Table ofContents

 

 

 

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **
| **x**                                                                                                                                                             | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                              |
| **For the quarterly period ended June 30,  2009**                                                                                                            |
|                                                                                                                                                              |
| **OR**                                                                                                                                                            |
|                                                                                                                                                              |
| **o**                                                                                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                              |
| **For the transition period from             to            ** |

 

**Commission file number 0-14719**

** **

**SKYWEST, INC.**

 

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

 

**444 South River Road**

**St. George, Utah 84790**

**(435) 634-3000**

** **

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was to required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

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

 

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

 
| **Class**                  | ** ** | **Outstanding at August 4, 2009** |
|----------------------------|------------|--------------------------------------------------|
| Common stock, no par value |       | 55,604,090                                       |

 

 

 

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**SKYWEST, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I       | FINANCIAL INFORMATION:                    |                                                                                                               | 3      |
|-------------------|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------|--------|
|              | Item 1.                                   | Financial Statements                                                                                               |   | 3 |
|              |                                      | Consolidated  Balance Sheets as of June  30, 2009 (unaudited) and  December 31, 2008                |   | 3 |
|              |                                      | Consolidated  Statements of Income (unaudited) for the three and six months ended  June 30, 2009 and 2008     |   | 5 |
|              |                                      | Condensed  Consolidated Statements of Cash Flows (unaudited) for the six months ended  June 30, 2009 and 2008 |   | 6 |
|              |                                      | Notes  to Condensed Consolidated Financial Statements                                                              |   | 7 |
|              | Item 2.                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |   | 14 |
|              | Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                        |   | 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 4.                                   | Submission  of Matters to a Vote of Security Holders                                                               |   | 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. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Dollars in Thousands)**

 
| ** **                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| ASSETS                                         |       |                    |       |                        |       |
| CURRENT ASSETS:                                |       |                    |       |                        |       |
| Cash and cash equivalents                      |       | $                       | 132,985    |                        | $          | 125,892 |   |
| Marketable securities                          |       | 587,967                 |       | 568,567                     |       |
| Restricted cash                                |       | 10,729                  |       | 10,728                      |       |
| Income tax receivable                          |       | 16,588                  |       | 14,868                      |       |
| Receivables, net                               |       | 81,856                  |       | 55,458                      |       |
| Inventories, net                               |       | 103,915                 |       | 104,383                     |       |
| Prepaid aircraft rents                         |       | 255,824                 |       | 226,474                     |       |
| Deferred tax assets                            |       | 52,885                  |       | 76,093                      |       |
| Other current assets                           |       | 31,417                  |       | 38,205                      |       |
| Total current assets                           |       | 1,274,166               |       | 1,220,668                   |       |
|                                           |       |                    |       |                        |       |
| PROPERTY AND EQUIPMENT:                        |       |                    |       |                        |       |
| Aircraft and rotable spares                    |       | 3,337,216               |       | 3,273,705                   |       |
| Deposits on aircraft                           |       | 16,077                  |       | 20,390                      |       |
| Buildings and ground equipment                 |       | 242,279                 |       | 239,573                     |       |
|                                           |       | 3,595,572               |       | 3,533,668                   |       |
| Less-accumulated depreciation and amortization |       | (889,229                | )          | (824,293                    | )          |
| Total property and equipment, net              |       | 2,706,343               |       | 2,709,375                   |       |
|                                           |       |                    |       |                        |       |
| OTHER ASSETS                                   |       |                    |       |                        |       |
| Intangible assets, net                         |       | 25,122                  |       | 26,247                      |       |
| Other assets                                   |       | 76,830                  |       | 58,001                      |       |
| Total other assets                             |       | 101,952                 |       | 84,248                      |       |
| Total assets                                   |       | $                       | 4,082,461  |                        | $          | 4,014,291 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Dollars in Thousands)**

 
| ** **                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                        |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                              |       |              |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                 | 135,281    |                  | $          | 129,783 |   |
| Accounts payable                                                                                                  |       | 154,312           |       | 110,902               |       |
| Accrued salaries, wages and benefits                                                                              |       | 67,793            |       | 66,553                |       |
| Accrued aircraft rents                                                                                            |       | 20,010            |       | 25,676                |       |
| Taxes other than income taxes                                                                                     |       | 18,359            |       | 16,651                |       |
| Other current liabilities                                                                                         |       | 32,842            |       | 37,039                |       |
| Total current liabilities                                                                                         |       | 428,597           |       | 386,604               |       |
|                                                                                                              |       |              |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 40,352            |       | 41,525                |       |
|                                                                                                              |       |              |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,681,458         |       | 1,681,705             |       |
|                                                                                                              |       |              |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 506,600           |       | 507,113               |       |
|                                                                                                              |       |              |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 123,083           |       | 121,823               |       |
|                                                                                                              |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                     |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |              |       |                  |       |
| Preferred stock, 5,000,000 shares authorized; none  issued                                                        |       | —            |       | —                |       |
| Common stock, no par value, 120,000,000 shares  authorized; 74,330,410 and 73,520,292 shares issued, respectively |       | 571,749           |       | 562,395               |       |
| Retained earnings                                                                                                 |       | 1,008,812         |       | 977,736               |       |
| Treasury stock, at cost, 18,924,100 and 17,150,580  shares, respectively                                          |       | (278,641          | )          | (261,174              | )          |
| Accumulated other comprehensive income (loss)                                                                     |       | 451               |       | (3,436                | )          |
| Total stockholders’ equity                                                                                   |       | 1,302,371         |       | 1,275,521             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                 | 4,082,461  |                  | $          | 4,014,291 |   |

 

See accompanyingnotes 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,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| OPERATING REVENUES:                         |       |                                            |       |                                          |       |   |   |   |   |
| Passenger                                   |       | $                                               | 691,141    |                                          | $          | 943,570 |   | $ | 1,356,023 |   | $ | 1,802,729 |   |
| Ground handling and other                   |       | 7,682                                           |       | 7,250                                         |       | 15,442 |   | 16,114 |   |
| Total operating revenues                    |       | 698,823                                         |       | 950,820                                       |       | 1,371,465 |   | 1,818,843 |   |
| OPERATING EXPENSES:                         |       |                                            |       |                                          |       |   |   |   |   |
| Aircraft fuel                               |       | 129,042                                         |       | 366,467                                       |       | 269,671 |   | 658,855 |   |
| Salaries, wages and benefits                |       | 173,862                                         |       | 180,677                                       |       | 350,734 |   | 366,572 |   |
| Aircraft maintenance, materials and repairs |       | 116,390                                         |       | 98,307                                        |       | 208,549 |   | 181,368 |   |
| Aircraft rentals                            |       | 75,958                                          |       | 73,893                                        |       | 148,740 |   | 147,320 |   |
| Depreciation and amortization               |       | 54,676                                          |       | 54,931                                        |       | 109,260 |   | 109,546 |   |
| Station rentals and landing fees            |       | 29,978                                          |       | 33,339                                        |       | 62,852 |   | 68,226 |   |
| Ground handling services                    |       | 23,124                                          |       | 26,869                                        |       | 48,572 |   | 58,887 |   |
| Other airline expense                       |       | 36,024                                          |       | 43,386                                        |       | 72,494 |   | 86,895 |   |
| Total operating expenses                    |       | 639,054                                         |       | 877,869                                       |       | 1,270,872 |   | 1,677,669 |   |
| OPERATING INCOME                            |       | 59,769                                          |       | 72,951                                        |       | 100,593 |   | 141,174 |   |
| OTHER INCOME (EXPENSE):                     |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                             |       | 2,724                                           |       | 5,009                                         |       | 5,446 |   | 11,771 |   |
| Interest expense                            |       | (21,117                                         | )          | (26,221                                       | )          | (44,069 | ) | (56,517 | ) |
| Impairment on marketable securities         |       | —                                          |       | —                                        |       | (7,115 | ) | — |   |
| Other                                       |       | 116                                             |       | 6,308                                         |       | (203 | ) | 6,308 |   |
|                                        |       | (18,277                                         | )          | (14,904                                       | )          | (45,941 | ) | (38,438 | ) |
| INCOME BEFORE INCOME TAXES                  |       | 41,492                                          |       | 58,047                                        |       | 54,652 |   | 102,736 |   |
| PROVISION FOR INCOME TAXES                  |       | 15,273                                          |       | 21,613                                        |       | 19,061 |   | 37,162 |   |
| NET INCOME                                  |       | $                                               | 26,219     |                                          | $          | 36,434 |   | $ | 35,591 |   | $ | 65,574 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| BASIC EARNINGS PER SHARE                    |       | $                                               | 0.47       |                                          | $          | 0.63 |   | $ | 0.63 |   | $ | 1.12 |   |
| DILUTED EARNINGS PER SHARE                  |       | $                                               | 0.46       |                                          | $          | 0.63 |   | $ | 0.62 |   | $ | 1.10 |   |
| Weighted average common shares:             |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                       |       | 55,657                                          |       | 57,377                                        |       | 56,102 |   | 58,695 |   |
| Diluted                                     |       | 56,558                                          |       | 58,009                                        |       | 56,993 |   | 59,680 |   |
|                                        |       |                                            |       |                                          |       |   |   |   |   |
| Dividends declared per share                |       | $                                               | 0.04       |                                          | $          | 0.03 |   | $ | 0.08 |   | $ | 0.06 |   |

 

See accompanying notes tocondensed 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** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                     | ** ** | **2008** | ** ** |
|                                                            |       |                                         |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                       |       | $                                            | 167,306    |   | $ | 248,587 |   |
|                                                            |       |                                         |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                           |       |                                         |       |   |   |
| Purchases of marketable securities                              |       | (362,079                                     | )          | (657,540 | ) |
| Sales of marketable securities                                  |       | 337,451                                      |       | 723,113 |   |
| Proceeds from the sale of equipment                             |       | 18,195                                       |       | 1,656 |   |
| Acquisition of property and equipment:                          |       |                                         |       |   |   |
| Aircraft and rotable spare parts                                |       | (123,416                                     | )          | (75,668 | ) |
| Buildings and ground equipment                                  |       | (3,182                                       | )          | (27,946 | ) |
| Increase in other assets                                        |       | (19,622                                      | )          | (1,647 | ) |
|                                                            |       |                                         |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                           |       | (152,653                                     | )          | (38,032 | ) |
| ** **                                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                           |       |                                         |       |   |   |
| Proceeds from issuance of long-term debt                        |       | 80,061                                       |       | 17,680 |   |
| Principal payments on long-term debt                            |       | (74,810                                      | )          | (58,470 | ) |
| Tax (deficiency) benefit from exercise of common  stock options |       | (1,024                                       | )          | 170 |   |
| Return of deposits on aircraft and rotable spare  parts         |       | 4,313                                        |       | 226 |   |
| Net proceeds from issuance of common stock                      |       | 5,907                                        |       | 8,970 |   |
| Purchase of treasury stock                                      |       | (17,467                                      | )          | (90,807 | ) |
| Payment of cash dividends                                       |       | (4,540                                       | )          | (3,727 | ) |
|                                                            |       |                                         |       |   |   |
| NET CASH USED IN FINANCING ACTIVITIES                           |       | (7,560                                       | )          | (125,958 | ) |
|                                                            |       |                                         |       |   |   |
| Increase in cash and cash equivalents                           |       | 7,093                                        |       | 84,597 |   |
| Cash and cash equivalents at beginning of period                |       | 125,892                                      |       | 122,802 |   |
|                                                            |       |                                         |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                      |       | $                                            | 132,985    |   | $ | 207,399 |   |
|                                                            |       |                                         |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               |       |                                         |       |   |   |
|                                                            |       |                                         |       |   |   |
| Cash paid during the year for:                                  |       |                                         |       |   |   |
| Interest, net of capitalized amounts                            |       | $                                            | 48,286     |   | $ | 55,990 |   |
| Income taxes                                                    |       | $                                            | 2,121      |   | $ | 15,783 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**SKYWEST, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

Note A — CondensedConsolidated Financial Statements

 

Thecondensed consolidated financial statements of SkyWest, Inc. (“SkyWest” orthe “Company”) and its wholly-owned subsidiaries, SkyWest Airlines, Inc. (“SkyWestAirlines”) and Atlantic Southeast Airlines, Inc. (“ASA”) included hereinhave been prepared, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations, althoughSkyWest believes that the following disclosures are adequate to make theinformation presented not misleading. These condensed consolidated financialstatements reflect all adjustments that, in the opinion of management, arenecessary to present fairly the results of operations for the interim periodspresented. All adjustments are of a normal recurring nature, unless otherwisedisclosed. The Company suggests that these condensed consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. The results of operations for the three and six month periods ended June 30,2009 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results will differ and may differmaterially from those estimates and assumptions.

