.79 for the ninemonths ended September 30, 2009. For illustrative purposes only, we haveestimated the impact of the market risk of fuel on our pro-rate operationsusing a hypothetical increase of 25% in the price per gallon we purchase. Basedon this hypothetical assumption, we would have incurred an additional $5.2million and $14.9 million in fuel expense for the three and nine-month periodsended September 30, 2010, respectively.

 

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Interest Rates

 

Our earnings are affected by changes in interest rates based on theamounts of variable rate long-term debt and the amount of cash and securitieswe hold during any given period.  Theinterest rates applicable to variable rate notes may rise and increase theamount of interest expense.  We wouldalso receive higher amounts of interest income on cash and securities held atthe time; however, the market value of our available-for-sale securities wouldlikely decline.  At September 30,2010, we had variable rate notes representing 36.3% of our total long-term debtcompared to 38.6% of our total long-term debt at December 31, 2009.  For illustrative purposes only, we haveestimated the impact of market risk using a hypothetical increase in interestrates of one percentage point for both variable rate long-term debt and cashand securities.  Based on thishypothetical assumption, we would have incurred an additional $1.8 million ininterest expense and received $2.0 million additional interest income for thethree months ended September 30, 2010. Based on this same hypotheticalassumption, we would have incurred an additional $5.5 million in interestexpense and received $5.6 million additional interest income for the ninemonths ended September 30, 2010. However, under our contractualarrangement with our major partners, the majority of the increase in interestexpense would be passed through and recorded as passenger revenue in theconsolidated statement of income.

 

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 United, our code-share agreements currently provide that reimbursementrates will be adjusted higher or lower to reflect changes in our aircraftrental rates.

 

**ITEM 4.****              ****CONTROLSAND PROCEDURES**

 

a) Evaluation of disclosurecontrols and procedures

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 under the Securities Exchange Act of1934, as amended (the “Exchange Act”), as of September 30, 2010.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. In addition,the design of disclosure controls and procedures must reflect the fact that thereare resource constraints and that management is required to apply its judgmentin evaluating the benefits of possible controls and procedures relative totheir 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) Changes in InternalControl 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.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.   LEGAL PROCEEDINGS**

 

Weare subject to certain legal actions which we consider routine to our businessactivities. As of September 30, 2010, our management believed, afterconsultation with legal counsel, that the ultimate outcome of such legalmatters is not likely to have a material adverse effect on our financialposition, liquidity or results of operations. However, the following aresignificant outstanding legal matters, which if not resolved consistent withthe position we have taken in those matters, would negatively impact ourfinancial results.

 

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*Atlantic Southeast and SkyWest Airlines v. Delta*

 

Duringthe quarter ended December 31, 2007, Delta notified SkyWest, SkyWestAirlines and Atlantic Southeast of a dispute under the Delta ConnectionAgreements executed by Delta with SkyWest Airlines and Atlantic Southeast. Thedispute relates to allocation of liability for IROP expenses that are paid bySkyWest Airlines and Atlantic Southeast to their passengers and vendors undercertain situations. As a result, Delta withheld a combined total ofapproximately $25 million (pretax) from one of the weekly scheduled wire paymentsto SkyWest Airlines and Atlantic Southeast during December 2007. Deltacontinues to withhold a portion of the funds we believe are payable as weeklyscheduled wire payments to SkyWest Airlines and Atlantic Southeast. As of June 30,2008, we had recognized a cumulative total of $31.7 million of revenueassociated with the funds withheld by Delta. Since July 1, 2008, we havenot recognized revenue related to IROP expense reimbursements withheld by Deltabecause collection of those reimbursements is subject of litigation (summarizedbelow) and  is therefore not reasonablyassured.  On February 1, 2008,SkyWest Airlines and Atlantic Southeast filed a lawsuit in Georgia state courtdisputing Delta’s treatment of the matter (the “Complaint”). Delta filed anAnswer to the Complaint and a Counterclaim against SkyWest Airlines andAtlantic Southeast on March 24, 2008. Delta’s Counterclaim alleges thatAtlantic Southeast and SkyWest Airlines breached the Delta ConnectionAgreements by invoicing Delta for the IROP expenses that were paid pursuant toDelta’s policies, and claims only a portion of those expenses may be invoicedto Delta. Delta seeks unspecified damages in its counterclaim.

 

OnMarch 24, 2008, Delta filed a Motion to Dismiss the Complaint (the “Motionto Dismiss”). A hearing on the Motion to Dismiss was held September 5,2008. In an order entered September 13, 2008, the Court granted in partand denied in part the Motion to Dismiss. The Court denied the Motion toDismiss with respect to the breach of contract claim contained in theComplaint. The Court denied in part the Motion to Dismiss with respect to theaction for declaratory judgment contained in the Complaint, and granted in partthe Motion to Dismiss to the extent the Complaint seeks to read alternative orsupplemental obligations created by prior conduct into the Delta ConnectionAgreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in the Complaint.The breach of contract claims and declaratory relief claims were not dismissed.

