Table of Contents

 

 

 

**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 June 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 August 2, 2010** |
|----------------------------|------------|-------------------------------------------------------|
| Common stock, no par value |       | 56,140,416                                            |

 

 

 

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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 June  30, 2010 (unaudited) and  December 31, 2009                | 3 |
|              |                                      | Consolidated  Statements of Income (unaudited) for the three and six months ended  June 30, 2010 and 2009     | 5 |
|              |                                      | Condensed  Consolidated Statements of Cash Flows (unaudited) for the six months ended  June 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                        | 14 |
|              | Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 24 |
|              | Item 4.                                   | Controls and  Procedures                                                                                           | 25 |
|              |                                      |                                                                                                               |
| PART II      | OTHER INFORMATION:                        | 25                                                                                                                 |
|              | Item 1.                                   | Legal Proceedings                                                                                                  | 25 |
|              | Item 1A.                                  | Risk Factors                                                                                                       | 26 |
|              | Item 2                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 26 |
|              | Item 6.                                   | Exhibits                                                                                                           | 27 |
|              |                                      | Signature                                                                                                          | 28 |
|              |                                      |                                                                                                               |
| 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**

 
| ** **                                     | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                |       |                    |       |                        |       |
| Cash and cash equivalents                      |       | $                       | 59,180     |                        | $          | 76,414 |   |
| Marketable securities                          |       | 680,439                 |       | 645,301                     |       |
| Restricted cash                                |       | 6,481                   |       | 10,730                      |       |
| Income tax receivable                          |       | 14,588                  |       | 12,608                      |       |
| Receivables, net                               |       | 110,805                 |       | 111,902                     |       |
| Inventories, net                               |       | 90,088                  |       | 89,876                      |       |
| Prepaid aircraft rents                         |       | 272,563                 |       | 237,350                     |       |
| Deferred tax assets                            |       | 46,341                  |       | 45,197                      |       |
| Other current assets                           |       | 19,926                  |       | 24,721                      |       |
| Total current assets                           |       | 1,300,411               |       | 1,254,099                   |       |
|                                           |       |                    |       |                        |       |
| PROPERTY AND EQUIPMENT:                        |       |                    |       |                        |       |
| Aircraft and rotable spares                    |       | 3,715,535               |       | 3,612,658                   |       |
| Deposits on aircraft                           |       | —                  |       | 4,247                       |       |
| Buildings and ground equipment                 |       | 244,122                 |       | 240,438                     |       |
|                                           |       | 3,959,657               |       | 3,857,343                   |       |
| Less-accumulated depreciation and amortization |       | (1,075,214              | )          | (977,637                    | )          |
| Total property and equipment, net              |       | 2,884,443               |       | 2,879,706                   |       |
|                                           |       |                    |       |                        |       |
| OTHER ASSETS                                   |       |                    |       |                        |       |
| Intangible assets, net                         |       | 22,872                  |       | 23,997                      |       |
| Other assets                                   |       | 159,244                 |       | 153,000                     |       |
| Total other assets                             |       | 182,116                 |       | 176,997                     |       |
| Total assets                                   |       | $                       | 4,366,970  |                        | $          | 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**

 
| ** **                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                              |       |              |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                 | 154,590    |                  | $          | 148,571 |   |
| Accounts payable                                                                                                  |       | 163,799           |       | 165,825               |       |
| Accrued salaries, wages and benefits                                                                              |       | 67,896            |       | 67,377                |       |
| Accrued aircraft rents                                                                                            |       | 10,692            |       | 17,661                |       |
| Taxes other than income taxes                                                                                     |       | 20,407            |       | 17,476                |       |
| Other current liabilities                                                                                         |       | 33,084            |       | 32,925                |       |
| Total current liabilities                                                                                         |       | 450,468           |       | 449,835               |       |
|                                                                                                              |       |              |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 39,165            |       | 38,540                |       |
|                                                                                                              |       |              |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,817,952         |       | 1,816,318             |       |
|                                                                                                              |       |              |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 561,870           |       | 536,540               |       |
|                                                                                                              |       |              |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 112,613           |       | 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; 75,037,249 and 74,626,660 shares issued, respectively |       | 583,053           |       | 578,153               |       |
| Retained earnings                                                                                                 |       | 1,081,535         |       | 1,052,375             |       |
| Treasury stock, at cost, 19,101,368 and 19,017,645  shares, respectively                                          |       | (280,798          | )          | (279,619              | )          |
| Accumulated other comprehensive income                                                                            |       | 1,112             |       | 1,310                 |       |
| Total stockholders’ equity                                                                                   |       | 1,384,902         |       | 1,352,219             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                 | 4,366,970  |                  | $          | 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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2010**                                        | ** ** | **2009**                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| OPERATING REVENUES:                         |       |                                            |       |                                          |       |   |   |   |   |
| Passenger                                   |       | $                                               | 642,201    |                                          | $          | 691,141 |   | $ | 1,265,313 |   | $ | 1,356,023 |   |
| Ground handling and other                   |       | 7,558                                           |       | 7,682                                         |       | 16,689 |   | 15,442 |   |
| Total operating revenues                    |       | 649,759                                         |       | 698,823                                       |       | 1,282,002 |   | 1,371,465 |   |
| OPERATING EXPENSES:                         |       |                                            |       |                                          |       |   |   |   |   |
| Aircraft fuel                               |       | 85,513                                          |       | 129,042                                       |       | 159,027 |   | 269,671 |   |
| Salaries, wages and benefits                |       | 173,716                                         |       | 173,862                                       |       | 352,278 |   | 350,734 |   |
| Aircraft maintenance, materials and repairs |       | 111,366                                         |       | 116,390                                       |       | 218,121 |   | 208,549 |   |
| Aircraft rentals                            |       | 75,642                                          |       | 75,958                                        |       | 152,101 |   | 148,740 |   |
| Depreciation and amortization               |       | 58,383                                          |       | 54,676                                        |       | 116,529 |   | 109,260 |   |
| Station rentals and landing fees            |       | 30,551                                          |       | 29,978                                        |       | 59,436 |   | 62,852 |   |
| Ground handling services                    |       | 26,945                                          |       | 23,124                                        |       | 56,389 |   | 48,572 |   |
| Other airline expense                       |       | 38,355                                          |       | 36,024                                        |       | 76,411 |   | 72,494 |   |
| Total operating expenses                    |       | 600,471                                         |       | 639,054                                       |       | 1,190,292 |   | 1,270,872 |   |
| OPERATING INCOME                            |       | 49,288                                          |       | 59,769                                        |       | 91,710 |   | 100,593 |   |
| OTHER INCOME (EXPENSE):                     |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                             |       | 4,142                                           |       | 2,724                                         |       | 8,112 |   | 5,446 |   |
| Interest expense                            |       | (21,659                                         | )          | (21,117                                       | )          | (43,244 | ) | (44,069 | ) |
| Impairment on marketable securities         |       | —                                          |       | —                                        |       | — |   | (7,115 | ) |
| Other                                       |       | (1,131                                          | )          | 116                                           |       | (1,385 | ) | (203 | ) |
|                                        |       | (18,648                                         | )          | (18,277                                       | )          | (36,517 | ) | (45,941 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 30,640                                          |       | 41,492                                        |       | 55,193 |   | 54,652 |   |
| PROVISION FOR INCOME TAXES                  |       | 11,985                                          |       | 15,273                                        |       | 21,522 |   | 19,061 |   |
| NET INCOME                                  |       | $                                               | 18,655     |                                          | $          | 26,219 |   | $ | 33,671 |   | $ | 35,591 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                    |       | $                                               | 0.33       |                                          | $          | 0.47 |   | $ | 0.60 |   | $ | 0.63 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                               | 0.33       |                                          | $          | 0.46 |   | $ | 0.59 |   | $ | 0.62 |   |
| Weighted average common shares:             |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                       |       | 55,936                                          |       | 55,657                                        |       | 55,895 |   | 56,102 |   |
| Diluted                                     |       | 56,718                                          |       | 56,558                                        |       | 56,791 |   | 56,993 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Dividends declared per share                |       | $                                               | 0.04       |                                          | $          | 0.04 |   | $ | 0.08 |   | $ | 0.08 |   |

 