 

Certain reclassifications have been made to the three and six monthperiods ended June 30, 2008 condensed consolidated financial statements toconform to current year presentation.

 

In preparing theaccompanying unaudited condensed consolidated financial statements, the Companyhas reviewed, as determined necessary by the Company’s management, events thathave occurred after June 30, 2009, up until the issuance of the condensedconsolidated financial statements, which occurred on August 7, 2009.

 

Note B — NewAccounting Pronouncements

 

In April 2009, theFinancial Accounting Standards Board (the “FASB”) released Staff PositionStatement of Financial Accounting Standards No. 157-4, *Determining Whether a Market Is Not Active and a Transaction Is NotDistressed* (“SFAS 157-4”).  SFAS 157-4 provides additionalguidance in determining whether a market for a financial asset is not activeand a transaction is not distressed for fair value measurement purposes asdefined in SFAS 157, *Fair Value Measurements*.  SFAS157-4 is effective for interim periods ending after June 15,2009.  The Company adopted the provisions of  SFAS 157-4 for the three months ended June 30,2009.  The adoption did not have a material effect on the Company’scondensed consolidated financial statements.

 

In April 2009, theFASB issued Staff Position No. FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments*(“FSP FAS 115-2”), which provides new guidance on the recognition ofother-than-temporary impairments of investments in debt securities and providesnew presentation and disclosure requirements for other-than-temporaryimpairments of investments in debt and equity securities.  TheCompany adopted the provisions of FSP FAS 115-2 for the three months ended June 30,2009.  The adoption did not have a material effect on the Company’scondensed consolidated financial statements.

 

In April 2009, theFASB issued Staff Position No. FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*(“FSP FAS 107-1”).  FSP FAS 107-1 amends SFAS No. 107, *Disclosures about Fair Value of Financial Instruments* (“SFAS107”) to require disclosures about fair value of financial instruments ininterim reporting periods.  Such disclosures were previously requiredonly in annual financial statements.  The Company adopted theprovisions of FSP FAS 107-1 for the three months ended June 30,2009.  Because FSP FAS 107-1 applies only to financial statementdisclosures, the adoption did not have a material effect on the Company’scondensed consolidated financial statements.

 

In May 2009, theFASB issued Statement of Financial Accounting Standards No. 165, *Subsequent Events* (“SFAS 165”), which establishes generalstandards of accounting for, and requires disclosure of, events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued.  The Company adopted the provisions of SFAS165 for the three months ended June 30, 2009.  The adoption ofthese provisions did not have a material effect on the Company’s condensedconsolidated financial statements.

 

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Note C — Passenger and GroundHandling 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 Air Lines, Inc.(“United”) and Midwest Airlines, Inc. (“Midwest”), revenue is consideredearned when the flight is completed. Revenue is recognized under the Company’spro-rate flying agreements based upon the portion of the pro-rate passengerfare the Company anticipates that it will receive.

 

SkyWest Airlines and ASA have each entered into a Delta ConnectionAgreement with Delta, pursuant to which SkyWest Airlines and ASA providecontract flight services for Delta. Among other provisions, those DeltaConnection Agreements provide that, upon the third anniversary of the executionof the agreements (September 8, 2008), the contractual rates under thoseagreements shall not exceed the average rate of all carriers within the DeltaConnection Program. In the event that the contractual rates have not beenfinalized at quarterly or annual financial statement dates, the Company recordsrevenues based on the prior period’s approved rates adjusted for the currentcontract negotiations. As of June 30, 2009, SkyWest Airlines and ASA hadnot finalized the contractual rates with Delta. Accordingly, the Company has primarily used Delta’s preliminary rateestimate as the basis for recording revenue during the three and six monthperiods ended June 30, 2009.

 

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 ASA of a dispute under theDelta Connection Agreements executed by Delta with SkyWest Airlines and ASA.The dispute relates to allocation of liability for certain irregular operations(“IROP”) expenses that are paid by SkyWest Airlines and ASA to their passengersunder certain situations. As a result, Delta withheld a combined total ofapproximately $25 million (pretax) from one of the weekly scheduled wirepayments to SkyWest and ASA during December 2007. Delta continues towithhold a portion of the funds the Company believes are payable as weeklyscheduled wire payments to SkyWest and ASA (See Note L for additionaldetails).

 

The Delta Connection Agreements executed by SkyWest Airlines and ASAprovide for fifteen-year terms, subject to early termination by Delta, SkyWestAirlines or ASA, 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 or ASAfrom performance for certain periods, and (iii) the right to terminateeach of the Delta Connection Agreements if SkyWest Airlines or ASA fails tomaintain competitive base rate costs, subject to certain adjustment rights. TheSkyWest Airlines and ASA Delta Connection Agreements contain multi-year ratereset provisions. 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 andASA have the right to terminate their respective Delta Connection Agreementupon the occurrence of certain breaches by Delta, including the failure to curepayment defaults. SkyWest Airlines and ASA also have cross-termination rightsbetween the two Delta Connection Agreements.

 

Under the terms of the SkyWest Airlines 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 ASA Delta Connection Agreement, Delta hasagreed to compensate ASA for its direct costs associated with operating theDelta Connection flights, plus, if ASA completes a certain minimum percentageof its Delta Connection flights, an additional percentage of such costs.Additionally, ASA’s Delta Connection Agreement provides for the payment ofincentive compensation upon satisfaction of certain performance goals. Theincentives are defined in the ASA 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 Agreementsmake customary representations, warranties and covenants, including withrespect to various operational, marketing and administrative matters.

 

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.

 

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On June 10, 2009, SkyWest Airlines and Midwest reached a mutualunderstanding to terminate the service SkyWest Airlines currently providesunder the Airline Services Agreement (the “Midwest Services Agreement”). As aresult, SkyWest Airlines has agreed to remove its remaining 12 CRJ200 regionaljet aircraft from Midwest service based on the following schedule: one aircraftwas removed in June 2009 and July 2009, three aircraft are scheduledto be removed in October 2009, two aircraft are scheduled to be removed inNovember 2009, two aircraft are scheduled to be removed in December 2009and the last three aircraft are scheduled to be removed in January 2010.Additionally, SkyWest Airlines agreed to cancel an unsecured note from Midwestin the amount of approximately $9.3 million in exchange for a $4.0 millionpayment from Midwest that is guaranteed by Republic Airways Holdings, Inc.The unsecured note related to certain deferred payments Midwest owed SkyWestAirlines for services provided under the Midwest Services Agreement.  Because of the unique modified payment termsassociated with the deferred payments, the Company did not recognize revenueassociated with the deferred amounts. The deferred amounts are scheduled to bepaid to SkyWest at the rate of $400,000 per aircraft as each applicableaircraft is removed from service, starting with the aircraft scheduled to beremoved in October 2009. Midwest has agreed to continue to pay existingrates and charges to SkyWest as agreed to under the Midwest Services Agreement,as previously amended, until the aircraft are removed from service.

 

The Company’s passenger and ground handling revenues could be impactedby a number of factors, including changes to the Company’s code-share agreementswith Delta, United or Midwest, contract modifications resulting from contractre-negotiations, the Company’s ability to earn incentive payments contemplatedunder the Company’s code-share agreements, Midwest’s proposed financialrestructuring and settlement of reimbursement disputes with the Company’s major partners.

 

#### Note D — Share-Based Compensation

####  

The fair value of stock options granted by theCompany has been estimated as of the grant date using the Black-Scholes optionpricing model. The Company accounts for share-based compensation in accordancewith Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”).  During the six months ended June 30,2009 the Company granted options to purchase 457,397 shares of common stockunder the SkyWest, Inc. 2006 Long-Term Incentive Plan (the “2006 IncentivePlan”) .  The following table shows theassumptions used and weighted average fair value for stock option grants duringthe six months ended June 30, 2009.

 
| Expected annual dividend rate                |   | 1.05 | %      |
|----------------------------------------------|--------|------|--------|
| Risk-free interest rate                      |   | 1.67 | %      |
| Average expected life (years)                |   | 4.6  |   |
| Expected volatility of common stock          |   | .351 |   |
| Forfeiture rate                              |   | 1.0  | %      |
| Weighted average fair value of option grants |   | $    | 4.42   |   |
|                                              |        |      |        |  |

 

During the six months ended June 30, 2009, theCompany granted 201,204 shares of restricted stock to the Company’s employeesunder the 2006 Incentive Plan.  Therestricted stock has a three-year vesting period, during which the recipientmust remain employed with the Company or one of the Company’ssubsidiaries.  Additionally, during thatsix-month period, the Company granted 26,247 fully-vested shares of commonstock to the Company’s directors.  Theweighted average fair value of the shares of restricted stock on the date ofgrant was $15.24 per share.

 

As required by SFAS No. 123(R), the Companyrecords share-based compensation expense only for those options and shares ofrestricted stock that are expected to vest. The estimated fair value of the stock options and shares of restrictedstock is amortized over the applicable vesting periods.  During the three months ended June 30,2009 and 2008, the Company recorded pre-tax share-based compensation expense of$1.9 million and $2.6 million, respectively. During the six months ended June 30, 2009 and 2008, the Companyrecorded pre-tax share-based compensation expense of $4.5 million and $6.0million, respectively.

 

NoteE — Net Income Per Common Share

 

Basicnet income per common share (“Basic EPS”) excludes dilution and is computed bydividing net income by the weighted average number of common shares outstandingduring the period. Diluted net income per common share (“Diluted EPS”) reflectsthe potential dilution that could occur if stock options or other contracts toissue common stock were exercised or converted into common stock. Thecomputation of Diluted EPS does not assume exercise or conversion of securitiesthat would have an anti-dilutive effect on net income per common share. Duringthe three months ended June 30, 2009 and 2008 options to acquire 4,525,000and 4,267,000 shares, respectively, were excluded from the computation ofDiluted EPS as their impact was anti-dilutive. During the six months ended June 30, 2009 and 2008 options toacquire 4,547,000 and 3,149,000 shares, respectively, were excluded from thecomputation of Diluted EPS as their impact was anti-dilutive.