 

OnJuly 31, 2009, SkyWest Airlines and Atlantic Southeast filed an AmendedComplaint in the lawsuit adding claims under Georgia law for voluntary paymentand mutual departure from the strict terms of the Delta Connection Agreements.Under those claims, SkyWest Airlines and Atlantic Southeast seek recovery ofall of the approximately $25 million withheld by Delta during December 2007.SkyWest Airlines and Atlantic Southeast are also seeking recovery of additionalamounts withheld by Delta subsequent to December 2007. Discovery onSkyWest Airlines’ and Atlantic Southeast’s claims and defenses has not yet beencompleted. On September 4, 2009, Delta filed a motion to dismiss theAmended Complaint in part. Delta asserted that the claims added by SkyWestAirlines and Atlantic Southeast in the Amended Complaint should be dismissedbased on legal arguments set forth in Delta’s memorandum in support of itsmotion. SkyWest Airlines and Atlantic Southeast opposed the motion.  On January 22, 2010, the Court grantedDelta’s motion in part, dismissing the claims under Georgia law for voluntarypayment and mutual departure from the strict terms of the ConnectionAgreements. SkyWest Airlines and Atlantic Southeast continue to vigorouslypursue their claims set forth in the Amended Complaint, to the extent permittedby the Court’s ruling on the Motion to Dismiss, and their defenses to Delta’scounterclaims.  The Court’s rulingsaffect the current posture of the case, but do not preclude pursuit of theclaims for breach of contract or for declaratory relief, under which SkyWestAirlines and Atlantic Southeast continue to seek recovery of the majority ofthe amounts withheld by Delta.

 

*ExpressJetStockholder Litigation*

 

BetweenAugust 5, 2010 and August 25, 2010, nine substantially similarputative shareholder class action suits (collectively, the “Texas State Actions”)were filed by individual ExpressJet stockholders in the District Court ofHarris County, Texas against ExpressJet and its directors.  Many of the petitions also name SkyWest,Atlantic Southeast and/or Express Merger Co. (together, the “SkyWest Defendants”)as defendants in the litigation.

 

Thepetitions filed in the Texas State Actions generally allege that the ExpressJetdirector defendants breached their fiduciary duties in connection with thenegotiations and approval of the Merger Agreement and that the SkyWestDefendants aided and abetted such alleged breaches of fiduciary duties.  The Texas State Actions seek, among otherthings, an injunction enjoining the Merger and the transactions contemplated bythe Merger Agreement and rescission of any transactions contemplated by theMerger Agreement which may be completed. On August 18, 2010, plaintiff Rayside filed a motion to consolidatethe Texas State Actions into Case No. 2010-48784 in the first-filed court(the “189th District Court).  On August 20, 2010, plaintiffs Levine,Tejeda, Doraiswamy and Swanepoel filed a similar motion in the 189th District Court.  On September 10, 2010, the 189th District Court ordered the consolidation ofthe Texas State Actions with and into Case No. 2010-48784 (theconsolidated action is referred to herein as the “Consolidated Texas StateAction”).

 

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OnSeptember 20, 2010, a putative stockholder class action (the “TexasFederal Action” and, together with the Consolidated Texas State Action, the “Actions”)was commenced in the United States District Court for the Southern District ofTexas, Houston Division.  The complaintfiled in the Texas Federal Action includes substantially identical allegationsto and requests substantially the same relief as the petitions in the TexasState Actions, but also includes allegations related to the ExpressJetpreliminary proxy statement filed with the U. S. Securities and ExchangeCommission on September 3, 2010.

 

OnOctober 8, 2010, counsel for the defendants in the Actions, counsel forthe plaintiff class in the Consolidated Texas State Action and counsel forplaintiff in the Texas Federal Action agreed to and executed a memorandum ofunderstanding (the “MOU”) containing the terms of an agreement in principle toresolve the Actions.  The MOU providesthat, in consideration for the settlement of the Actions, ExpressJet will makecertain disclosures in the definitive proxy statement to be sent to the ExpressJetstockholders soliciting approval of the Merger. In the MOU, the defendants in the Actions acknowledge that theyconsidered the claims raised by the plaintiffs in the Actions in connectionwith the disclosures contemplated by the MOU. In exchange, the parties to the MOU have agreed to use their bestefforts to draft and execute a definitive stipulation of settlement thatincludes a plaintiff class consisting of all record and beneficial holders ofExpressJet stock, other than defendants in the Consolidated Texas State Actionand any firm, trust, corporation or other entity controlled by any suchdefendant, during the period beginning on and including December 2, 2009,through and including the date of the consummation of the merger.  If approved by the parties and the 189th District Court, the settlement will result inthe dismissal with prejudice of the Consolidated Texas State Action and releaseby the plaintiff class of all claims under federal and state law that were orcould have been asserted in the Actions or which arise out of or relate to thetransactions contemplated by the Merger. The MOU further provides that, in the event the Consolidated Texas StateAction is dismissed in accordance with the settlement stipulation, the partiesto the MOU will use their best efforts to obtain the dismissal with prejudiceof the Texas Federal Action.  Thesettlement of the Consolidated Texas State Actions is subject to numerousconditions set forth in the MOU and to be contained in any stipulation ofsettlement, including the completion of the Merger.