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)

 
| ** **                                                  | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
|                                                        |       |                                         |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                   |       | $                                            | 141,140    |   | $ | 167,306 |   |
|                                                        |       |                                         |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                       |       |                                         |       |   |   |
| Purchases of marketable securities                          |       | (390,615                                     | )          | (362,079 | ) |
| Sales of marketable securities                              |       | 355,195                                      |       | 337,451 |   |
| Payments received on note receivable from United  Air Lines |       | 4,000                                        |       | — |   |
| Proceeds from the sale of equipment                         |       | 114                                          |       | 18,195 |   |
| Acquisition of property and equipment:                      |       |                                         |       |   |   |
| Aircraft and rotable spare parts                            |       | (119,010                                     | )          | (123,416 | ) |
| Buildings and ground equipment                              |       | (4,172                                       | )          | (3,182 | ) |
| Increase in other assets                                    |       | (12,600                                      | )          | (19,622 | ) |
|                                                        |       |                                         |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                       |       | (167,088                                     | )          | (152,653 | ) |
| ** **                                                  | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                       |       |                                         |       |   |   |
| Proceeds from issuance of long-term debt                    |       | 81,698                                       |       | 80,061 |   |
| Principal payments on long-term debt                        |       | (74,045                                      | )          | (74,810 | ) |
| Tax deficiency from exercise of common stock  options       |       | —                                       |       | (1,024 | ) |
| Return of deposits on aircraft and rotable spare  parts     |       | 4,247                                        |       | 4,313 |   |
| Net proceeds from issuance of common stock                  |       | 2,504                                        |       | 5,907 |   |
| Purchase of treasury stock                                  |       | (1,179                                       | )          | (17,467 | ) |
| Payment of cash dividends                                   |       | (4,511                                       | )          | (4,540 | ) |
|                                                        |       |                                         |       |   |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES        |       | 8,714                                        |       | (7,560 | ) |
|                                                        |       |                                         |       |   |   |
| Increase (decrease) in cash and cash equivalents            |       | (17,234                                      | )          | 7,093 |   |
| Cash and cash equivalents at beginning of period            |       | 76,414                                       |       | 125,892 |   |
|                                                        |       |                                         |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                  |       | $                                            | 59,180     |   | $ | 132,985 |   |
|                                                        |       |                                         |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:           |       |                                         |       |   |   |
|                                                        |       |                                         |       |   |   |
| Cash paid during the year for:                              |       |                                         |       |   |   |
| Interest, net of capitalized amounts                        |       | $                                            | 42,698     |   | $ | 48,286 |   |
| Income taxes                                                |       | $                                            | 495        |   | $ | 2,121 |   |

 

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 six month periods ended June 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 and thereported amounts of revenues and expenses during the reporting period. Actualresults will differ and may differ materially from those estimates andassumptions.

 

NoteB — 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 C — Passenger andGround Handling Revenue

 

The Company recognizes passenger and ground handling revenues when theservice is provided. Under the Company’s contract and pro-rate flyingagreements with Delta Air Lines, Inc. (“Delta”), United 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 right to terminate each of the DeltaConnection Agreements upon the occurrence of certain force majeure events,including certain labor-related events, that prevent SkyWest Airlines orAtlantic Southeast from performance for certain periods, and (iii) theright to terminate each of the Delta Connection Agreements if SkyWest Airlinesor Atlantic Southeast fails to maintain competitive base rate costs, subject tocertain adjustment rights. The SkyWest Airlines and Atlantic Southeast DeltaConnection Agreements contain multi-year rate reset provisions beginning in2010 and each 5th yearthereafter. In the Delta Connection Agreements, the fixed-fee rates arespecifically defined through 2009. The parties agreed that on or after aspecified date in 2010 the parties would reset such rates to reflect SkyWestAirlines’ actual costs in 2010 (with a similar process on each 5th yearthereafter). In addition to the termination rights, Delta has the right toextend the term of the Delta Connection Agreements upon the occurrence ofcertain events or at the expiration of the initial term. SkyWest Airlines andAtlantic Southeast have the right to terminate their respective DeltaConnection Agreement upon the occurrence of certain breaches by Delta,including the failure to cure payment defaults. SkyWest Airlines and AtlanticSoutheast also have cross-termination rights between the two Delta ConnectionAgreements.

 

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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 theagreements (September 8, 2008), Delta has the right to require thatcertain contractual rates under those agreements shall not exceed the averagerate of all carriers within the Delta Connection Program. On October 23,2009, Delta sent letters to SkyWest Airlines and Atlantic Southeast requiringthem to either 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 carrierswithin the Delta Connection Program. Because SkyWest Airlines and AtlanticSoutheast have not reached an agreement with Delta regarding the finalcontractual rates to be established under the Delta Connection Agreements, theCompany has evaluated the method for calculating the average rate of thecarriers within the Delta Connection Program under the revenue recognitionaccounting guidance and 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 six months ended June 30, 2010.

 

The SkyWest Airlines and the Atlantic Southeast Delta ConnectionAgreements provide that, beginning with the fifth anniversary of the executionof the agreements (September 8, 2010), Delta has the right to require thatcertain contractual rates under those agreements shall not exceed thesecond lowest of all carriers within the Delta Connection Program.

 

In the event the Company has a reimbursement dispute with a majorpartner, the Company evaluates the dispute under its established revenuerecognition criteria and, provided the revenue recognition criteria have beenmet, the Company recognizes revenue based on management’s estimate of theresolution of the dispute. During the quarter ended December 31, 2007,Delta notified the Company, SkyWest Airlines and Atlantic Southeast of adispute under the Delta Connection Agreements executed by Delta with SkyWestAirlines and Atlantic Southeast. The dispute relates to allocation of liabilityfor certain irregular operations (“IROP”) expenses that are paid by SkyWestAirlines and Atlantic Southeast to their passengers under certain situations.As a result, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest Airlines andAtlantic Southeast during December 2007. Delta continues to withhold aportion of the funds the Company believes are payable as weekly scheduled wirepayments to SkyWest Airlines and Atlantic Southeast (See Note K foradditional 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 UnitedExpress Agreement is a capacity purchase agreement with a five-year term, andother terms which are generally consistent with the SkyWest Airlines UnitedExpress Agreement.  As of June 30,2010, Atlantic Southeast was operating 14 CRJ 200s as a United Express carrier.

 

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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, contract modifications resulting fromcontract re-negotiations, the Company’s ability to earn incentive paymentscontemplated under the Company’s code-share agreements, settlement ofreimbursement disputes with the Company’s major partners and settlement of theDelta rates.

 

Note D — Share-Based Compensation

 

Thefair value of stock options granted by the Company has been estimated as of thegrant date using the Black-Scholes option pricing model. During the six monthsended June 30, 2010 the Company granted options to purchase 320,458 sharesof common stock under the SkyWest, Inc. 2006 Long-Term Incentive Plan (the“2006 Incentive Plan”).  The followingtable shows the assumptions used and weighted average fair value for stockoption grants during the six months ended June 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   |   |
|                                              |        |      |        |  |

 

Duringthe six months ended June 30, 2010, the Company granted 220,779 restrictedstock units to the Company’s employees under the 2006 Incentive Plan.  The restricted stock units have a three-yearvesting period, during which the recipient must remain employed with theCompany or one of the Company’s subsidiaries. Upon vesting, a restricted stock unit will be replaced with a share ofthe Company’s common stock. Additionally, during the six months ended June 30,2010, the Company granted 27,605 fully-vested shares of common stock to theCompany’s directors.  The weightedaverage fair value of the shares of restricted stock on the date of grant was$14.49 per share.

 

TheCompany records share-based compensation expense only for those options andrestricted stock units that are expected to vest.  The estimated fair value of the stock optionsand restricted stock units is amortized over the applicable vesting periods.  During the three months ended June 30,2010 and 2009, the Company recorded pre-tax share-based compensation expense of$1.5 million and $1.9 million, respectively. During the six months ended June 30,2010 and 2009, the Company recorded pre-tax share-based compensation expense of$3.5 million and $4.5 million, respectively.

 

NoteE — 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 potentialdilution that could occur if stock options or other contracts to issue commonstock were exercised or converted into common stock. The computation of DilutedEPS does not assume exercise or conversion of securities that would have ananti-dilutive effect on net income per common share. During the three monthsended June 30, 2010 and 2009 options to acquire 4,495,000 and 4,525,000shares, respectively, were excluded from the computation of Diluted EPS astheir impact was anti-dilutive. During the six months ended June 30, 2010and 2009 options to acquire 4,448,000 and 4,547,000 shares, respectively, wereexcluded from the computation of Diluted EPS as their impact was anti-dilutive.

 

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

 
| ** **                                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                               | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| **Numerator**                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Net Income                                                               |       | $                                                   | 18,655     |                                              | $          | 26,219 |   | $ | 33,671 |   | $ | 35,591 |   |
|                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| **Denominator**                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares  outstanding                    |       | 55,936                                              |       | 55,657                                            |       | 55,895 |   | 56,102 |   |
| Effect of outstanding share-based awards                                 |       | 782                                                 |       | 901                                               |       | 896 |   | 891 |   |
| Weighted average number of shares for diluted  earnings per common share |       | 56,718                                              |       | 56,558                                            |       | 56,791 |   | 56,993 |   |
|                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings per share                                                 |       | $                                                   | 0.33       |                                              | $          | 0.47 |   | $ | 0.60 |   | $ | 0.63 |   |
| Diluted earnings per share                                               |       | $                                                   | 0.33       |                                              | $          | 0.46 |   | $ | 0.59 |   | $ | 0.62 |   |

 

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Note F — 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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                                            | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                                              |       | $                                                   | 18,655     |                                              | $          | 26,219 |   | $ | 33,671 |   | $ | 35,591 |   |
| Proportionate share of other companies foreign  currency translation adjustment, net of tax |       | (65                                                 | )          | (57                                               | )          | 82 |   | (237 | ) |
| Unrealized appreciation (depreciation) on  marketable securities, net of tax                |       | (185                                                | )          | (94                                               | )          | (280 | ) | 4,124 |   |
|                                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| **Comprehensive income**                                                                    |       | $                                                   | 18,405     |                                              | $          | 26,068 |   | $ | 33,473 |   | $ | 39,478 |   |