 

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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,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| **Numerator**                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Net Income                                                                 |       | $                                                   | 26,219     |                                              | $          | 36,434 |   | $ | 35,591 |   | $ | 65,574 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Denominator**                                                            |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares  outstanding                      |       | 55,657                                              |       | 57,377                                            |       | 56,102 |   | 58,695 |   |
| Effect of outstanding stock compensation                                   |       | 901                                                 |       | 632                                               |       | 891 |   | 985 |   |
| Weighted average number of shares for Diluted net  income per common share |       | 56,558                                              |       | 58,009                                            |       | 56,993 |   | 59,680 |   |
|                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Basic earnings per share                                                   |       | $                                                   | 0.47       |                                              | $          | 0.63 |   | $ | 0.63 |   | $ | 1.12 |   |
| Diluted earnings per share                                                 |       | $                                                   | 0.46       |                                              | $          | 0.63 |   | $ | 0.62 |   | $ | 1.10 |   |

 

Note F — ComprehensiveIncome

 

TheCompany reports comprehensive income in accordance with Statement of FinancialAccounting Standards No. 130, *Reporting**Comprehensive*Income**(“SFAS 130”).SFAS 130 establishes standards for reporting and displaying comprehensiveincome and its components in financial statements. Comprehensive incomeincludes charges and credits to stockholders’ equity that are not the result oftransactions with shareholders. Comprehensive income consisted of net income plus changes in unrealizedappreciation (depreciation) on marketable securities, net of tax, for theperiods indicated (in thousands):

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                  | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                              |       | $                                                   | 26,219     |                                              | $          | 36,434 |   | $ | 35,591 |   | $ | 65,574 |   |
| Unrealized appreciation (depreciation) on marketable securities, net of tax |       | (151                                                | )          | (200                                              | )          | 3,887 |   | (135 | ) |
|                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| **Comprehensive income**                                                    |       | $                                                   | 26,068     |                                              | $          | 36,234 |   | $ | 39,478 |   | $ | 65,439 |   |

 

Note G — Long-Term Debt

 

Long-termdebt of the Company consisted of the following for the periods indicated (inthousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 1.05% to 4.19% through 2012 to 2020, secured by aircraft                                     |       | $                       | 494,310    |                        | $          | 529,625 |   |
| Notes payable to a financing company, due in  semi-annual installments, variable interest based on LIBOR, or with interest  rates ranging from 1.40% to 7.52% through 2021, secured by aircraft                               |       | 576,336                 |       | 594,999                     |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                   |       | 239,952                 |       | 248,731                     |       |
| Notes payable to a financing company, due in  semi-annual installments plus interest at 5.78% to 6.23% through 2019,  secured by aircraft                                                                                     |       | 71,255                  |       | 74,455                      |       |
| Notes payable to banks, due in monthly  installments plus interest of 3.15% to 8.18% through 2020, secured by  aircraft                                                                                                       |       | 399,578                 |       | 325,834                     |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                 |       | 24,904                  |       | 25,857                      |       |
| Notes payable to banks, due in semi-annual  installments, plus interest at 3.72% to 3.86%, net of the benefits of  interest rate subsidies through the Brazilian Export financing program,  through 2011, secured by aircraft |       | 4,581                   |       | 5,936                       |       |
| Notes payable to a bank, due in monthly  installments interest based on LIBOR through 2012, interest rate at 7.9%  secured by building                                                                                        |       | 5,823                   |       | 6,051                       |       |
| Long-term debt                                                                                                                                                                                                                |       | $                       | 1,816,739  |                        | $          | 1,811,488 |   |
|                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Less current maturities                                                                                                                                                                                                       |       | (135,281                | )          | (129,783                    | )          |
|                                                                                                                                                                                                                          |       |                    |       |                        |       |
| Long-term debt, net of current maturities                                                                                                                                                                                     |       | $                       | 1,681,458  |                        | $          | 1,681,705 |   |

 

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AtJune 30, 2009, the three-month and six-month LIBOR rates were 0.60% and1.11%, respectively.   At December 31,2008, the three-month and six-month LIBOR rates were 1.43% and 1.75%,respectively.

 

Asof June 30, 2009, SkyWest Airlines had a $25 million line of credit withno amount outstanding under the facility. The facility expires on June 30, 2010 and has a rate of 4.96%.

 

Note H — Change inAccounting Estimates

 

Duringthe first quarter of 2009, the Company changed its estimate of depreciablelives on ground equipment from five to seven years to five to ten years andmaintained the residual value of zero percent. The impact of this change increased the Company’s pre-tax income for thethree and six month periods ended June 30, 2009 by $0.9 million ($.02 pershare Basic EPS and Diluted EPS) and $2.1 million ($.04 per share Basic EPS andDiluted EPS), respectively.  The impactof this change, net of tax, increased the Company’s net income for the threeand six month periods ended June 30, 2009 by $579,000 ($.01 per share,Basic EPS and Diluted EPS) and $1.4 million ($.02 per share Basic EPS andDiluted EPS), respectively.

 

Note I — Commitments andContingencies

 

TheCompany leases 288 aircraft, as well as airport facilities, office space, andvarious other property and equipment under non-cancelable operating leaseswhich are generally 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, 2009 (in thousands):

 

| July through December 2009 |   | $         | 143,703   |   |
|--------------------------------------|--------|-----------|-----------|--------|
| 2010                                 |   | 329,211   |      |
| 2011                                 |   | 319,957   |      |
| 2012                                 |   | 320,708   |      |
| 2013                                 |   | 313,120   |      |
| Thereafter                           |   | 1,608,187 |      |
|                                 |   | $         | 3,034,886 |   |

 

Note J — Fair Value Measurements

 

The Company adopted the provisions of Statement of Financial AccountingStandards No. 157, *Fair ValueMeasurements* (“SFAS No. 157”) as of January 1, 2008.Although the adoption of SFAS No. 157 did not materially impact theCompany’s financial condition, results of operations or cash flows, SFAS No. 157requires the presentation of the following disclosures in these notes to condensedconsolidated financial statements.

 

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

 
| *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.                                                                                                                                                                                                                                            |

 

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As of June 30, 2009, 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, due primarily to credit market eventsbeginning during the first quarter of 2008, the auction events for most ofthese instruments failed. Therefore, quoted prices in active marketsare no longer available and the Company has estimated the fair values of thesesecurities utilizing a discounted cash flow analysis as of June 30, 2009.These analyses consider, among other items, the collateralization underlyingthe security investments, the creditworthiness of the counterparty, the timingof expected future cash flows, and the expectation of the next time thesecurity is expected to have a successful auction.

 

As of June 30, 2009, the Company owned $4.5 million ofauction rate security instruments. The auction rate security instruments heldby the Company at June 30, 2009 were tax-exempt municipal bondinvestments, for which the market has experienced some successful auctions. TheCompany has classified the investments as non-current and has identified themas “Other assets” in its Consolidated Balance Sheet as of June 30, 2009.The Company 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, 2009, 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, it intends torecord a charge to earnings as appropriate.

 

As of June 30, 2009,the Company held certain assets that are required to be measured at fair valueon a recurring basis.Assets measured at fair value on a recurring basis are summarized below (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of June 30, 2009** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                               |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | $                                                                                  | 143,714    |   | $ | 143,714 |   | $ | — |   | $ | — |   |
| Marketable Securities                      |       | 587,967                                                                            |       | 26,887 |   | 561,080 |   | — |   |
| Other Assets                               |       | 4,474                                                                              |       | — |   | — |   | 4,474 |   |
| Total Assets Measured at Fair Value        |       | $                                                                                  | 736,155    |   | $ | 170,601 |   | $ | 561,080 |   | $ | 4,474 |   |

 

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 within the hierarchy establishedpursuant to SFAS No. 157.

 

The following table presents the Company’s assets measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)as defined in SFAS No. 157 at June 30, 2009 (in thousands):

 

**Fair Value Measurements Using Significant UnobservableInputs**

**(Level 3)**

 

| ** **                                      | ** ** | **Auction Rate  Securities** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| Balance at January 1, 2009                 |       | $                                 | 4,686      |   |
| Total realized and unrealized gains or (losses) |       |                              |       |
| Included in earnings                            |       | —                            |       |
| Included in other comprehensive income          |       | (212                              | )          |
| Transferred out                                 |       | —                            |       |
| Settlements                                     |       | —                            |       |
| Balance at June 30, 2009                   |       | $                                 | 4,474      |   |

 

Thefair value of the Company’s long-term debt is estimated based on current ratesoffered to the Company for similar debt and was estimated to be $1,915.8million as of June 30, 2009, as compared to the carrying amount of$1,816.7 million as of June 30, 2009.

 

Note K  — Stock Repurchase

 

The Company’s Board of Directors has authorized the repurchase of up to15,000,000 shares of the Company’s common stock in the public market. Duringthe three months ended June 30, 2009, the Company repurchased463,380 shares of common stock for approximately $4.9 million at aweighted average price per share of $10.50.

 

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Note L — Legal Matters

 

*Legal Matters*

 

The Company is subject to certain legal actions which it considersroutine to its business activities. As of June 30, 2009, the Company’smanagement believed, after consultation with legal counsel, that the ultimateoutcome of such legal matters was not likely to have a material adverse effecton the Company’s financial position, liquidity or results of operations.However, the following is a significant outstanding legal matter.

 

*ASA and SkyWest Airlines v. Delta*

 

During the quarter ended December 31, 2007, Delta notified theCompany, SkyWest Airlines and ASA of a dispute under the Delta ConnectionAgreements executed by Delta with SkyWest Airlines and ASA. The dispute relatesto allocation of liability for certain IROP expenses that are paid by SkyWestAirlines and ASA to their passengers under certain situations. As a result,Delta withheld a combined total of approximately $25 million (pretax) fromone of the weekly scheduled wire payments to SkyWest Airlines and ASA during December 2007.Delta continues to withhold a portion of the funds the Company believes arepayable as weekly scheduled wire payments to SkyWest Airlines and ASA. As of June 30,2009, the Company had recognized a cumulative total of $32.4 million ofrevenue associated with the funds withheld by Delta. On February 1, 2008,SkyWest Airlines and ASA 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 ASA on March 24,2008. Delta’s Counterclaim alleges that ASA and SkyWest Airlines breached theDelta Connection Agreements by invoicing Delta for the IROP expenses that werepaid pursuant to Delta’s policies, and claims only a portion of those expensesmay be invoiced to Delta. Delta seeks unspecified damages in its counterclaim.

 

On March 24, 2008, Delta also filed a Motion to Dismiss theComplaint. A hearing on the Motion was held June 5, 2008. In an orderentered June 13, 2008, the Court granted in part and denied in part theMotion to Dismiss. The Court denied the Motion to Dismiss with respect to thebreach of contract claim contained in the Complaint. The Court denied in partthe 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. SkyWest Airlines andASA continue to vigorously pursue their claims set forth in the Complaint, tothe extent permitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.

 

The Company has evaluated the Delta dispute in accordance with theprovisions of Statement of Financial Accounting Standards No. 5, *Accounting for Contingencies* (“SFAS No.5”).Based on the provisions of SFAS No. 5, an estimated loss is accrued if theloss is probable and reasonably estimable. Because these conditions have notbeen satisfied, the Company has not recorded a loss related to the precedingdispute in the condensed consolidated financial statements as of June 30,2009.

 

**Cautionary Statement ConcerningForward-Looking Statements**

 

Certain of the statementscontained in this Report should be considered “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  These forward-looking statementsmay be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,”“believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,”and “continue” and similar terms used in connection with statements regardingSkyWest’s outlook, the revenue environment, SkyWest’s contract relationships,and SkyWest’s expected financial performance. These statements include, but are not limited to, statements aboutSkyWest’s future growth and development plans, including SkyWest’s futurefinancial and operating results, SkyWest’s plans for SkyWest Airlines and ASA,SkyWest’s objectives, expectations and intentions, and other statements thatare not historical facts.  You should also keep in mind that allforward-looking statements are based on SkyWest’s existing beliefs aboutpresent and future events outside of SkyWest’s control and on assumptions thatmay prove to be incorrect.  If one ormore risks identified in this Report materializes, or any other underlyingassumption proves incorrect, SkyWest’s actual results will vary, and may varymaterially, from those anticipated, estimated, projected, or intended.

