Tableof Contents

 

 

 

**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 quarterlyperiod ended September 30, 2008**

** **

**OR**

** **
| **o** | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

** **

**For the transitionperiodfrom                    to                    **

 

**Commission filenumber 0-14719**

 

**SKYWEST, INC.**

 

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

 

**444 South River Road**

**St. George, Utah 84790**

**(435) 634-3000**

** **

Indicate by a check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes        x        No        o

 

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

 

| 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 a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes     o     No     x

 

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

 

| **Class**                   | ** ** | **Outstanding at November 3, 2008** |
|-----------------------------|------------|---------------------------------------------------------|
| Common  stock, no par value |       | 57,031,896                                              |

 

 

 

----

Tableof Contents

 

**SKYWEST, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**TABLE OF CONTENTS**

 

| PART I  | FINANCIAL INFORMATION: |                                                                                                                           | 3      |
|--------------|------------------------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|         | Item 1.                | Consolidated Balance Sheets as of  September 30, 2008 (unaudited) and December 31, 2007                              |   | 3 |
|         |                   | Condensed Consolidated  Statements of Income (unaudited) for the three and nine months ended September 30,  2008 and 2007 |   | 5 |
|         |                   | Condensed Consolidated Statements  of Cash Flows (unaudited) for the nine months ended September 30, 2008  and 2007       |   | 6 |
|         |                   | Notes to Condensed Consolidated Financial Statements                                                                           |   | 7 |
|         | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    |   | 14 |
|         | Item 3.                | Quantitative  and Qualitative Disclosures About Market Risk                                                                    |   | 26 |
|         | Item 4.                | Controls and  Procedures                                                                                                       |   | 27 |
|         |                   |                                                                                                                           |   |   |
| PART II | OTHER INFORMATION:     |                                                                                                                           | 27     |
|         | Item 1.                | Legal Proceedings                                                                                                              |   | 27 |
|         | Item 1A.               | Risk Factors                                                                                                                   |   | 28 |
|         | Item 6.                | Exhibits                                                                                                                       |   | 29 |
|         |                   | Signature                                                                                                                      |   | 30 |

 

2

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

** **

**SKYWEST, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in Thousands)**

 
| ** **                                      | ** ** | **September 30,   2008** | ** ** | **December 31,   2007** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**                    | ** ** | ** **                        | ** ** |
|                                            |       |                               |       |                              |       |
| **ASSETS**                                      |       |                               |       |                              |       |
|                                            |       |                               |       |                              |       |
| CURRENT ASSETS:                                 |       |                               |       |                              |       |
| Cash and cash equivalents                       |       | $                                  | 152,194    |                              | $          | 122,802 |   |
| Marketable securities                           |       | 566,688                            |       | 522,925                           |       |
| Restricted cash                                 |       | 10,718                             |       | 14,705                            |       |
| Income tax receivable                           |       | 9,220                              |       | 23,114                            |       |
| Receivables, net                                |       | 74,334                             |       | 81,216                            |       |
| Inventories                                     |       | 108,087                            |       | 105,738                           |       |
| Prepaid aircraft rents                          |       | 207,241                            |       | 223,891                           |       |
| Deferred tax assets                             |       | 73,999                             |       | 70,523                            |       |
| Other current assets                            |       | 54,590                             |       | 45,225                            |       |
| Total current assets                            |       | 1,257,071                          |       | 1,210,139                         |       |
|                                            |       |                               |       |                              |       |
| PROPERTY AND EQUIPMENT:                         |       |                               |       |                              |       |
| Aircraft and rotable spares                     |       | 3,219,175                          |       | 3,146,602                         |       |
| Deposits on aircraft                            |       | 23,622                             |       | 23,848                            |       |
| Buildings and ground equipment                  |       | 241,340                            |       | 215,466                           |       |
|                                            |       | 3,484,137                          |       | 3,385,916                         |       |
| Less-accumulated depreciation and  amortization |       | (821,015                           | )          | (685,327                          | )          |
| Total property and equipment, net               |       | 2,663,122                          |       | 2,700,589                         |       |
|                                            |       |                               |       |                              |       |
| OTHER ASSETS:                                   |       |                               |       |                              |       |
| Intangible assets, net                          |       | 26,809                             |       | 28,498                            |       |
| Other assets                                    |       | 55,769                             |       | 51,299                            |       |
| Total other assets                              |       | 82,578                             |       | 79,797                            |       |
| Total assets                                    |       | $                                  | 4,002,771  |                              | $          | 3,990,525 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

----

Table of Contents

 