 

Note G — Long-Term Debt

 

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

 
| ** **                                                                                                                                                                                                                                        | ** ** | **June 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                                                         |       | $                       | 443,894    |                        | $          | 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                                                   |       | 537,881                 |       | 557,293                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                                       |       | 221,843                 |       | 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                                                                                                    |       | 64,574                  |       | 67,963                      |       |
| Notes payable to banks, due in monthly  installments plus interest of 3.15% to 8.18% through 2020, secured by  aircraft                                                                                                                      |       | 679,595                 |       | 611,829                     |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                                |       | 22,960                  |       | 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 |       | 1,795                   |       | 3,200                       |       |
| Long-term debt                                                                                                                                                                                                                                    |       | $                       | 1,972,542  |                        | $          | 1,964,889 |   |
|                                                                                                                                                                                                                                              |       |                    |       |                        |       |
| Less current maturities                                                                                                                                                                                                                           |       | (154,590                | )          | (148,571                    | )          |
|                                                                                                                                                                                                                                              |       |                    |       |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                                         |       | $                       | 1,817,952  |                        | $          | 1,816,318 |   |

 

At June 30, 2010, thethree-month and six-month LIBOR rates were 0.53% and 0.75%, respectively.   At December 31, 2009, the three-monthand six-month LIBOR rates were 0.25% and 0.43%, respectively.

 

As of June 30, 2010,SkyWest Airlines had a $25 million line of credit with no amount outstandingunder the facility.  The facility isscheduled to expire on March 31, 2011 and has a rate of 4.50%.

 

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Note H — Commitments andContingencies

 

The Company leases 283aircraft, as well as airport facilities, office space, and various otherproperty and equipment under non-cancelable operating leases which aregenerally on a long-term net rent basis where the Company pays taxes,maintenance, insurance and certain other operating expenses applicable to theleased property.  The Company expectsthat, in the normal course of business, leases that expire will be renewed orreplaced by other leases.  The followingtable summarizes future minimum rental payments required under operating leasesthat had initial or remaining non-cancelable lease terms in excess of one yearas of June 30, 2010 (in thousands):

 
| July through December 2010 |   | $         | 129,999   |   |
|--------------------------------------|--------|-----------|-----------|--------|
| 2011                                 |   | 330,001   |      |
| 2012                                 |   | 324,348   |      |
| 2013                                 |   | 313,388   |      |
| 2014                                 |   | 301,993   |      |
| Thereafter                           |   | 1,306,557 |      |
|                                 |   | $         | 2,706,286 |   |

 

NoteI — 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 June 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 estimated thefair values of these securities utilizing a discounted cash flow analysis as ofJune 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.

 

Asof June 30, 2010, the Company owned $4.3 million of auction ratesecurity instruments. The auction rate security instruments held by the Companyat June 30, 2010 were tax-exempt municipal bond investments, for which themarket has experienced some successful auctions. The Company has classified theinvestments as non-current and has identified them as “Other assets” in itsunaudited Condensed Consolidated Balance Sheet as of June 30, 2010. TheCompany has classified these securities as non-current due to the Company’sbelief that the market for these securities may take in excess of twelve monthsto fully recover. As of June 30, 2010, the Company continued to recordinterest on all of its auction rate security instruments. Any futurefluctuations in fair value related to these instruments that the Company deemsto be temporary, including any recoveries of previous write downs, would berecorded to accumulated other comprehensive income. If the Company determinesthat any future valuation adjustment was other than temporary, a charge wouldbe recorded to earnings as appropriate.

 

Asof June 30, 2010, the Company held certain assets that are required to bemeasured at fair value on a recurring basis. Assets measured at fair value on arecurring basis are summarized below (in thousands):

 

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| ** **                                 | ** ** | **Fair Value Measurements as of June 30,  2010** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                           |       |   |   |   |   |   |   |
| Marketable Securities                      |       |                                                                           |       |   |   |   |   |   |   |
| Bond and bond fund                         |       | $                                                                              | 673,434    |   | $ | — |   | $ | 673,434 |   | $ | — |   |
| Commercial paper                           |       | 6,105                                                                          |       | — |   | 6,105 |   | — |   |
| Asset backed securities                    |       | 900                                                                            |       | — |   | 900 |   | — |   |
|                                       |       | 680,439                                                                        |       | — |   | 680,439 |   | — |   |
|                                       |       |                                                                           |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | 65,661                                                                         |       | 65,661 |   | — |   | — |   |
| Other Assets (a)                           |       | 4,260                                                                          |       | — |   | — |   | 4,260 |   |
| Total Assets Measured at Fair Value        |       | $                                                                              | 750,360    |   | $ | 65,661 |   | $ | 680,439 |   | $ | 4,260 |   |

 

----

(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 six months ended June 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 June 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          |       | 1                                 |       |
| Transferred out                                 |       | —                            |       |
| Settlements                                     |       | —                            |       |
| Balance at June 30, 2010                   |       | $                                 | 4,260      |   |

 

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 $2,102.0 million as of June 30,2010, as compared to the carrying amount of $1,972.5 million as of June 30,2010.

 

Note J — Investment in Other Companies

 

InSeptember  2008, the Company entered into an agreement to acquire a 20%interest in a Brazilian regional airline, Trip Linhas Aereas (“Trip”). Duringthe six months ended June 30, 2010, the Company invested an additional $10million in Trip. As of June 30, 2010, the Company’s investment balance inTrip was $32.1 million which represents a 20% ownership interest and isrecorded as an “Other asset” on the Company’s consolidated balance sheet. TheCompany accounts for its interest in Trip using the equity method ofaccounting. The Company records its equity in Trip’s earnings on a one-quarterlag. The Company’s portion of Trip’s loss for the three and six months ended June 30,2010 was $1.1million and $1.4 million, respectively.

 

Note K — Legal Matters

 

***Legal Matters***

 

TheCompany is subject to certain legal actions which it considers routine to itsbusiness activities. As of June 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 followingis a significant outstanding legal matter and if the dispute is not resolvedconsistent with the position taken by the Company, the Company’s financialresults would be negatively impacted.

 

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*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 under certain situations. As a result,Delta withheld a combined total of approximately $25 million (pretax) fromone of the weekly scheduled wire payments to SkyWest 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 not reasonably assured. 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 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.

 

Forfinancial reporting purposes the Company accrues an estimated loss if the lossis probable and reasonably estimable. Because these conditions have not beensatisfied, the Company had not recorded a loss related to the preceding disputeas of June 30, 2010.

 

NoteL — Subsequent Event

 

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,pursuant to which Atlantic Southeast would acquire all of the outstandingshares of ExpressJet.  The Merger Agreement provides for the merger ofExpress Delaware Merger Co. and ExpressJet, with ExpressJet becoming awholly-owned subsidiary of Atlantic Southeast.  If the proposed 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 the ExpressJet stock would beapproximately $133 million.  In connection with the proposed transaction,the Company has negotiated the terms of an amended capacity purchase agreementbetween ExpressJet and Continental Airlines, Inc., which the Companyanticipates will become effective if the proposed transaction iscompleted.  Completion of the transaction is subject to approval byExpressJet’s stockholders, regulatory approvals and other customary closingconditions and is currently expected to occur during the fourth quarter of2010.

 

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

 

*The following discussion and analysis presents factors that had a materialeffect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”)during the three and six-month periods ended June 30, 2010 and 2009. Alsodiscussed is our financial position as of June 30, 2010 andDecember 31, 2009. You should read this discussion in conjunction with ourcondensed consolidated financial statements for the three and six-month periodsended June 30, 2010, including the notes thereto, appearing elsewhere inthis Report.  This discussion andanalysis contains forward-looking statements. Please refer to the sections ofthis Report entitled “Cautionary Statement Concerning Forward-LookingStatements” and “Risk Factors” for discussion of the uncertainties, risks andassumptions 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 SkyWest’s outlook, the revenue environment, SkyWest’scontract relationships, and SkyWest’s expected financial performance.  These statements include, but are not limitedto, statements about SkyWest’s future growth and development plans, includingSkyWest’s future financial and operating results, SkyWest’s plans for SkyWestAirlines and Atlantic Southeast, SkyWest’s objectives, expectations andintentions, and other statements that are not historical facts.  Youshould also keep in mind that all forward-looking statements are based onSkyWest’s existing beliefs about present and future events outside of SkyWest’scontrol and on assumptions that may prove to be incorrect.  If one or more risks identified in thisReport materializes, or any other underlying assumption proves incorrect,SkyWest’s actual results will vary, and may vary materially, from thoseanticipated, estimated, projected, or intended.