 

There may be other factorsnot identified above of which SkyWest is not currently aware that may affectmatters discussed in the forward-looking statements, and may also cause actualresults to differ materially from those discussed.  SkyWest assumes no obligation to publiclyupdate any forward-looking statement to reflect actual results, changes inassumptions or changes in other factors affecting these statements other thanas required by law.

 

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**ITEM 2:**               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

** **

*The following discussionand analysis presents factors that had a material effect on the results ofoperations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three andsix months ended June 30, 2009 and 2008. Also discussed is our financialposition as of June 30, 2009 and December 31, 2008. You should readthis discussion in conjunction with our condensed consolidated financialstatements for the three and six months ended June 30, 2009, including thenotes thereto, appearing elsewhere in this Report.  This discussion and analysis containsforward-looking statements. Please refer to the sections of this Reportentitled “Cautionary Statement Concerning Forward-Looking Statements” and “RiskFactors” for discussion of the uncertainties, risks and assumptions associatedwith these statements.*

 

**Overview**

 

Through SkyWest Airlines, Inc. (“SkyWest Airlines”) and AtlanticSoutheast Airlines, Inc. (“ASA”), we operate the largest regional airlinein the United States. As of June 30, 2009, SkyWest Airlines and ASAoffered scheduled passenger and air freight service with more than 2,400 totaldaily departures to 208 destinations in the United States, Canada, Mexico andthe Caribbean. Additionally, as of June 30, 2009, we provided groundhandling services for approximately 11 other airlines throughout our system. Asof June 30, 2009, we operated a combined fleet of 442 aircraft consistingof 250 50-seat Bombardier Aerospace (“Bombardier”) CRJ 200 Regional Jets (the “CRJ200”)(74 assigned to United Air Lines Inc. (“United”), 164 assigned to Delta AirLines, Inc. (“Delta”), 10 assigned to Midwest Airlines, Inc. (“Midwest”)and two used by SkyWest Airlines as additional maintenance spare aircraft) 10670-seat Bombardier CRJ700 Regional Jets (the “CRJ700”)  (55 assigned to United and 51 assigned toDelta), 31 CRJ900s Regional Jets (the “CRJ900”) (all assigned to Delta), 5130-seat Embraer Brasilia EMB-120 turboprop aircraft (the “Brasilia turboprop”)(39 assigned to United and 12 assigned to Delta), and four 66-seat Avions deTransport 72-210 turboprop aircraft (the “ATR-72 turboprops) (all assigned toDelta). As of June 30, 2009, the four ATR-72 turboprops were no longer inrevenue service. We believe our success in attracting multiple contractualrelationships with our major airline partners is attributable to our deliveryof high-quality customer service with an all cabin-class fleet at a competitivecost structure. For the three months ended June 30, 2009, approximately57.2% of our aggregate capacity was operated under the Delta code,approximately 40.5% was operated under the United code and approximately 2.3%was operated under the Midwest 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 June 10,2009, SkyWest Airlines and Midwest mutually agreed to terminate the serviceSkyWest Airlines currently provides under the Airline Services Agreement (the “MidwestServices Agreement”). As a result, SkyWest Airlines has agreed to remove itsremaining 12 CRJ200s from Midwest service based on the following schedule: oneaircraft was removed in each of June 2009 and July 2009, threeaircraft are scheduled to be removed in October 2009, two aircraft arescheduled to be removed in November 2009, two aircraft are scheduled to beremoved in December 2009 and the last three aircraft are scheduled to beremoved in January 2010. As of June 30, 2009, SkyWest Airlinesoperated as a Delta Connection carrier in Salt Lake City, a United Expresscarrier in Los Angeles, San Francisco, Denver, Chicago and the PacificNorthwest, and a Midwest Connect carrier in Milwaukee, operating more than1,660 total daily flights.

 

ASA has been a code-share partner with Delta in Atlanta since 1984. Asof June 30, 2009, ASA operated as a Delta Connection carrier in Atlantaand Cincinnati. ASA operates approximately 940 daily flights, all in the DeltaConnection system.

 

We provide a substantial majority of the regional airline service forDelta in Atlanta and Salt Lake City. In connection with our acquisition of ASAin September 2005, we established new, separate, but substantiallysimilar, long-term fixed-fee Delta Connection Agreements with Delta for bothSkyWest Airlines and ASA. We also obtained the right to use 29 gates in theHartsfield-Jackson International Airport located in Atlanta, from which wecurrently provide service to Delta. Pursuant to the terms of the DeltaConnection Agreement executed by ASA and Delta, Delta has also agreed that ifDelta solicits requests for proposals to fly Delta Connection regionalaircraft, ASA will be permitted to bid to maintain the same percentage of totalDelta Connection regional jet flights that it operated during 2007, and, if ASAdoes not achieve the winning bid for the proposed flying, ASA will be permittedto match the terms of the winning bid to the extent necessary for ASA tomaintain the same percentage of Delta Connection regional jet flights that itoperated during 2007.

 

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, 2009, contract flying revenueand pro-rate revenue represented approximately 95% and 5%, respectively, of ourtotal passenger revenues. On contract routes, the major airline partnercontrols scheduling, ticketing, pricing and seat inventories and we arecompensated by the major airline partner at contracted rates based on thecompleted block hours, flight departures and other operating 

 

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measures.On pro-rate flights, we control scheduling, ticketing, pricing and seat inventoriesand receive a pro-rated portion of passenger fares. As of June 30, 2009,essentially all of our Brasilia turboprops flown for Delta were flown underpro-rate arrangements, while approximately 55% of our Brasilia turboprops flownin the United system were flown under contractual arrangements, with theremaining 45% flown under pro-rate arrangements.  During June 2009, we began flying sevenCRJ200s for United under a pro-rate agreement.

 

**SecondQuarter Summary**

 

We had revenues of $698.8 million for the three months ended June 30,2009, a 26.5% decrease, compared to revenues of $950.8 million for thethree months ended June 30, 2008. We had net income of $26.2 million,or $0.46 per diluted share, for the three months ended June 30, 2009, adecrease in net income of 28.0%, compared to $36.4 million of net income,or $0.63 per diluted share, for the three months ended June 30, 2008.

 

The significant items affecting our financial performance during thethree months ended June 30, 2009 are outlined below:

 

On June 10, 2009, SkyWest reached a mutual understanding withMidwest to terminate the service SkyWest Airlines currently provides under theMidwest Services Agreement. As a result, SkyWest Airlines agreed to remove itsremaining 12 CRJ200s from Midwest service based on the following schedule: oneaircraft was removed in each of June 2009 and July 2009, threeaircraft are scheduled to be removed in October 2009, two aircraft arescheduled to be removed in November 2009, two aircraft are scheduled to beremoved in December 2009 and the last three aircraft are scheduled to beremoved in January 2010. Additionally, we agreed to cancel an unsecurednote from Midwest in the amount of approximately $9.3 million in exchange for a$4.0 million payment from Midwest that is guaranteed by Republic AirwaysHoldings, Inc. The unsecured note related to certain deferred paymentsMidwest owed SkyWest Airlines from services provided under the Midwest ServicesAgreement.  Because of the uniquemodified payment terms associated with the deferred payments, we have notrecognized revenue associated with the deferred amount.  The deferred amount is scheduled to be paidto SkyWest Airlines at the rate of $400,000 per aircraft as each applicable aircraftis removed from service starting with the aircraft that will be removed in October 2009.Midwest has agreed to continue to pay existing rates and charges to SkyWestAirlines as agreed to under the Midwest Services Agreement, as previouslyamended, until the aircraft are removed from service.

 

Our maintenance costs increased $18.1 million, or 18.4%, duringthe three months ended June 30, 2009, compared to the three months ended June 30,2008. The increase in maintenance costs was principally due to scheduledmaintenance and engine events on our aging CRJ200 and CRJ700 aircraft.

 

Total available seat miles (“ASMs”) for the three months ended June 30,2009 decreased 2.4%, compared to the three months ended June 30, 2008,primarily as a result of our major partners decreasing the utilization of ouraircraft and a reduction in the number of aircraft we operated for Midwest.During the three months ended June 30, 2009, we generated 5.6 billionASMs, compared to 5.7 billion ASMs during the three months ended June 30,2008.

 

**Outlook**

 

On October 12, 2007, we announced SkyWest Airlines’ plans toacquire 22 additional regional jet aircraft through 2010, 18 of which SkyWestAirlines intends to operate for United Express, as part of an aircrafttransition plan. We believe this transition plan will allow United Express toremove 23 30-seat Brasilia turboprops from operation under the United ExpressAgreement and add 66-seat regional jet aircraft for United Express flying.Generally, the turboprop removals are intended to occur in conjunction withdeliveries of new regional jet aircraft in an effort to facilitate a smoothtransition in existing markets. Additionally, SkyWest Airlines exchanged four50-seat CRJ200s for four 76-seat CRJ900s in its Delta Connection operations. OnNovember 30, 2007, we announced that SkyWest Airlines placed a firm orderfor 22 aircraft with Bombardier. As of June 30, 2009, SkyWest Airlines hadtaken delivery of four CRJ900s and three CRJ700s under that order. SkyWestAirlines is scheduled to take delivery of the remaining 15 aircraft during theremainder of 2009 and the first quarter of 2010.

 

On January 9, 2009, we announced that ASA reached an agreementwith Delta to operate an additional ten CRJ900s. The aircraft were previouslyordered by Delta and are now being contracted for flying with ASA. As of June 30,2009, ASA had taken delivery of all of these aircraft. ASA intends to use theaircraft as replacements for 20, 50-seat CRJ200s that are scheduled for removalfrom contract service between April and August 2010, which is earlierthan the existing scheduled termination dates as contained in the DeltaConnection Agreement.

 

On June 10, 2009, we announced the wind down of the MidwestServices Agreement. As a result, SkyWest Airlines agreed to remove theremaining 12 CRJ200s from Midwest service based on the following schedule:  one aircraft was removed in each of June 2009and July 2009, three aircraft are scheduled to be removed in October 2009,two aircraft are scheduled to be removed in November 2009, two aircraftare scheduled to be removed in December 2009 and the last three aircraftare scheduled to be removed in January 2010.  We are pursuing opportunities to place these12 aircraft into service with other major airline carriers.