 

Forfinancial reporting purposes we accrue an estimated loss if the loss isprobable and reasonably estimable. Because these conditions have not beensatisfied, we did not record a loss related to the preceding matters as of September 30,2010.

 

**ITEM 1A.  RISK FACTORS**

 

Part I, Item1A, “Risk Factors,” of our Annual Report on Form 10-K for the year endedDecember 31, 2009 includes a detailed discussion of risks anduncertainties which could adversely affect our future results. The risk factorpresented below reflects a material addition to the Risk Factors in our AnnualReport on Form 10-K for the year ended December 31, 2009.  Therisk factor set forth below supplements, and should be read in conjunctionwith, the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

***The proposed merger between AtlanticSoutheast and ExpressJet presents certain risks to our business and operations.***

 

OnAugust 3, 2010, we entered into the Merger Agreement with ExpressJet andExpress Merger Co., pursuant to which Atlantic Southeast would acquire all ofthe outstanding shares of ExpressJet common stock.  The Merger Agreementprovides for the merger of Express Delaware Merger Co. and ExpressJet, withExpressJet becoming a wholly-owned subsidiary of AtlanticSoutheast.   Completion of the transaction is subject to approval byExpressJet’s stockholders, regulatory approvals and other customary closingconditions.  The announcement of ourintention to complete the Merger presents certain risks to our business andoperations prior to the closing of the Merger, including, among other things,risks that:

 
| · |   | our  operations will be restricted by the terms of the Merger Agreement, which may  cause us to forego otherwise beneficial business opportunities;                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | we  may lose management personnel and other key employees and be unable to  attract and retain such personnel and employees;                                                                            |
| · |   | management’s  attention and other company resources may be focused on the proposed Merger  instead of on day-to-day management activities, including pursuing other  beneficial opportunities; and |
| · |   | the  Merger may not be completed, which may have an adverse effect on our stock  price and future business and financial results.                                                                       |

 

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Inaddition, if the Merger is completed, of which we can provide no assurance, wewill be subject to additional risks, including, among other things, risks that:

 
| · |   | we  may be unable to successfully integrate Atlantic Southeast’s business and  workforce with those of ExpressJet;                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | conditions,  terms, obligations or restrictions imposed on us by regulatory authorities  prior to granting regulatory clearance for the Merger may affect the combined  company’s business and operations; |
| · |   | we  may lose management personnel and other key employees and be unable to  attract and retain such personnel and employees;                                                                                    |
| · |   | we  may be unable to successfully manage the expanded business and monitor new  operations and associated increased costs and complexity;                                                                       |

 

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

 

Our Board of Directors has adopted a stock repurchase program whichauthorizes us to repurchase shares of our common stock in the public market,from time to time, at prevailing prices. The stock repurchase program currentlyauthorizes the repurchase of up to 20,000,000 shares of our common stock. Thefollowing table summarizes our purchases under the stock repurchase program forthe three months ended September 30, 2010:

 
| **Period**                                      | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of a  Publicly Announced  Program(1)** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Program** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| July 1 – July 31, 2010           |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                | 7,692,688  |   |
| August 1 – August 31, 2010       |       | 340,700                                              |       | 12.80                                            |       | 340,700                                                                                                                    |       | 7,351,988                                                                                                           |       |
| September 1 – September 30, 2010 |       | 515,471                                              |       | 13.54                                            |       | 515,471                                                                                                                    |       | 6,836,517                                                                                                           |       |
| Total                                           |       | 856,171                                              |       | $                                                | 13.24      |                                                                                                                       | 856,171    |                                                                                                                | 6,836,517  |   |

 

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(1)         Under resolutions adopted inFebruary 2007, November 2007, May 2009 and May 2010, ourBoard of Directors authorized the repurchase of up to 20,000,000 shares of ourcommon stock. Purchases are made at management’s discretion based on marketconditions and our financial resources. In addition, effective March 13,2009, we entered into the SkyWest, Inc. Stock Repurchase Plan (the “StockRepurchase Plan”). The Stock Repurchase Plan provides for the repurchase of upto 3,400,000 shares of our common stock (which are included within, and are notin addition to, the 20,000,000 shares of common stock described above) by anindependent third party pursuant to trading parameters contemplated by theStock Repurchase Plan. As of September 30, 2010, we had spent approximately$259.5 million to purchase and retire approximately 13,163,483 shares of the20,000,000 shares of common stock designated for repurchase by our Board ofDirectors. The authorization of our Board of Directors does not have anexpiration date. The Stock Repurchase Plan expires on March 13, 2011.

 

**ITEM 6: EXHIBITS**

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the Registrant has dulycaused this Quarterly Report on Form 10-Q for the quarter ended September 30,2010, to be signed on its behalf by the undersigned, thereunto duly authorized,on November 5, 2010.

 
|   | SKYWEST, INC. |
|--------|--------------------|
|   |               |   |
|   | By                 | /s/  Bradford R. Rich |
|   |               | Bradford  R. Rich |
|   |               | Executive  Vice President and Chief Financial Officer*On behalf of the Registrant and in his capacity as Principal  Financial and Accounting Officer)* |

 

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