 

There may be other factors not identified above of which SkyWest is notcurrently aware that may affect matters discussed in the forward-lookingstatements, and may also cause actual results to differ materially from thosediscussed.  SkyWest assumes no obligationto publicly 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, Inc. (“SkyWest Airlines”) and AtlanticSoutheast Airlines, Inc. (“Atlantic Southeast”), we operate the largestregional airline in the United States. As of June 30, 2010, SkyWestAirlines and Atlantic Southeast offered scheduled passenger and air freightservice with more than 2,800 total daily departures to 226 destinations in theUnited States, Canada, Mexico and the Caribbean. Additionally, as of June 30,2010, we provided ground handling services for approximately 11 other airlinesthroughout our system. As of June 30, 2010, we operated a combined fleetof 452 aircraft consisting of 252 50-seat Bombardier Aerospace (“Bombardier”)CRJ 200 Regional Jets (the “CRJ200”) (97 assigned to United AirLines, Inc. (“United”), 150 assigned to Delta Air Lines, Inc. (“Delta”),four assigned to Air Tran Airways, Inc. (“AirTran”) and one  used by SkyWest Airlines as an additionalmaintenance spare aircraft) 121 70-seat Bombardier CRJ700 Regional Jets (the “CRJ700”)  (70 assigned to United and 51 assigned toDelta), 31 76-seat Bombardier CRJ900 Regional Jets (the “CRJ900”) (all assignedto Delta) and 48 30-seat Embraer Brasilia EMB-120 turboprop aircraft (the “Brasiliaturboprop”) (36 assigned to United and 12 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 June 30, 2010, approximately 48.7% of our aggregate capacity wasoperated under the Delta code, approximately 50.5% was operated under theUnited 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 June 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 1,850 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 June 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 950 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 June 30,2010, all 14 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 June 30, 2010, contract flying revenueand pro-rate revenue represented approximately 88% and 12%, respectively, ofour 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 the completedblock hours, flight departures and other operating measures. On pro-rateflights, we control scheduling, ticketing, pricing and seat inventories andreceive a pro-rated portion of passenger fares. For the three months ended June 30,2010, essentially all of our Brasilia turboprops flown for Delta were flownunder pro-rate arrangements, while approximately 27% of our Brasilia turbopropsflown in the United system were flown under contractual arrangements, with theremaining 73% flown under pro-rate arrangements. For the three months ended June 30,2010, approximately 89% of our CRJ200s flown in the United system were flownunder contractual arrangements, with the remaining 11% flown under pro-ratearrangements. On November 4, 2009, SkyWest Airlines entered into acode-share agreement with AirTran. Under the terms of the code-share agreement,SkyWest Airlines has agreed to operate four CRJ200s for AirTran under apro-rate arrangement.

 

**Second Quarter Summary**

 

We had revenues of $649.8 million for the three months ended June 30,2010, a 7.0% decrease, compared to revenues of $698.8 million for thethree months ended June 30, 2009. We had net income of $18.7 million,or $0.33 per diluted share, for the three months ended June 30, 2010, adecrease of 28.8%, compared to $26.2 million of net income, or $0.46 perdiluted share, for the three months ended June 30, 2009.

 

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

 

Our maintenance costs decreased $5.0 million, or 4.3%, during thethree months ended June 30, 2010, compared to the three months ended June,2009. The decrease was primarily related to the timing of engine overhaulevents on engines operated under our Delta Connection Agreements. Under ourDelta Connection Agreements we are reimbursed for engine overhaul costs byDelta at the time the maintenance event occurs. Such reimbursements arereflected as passenger revenue in our condensed consolidated statements ofincome. Our Delta engine expense decreased $24.2 million. The decrease in theDelta engine expense was partly offset by an increase in our CRJ 200 engineoverhauls reimbursed at a fixed hourly rate. During the three months ended June 30, 2010, our CRJ 200 engineoverhauls reimbursed at a fixed hourly rate increased $16.4 millioncompared to the three months ended June 30, 2009.  The increase in CRJ 200 engine overhaulsreimbursed at a fixed hourly rate was principally due to scheduled enginemaintenance events.  We anticipate thenumber of scheduled engine maintenance events we experienced during the threemonths ended June 30, 2010 will likely continue each quarter through thefirst quarter of 2012.

 

Under the Delta Connection Agreements, Delta has the right to requirethat certain contractual rates under those agreements shall not exceed theaverage 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, and notifying SkyWest Airlines and Atlantic Southeast of Delta’sestimate of the average rates to be applied under the agreements. OnOctober 28, 2009, SkyWest Airlines and Atlantic Southeast notified Deltaof their election to adjust the rates payable under the Delta ConnectionAgreements; however, they also notified Delta of their disagreement 

 

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withDelta’s estimated rates and their belief that the methodology Delta used tocalculate its estimated rates is inconsistent with the terms of the DeltaConnection Agreements. SkyWest Airlines and Atlantic Southeast continue tonegotiate with Delta in an effort to determine an appropriate methodology forcalculating the average rates of the carriers within the Delta ConnectionProgram. Because SkyWest Airlines 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 dispute forcalculating the average rate of the carriers within the Delta Connection Programunder the revenue recognition accounting guidance and recorded revenue underthose agreements based on management’s understanding of the applicable terms inthe Delta Connection Agreements and management’s best estimate of the revenuethat will ultimately be realized upon settlement of the contractual rates withDelta with respect to the three months ended June 30, 2010.

 

During the three months ended June 30, 2010, we announced thatAtlantic Southeast reached an agreement with Delta to operate an additionalfour CRJ700s. We anticipate sourcing these aircraft through the used leasemarket.   We anticipate placing theseaircraft in service during the three months ended September 30, 2010.

 

Total available seat miles (“ASMs”) for the three months ended June 30,2010 increased 6.4%, compared to the three months ended June 30, 2009,primarily due to SkyWest Airlines taking delivery of 18 new CRJ700s sinceApril 1, 2009. During the three months ended June 30, 2010, wegenerated 5.9 billion ASMs, compared to 5.6 billion ASMs duringthe three months ended June 30, 2009.

 

**Recent Developments**

 

OnAugust 3, 2010, we entered into an Agreement and Plan of Merger (the “MergerAgreement”) with ExpressJet Holdings, Inc. (“ExpressJet”) and ExpressDelaware Merger Co., a wholly-owned subsidiary of Atlantic Southeast, pursuantto which Atlantic Southeast would acquire all of the outstanding shares ofExpressJet.  The Merger Agreement provides for the merger of ExpressDelaware Merger Co. and ExpressJet, with ExpressJet becoming a wholly-ownedsubsidiary of Atlantic Southeast.  If the proposed 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 the netacquisition price for the ExpressJet stock 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 proposed transaction is completed.  Completion of the transaction issubject to approval by ExpressJet’s stockholders, regulatory approvals andother customary closing conditions and is currently expected to occur duringthe fourth quarter of 2010.

 

**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, stock-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.

 

**Results of Operations**

 

**Three Months Ended June 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 June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2010**                                                              | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 4,796,858                                                             |       | 4,474,923 |   | 7.2 |   |
| Available seat miles (“ASMs”) (000) |       | 5,941,063                                                             |       | 5,582,862 |   | 6.4 |   |
| Block hours                                   |       | 357,645                                                               |       | 343,113 |   | 4.2 |   |
| Departures                                    |       | 236,826                                                               |       | 220,605 |   | 7.4 |   |
| Passengers carried                            |       | 9,697,145                                                             |       | 8,884,664 |   | 9.1 |   |
| Passenger load factor                         |       | 80.7                                                                  | %          | 80.2 | % | 0.5 | Pts |
| Revenue per available seat mile               |       | 10.9                                                                  | ¢     | 12.5 | ¢ | (12.8 | ) |
| Cost per available seat mile                  |       | 10.5                                                                  | ¢     | 11.8 | ¢ | (11.0 | ) |
| Cost per available seat mile excluding fuel   |       | 9.1                                                                   | ¢     | 9.5 |   | (4.2 | ) |
| Fuel cost per available seat mile             |       | 1.4                                                                   | ¢     | 2.3 | ¢ | (39.1 | ) |
| Average passenger trip length (miles)         |       | 495                                                                   |       | 504 |   | (1.8 | ) |

 

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*Revenues.*  Operating revenues decreased$49.1 million, or 7.0%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. We are reimbursed forour actual fuel costs by our major partners under our contract flyingarrangements. For financial reporting purposes, we record these reimbursementsas operating revenue. Under the SkyWest Airlines and Atlantic Southeast DeltaConnection Agreements, we are reimbursed for our engine overhaul expenses asincurred. We also record those engine overhaul reimbursements as operatingrevenue. The following table summarizes the amount of fuel and engine overhaulreimbursements included in our passenger revenues for the periods indicated(dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the three months ended June 30,** | ** **    |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|---------------|
| ** **                                                            | ** ** | **2010**                                                              | ** **    | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                     | 642,201       |   | $ | 691,141 |   | $ | (48,940 | ) | (7.1 | )% |
| Less: Fuel reimbursement from major partners                          |       | 65,309                                                                |          | 123,584 |   | (58,275 | ) | (47.2 | )% |
| Less: Engine overhaul reimbursement from major  partners              |       | 15,097                                                                |          | 39,341 |   | (24,244 | ) | (61.6 | )% |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                     |  561,795 |   | $ |  528,216 |   | $ |  33,579 |   | 6.4 | % |

 

*Passenger revenues.*  Passenger revenues decreased$48.9 million, or 7.1%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. The decrease inpassenger revenues was primarily due to a decrease in fuel reimbursements fromour major partners. The fuel reimbursement from our major partners decreased$58.3 million or 47.2%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. Our passenger revenues,excluding fuel and engine overhaul reimbursements from major partners,increased $33.6 million, or 6.4%, during the three months ended June 30,2010, compared to the three months ended June 30, 2009. The increase inpassenger revenues, excluding fuel and engine overhaul reimbursements, wasgenerally consistent with the increase in ASMs. The increase in ASMs wasprimarily due to SkyWest Airlines taking delivery of 18 CRJ 700s sinceApril 1, 2009.