 

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**Critical Accounting Policies**

 

Our significant accounting policies are summarizedin Note 1 to our consolidated financial statements for the year ended December 31,2008, which are presented in our Annual Report on Form 10-K for the yearended December 31, 2008.  Criticalaccounting policies are those policies that are most important to thepreparation of our consolidated financial statements and require management’ssubjective and complex judgments due to the need to make estimates about theeffect of matters that are inherently uncertain. Our critical accountingpolicies relate to revenue recognition, aircraft maintenance, aircraft leases,impairment of long-lived assets and intangibles, 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 30,2009 and 2008**

 

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

 
| ** **                                    | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 4,474,923                                                             |       | 4,496,464 |   | (0.5 | ) |
| Available seat miles (“ASMs”) (000) |       | 5,582,862                                                             |       | 5,717,958 |   | (2.4 | ) |
| Block hours                                   |       | 343,113                                                               |       | 353,723 |   | (3.0 | ) |
| Departures                                    |       | 220,605                                                               |       | 226,176 |   | (2.5 | ) |
| Passengers carried                            |       | 8,884,664                                                             |       | 8,794,735 |   | 1.0 |   |
| Passenger load factor                         |       | 80.2                                                                  | %          | 78.6 | % | 1.6 | pts |
| Revenue per available seat mile               |       | 12.5                                                                  | ¢     | 16.6 | ¢ | (24.7 | ) |
| Cost per available seat mile                  |       | 11.8                                                                  | ¢     | 15.8 | ¢ | (25.3 | ) |
| Fuel cost per available seat mile             |       | 2.3                                                                   | ¢     | 6.4 | ¢ | (64.1 | ) |
| Average passenger trip length (miles)         |       | 504                                                                   |       | 511 |   | (1.4 | ) |

 

*Revenues.*  Operating revenues decreased$252.0 million, or 26.5%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. We are reimbursedfor our actual fuel costs by our major partners under our contract flyingarrangements. For financial reporting purposes, we record these reimbursementsas operating revenue. Under the SkyWest Airlines and ASA Delta Connection Agreements,we are reimbursed for our engine overhaul expenses. We also record those engineoverhaul reimbursements as operating revenue. The following table summarizesthe amount of fuel and engine overhaul reimbursements included in our passengerrevenues for the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                     | 691,141    |   | $ | 943,570 |   | $ | (252,429 | ) | (26.8 | )% |
| Less: Fuel reimbursement from major partners                          |       | 123,584                                                               |       | 356,445 |   | (232,861 | ) | (65.3 | )% |
| Less: Engine overhaul reimbursement from major  partners              |       | 39,341                                                                |       | 36,030 |   | 3,311 |   | 9.2 | % |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                     | 528,216    |   | $ | 551,095 |   | $ | (22,879 | ) | (4.2 | )% |

 

*Passenger revenues.*  Passenger revenues decreased$252.4 million, or 26.8%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. The decrease inpassenger revenues was primarily due to a decrease in fuel reimbursements fromour major partners. The fuel reimbursement from our major partners decreased$232.9 million or 65.3%, during the three months ended June 30, 2009,compared to the three months ended June 30, 2008. Our passenger revenues,excluding fuel and engine overhaul reimbursements from major partners,decreased $22.9 million, or 4.2%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. The decrease inpassenger revenues, excluding fuel and engine overhaul reimbursements, was morethan the corresponding percentage decrease in ASMs, primarily due to twofactors. First, Delta transitioned 23 stations from SkyWest Airlines and ASA toother ground handlers during the second quarter of 2009. Second, operating efficiencies obtained by addingincremental aircraft under our contract flying arrangements, were factored intoour contractual rates and our passenger revenues.

 

*Ground handling and other.*  Total ground handling and other revenuesincreased $0.4 million, or 6.0%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. Revenue earnedunder other ground handling contracts where we provide ground handling servicesfor other airlines is presented in the “Ground handling and other” line in ourconsolidated statements of income. The increase was primarily due to leaserevenue we received on two CRJ200s.

 

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Individual expense components are also expressed in the following tableon the basis of cents per ASM. ASM is a common metric used in the airlineindustry to measure an airline’s passenger capacity. ASMs reflect both thenumber of aircraft in an airline’s fleet and the seat capacity for the aircraftin the fleet. As the size of our fleet is the underlying driver of ouroperating costs, the primary basis for our presentation 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,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                            | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                     | 129,042    |   | $ | 366,467 |   | $ | (237,425 | ) | (64.8 | )% | 2.3 |   | 6.4 |   |
| Salaries, wages and benefits                |       | 173,862                                                               |       | 180,677 |   | (6,815 | ) | (3.8 | )% | 3.1 |   | 3.2 |   |
| Aircraft maintenance, materials and repairs |       | 116,390                                                               |       | 98,307 |   | 18,083 |   | 18.4 | % | 2.1 |   | 1.7 |   |
| Aircraft rentals                            |       | 75,958                                                                |       | 73,893 |   | 2,065 |   | 2.8 | % | 1.4 |   | 1.3 |   |
| Depreciation and amortization               |       | 54,676                                                                |       | 54,931 |   | (255 | ) | (0.5 | )% | 1.0 |   | 1.0 |   |
| Station rentals and landing fees            |       | 29,978                                                                |       | 33,339 |   | (3,361 | ) | (10.1 | )% | 0.5 |   | 0.5 |   |
| Ground handling services                    |       | 23,124                                                                |       | 26,869 |   | (3,745 | ) | (13.9 | )% | 0.4 |   | 0.4 |   |
| Other airline expense                       |       | 36,024                                                                |       | 43,386 |   | (7,362 | ) | (17.0 | )% | 0.6 |   | 0.8 |   |
| Total operating expenses                    |       | 639,054                                                               |       | 877,869 |   | (238,815 | ) | (27.2 | )% | 11.4 |   | 15.3 |   |
| Interest                                    |       | 21,117                                                                |       | 26,221 |   | (5,104 | ) | (19.5 | )% | 0.4 |   | 0.5 |   |
| Total airline expenses                      |       | $                                                                     | 660,171    |   | $ | 904,090 |   | (243,919 | ) | (27.0 | )% | 11.8 |   | 15.8 |   |
|                                             |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $237.4 million, or64.8%, during the three months ended June 30, 2009, compared to the threemonths ended June 30, 2008. The average cost per gallon of fuel decreasedto $1.80 per gallon during the three months ended June 30, 2009 from $3.89during the three months ended June 30, 2008. In addition to the decreasein the average cost per gallon during the three months ended June 30,2009, United purchased fuel directly from a fuel vendor for our United Expressaircraft operated out of Chicago, San Francisco, Los Angeles and Denver,Midwest purchased all of its fuel directly from fuel vendors during the threemonths ended June 30, 2009 and during the month of June 2009, Deltapurchased the majority of its fuel directly from fuel vendors, all of whichreduced our total fuel costs and passenger revenue. During the three monthsended June 30, 2008, we purchased the fuel for all of our Delta Connectionflights. The following table summarizes the gallons of fuel we purchaseddirectly, and the percentage change in fuel price per gallon on our fuelexpense, for the periods indicated:

 

| ** **                                                             | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 71,872                                                                |       | 94,301 |   | (23.8 | )% |
| Average price per gallon                                               |       | $                                                                     | 1.80       |   | $ | 3.89 |   | (53.7 | )% |
| Fuel expense                                                           |       | $                                                                     | 129,042    |   | $ | 366,467 |   | (64.8 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $6.8 million, or 3.8%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. The average numberof full-time equivalent employees decreased 13.3% to 12,578 for the threemonths ended June 30, 2009, from 14,510 for the three months ended June 30,2008. The decrease in number of employees was significantly due to a reductionin our customer service employees resulting from United transitioning 16stations from SkyWest Airlines to other ground handlers during the secondquarter of 2008 and Delta transitioning 23 stations from SkyWest Airlines andASA to other ground handlers during the second quarter of 2009.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$18.1 million, or 18.4%, during the three months ended June 30, 2009,compared to the three months ended June 30, 2008. The following tablesummarizes the amount of engine overhauls and engine overhaul reimbursementsincluded in our aircraft maintenance expense for the periods indicated (dollaramounts in thousands).

 
| ** **                                                  | ** ** | **For the three months ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                 |       | $                                                                     | 116,390    |   | $ | 98,307 |   | $ | 18,083 |   | 18.4 | % |
| Less: Engine overhaul reimbursed from major  partners       |       | 39,341                                                                |       | 36,030 |   | 3,311 |   | 9.2 | % |
| Aircraft maintenance excluding reimbursed engine  overhauls |       | $                                                                     | 77,049     |   | $ | 62,277 |   | $ | 14,772 |   | 23.7 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls,increased $14.8 million, or 23.7%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008.  The increase in aircraft maintenance expenses

 

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excludingengine overhauls reimbursed from major partners was principally due toscheduled maintenance events on our aging CRJ200 and CRJ700 aircraft.

 

Under the United Express and Midwest Services Agreements, we recognizerevenue at a fixed hourly rate for mature engine maintenance on regional jetengines. We record the gross amount of that maintenance as revenue in ourconsolidated statements of income, and we recognize engine maintenance expenseon our CRJ200 regional jet engines on an as incurred basis as maintenanceexpense in our consolidated statements of income. As a result, during the threemonths ended June 30, 2009, we collected and recorded $2.2 million(pretax) of revenue in excess of our maintenance expense under the UnitedExpress Agreement and the Midwest Services Agreement, compared to $9.4 millionduring the three months ended June 30, 2008, which the excess is intendedto compensate us for the expense of future engine maintenance overhauls. Underour Delta Connection Agreements we were reimbursed for engine overhaul costs byDelta. Such reimbursements are reflected as passenger revenue in ourconsolidated statements of income.

 

*Aircraft rentals.*  Aircraft rentals increased $2.1 million, or2.8%, during the three months ended June 30, 2009, compared to the threemonths ended June 30, 2008. The increase in aircraft rental expense wasprimarily due to ASA taking delivery of ten CRJ900s during 2009.  These aircraft were financed throughlong-term leases with Delta. This increase was partially offset by ASAreturning eight ATR-72 turboprops to the lessor.

 

*Depreciation and amortization.*  Depreciation and amortization expensedecreased $255,000, or 0.5%, during the three months ended June 30, 2009,compared to the three months ended June 30, 2008.  The decrease was primarily due to the changein depreciable lives on ground equipment from a range of five to seven years toa range of five to ten years. For purposes of the foregoing calculations, theground equipment was deemed to maintain a residual value of zero percent.  The impact of this change decreased our pretax income for the three months ended June 30, 2009 by $0.9 million.  This decrease was partially offset by theincrease in depreciation due to the addition of four CRJ900s and three CRJ700sthat were financed using long-term debt.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $3.4 million, or 10.1%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. The decrease instation rentals and landing fees expense was primarily due to our majorpartners paying for certain station rentals and landing fees directly to theairport.

 

*Ground handling service.*  Ground handling service expense decreased$3.7 million, or 13.9%, during the three months ended June 30, 2009,compared to the three months ended June 30, 2008. The decrease in groundhandling service expense was due primarily to United transitioning 16 stationsfrom SkyWest Airlines to other ground handlers during the second quarter of2008 and Delta transitioning 23 stations from SkyWest Airlines and ASA to otherground handlers during the second quarter of 2009.

 

*Other airline expenses.*  Other airline expenses, primarily consistingof property taxes, hull and liability insurance, crew simulator training andcrew hotel costs, decreased $7.4 million, or 17.0%, during the threemonths ended June 30, 2009, compared to the three months ended June 30,2008. The decrease in other expenses was primarily due to the decrease in crewsimulator training and crew hotel costs. These decreases were due primarily tofewer training events during the three months ended June 30, 2009.

 

*Interest.*  Interest expense decreased $5.1 million,or 19.5%, during the three months ended June 30, 2009 compared to thethree months ended June 30, 2008. The decrease in interest expense wassubstantially due to a decrease in interest rates. At June 30, 2009, wehad variable rate notes representing 43.8% of our total long-term debt . Themajority of our variable rate notes are based on the three-month and six-monthLIBOR rates. At June 30, 2009, the three-month and six-month LIBOR rateswere 0.60% and 1.11%, respectively. At June 30, 2008, the three-month andsix-month LIBOR rates were 2.78% and 3.11%, respectively.

 

*Interest Income.* Interest income decreased $2.3 million,or 45.6% during the three months ended June 30, 2009, compared to thethree months ended June 30, 2008. The decrease in interest income wassubstantially due to a decrease in interest rates. At June 30, 2009, thethree-month and six-month LIBOR rates were 0.60% and 1.11%, respectively. At June 30,2008, the three-month and six-month LIBOR rates were 2.78% and 3.11%,respectively.

 

*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $243.9 million, or 27.0%,during the three months ended June 30, 2009, compared to the three monthsended June 30, 2008. We are reimbursed for our actual fuel costs by ourmajor partners under our contract flying arrangements. We record the amount ofthose reimbursements as revenue. Under the SkyWest Airlines and ASA DeltaConnection Agreements, we are reimbursed for our engine overhaul expense, whichwe record as revenue. The following table summarizes the amount of fuel andengine overhaul expenses which are included in our total airline expenses forthe periods indicated (dollar amounts in thousands).

 
| ** **                                                 | ** ** | **For the three months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                                              | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                      |       | $                                                                     | 660,171    |   | $ | 904,090 |   | $ | (243,919 | ) | (27.0 | )% |
| Less: Fuel expense                                         |       | 129,042                                                               |       | 366,467 |   | (237,425 | ) | (64.8 | )% |
| Less: Engine overhaul reimbursement from major  partners   |       | 39,341                                                                |       | 36,030 |   | 3,311 |   | 9.2 | % |
| Total airline expense excluding fuel and engine  overhauls |       | $                                                                     | 491,788    |   | $ | 501,593 |   | $ | (9,805 | ) | (2.0 | )% |

 

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Excluding fuel and engine overhaul costs, our total airline expensesdecreased $9.8 million, or 2.0%, during the three months ended June 30,2009, compared to the three months ended June 30, 2008. The percentagedecrease in total airline expenses excluding fuel and engine overhauls, wasless than the percentage decrease in ASMs, which is primarily due to increasesin non-engine overhaul maintenance expenses attributable to the increasing ageof our fleet.

 

*Other Income.* During the three months ended June 30,2008, we negotiated the principal terms of a prospective capacity purchaseagreement with Continental, which was intended to become effective if we hadsuccessfully completed our proposed acquisition of the outstanding shares ofcapital stock of ExpressJet.  During thecourse of those negotiations, Continental agreed it would pay us a break-up feeunder certain circumstances in the event our efforts to acquire ExpressJet werenot successful.  In June 2008,ExpressJet reached terms directly with Continental on a new capacity purchaseagreement, and accordingly, we were precluded from completing the acquisitionof ExpressJet.  As a result, we receivedthe break-up fee from Continental during the three months ended June 30,2008.  The break-up fee, net of ourdirect transaction costs, was $6.3 million (pre-tax) and was recorded as otherincome during the three months ended June 30, 2008.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $26.2 million, or $0.46 per diluted share, for thethree months ended June 30, 2009, compared to $36.4 million, or $0.63per diluted share, for the three months ended June 30, 2008.

 

**Six Months Ended June 30,2009 and 2008**

 

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

 
| ** **                                    | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Revenue passenger miles (000)                 |       | 8,324,451                                                           |       | 8,690,793 |   | (4.2 | ) |
| Available seat miles (“ASMs”) (000) |       | 10,717,585                                                          |       | 11,296,537 |   | (5.1 | ) |
| Block hours                                   |       | 667,911                                                             |       | 707,362 |   | (5.6 | ) |
| Departures                                    |       | 426,485                                                             |       | 443,686 |   | (3.9 | ) |
| Passengers carried                            |       | 16,518,573                                                          |       | 16,871,066 |   | (2.1 | ) |
| Passenger load factor                         |       | 77.7                                                                | %          | 76.9 | % | 0.8 | pts |
| Revenue per available seat mile               |       | 12.8                                                                | ¢     | 16.1 | ¢ | (20.5 | ) |
| Cost per available seat mile                  |       | 12.3                                                                | ¢     | 15.4 | ¢ | (20.1 | ) |
| Fuel cost per available seat mile             |       | 2.5                                                                 | ¢     | 5.8 | ¢ | (56.9 | ) |
| Average passenger trip length (miles)         |       | 504                                                                 |       | 515 |   | (2.1 | ) |

 

*Revenues.*  Operating revenues decreased$447.4 million, or 24.6%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008. 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 ASA Delta Connection Agreements, we arereimbursed for our engine overhaul expenses. We also record those engine overhaulreimbursements as operating revenue. The following table summarizes the amountof fuel and engine overhaul reimbursements included in our passenger revenuesfor the periods indicated (dollar amounts in thousands).

 
| ** **                                                            | ** ** | **For the six months ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Passenger revenues                                                    |       | $                                                                   | 1,356,023  |   | $ | 1,802,729 |   | $ | (446,706 | ) | (24.8 | )% |
| Less: Fuel reimbursement from major partners                          |       | 260,136                                                             |       | 639,994 |   | (379,858 | ) | (59.4 | )% |
| Less: Engine overhaul reimbursement from major  partners              |       | 55,785                                                              |       | 52,032 |   | 3,753 |   | 7.2 | % |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                   | 1,040,102  |   | $ | 1,110,703 |   | $ | (70,601 | ) | (6.4 | )% |

 

*Passenger revenues.*  Passenger revenues decreased$446.7 million, or 24.8%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008. The decrease in passengerrevenues was primarily due to a decrease in fuel reimbursements from our majorpartners. The fuel reimbursement from our major partners decreased$379.9 million or 59.4%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008. Our passenger revenues,excluding fuel and engine overhaul reimbursements from major partners,decreased $70.6 million, or 6.4%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008. The decrease inpassenger revenues, excluding fuel and engine overhaul reimbursements, was morethan the corresponding decrease in ASMs, primarily due to three factors. First,ASA experienced an 

 

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abnormallyhigh number of flight cancellations in part due to significant weather relatedcancellations in its Atlanta hub during the three months ended March 31,2009.  Additionally, on March 31,2009, as a result of an internal audit, ASA grounded 60 CRJ200s in order toperform engine safety inspections in accordance with the manufacturer’srecommendations. ASA cancelled approximately 750 flights more than normal as aresult of the severe weather and aircraft grounding during the first quarter of2009. As a result, ASA experienced a negative impact on passenger revenues ofapproximately $7.6 million. Second, Delta transitioned 23 stations from SkyWestAirlines and ASA to other ground handlers during the second quarter of 2009.Third, operatingefficiencies obtained by adding incremental aircraft under our contract flyingarrangements, were factored into our contractual rates and our passengerrevenues.

 

*Ground handling and other.*  Total ground handling and other revenuesdecreased $0.7 million, or 4.2%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008. Revenue earned underother ground handling contracts where we provide ground handling services forother airlines is presented in the “Ground handling and other” line in ourconsolidated statements of income. The decrease was primarily related to thelower volume of flights serviced under ground handling contracts with Unitedand Delta, whereby we perform ground handling services for several otherregional airlines.

 

Individual expense components are also expressed in the following tableon the basis of cents per ASM.

 
| ** **                                  | ** ** | **For the six months ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                                  | ** ** | **Amount**                                                          | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| Aircraft fuel                               |       | $                                                                   | 269,671    |   | $ | 658,855 |   | $ | (389,184 | ) | (59.1 | )% | 2.5 |   | 5.8 |   |
| Salaries, wages and benefits                |       | 350,734                                                             |       | 366,572 |   | (15,838 | ) | (4.3 | )% | 3.3 |   | 3.3 |   |
| Aircraft maintenance, materials and repairs |       | 208,549                                                             |       | 181,368 |   | 27,181 |   | 15.0 | % | 1.9 |   | 1.6 |   |
| Aircraft rentals                            |       | 148,740                                                             |       | 147,320 |   | 1,420 |   | 1.0 | % | 1.4 |   | 1.3 |   |
| Depreciation and amortization               |       | 109,260                                                             |       | 109,546 |   | (286 | ) | (0.3 | )% | 1.0 |   | 1.0 |   |
| Station rentals and landing fees            |       | 62,852                                                              |       | 68,226 |   | (5,374 | ) | (7.9 | )% | 0.6 |   | 0.6 |   |
| Ground handling services                    |       | 48,572                                                              |       | 58,887 |   | (10,315 | ) | (17.5 | )% | 0.5 |   | 0.5 |   |
| Other airline expense                       |       | 72,494                                                              |       | 86,895 |   | (14,401 | ) | (16.6 | )% | 0.7 |   | 0.8 |   |
| Total operating expenses                    |       | 1,270,872                                                           |       | 1,677,669 |   | (406,797 | ) | (24.2 | )% | 11.9 |   | 14.9 |   |
| Interest                                    |       | 44,069                                                              |       | 56,517 |   | (12,448 | ) | (22.0 | )% | 0.4 |   | 0.5 |   |
| Total airline expenses                      |       | $                                                                   | 1,314,941  |   | $ | 1,734,186 |   | (419,245 | ) | (24.2 | )% | 12.3 |   | 15.4 |   |
|                                             |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Fuel.*  Fuel costs decreased $389.2 million, or59.1%, during the six months ended June 30, 2009, compared to the sixmonths ended June 30, 2008. The average cost per gallon of fuel decreasedto $1.72 per gallon during the six months ended June 30, 2009 from $3.48during the six months ended June 30, 2008. In addition to the decrease inthe average cost per gallon during the six months ended June 30, 2009,United purchased fuel directly from a fuel vendor for our United Expressaircraft operated out of Chicago, San Francisco, Los Angeles and Denver,Midwest purchased all of its fuel directly from fuel vendors during the sixmonths ended June 30, 2009 and during the month of June 2009, Deltapurchased the majority of its fuel directly from fuel vendors, all of whichreduced our total fuel costs and related passenger revenue. During the sixmonths ended June 30, 2008, we purchased the fuel for all of our DeltaConnection flights. The following table summarizes the gallons of fuel wepurchased directly, and the percentage change in fuel price per gallon on ourfuel expense, for the periods indicated:

 

| ** **                                                             | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Fuel gallons purchased                                                 |       | 157,183                                                             |       | 189,256 |   | (16.9 | )% |
| Average price per gallon                                               |       | $                                                                   | 1.72       |   | $ | 3.48 |   | (50.6 | )% |
| Fuel expense                                                           |       | $                                                                   | 269,671    |   | $ | 658,855 |   | (59.1 | )% |

 

*Salaries Wages and Employee Benefits.*  Salaries, wages and employee benefitsdecreased $15.8 million, or 4.3%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008. The average numberof full-time equivalent employees decreased 12.4% to 13,008 for the six monthsended June 30, 2009, from 14,847 for the six months ended June 30,2008. The decrease in number of employees was significantly due to a reductionin our customer service employees resulting from United transitioning 16stations from SkyWest Airlines to other ground handlers during the secondquarter of 2008 and Delta transitioning 23 stations from SkyWest Airlines andASA to other ground handlers during the second quarter of 2009.

 

*Aircraft maintenance, materials and repairs.*  Maintenance costs increased$27.2 million, or 15.0%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008. The following tablesummarizes the amount of engine overhauls and engine overhaul reimbursementsincluded in our aircraft maintenance expense for the periods indicated (dollaramounts in thousands).

 

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| ** **                                                  | ** ** | **For the six months ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Aircraft maintenance, materials and repairs                 |       | $                                                                   | 208,549    |   | $ | 181,368 |   | $ | 27,181 |   | 15.0 | % |
| Less: Engine overhaul reimbursed from major  partners       |       | 55,785                                                              |       | 52,032 |   | 3,753 |   | 7.2 | % |
| Aircraft maintenance excluding reimbursed engine  overhauls |       | $                                                                   | 152,764    |   | $ | 129,336 |   | $ | 23,428 |   | 18.1 | % |

 

Aircraft maintenance expense excluding reimbursed engine overhauls,increased $23.4 million, or 18.1%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008.  The increase in maintenance excluding engineoverhaul costs was principally due to scheduled maintenance events on our agingCRJ200 and CRJ700 aircraft.