 

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 in MD&A is on acost per ASM basis to discuss significant changes in our costs notproportionate to the relative changes in our fleet size (dollar amounts inthousands).

 
| ** **                                   | ** ** | **For the three months ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **2010**                                                              | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                   | ** ** | **Amount**                                                            | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                                |       | $                                                                     | 85,513     |   | $ | 129,042 |   | $ | (43,529 | ) | (33.7 | )% | 1.4 |   | 2.3 |   |
| Salaries, wages and  benefits                |       | 173,716                                                               |       | 173,862 |   | (146 | ) | (0.1 | )% | 2.9 |   | 3.1 |   |
| Aircraft maintenance,  materials and repairs |       | 111,366                                                               |       | 116,390 |   | (5,024 | ) | (4.3 | )% | 1.9 |   | 2.1 |   |
| Aircraft rentals                             |       | 75,642                                                                |       | 75,958 |   | (316 | ) | (0.4 | )% | 1.3 |   | 1.4 |   |
| Depreciation and  amortization               |       | 58,383                                                                |       | 54,676 |   | 3,707 |   | 6.8 | % | 1.0 |   | 1.0 |   |
| Station rentals and  landing fees            |       | 30,551                                                                |       | 29,978 |   | 573 |   | 1.9 | % | 0.5 |   | 0.5 |   |
| Ground handling services                     |       | 26,945                                                                |       | 23,124 |   | 3,821 |   | 16.5 | % | 0.5 |   | 0.4 |   |
| Other                                        |       | 38,355                                                                |       | 36,024 |   | 2,331 |   | 6.5 | % | 0.6 |   | 0.6 |   |
| Total operating expenses                     |       | 600,471                                                               |       | 639,054 |   | (38,583 | ) | (6.0 | )% | 10.1 |   | 11.4 |   |
| Interest                                     |       | 21,659                                                                |       | 21,117 |   | 542 |   | 2.6 | % | 0.4 |   | 0.4 |   |
| Total airline expenses                       |       | $                                                                     | 622,130    |   | $ | 660,171 |   | (38,041 | ) | (5.8 | )% | 10.5 |   | 11.8 |   |
|                                              |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $43.5 million, or33.7%, during the three months ended June 30, 2010, compared to the threemonths ended June 30, 2009. The average cost per gallon of fuel increasedto $2.58 per gallon during the three months ended June 30, 2010, from$1.80 per gallon during the three months ended June 30, 2009. The increasein the average cost per gallon was offset by Delta purchasing the majority ofthe fuel for our Delta Connection aircraft, commencing on June 1,2009.  United also purchased fueldirectly 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:

 

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| ** **                                                             | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2010**                                                              | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 33,170                                                                |       | 71,872 |   | (53.8 | )% |
| Average price per gallon                                               |       | $                                                                     | 2.58       |   | $ | 1.80 |   | 43.3 | % |
| Fuel expense                                                           |       | $                                                                     | 85,513     |   | $ | 129,042 |   | (33.7 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $0.1 million, or 0.1%, during the three months ended June 30,2010, compared to the three months ended June 30, 2009. The average numberof full-time equivalent employees decreased 0.3% to 12,535 for the three monthsended June 30, 2010, from 12,578 for the three months ended June 30,2009. The decrease in number of employees was primarily due to a reduction inour customer service employees resulting from Delta transitioning 23 stationsfrom SkyWest Airlines and Atlantic Southeast to other ground handlers duringthe second quarter of 2009.  Although ourdecrease in full-time equivalent employees was primarily due to a reduction incustomer service agents, we experienced an increase of 4.2% in block hours,which resulted in an increase in crew-related salaries, wages and employeebenefits.  The net impact resulted in a0.1% decrease in salaries, wages and employee benefits.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs decreased $5.0 million,or 4.3%, during the three months ended June 30, 2010, compared to thethree months ended June 30, 2009. The following table summarizes theamount of engine overhauls and engine overhaul reimbursements included in ouraircraft maintenance expense for the periods indicated (dollar amounts inthousands).

 
| ** **                                                                                                               | ** ** | **For  the three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Aircraft maintenance,  materials and repairs                                                                             |       | $                                             | 111,366    |   | $ | 116,390 |   | $ | (5,024 | ) | (4.3 | )% |
| Less: Engine overhaul  reimbursed from major partners                                                                    |       | 15,097                                        |       | 39,341 |   | (24,244 | ) | (61.6 | )% |
| Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate                                                           |       | 21,660                                        |       | 5,310 |   | 16,350 |   | 307.9 | % |
| Aircraft maintenance excluding reimbursed engine overhauls and CRJ 200  engine overhauls reimbursed at fixed hourly rate |       | $                                             | 74,609     |   | $ | 71,739 |   | $ | 2,870 |   | 4.0 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls andCRJ 200 engine overhauls reimbursed at fixed hourly rates, increased$2.9 million, or 4.0%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. The increase inmaintenance expense excluding engine overhaul costs, was principally due to thetiming of scheduled maintenance events and our aging fleet.

 

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 June 30, 2010, ourCRJ200 engine expense under our SkyWest Airlines and Atlantic Southeast UnitedExpress Agreements increased $16.4 million compared to the three monthsended June 30, 2009.  The increasein CRJ 200 engine overhauls reimbursed at a fixed hourly rate was principallydue to scheduled engine maintenance events. We anticipate the average quarterly number of scheduled enginemaintenance events we experienced during the three months ended June 30,2010 will likely continue each quarter through the remaining quarters of 2010and the first quarter 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.

 

*Depreciation and amortization.*  Depreciation and amortization expense increased$3.7 million, or 6.8%, during the three months ended June 30, 2010,compared to the three months ended June 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 expenseincreased $0.6 million, or 1.9%, during the three months ended June 30,2010, compared to the three months ended June 30, 2009. The increase instation rentals and landing fees expense was primarily due to an increase inthe number of departures.

 

*Ground handling service.*  Ground handling service expense increased$3.8 million, or 16.5%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. The increase in groundhandling was due primarily to 16 new pro-rate stations SkyWest Airlinesoutsourced to other ground handlers since April 1, 2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, increased $2.3 million, or 6.5%, during the three monthsended June 30, 2010, compared to the three months ended June 30,2009. The increase in other expenses was primarily due to the increase in ASMsduring the three months ended June 30, 2010.

 

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* *

*Interest.*  Interest expense increased $0.5 million,or 2.6%, during the three months ended June 30, 2010 compared to the threemonths ended June 30, 2009. The increase in interest expense was primarilydue to SkyWest Airlines taking delivery of 18 new CRJ700s since April 1,2009. These aircraft were financed through long-term debt.

 

*Interest Income.* Interest income increased $1.4 million,or 52.1% during the three months ended June 30, 2010, compared to thethree months ended June 30, 2009. The increase in interest income was dueprimarily to the secured term loan SkyWest Airlines extended to United in theamount of $80 million. The term loan bears interest at a rate of 11%, witha ten-year amortization period. SkyWest Airlines also agreed to defer $49million otherwise payable by United to SkyWest Airlines under the SkyWestAirlines United Express Agreement.  Thisamount accrues a deferral fee of 8% which is included in interest income.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $38.0 million, or 5.8%, duringthe three months ended June 30, 2010, compared to the three months ended June 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).

 
| ** **                                                                                                               | ** ** | **For  the three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Total airline expense                                                                                                    |       | $                                             | 622,130    |   | $ | 660,171 |   | $ | (38,041 | ) | (5.8 | )% |
| Less: Fuel expense                                                                                                       |       | 85,513                                        |       | 129,042 |   | (43,529 | ) | (33.7 | )% |
| Less: Engine overhaul  reimbursement from major partners                                                                 |       | 15,097                                        |       | 39,341 |   | (24,244 | ) | 61.6 | % |
| Less: CRJ 200 engine  overhauls reimbursed at fixed hourly rate                                                     |       | 21,660                                        |       | 5,310 |   | 16,350 |   | 307.9 | % |
| Total airline expense  excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed  at fixed hourly rate |       | $                                             | 499,860    |   | $ | 486,478 |   | $ | 13,382 |   | 2.8 | % |

 

Excluding fuel and engine overhaul costs and CRJ 200 engine overhaulsreimbursed at fixed hourly rates, our total airline expenses increased$13.4 million, or 2.8%, during the three months ended June 30, 2010,compared to the three months ended June 30, 2009. The percentage increasein total airline expenses excluding fuel and engine overhauls, was less thanthe percentage increase in ASMs, which was primarily due to the increasedoperating efficiencies obtained from operating larger regional jets.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $18.7 million, or $0.33 per diluted share, for thethree months ended June 30, 2010, compared to $26.2 million, or $0.46per diluted share, for the three months ended June 30, 2009.

 

**Six Months Ended June 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 six months ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                            | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Revenue passenger miles  (000)               |       | 9,145,034                                                           |       | 8,324,451 |   | 9.9 |   |
| Available seat miles  (000)             |       | 11,582,033                                                          |       | 10,717,585 |   | 8.1 |   |
| Block hours                                  |       | 701,797                                                             |       | 667,911 |   | 5.1 |   |
| Departures                                   |       | 459,066                                                             |       | 426,485 |   | 7.6 |   |
| Passengers carried                           |       | 18,419,314                                                          |       | 16,518,573 |   | 11.5 |   |
| Passenger load factor                        |       | 79.0                                                                | %          | 77.7 | % | 1.3 | Pts |
| Revenue per available seat  mile             |       | 11.1                                                                | ¢     | 12.8 | ¢ | (13.3 | ) |
| Cost per available seat  mile                |       | 10.7                                                                | ¢     | 12.3 | ¢ | (13.0 | ) |
| Cost per available seat  mile excluding fuel |       | 9.3                                                                 | ¢     | 9.8 |   | (5.1 | ) |
| Fuel cost per available  seat mile           |       | 1.4                                                                 | ¢     | 2.5 | ¢ | (44.0 | ) |
| Average passenger trip  length (miles)       |       | 496                                                                 |       | 504 |   | (1.6 | ) |

 

*Revenues.*  Operating revenues decreased$89.5 million, or 6.5%, during the six months ended June 30, 2010,compared to the six months ended June 30, 2009. We are reimbursed for ouractual fuel costs by our major partners under our contract flying arrangements.For financial reporting purposes, we record these reimbursements as operatingrevenue. Under the SkyWest Airlines and Atlantic Southeast Delta ConnectionAgreements, we are reimbursed for our engine overhaul expenses as incurred. Wealso 

 

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recordthose engine overhaul reimbursements as operating revenue. The following tablesummarizes the amount of fuel and engine overhaul reimbursements included inour passenger revenues for the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                                            | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                   | 1,265,313  |   | $ | 1,356,023 |   | $ | (90,710 | ) | (6.7 | )% |
| Less: Fuel reimbursement  from major partners                         |       | 120,464                                                             |       | 260,136 |   | (139,672 | ) | (53.7 | )% |
| Less: Engine overhaul  reimbursement from major partners              |       | 40,834                                                              |       | 55,785 |   | (14,951 | ) | (26.8 | )% |
| Passenger revenue  excluding fuel and engine overhauls reimbursements |       | $                                                                   | 1,104,015  |   | $ | 1,040,102 |   | $ | 63,913 |   | 6.1 | % |

 

*Passenger revenues.*  Passenger revenues decreased$90.7 million, or 6.7%, during the six months ended June 30, 2010,compared to the six months ended June 30, 2009. The decrease in passengerrevenues was primarily due to a decrease in fuel reimbursements from our majorpartners. The fuel reimbursement from our major partners decreased$139.7 million or 53.7%, during the six months ended June 30, 2010,compared to the six months ended June 30, 2009. Our passenger revenues,excluding fuel and engine overhaul reimbursements from major partners,increased $63.9 million, or 6.1%, during the six months ended June 30,2010, compared to the six months ended June 30, 2009. The increase inpassenger 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 six months ended June 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. Atlantic Southeast cancelled approximately 750more flights than normal as a result of the severe weather and the aircraftgrounding during the quarter. As a result of the abnormally high number ofcancellations, Atlantic Southeast experienced a negative impact on passengerrevenues of approximately $7.6 million. Second, our block hour productionincreased 5.1% during the six months end June 30, 2010, compared to thesix months ended June 30, 2009.The increase in block hours is primarilydue to SkyWest Airlines taking delivery of 18 CRJ 700s since April 1,2009.

 

*Ground handling and other.*  Total ground handling and other revenuesincreased $1.2 million, or 8.1%, during the six months ended June 30,2010, compared to the six months ended June 30, 2009. Revenue earned underground handling contracts where we provide ground handling services for otherairlines is presented in the “Ground handling and other” line in ourconsolidated statements of income. The increase was primarily related to thehigher volume of flights serviced under ground handling contracts with Unitedand Delta, whereby we perform ground handling services for several otherregional airlines.

 

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 in MD&A is on acost per ASM basis to discuss significant changes in our costs notproportionate to the relative changes in our fleet size (dollar amounts inthousands).

 
| ** **                                   | ** ** | **For the six months ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                   | ** ** | **2010**                                                            | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                   | ** ** | **Amount**                                                          | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                                |       | $                                                                   | 159,027    |   | $ | 269,671 |   | $ | (110,644 | ) | (41.0 | )% | 1.4 |   | 2.5 |   |
| Salaries, wages and  benefits                |       | 352,278                                                             |       | 350,734 |   | 1,544 |   | 0.4 | % | 3.0 |   | 3.3 |   |
| Aircraft maintenance, materials  and repairs |       | 218,121                                                             |       | 208,549 |   | 9,572 |   | 4.6 | % | 1.9 |   | 1.9 |   |
| Aircraft rentals                             |       | 152,101                                                             |       | 148,740 |   | 3,361 |   | 2.3 | % | 1.3 |   | 1.4 |   |
| Depreciation and  amortization               |       | 116,529                                                             |       | 109,260 |   | 7,269 |   | 6.7 | % | 1.0 |   | 1.0 |   |
| Station rentals and  landing fees            |       | 59,436                                                              |       | 62,852 |   | (3,416 | ) | (5.4 | )% | 0.5 |   | 0.6 |   |
| Ground handling services                     |       | 56,389                                                              |       | 48,572 |   | 7,817 |   | 16.1 | % | 0.5 |   | 0.5 |   |
| Other                                        |       | 76,411                                                              |       | 72,494 |   | 3,917 |   | 5.4 | % | 0.7 |   | 0.7 |   |
| Total operating expenses                     |       | 1,190,292                                                           |       | 1,270,872 |   | (80,580 | ) | (6.3 | )% | 10.3 |   | 11.9 |   |
| Interest                                     |       | 43,244                                                              |       | 44,069 |   | (825 | ) | (1.9 | )% | 0.4 |   | 0.4 |   |
| Total airline expenses                       |       | $                                                                   | 1,233,536  |   | $ | 1,314,941 |   | (81,405 | ) | (6.2 | )% | 10.7 |   | 12.3 |   |
|                                              |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $110.6 million, or41.0%, during the six months ended June 30, 2010, compared to the sixmonths ended June 30, 2009. The average cost per gallon of fuel increasedto $2.55 per gallon during the six months ended June 30, 2010, from $1.72during the six months ended June 30, 2009. The increase in the averagecost per gallon was offset by Delta purchasing the majority of the fuel for ourDelta Connection aircraft, commencing on June 1, 2009.  United also purchased fuel directly from afuel vendor for our United Express aircraft under contract flying operated outof Chicago, San Francisco, Los Angeles and Denver. The 

 

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followingtable summarizes the gallons of fuel we purchased directly, and the change infuel price per gallon on our fuel expense, for the periods indicated:

 

| ** **                                                             | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2010**                                                            | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 62,381                                                              |       | 157,183 |   | (60.3 | )% |
| Average price per gallon                                               |       | $                                                                   | 2.55       |   | $ | 1.72 |   | 48.3 | % |
| Fuel expense                                                           |       | $                                                                   | 159,027    |   | $ | 269,671 |   | (41.0 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsincreased $1.5 million, or 0.4%, during the six months ended June 30,2010, compared to the six months ended June 30, 2009. The average numberof full-time equivalent employees decreased 4.0% to 12,491 for the six monthsended June 30, 2010, from 13,008 for the six months ended June 30,2009. The decrease in number of employees was primarily due to a reduction inour customer service employees resulting from Delta transitioning 23 stationsfrom SkyWest Airlines and Atlantic Southeast to other ground handlers duringthe second quarter of 2009.  Although ourdecrease in full-time equivalent employees was primarily due to a reduction incustomer service agents, we experienced an increase of 5.1% in block hours,which resulted in an increase in crew related salaries, wages and employeebenefits.  The net impact resulted in a0.4% increase in salaries, wages and employee benefits

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$9.6 million, or 4.6%, during the six months ended June 30, 2010,compared to the six months ended June 30, 2009. The following tablesummarizes the amount of engine overhauls and engine overhaul reimbursementsincluded in our aircraft maintenance expense for the periods indicated (dollaramounts in thousands).

 
| ** **                                                                                                                     | ** ** | **For  the six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2010**                                    | ** ** | **2009** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Aircraft maintenance,  materials and repairs                                                                                   |       | $                                           | 218,121    |   | $ | 208,549 |   | $ | 9,572 |   | 4.6 | % |
| Less: Engine overhaul  reimbursed from major partners                                                                          |       | 40,834                                      |       | 55,785 |   | (14,951 | ) | (26.8 | )% |
| Less: CRJ 200 engine  overhauls reimbursed at fixed hourly rate                                                                |       | 36,987                                      |       | 9,078 |   | 27,909 |   | 307.4 | % |
| Aircraft maintenance  excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed  at fixed hourly rate |       | $                                           | 140,300    |   | $ | 143,686 |   | $ | (3,386 | ) | (2.4 | )% |

 

Aircraft maintenance expense excluding reimbursed engine overhauls andCRJ 200 engine overhauls reimbursed at fixed hourly rates, decreased$3.4 million, or 2.4%, during the six months ended June 30, 2010,compared to the six months ended June 30, 2009. The decrease inmaintenance excluding engine overhaul costs was principally due to timing ofscheduled 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 six months ended June 30, 2010, our CRJ200engine expense under our SkyWest Airlines and Atlantic Southeast United ExpressAgreements increased $27.9 million compared to the six months ended June 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 quarters ended March 31, 2010 and June 30, 2010 willlikely continue each quarter through the remaining quarters of 2010 and thefirst quarter 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 $3.4 million, or2.3%, during the six months ended June 30, 2010, compared to the sixmonths ended June 30, 2009. The increase in aircraft rents was primarilydue to Atlantic Southeast taking delivery of ten CRJ900s during 2009. Theseaircraft were financed through long-term leases.