 

Under the United Express and Midwest Services Agreements, we recognizerevenue at a fixed hourly rate for mature engine maintenance on regional jetengines. We record the gross amount of that maintenance as revenue in ourconsolidated statements of income, and we recognize engine maintenance expenseon our CRJ200 engines on an as incurred basis as maintenance expense in ourconsolidated statements of income. As a result, during the six months ended June 30,2009, we collected and recorded $5.9 million (pretax) of revenue in excessof our maintenance expense under the United Express Agreement and the MidwestServices Agreement, compared to $17.5 million during the six months ended June 30,2008, which excess is intended to compensate us for the expense of futureengine maintenance overhauls. This decrease is primarily due to the timing ofour engine overhauls. Under our Delta Connection Agreements we were reimbursedfor engine overhaul costs by Delta. Such reimbursements are reflected as passengerrevenue in our consolidated statements of income.

 

*Aircraft rentals.*  Aircraft rentals increased $1.4 million, or1.0%, during the six months ended June 30, 2009, compared to the sixmonths ended June 30, 2008. The increase in aircraft rents was primarilydue to ASA taking delivery of ten CRJ900s during 2009.  These aircraft were financed throughlong-term leases. This increase was partially offset by ASA returning eightATR-72 turboprops to the lessor.

 

*Depreciation and amortization.*  Depreciation and amortization expensedecreased $286,000, or 0.3%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008.  The decrease was primarily due to the changein depreciable lives on ground equipment from a range of five to seven years toa range of five to ten years. For purposes of the foregoing calculations, theground equipment was deemed to maintain a residual value of zero percent.  The impact of this change decreased our pretax income for the six months ended June 30, 2009 by $2.1 million.  This decrease was partially offset by theincrease in depreciation due to the addition of four CRJ900s and three CRJ700sthat were financed using long-term debt.

 

*Station rentals and landing fees.*  Station rentals and landing fees expensedecreased $5.4 million, or 7.9%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008. The decrease instation rentals and landing fees expense was primarily due to our majorpartners paying for certain station rents and landing fees directly to theairport.

 

*Ground handling service.*  Ground handling service expense decreased$10.3 million, or 17.5%, during the six months ended June 30, 2009,compared to the six months ended June 30, 2008. The decrease in ground handlingwas due primarily to United transitioning 16 stations from SkyWest Airlines toother ground handlers during the second quarter of 2008 and Delta transitioning23 stations from SkyWest Airlines and ASA to other ground handlers during thesecond quarter of 2009.

 

*Other airline expenses.*  Other airline expenses, primarily consistingof property taxes, hull and liability insurance, crew simulator training andcrew hotel costs, decreased $14.4 million, or 16.6%, during the six monthsended June 30, 2009, compared to the three months ended June 30,2008. The decrease in other airline expenses was primarily due to the decreasein crew simulator training and crew hotel costs. These decreases were dueprimarily to fewer training events during the three months ended June 30,2009.

 

*Interest.*  Interest expense decreased$12.4 million, or 22.0%, during the six months ended June 30, 2009compared to the six months ended June 30, 2008. The decrease in interestexpense was substantially due to a decrease in interest rates. . At June 30,2009, we had variable rate notes representing 43.8% of our total long-term debt.. The majority of our variable rate notes are based on the three-month andsix-month LIBOR rates. At June 30, 2009, the three-month and six-monthLIBOR rates were 0.60% and 1.11%, respectively. At June 30, 2008, thethree-month and six-month LIBOR rates were 2.78% and 3.11%, respectively.

 

*Interest Income.* Interest income decreased $6.3 million,or 53.7% during the six months ended June 30, 2009, compared to the sixmonths ended June 30, 2008. The decrease in interest income wassubstantially due to a decrease in interest rates. At June 30, 2009, thethree-month and six-month LIBOR rates were 0.60% and 1.11%, respectively. At June 30,2008, the three-month and six-month LIBOR rates were 2.78% and 3.11%,respectively.

 

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*Total Airline Expenses.*  Total airline expenses (consisting of totaloperating and interest expenses) decreased $419.2 million, or 24.2%,during the six months ended June 30, 2009, compared to the six monthsended June 30, 2008. We are reimbursed for our actual fuel costs by ourmajor partners under our contract flying arrangements. We record the amount ofthose reimbursements as revenue. Under the SkyWest Airlines and ASA DeltaConnection Agreements, we are reimbursed for our engine overhaul expense, whichwe record as revenue. The following table summarizes the amount of fuel andengine overhaul expenses which are included in our total airline expenses forthe periods indicated (dollar amounts in thousands).

 
| ** **                                                 | ** ** | **For the six months ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                                            | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Total airline expense                                      |       | $                                                                   | 1,314,941  |   | $ | 1,734,186 |   | $ | (419,245 | ) | (24.2 | )% |
| Less: Fuel expense                                         |       | 269,671                                                             |       | 658,855 |   | (389,184 | ) | (59.1 | )% |
| Less: Engine overhaul reimbursement from major  partners   |       | 55,785                                                              |       | 52,032 |   | 3,753 |   | 7.2 | % |
| Total airline expense excluding fuel and engine  overhauls |       | $                                                                   | 989,485    |   | $ | 1,023,299 |   | $ | (33,814 | ) | (3.3 | )% |

 

Excluding fuel and engine overhaul costs, our total airline expensesdecreased $33.8 million, or 3.3%, during the six months ended June 30,2009, compared to the six months ended June 30, 2008. The percentage decreasein total airline expenses excluding fuel and engine overhauls, was less thanthe percentage decrease in ASMs, which was primarily due to increases innon-engine overhaul maintenance expenses attributable to the increasing age ofour fleet.

 

*Impairment of marketable securities.*  As a result of an ongoing valuation review ofour marketable securities portfolio, we recognized a pre-tax charge ofapproximately $7.1 million during the six months ended June 30, 2009 forcertain marketable securities deemed to have other-than-temporary impairment.

 

*Other Income.* During the three months ended June 30,2008, we negotiated the principal terms of a prospective capacity purchaseagreement with Continental, which was intended to become effective if we hadsuccessfully completed our proposed acquisition of the outstanding shares ofcapital stock of ExpressJet.  During thecourse of those negotiations, Continental agreed it would pay us a break-up feeunder certain circumstances in the event our efforts to acquire ExpressJet werenot successful.  In June 2008,ExpressJet reached terms directly with Continental on a new capacity purchaseagreement, and accordingly, we were precluded from completing the acquisitionof ExpressJet.  As a result, we receivedthe break-up fee from Continental in June 2008.  The break-up fee, net of our directtransaction costs, was $6.3 million (pre-tax) and was recorded as other incomeduring the six months ended June 30, 2008.

 

*Net Income.*  Primarily due to factors described above, netincome decreased to $35.6 million, or $0.62 per diluted share, for the sixmonths ended June 30, 2009, compared to $65.6 million, or $1.10 perdiluted share, for the six months ended June 30, 2008.

 

## **Liquidity and Capital Resources**

##  

We had working capital of $845.6 million and acurrent ratio of 3.0:1 at June 30, 2009, compared to working capital of$834.1 million and a current ratio of 3.2:1 at December 31, 2008. Theincrease in working capital was principally attributable to the $167.3 millionof cash provided by operating activities.

 

The principal sources of cash during the six monthsended June 30, 2009 were $167.3 million provided by operating activities,$80.1 million from the proceeds of long-term debt, $18.2 million of proceedsfrom the sale of equipment, $5.9 million of proceeds from the sale of commonstock in connection with the exercise of stock options under our stock optionand employee stock purchase plans and $4.3 million from returns on aircraftdeposits.  We invested $123.4 million inflight equipment, made principal payments on long-term debt of $74.8 million,completed net purchases of $24.6 million of marketable securities, purchased$19.6 million in other assets, repurchased $17.5 million of outstanding sharesof our common stock, paid $4.5 million in cash dividends, spent $3.2 millionfor buildings and ground equipment and incurred a tax deficiency of $1.0million from exercise of common stock options. These factors resulted in a $7.1 million increase in cash and cashequivalents during the six months ended June 30, 2009.

 

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

 

Our position in marketable securities, consistingprimarily of bonds, bond funds and commercial paper, increased to $588.0million at June 30, 2009, compared to $568.6 million at December 31,2008.  The increase in marketablesecurities was due primarily to cash provided by operating activities.

 

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At June 30, 2009, our total capital mix was43.6% equity and 56.4% long-term debt, compared to 43.1% equity and 56.9%long-term debt at December 31, 2008.

 

**Significant Commitments and Obligations**

 

*General*

 

The following tablesummarizes our commitments and obligations stated in calendar years except asnoted for each of the next five years and thereafter (in thousands):

 
| ** **                                                     | ** ** | **Total**  | ** ** | **July-Dec  2009** | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft commitments                                      |       | $          | 359,056    |               | $          | 261,045    |       | $          | 98,011     |       | $          | —     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease payments for aircraft and facility obligations |       | 3,034,886  |       | 143,703            |       | 329,211    |       | 319,957    |       | 320,708    |       | 313,120    |       | 1,608,187      |       |
| Interest commitments                                           |       | 623,758    |       | 42,519             |       | 80,849     |       | 75,134     |       | 68,583     |       | 61,375     |       | 295,298        |       |
| Principal maturities on long-term debt                         |       | 1,816,739  |       | 66,908             |       | 138,211    |       | 141,928    |       | 192,383    |       | 140,865    |       | 1,136,444      |       |
| Total commitments and obligations                              |       | $          | 5,834,439  |               | $          | 514,175    |       | $          | 646,282    |       | $          | 537,019    |       | $              | 581,674    |   | $ | 515,360 |   | $ | 3,039,929 |   |

 

*Purchase Commitments and Options*

 

On October 12, 2007, we announced SkyWest Airlines’ plans toacquire 22 additional regional jet aircraft through 2010, 18 of which SkyWestAirlines intends to operate under its United Express Agreement as part of anaircraft transition plan, allowing United to remove 23 30-seat Brasiliaturboprops from the contract reimbursement model contemplated by the UnitedExpress Agreement and add 66-seat regional jet aircraft for United Expressflying. Generally, we anticipate that the Brasilia turboprop removals under theUnited Express Agreement will occur in conjunction with deliveries of newregional jet aircraft in order to facilitate a smooth transition in existingmarkets. Additionally, SkyWest Airlines exchanged four CRJ200s for four CRJ900sin its Delta Connection operations. These four 50-seat CRJ200s were placed intoservice under other capacity purchase agreements. In November 2007,SkyWest Airlines placed a firm order with Bombardier for the 22 new aircraft.As of June 30, 2009, SkyWest Airlines had taken delivery of four CRJ900sand three CRJ700s pursuant to that order. SkyWest Airlines is scheduled to takedelivery of the remaining 15 aircraft during 2009 and the first quarter of2010.

 

On January 9, 2009, we announced that ASA reached an agreementwith Delta to operate ten additional CRJ900 regional jet aircraft. The aircraftwere previously ordered by Delta and are now being contracted for flying withASA. As of June 30, 2009, ASA had taken delivery of all ten CRJ900s. ASAintends to use the aircraft as replacements for 20 CRJ200s that are scheduledfor removal from contract service between April 2010 and August 2010,which is earlier than the existing scheduled termination dates contemplated bythe Delta Connection Agreement.

 

Total expenditures for these aircraft and related flight equipment,including amounts for contractual price escalations, are estimated to beapproximately $359.1 million through the first quarter of 2010.Additionally, SkyWest Airlines’ agreement with Bombardier includes options foranother 22 aircraft that can be delivered in either 70 or 90-seatconfigurations. Delivery dates for these aircraft remain subject to finaldetermination as we agree upon with our major partners.

 

We have not historically funded a substantial portion of our aircraftacquisitions with working capital. Rather, we have generally funded ouraircraft acquisitions through a combination of operating leases and long-termdebt financing. At the time of each aircraft acquisition, we evaluate thefinancing alternatives available to us, and select one or more of these methodsto fund the acquisition. In the event that alternative financing cannot bearranged at the time of delivery, Bombardier has typically financed ouraircraft acquisitions until more permanent arrangements can be made. Subsequentto this initial acquisition of an aircraft, we may also refinance the aircraftor convert one form of financing to another (e.g., replacing debtfinancing with leveraged lease financing).