 

*Depreciation and amortization.*  Depreciation and amortization expenseincreased $7.3 million, or 6.7%, during the six months ended June 30,2010, compared to the six months ended June 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 expensedecreased $3.4 million, or 5.4%, during the six months ended June 30,2010, compared to the six months ended June 30, 2009. The decrease instation rentals and landing fees expense was primarily due to our majorpartners paying for certain station rents and landing fees directly to theapplicable airports.

 

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*Ground handling service.*  Ground handling service expense increased$7.8 million, or 16.1%, during the six months ended June 30, 2010, compared tothe six months ended June 30, 2009. The increase in ground handling was dueprimarily to 16 new pro-rate stations SkyWest Airlines outsourced to otherground handlers since April 1, 2009.

 

*Other expenses.*  Other expenses, primarily consisting ofproperty taxes, hull and liability insurance, crew simulator training and crewhotel costs, increased $3.9 million, or 5.4%, during the six months ended June 30,2010, compared to the six months ended June 30, 2009. The increase in otherexpenses was primarily due to the increase in ASMs during the six-month period.

 

*Interest.*  Interest expense decreased $0.8 million, or1.9%, during the six months ended June 30, 2010 compared to the six monthsended June 30, 2009. The decrease in interest expense was substantially due toa decrease in interest rates. At June 30, 2010, we had variable rate notesrepresenting 36.5% of our total long-term debt . The majority of our variablerate notes are based on the three-month and six-month LIBOR rates. At June 30,2010, the three-month and six-month LIBOR rates were 0.53% and 0.75%,respectively. At June 30, 2009, the three-month and six-month LIBOR rates were0.60% and 1.11%, respectively. The decrease in interest rates was partly offsetby SkyWest Airlines taking delivery of 18 new CRJ700s since April 1, 2009.These aircraft were financed through long-term debt.

 

*Interest Income.* Interest income increased $2.7 million, or49.0% during the six months ended June 30, 2010, compared to the six monthsended June 30, 2009. The increase in interest income was due primarily to thesecured term loan SkyWest Airlines extended to United in the amount of $80 million.The term loan bears interest at a rate of 11%, with a ten-year amortizationperiod. SkyWest Airlines also agreed to defer $49 million otherwise payable byUnited to SkyWest Airlines under the SkyWest Airlines United ExpressAgreement.  This amount accrues adeferral fee of 8% which is included in interest income.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $81.4 million, or 6.2%, during thesix months ended June 30, 2010, compared to the six months ended June 30, 2009.We are reimbursed for our actual fuel costs by our major partners under ourcontract flying arrangements. We record the amount of those reimbursements asrevenue. 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).

 
| ** **                                                                                                               | ** ** | **For  the six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2010**                               | ** ** | **2009** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Total airline expense                                                                                                    |       | $                                      | 1,233,536  |   | $ | 1,314,941 |   | $ | (81,405 | ) | (6.2 | )% |
| Less: Fuel expense                                                                                                       |       | 159,027                                |       | 269,671 |   | (110,644 | ) | (41.0 | )% |
| Less: Engine overhaul  reimbursement from major partners                                                                 |       | 40,834                                 |       | 55,785 |   | (14,951 | ) | (26.8 | )% |
| Less: CRJ 200 engine  overhauls reimbursed at fixed hourly rate                                                          |       | 36,987                                 |       | 9,078 |   | 27,909 |   | 307.4 | % |
| Total airline expense  excluding fuel and engine overhauls and CRJ 200 engine overhauls reimbursed  at fixed hourly rate |       | $                                      | 996,688    |   | $ | 980,407 |   | $ | 16,281 |   | 1.7 | % |

 

Excluding fuel and engine overhaul costs and CRJ 200 engine overhaulsreimbursed at fixed hourly rates, our total airline expenses increased $16.3 million,or 1.7%, during the six months ended June 30, 2010, compared to the six monthsended June 30, 2009. The percentage increase in total airline expensesexcluding fuel and engine overhauls, was less than the percentage increase inASMs, which was primarily due to the increased operating efficiencies obtainedfrom 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 six months ended June 30, 2009 forcertain marketable securities deemed to have other-than-temporary impairment.We did not experience a corresponding charge during the six months ended June 30,2010.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $33.7 million, or $0.59 per diluted share, for the sixmonths ended June 30, 2010, compared to $35.6 million, or $0.62 per dilutedshare, for the six months ended June 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 six months ended June 30, 2010 and2009 and total cash  and marketablesecurities position as of June 30, 2010 and December 31, 2009 (in thousands).

 
| ** **                                           | ** ** | **For the six  months ended June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Net cash provided by  operating activities           |       | $                                      | 141,140    |   | $ | 167,306 |   | $ | (26,166 | ) | (15.6 | )% |
| Net cash used in investing  activities               |       | (167,088                               | )          | (152,653 | ) | (14,435 | ) | (9.5 | )% |
| Net cash provided by (used  in) financing activities |       | 8,714                                  |       | (7,560 | ) | 16,274 |   | 215.3 | % |
|                                                      |            |                                        |            |  |  |  |  |  |  |  |  |  |

 
| *** ***              | *** *** | **June 30,  2010** | ** ** | **December  31,  2010** | ** ** | **$ Change** | ** ** | **% Change** | *** *** |
|---------------------------|--------------|--------------------|------------|-------------------------|------------|-------------------|------------|--------------|--------------|
| * *                  | * *     | * *           | * *   | * *                | * *   | * *          | * *   | * *     | * *     |
| Cash and cash equivalents |         | $                  | 59,180     |                    | $          | 76,414            |       | $            | (17,234      | ) |   | (22.6 | )% |
| Restricted cash           |         | 6,481              |       | 10,730                  |       | (4,249            | )          | (39.6        | )%           |
| Marketable securities     |         | 680,439            |       | 645,301                 |       | 35,138            |       | 5.4          | %            |
| Total                     |         | $                  | 746,100    |                    | $          | 732,445           |       | $            | 13,655       |   |   | 1.9 | % |

 

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

 

Netcash provided by operating activities decreased $26.2 million or 15.6%, duringthe six months ended June 30, 2010, compared to the six months ended June 30,2009.  The decrease was primarily due tochanges in accounts payable.  During thesix month ended June 30, 2010 accounts payable decreased $2.0 million ascompared to an increase in accounts payable of $43.4 million during the sixmonths ended June 30, 2009. The increase in the change in accounts payable wasdue primarily to the timing of our payments of the engine overhaul expenses.

 

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

 

Netcash used in investing activities increased $14.4 million or 9.5%, during thesix months ended June 30, 2010, compared to the six months ended June 30, 2009.The increase was partly due to an increase in net purchases of marketablesecurities.  During the six months ended June30, 2010 we made net purchases of marketable securities of $35.4 million ascompared to net purchases of marketable securities of $24.6 million during thesix months ended June 30, 2009. The proceeds from the sale of equipmentdecreased $18.0 million during the six months ended June 30, 2010.  The decrease in proceeds from the sale ofequipment was principally due to the sale of three aircraft during the sixmonths ended June 30, 2009. These increases were partly offset by two factors.First, during the six months ended June 30, 2010, we collected $4 million of anote receivable from United.  Second, ouraircraft and rotable spare parts purchased decreased $4.4 million during thesix months ended June 30, 2010 as compared to the six months ended June 30,2009.

 

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

 

Netcash provided by financing activities increased $16.3 million or 215.3%, duringthe six months ended June 30, 2010, compared to the six months ended June 30,2009. The increase was primarily due to a reduction in the amount of cash weused to purchase of treasury stock. During the six months ended June 30, 2010 we made purchases of treasurystock of $1.2 million, as compared to purchases of treasury stock of $17.5million during the six months ended June 30, 2009.

 

***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.

 

AtJune 30, 2010, our total capital mix was 43.2% equity and 56.8% long-term debt,compared to 42.7% equity and 57.3% long-term debt at December 31, 2009.