 

At present, we intend to satisfy our 2009 firm aircraft purchasecommitment, as well as our acquisition of any additional aircraft, through acombination of operating leases and debt financing, consistent with ourhistorical practices. Based on current market conditions and discussions withprospective leasing organizations and financial institutions, we currentlybelieve that we will be able to obtain financing for our committedacquisitions, as well as additional aircraft, without materially reducing theamount of working capital available for our operating activities. Nonetheless,recent disruptions in the credit markets have resulted in greater 

 

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volatility,decreased liquidity and limited availability of capital, and there is noassurance that we will be able to obtain necessary funding or that, if we areable to obtain necessary capital, the corresponding terms will be favorable oracceptable to us.

 

*Aircraft Lease and Facility Obligations*

 

We also have significant long-term lease obligations primarily relatingto our aircraft fleet. At June 30, 2009, we had 288 aircraft under leasewith remaining terms ranging from one to 17 years. Future minimum leasepayments due under all long-term operating leases were approximately$3.0 billion at June 30, 2009. Assuming a 6.2% discount rate, whichis the average rate used to approximate the implicit rates within theapplicable aircraft leases, the present value of these lease obligations wouldhave been equal to approximately $2.1 billion at June 30, 2009.

 

*Long-term Debt Obligations*

 

Ourtotal long-term debt at June 30, 2009 was $1,816.7 million, of which$1,810.9 million related to the acquisition of Brasilia turboprop, CRJ200,CRJ700 and CRJ900 aircraft and $5.8 million related to our corporateoffice building. The average effective interest rate on the debt related to theBrasilia turboprop and CRJ aircraft was approximately 4.6% at June 30, 2009.

 

**Seasonality**

 

Our results of operations for any interim period arenot necessarily indicative of those for the entire period, since the airlineindustry is subject to seasonal fluctuations and general economicconditions.  Our operations are somewhatfavorably affected by increased travel on our pro-rate routes, historicallyoccurring during the summer months, and unfavorably affected by decreasedtravel during the months November through February and by inclementweather which occasionally results in cancelled flights during the wintermonths.

 

****ITEM 3:********                 ********QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK****

** **

Aircraft Fuel

 

In the past, we have not 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, 2009, essentially all of ourBrasilia turboprops flown for Delta were flown under pro-rate arrangementswhile, approximately 45% of our Brasilia turboprops flown in the United systemwere flown under pro-rate arrangements. During June 2009, we started tofly seven CRJ200s for United under a pro-rate agreement.  The average price per gallon of aircraft fueldecreased 53.7% to $1.80 for the three months ended June 30, 2009, from$3.89 for the three months ended June 30, 2008. For illustrative purposesonly, we have estimated the impact of the market risk of fuel on our pro-rateoperations using a hypothetical increase of 25% in the price per gallon wepurchase. Based on this hypothetical assumption, we would have incurred anadditional $1.5 million and $2.5 million in fuel expense for the threemonths and six months ended June 30, 2009, 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, 2009,we had variable rate notes representing 43.8% of our total long-term debtcompared to 46.6% of our total long-term debt at December 31, 2008.  For illustrative purposes only, we haveestimated the impact of market risk using a hypothetical increase in interestrates of one percentage point for both variable rate long-term debt and cashand securities.  Based on thishypothetical assumption, we would have incurred an additional $2.0 million ininterest expense and received $1.8 million additional interest income for thethree months ended June 30, 2009. Based on this same hypotheticalassumption, we would have incurred an additional $4.1 million in interestexpense and received $3.6 million additional interest income for the six monthsended June 30, 2009. However, under our contractual arrangement with ourmajor partners, the majority of the increase in interest expense would bepassed through and recorded as passenger revenue in the consolidated statementof income.

 

We currently intend to finance the acquisition ofaircraft through manufacturer financing, third-party leases or long-termborrowings. Changes in interest rates may impact the actual cost to us toacquire these aircraft. To the extent we place these aircraft in service underour code-share agreements with Delta and United, our code-share agreementscurrently provide that reimbursement rates 

 

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willbe adjusted higher or lower to reflect changes in our aircraft rental rates.

 

**ITEM 4.**                    CONTROLS AND PROCEDURES

** **

a) Evaluation of disclosure controls and procedures

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures pursuantto Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of June 30, 2009.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. In addition, the design of disclosure controls and proceduresmust reflect the fact that there are resource constraints and that managementis required to apply its judgment in evaluating the benefits of possiblecontrols and procedures relative to their costs.

 

Based on that evaluation, our chief executive officerand chief financial officer concluded that our disclosure controls andprocedures are designed at a reasonable assurance level and are effective toprovide reasonable assurance that information we are required to disclose inreports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms, and that such information isaccumulated and communicated to our management, including our chief executiveofficer and chief financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

b) Changes in InternalControl over Financial Reporting

 

There were no significant changes (includingcorrective actions with regard to material weaknesses) in our internal controlover financial reporting that occurred during the period covered by this Reportthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**PART II. OTHER INFORMATION**

** **

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

** **

We are subject to certain legal actions which we consider routine toour business activities. As of June 30, 2009, our management believed,after consultation with legal counsel, that the ultimate outcome of such legalmatters is not likely to have a material adverse effect on our financialposition, liquidity or results of operations. However, the following is asignificant outstanding legal matter.

 

*ASA and SkyWest Airlines v. Delta Air Lines*

 

During the quarter ended December 31, 2007, Delta notifiedSkyWest, SkyWest Airlines and ASA of a dispute under the Delta ConnectionAgreements executed by Delta with SkyWest Airlines and ASA. The dispute relatesto allocation of liability for certain irregular operations (“IROP”) expensesthat are paid by SkyWest Airlines and ASA to their passengers under certainsituations. As a result, Delta withheld a combined total of approximately$25 million (pretax) from one of the weekly scheduled wire payments toSkyWest and ASA during December 2007. Delta continues to withhold aportion of the funds we believe are payable as weekly scheduled wire paymentsto SkyWest and ASA. As of June 30, 2009, we had recognized a cumulativetotal of $32.4 million of revenue associated with funds withheld by Delta.On February 1, 2008, SkyWest Airlines and ASA filed a lawsuit in Georgiastate court disputing Delta’s treatment of the matter (the “Complaint”). Deltafiled an Answer to the Complaint and a Counterclaim against SkyWest Airlinesand ASA on March 24, 2008. Delta’s Counterclaim alleges that ASA andSkyWest Airlines breached the Delta Connection Agreements by invoicing Deltafor the IROP expenses that were paid pursuant to Delta’s policies, and claimsonly a portion of those expenses may be invoiced to Delta. Delta seeksunspecified damages in its Counterclaim.

 

On March 24, 2008, Delta also filed a Motion to Dismiss theComplaint. A hearing on the Motion was held June 5, 2008. In an orderentered June 13, 2008, the Court granted in part and denied in part theMotion to Dismiss. The Court denied the Motion to Dismiss with respect to thebreach of contract claim contained in the Complaint. The Court denied in partthe 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 Connection Agreements. The Court granted theMotion to Dismiss with respect to claims for estoppel, unilateral mistake, andmutual mistake contained in the Complaint. SkyWest Airlines and ASA continue tovigorously pursue their claims set forth in the Complaint, to the extentpermitted by the Court’s ruling on the Motion to Dismiss, and their defenses toDelta’s counterclaims.

 

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Wehave evaluated the Delta dispute in accordance with the provisions of Statementof Financial Accounting Standard (“SFAS No.5”), Accounting for Contingencies.Based on the provisions of SFAS No. 5, an estimated loss is accrued if theloss is probable and reasonably estimable. Because these conditions have notbeen satisfied, we have not recorded a loss in our condensed consolidatedfinancial statements as of June 30, 2009.

 

**ITEM 1A.  RISKFACTORS**

** **

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

 

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE 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, 2009:

 
| **Period**                                   | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of a  Publicly Announced  Program(1)** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Program** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| April 1 – April 30, 2009 |       | —                                               |       | $                                                | —     |                                                                                                                       | —     |                                                                                                                | 3,333,336  |   |
| May 1 – May 31, 2009     |       | 160,080                                              |       | 11.34                                            |       | 160,080                                                                                                                    |       | 3,173,256                                                                                                           |       |
| June 1 – June 30, 2009   |       | 303,300                                              |       | 10.05                                            |       | 303,300                                                                                                                    |       | 2,869,956                                                                                                           |       |
| Total                                        |       | 463,380                                              |       | $                                                | 10.50      |                                                                                                                       | 463,380    |                                                                                                                | 2,869,956  |   |

 

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(1)        Under resolutions adopted inFebruary 2007, November 2007 and May 2008, our Board ofDirectors authorized the repurchase of up to 15,000,000 shares of our commonstock. Purchases are made at management’s discretion based on market conditionsand our financial resources.  In addition, effective March 13,2009, we entered into the SkyWest, Inc.Stock Repurchase Plan (the “Stock Repurchase Plan”).  The StockRepurchase Plan provides for the repurchase of up to 3,400,000 shares of ourcommon stock (which are included within, and are not in addition to, the15,000,000 shares of common stock described above) by an independent thirdparty pursuant to trading parameters contemplated by the Stock RepurchasePlan.  As of June 30, 2009, we had spent approximately$246.1 million to purchase and retire approximately 12,130,044 sharesof the 15,000,000 shares of common stock designated for repurchase by ourBoard of Directors. The authorization of our Board of Directors does nothave an expiration date.  The Stock Repurchase Plan expires on March 13,2011.

 

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

** **

On May 5, 2009, weheld our 2009 Annual Meeting of Shareholders at which our shareholdersconsidered and voted on the items described below:

 

(a)             The shareholders considered whether toelect the following persons as directors, each to serve until the next annualmeeting of shareholders and until his or her respective successor shall havebeen duly elected and shall qualify:

 
| **Name of Nominee** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------|------------|--------------------|------------|-------------------------|------------|
| W. Steve Albrecht             |       | 47,710,851         |       | 1,615,133               |       |
| Jerry C. Atkin                |       | 47,834,611         |       | 1,491,103               |       |
| J. Ralph Atkin                |       | 18,440,846         |       | 30,884,868              |       |
| Margeret S. Billson           |       | 48,713,820         |       | 611,894                 |       |
| Ian M. Cumming                |       | 25,435,818         |       | 23,889,896              |       |
| Henry J. Eyring               |       | 48,708,845         |       | 616,869                 |       |
| Steven F. Udvar-Hazy          |       | 47,649,409         |       | 1,676,305               |       |
| Robert G. Sarver              |       | 48,400,718         |       | 924,996                 |       |
| James Welch                   |       | 48,399,237         |       | 926,477                 |       |

 

(b)         The shareholders also considered aproposal to ratify the appointment of Ernst & Young, LLP as ourindependent public accountants for the fiscal year ending December 31, 2008.  There were 48,975,442 votes cast in favor ofthe proposal, 322,421 votes cast against the proposal and 27,851 voteswithheld.

 

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(c)          The shareholders also considered aproposal to approve the adoption of the SkyWest, Inc. 2009 Employee StockPurchase Plan. There were 43,647,150 votes cast in favor of the proposal,1,032,107 votes cast against the proposal and 20,715 votes withheld.

 

**ITEM 6:**                  EXHIBITS

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

 

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**SIGNATURES**

 

Pursuant to 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 30,2009, to be signed on its behalf by the undersigned, thereunto duly authorized,on August 7, 2009.

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

 

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