 

**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):

 

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| ** **                                                      | ** ** | **Total**  | ** ** | **July-Dec  2010** | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **2014**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Operating lease payments  for aircraft and facility obligations |       | $          | 2,706,286  |               | $          | 129,999    |       | $          | 330,001    |       | $          | 324,348    |       | $              | 313,388    |   | $ | 301,993 |   | $ | 1,306,557 |   |
| Interest commitments                                            |       | 625,356    |       | 42,740             |       | 82,544     |       | 76,265     |       | 69,318     |       | 63,029     |       | 291,460        |       |
| Principal maturities on  long-term debt                         |       | 1,972,542  |       | 76,957             |       | 156,650    |       | 202,991    |       | 157,413    |       | 163,256    |       | 1,215,275      |       |
| Total commitments and  obligations                              |       | $          | 5,304,184  |               | $          | 249,696    |       | $          | 569,195    |       | $          | 603,604    |       | $              | 540,119    |   | $ | 528,278 |   | $ | 2,813,292 |   |

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term lease obligations primarily relatingto our aircraft fleet. At June 30, 2010, we had 283 aircraft under lease withremaining terms ranging from one to 17 years. Future minimum lease payments dueunder all long-term operating leases were approximately $2.7 billion at June 30,2010. Assuming a 5.8% discount rate, which is the average rate used toapproximate the implicit rates within the applicable aircraft leases, thepresent value of these lease obligations would have been equal to approximately$1.9 billion at June 30, 2010.

 

*Long-term Debt Obligations*

 

As of June 30, 2010, we had $1,972.5 million of long term debtobligations related to the acquisition of Brasilia turboprop, CRJ200, CRJ700and CRJ900 aircraft. The average effective interest rate on the debt related tothe Brasilia turboprop and CRJ aircraft was approximately 4.3% at June 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 June 30, 2010, essentially all of ourBrasilia turboprops flown for Delta were flown under pro-rate arrangementswhile, approximately 73% of our Brasilia turboprops flown in the United systemwere flown under pro-rate arrangements. As of June 30, 2010, we operated 18CRJ200s for United under a pro-rate agreement and four CRJ200s under a pro-rateagreement with AirTran.  The averageprice per gallon of aircraft fuel increased 43.3% to $2.58 for the three monthsended June 30, 2010, from $1.80 for the three months ended June 30, 2009.  The average price per gallon of aircraft fuelincreased 48.3% to $2.55 for the six months ended June 30, 2010, from $1.72 forthe six months ended June 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 $5.0 millionand $9.6 million in fuel expense for the three and six month periods ended June30, 2010, respectively.

 

Interest Rates

 

Our earnings are affected by changes in interest rates based on theamounts of variable rate long-term debt and the amount of cash and securitieswe hold during any given period.  Theinterest rates applicable to variable rate notes may rise and increase theamount of interest expense.  We wouldalso receive higher amounts of interest income on cash and securities held atthe time; however, the market value of our available-for-sale securities wouldlikely decline.  At June 30, 2010, we hadvariable rate notes 

 

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representing36.5% of our total long-term debt compared to 38.6% of our total long-term debtat December 31, 2009.  For illustrativepurposes only, we have estimated the impact of market risk using a hypotheticalincrease in interest rates of one percentage point for both variable ratelong-term debt and cash and securities. Based on this hypothetical assumption, we would have incurred anadditional $1.8 million in interest expense and received $1.8 millionadditional interest income for the three months ended June 30, 2010. Based onthis same hypothetical assumption, we would have incurred an additional $3.7million in interest expense and received $3.6 million additional interestincome for the six months ended June 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 of 1934,as amended (the “Exchange Act”), as of June 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 thatthere are resource constraints and that management is required to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

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

 

b) 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.   LEGALPROCEEDINGS**

 

Weare subject to certain legal actions which we consider routine to our businessactivities. As of June 30, 2010, our management believed, after consultationwith legal counsel, that the ultimate outcome of such legal matters is notlikely to have a material adverse effect on our financial position, liquidityor results of operations. However, the following is a significant outstandinglegal matter and if the dispute is not resolved consistent with the position wehave taken in that matter, our financial results would be negatively impacted.

 

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*Atlantic Southeast and SkyWest Airlines v. Delta*

 

Duringthe quarter ended December 31, 2007, Delta notified SkyWest, SkyWest Airlinesand Atlantic Southeast of a dispute under the Delta Connection Agreementsexecuted by Delta with SkyWest Airlines and Atlantic Southeast. The disputerelates to allocation of liability for IROP expenses that are paid by SkyWestAirlines and Atlantic Southeast to their passengers under certain situations.As a result, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest Airlines andAtlantic Southeast during December 2007. Delta continues to withhold a portionof the funds we believe are payable as weekly scheduled wire payments toSkyWest Airlines and Atlantic Southeast. As of June 30, 2008, we had recognizeda cumulative total of $31.7 million of revenue associated with the fundswithheld by Delta. Since July 1, 2008, we have not recognized revenue relatedto IROP expense reimbursements withheld by Delta because collection of thosereimbursements is subject of litigation (summarized below) and  is not reasonably assured.  On February 1, 2008, SkyWest Airlines andAtlantic Southeast filed a lawsuit in Georgia state court disputing Delta’streatment of the matter (the “Complaint”). Delta filed an Answer to theComplaint and a Counterclaim against SkyWest Airlines and Atlantic Southeast onMarch 24, 2008. Delta’s Counterclaim alleges that Atlantic Southeast andSkyWest Airlines breached the Delta Connection Agreements by invoicing Deltafor the IROP expenses that were paid pursuant to Delta’s policies, and claimsonly a portion of those expenses may be invoiced to Delta. Delta seeksunspecified damages in its counterclaim.

 

OnMarch 24, 2008, Delta filed a Motion to Dismiss the Complaint (the “Motion toDismiss”). A hearing on the Motion to Dismiss was held September 5, 2008. In anorder entered September 13, 2008, the Court granted in part and denied in partthe Motion to Dismiss. The Court denied the Motion to Dismiss with respect tothe breach of contract claim contained in the Complaint. The Court denied inpart the Motion to Dismiss with respect to the action for declaratory judgmentcontained in the Complaint, and granted in part the Motion to Dismiss to theextent the Complaint seeks to read alternative or supplemental obligationscreated by prior conduct into the Delta Connection Agreements. The Courtgranted the Motion to Dismiss with respect to claims for estoppel, unilateralmistake, and mutual mistake contained in the Complaint. The breach of contractclaims 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 on SkyWestAirlines’ and Atlantic Southeast’s claims and defenses has not yet beencompleted. On September 4, 2009, Delta filed a motion to dismiss the AmendedComplaint in part. Delta asserted that the claims added by SkyWest Airlines andAtlantic Southeast in the Amended Complaint should be dismissed based on legalarguments set forth in Delta’s memorandum in support of its motion. SkyWestAirlines and Atlantic Southeast opposed the motion.  On January 22, 2010, the Court granted Delta’smotion in part, dismissing the claims under Georgia law for voluntary paymentand mutual departure from the strict terms of the Connection Agreements.SkyWest Airlines and Atlantic Southeast continue to vigorously pursue theirclaims set forth in the Amended Complaint, to the extent permitted by the Court’sruling 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.

 

Forfinancial reporting purposes we accrue an estimated loss if the loss isprobable and reasonably estimable. Because these conditions have not beensatisfied, we had not recorded a loss related to the preceding dispute as of June30, 2010.

 

**ITEM 1A.  RISK FACTORS**

 

Therehave been no material changes to the factors disclosed in Item 1A. Risk Factorsin our Annual Report on Form 10-K for the year ended December 31, 2009.

 

**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 15,000,000 shares of our common stock. Thefollowing table summarizes our purchases under the stock repurchase program forthe three months ended June 30, 2010:

 

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| **Period**                    | ** ** | **Total Number  of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number  of Shares  Purchased as Part of a  Publicly Announced  Program(1)** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Program** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| April 1 – April 30, 2010 |       | 435                                    |       | $                                 | 11.65      |                                                                                | 435        |                                                                        | 7,692,688  |   |
| May 1 – May 31, 2010     |       | —                                 |       | —                            |       | —                                                                              |       | 7,692,688                                                                   |       |
| June 1 – June 30, 2010   |       | —                                 |       | —                            |       | —                                                                              |       | 7,692,688                                                                   |       |
| Total                         |       | 435                                    |       | $                                 | 11.65      |                                                                                | 435        |                                                                        | 7,692,688  |   |

 

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(1)       Under resolutions adopted inFebruary 2007, November 2007, May 2009 and May 2010, our Board of Directorsauthorized the repurchase of up to 20,000,000 shares of our common stock.Purchases are made at management’s discretion based on market conditions andour financial resources.  In addition,effective March 13, 2009, we entered into the SkyWest, Inc. Stock RepurchasePlan (the “Stock Repurchase Plan”).  TheStock Repurchase Plan provides for the repurchase of up to 3,400,000 shares ofour common stock (which are included within, and are not in addition to, the20,000,000 shares of common stock described above) by an independent thirdparty pursuant to trading parameters contemplated by the Stock Repurchase Plan. As of June 30, 2010, we had spentapproximately $248.2 million to purchase and retire approximately 12,307,312shares of the 20,000,000 shares of common stock designated for repurchase byour Board of Directors. The authorization of our Board of Directors does nothave an expiration date.  The Stock RepurchasePlan 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 June 30, 2010,to be signed on its behalf by the undersigned, thereunto duly authorized, onAugust 6, 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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