**SKYWEST, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Dollars inThousands)**

** **
| ** **                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                                                              |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                    |       |                   |       |                  |       |
|                                                                                                              |       |                   |       |                  |       |
| CURRENT LIABILITIES:                                                                                              |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                              |       | $                      | 125,012    |                  | $          | 118,202 |   |
| Accounts payable                                                                                                  |       | 154,297                |       | 133,728               |       |
| Accrued salaries, wages and benefits                                                                              |       | 64,507                 |       | 67,242                |       |
| Accrued aircraft rents                                                                                            |       | 14,565                 |       | 26,516                |       |
| Taxes other than income taxes                                                                                     |       | 24,465                 |       | 12,433                |       |
| Other current liabilities                                                                                         |       | 41,231                 |       | 40,098                |       |
| Total current liabilities                                                                                         |       | 424,077                |       | 398,219               |       |
|                                                                                                              |       |                   |       |                  |       |
| OTHER LONG-TERM LIABILITIES                                                                                       |       | 41,689                 |       | 40,355                |       |
|                                                                                                              |       |                   |       |                  |       |
| LONG-TERM DEBT, net of current maturities                                                                         |       | 1,661,397              |       | 1,732,748             |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED INCOME TAXES PAYABLE                                                                                     |       | 488,450                |       | 445,993               |       |
|                                                                                                              |       |                   |       |                  |       |
| DEFERRED AIRCRAFT CREDITS                                                                                         |       | 122,518                |       | 127,203               |       |
|                                                                                                              |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                        |       |                   |       |                  |       |
| Preferred stock, 5,000,000 shares  authorized; none issued                                                        |       | —                 |       | —                |       |
| Common stock, no par value, 120,000,000  shares authorized; 72,779,301 and 72,272,671 shares issued, respectively |       | 557,752                |       | 533,545               |       |
| Retained earnings                                                                                                 |       | 958,008                |       | 871,874               |       |
| Treasury stock, at cost, 16,294,506 and  11,794,056 shares, respectively                                          |       | (249,349               | )          | (158,542              | )          |
| Accumulated other comprehensive loss                                                                              |       | (1,771                 | )          | (870                  | )          |
| Total stockholders’ equity                                                                                   |       | 1,264,640              |       | 1,246,007             |       |
| Total liabilities and stockholders’ equity                                                                   |       | $                      | 4,002,771  |                  | $          | 3,990,525 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

----

Table of Contents

 

**SKYWEST, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(Dollars and Shares in Thousands, Except perShare Amounts)

(Unaudited)

 
| ** **                      | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating revenues:             |       |                                                       |       |                                                      |       |   |   |   |   |
| Passenger                       |       | $                                                          | 926,193    |                                                      | $          | 867,076 |   | $ | 2,728,922 |   | $ | 2,493,999 |   |
| Ground handling and other       |       | 7,919                                                      |       | 8,525                                                     |       | 24,032 |   | 25,618 |   |
|                            |       | 934,112                                                    |       | 875,601                                                   |       | 2,752,954 |   | 2,519,617 |   |
| Operating expenses:             |       |                                                       |       |                                                      |       |   |   |   |   |
| Flying operations               |       | 564,065                                                    |       | 487,551                                                   |       | 1,625,830 |   | 1,368,512 |   |
| Customer service                |       | 88,137                                                     |       | 103,032                                                   |       | 279,829 |   | 328,258 |   |
| Maintenance                     |       | 126,795                                                    |       | 101,196                                                   |       | 362,291 |   | 292,148 |   |
| Depreciation and amortization   |       | 55,141                                                     |       | 53,169                                                    |       | 164,687 |   | 155,622 |   |
| General and administrative      |       | 39,715                                                     |       | 38,184                                                    |       | 118,884 |   | 114,177 |   |
|                            |       | 873,853                                                    |       | 783,132                                                   |       | 2,551,521 |   | 2,258,717 |   |
| Operating income                |       | 60,259                                                     |       | 92,469                                                    |       | 201,433 |   | 260,900 |   |
| Other income (expense):         |       |                                                       |       |                                                      |       |   |   |   |   |
| Interest income                 |       | 4,627                                                      |       | 8,674                                                     |       | 16,398 |   | 23,915 |   |
| Interest expense                |       | (23,872                                                    | )          | (32,831                                                   | )          | (80,389 | ) | (95,134 | ) |
| Other                           |       | —                                                     |       | —                                                    |       | 6,308 |   | 467 |   |
|                            |       | (19,245                                                    | )          | (24,157                                                   | )          | (57,683 | ) | (70,752 | ) |
| Income before income taxes      |       | 41,014                                                     |       | 68,312                                                    |       | 143,750 |   | 190,148 |   |
| Provision for income taxes      |       | 14,858                                                     |       | 25,385                                                    |       | 52,019 |   | 71,810 |   |
| Net income                      |       | $                                                          | 26,156     |                                                      | $          | 42,927 |   | $ | 91,731 |   | $ | 118,338 |   |
|                            |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic earnings per share        |       | $                                                          | 0.46       |                                                      | $          | 0.69 |   | $ | 1.58 |   | $ | 1.87 |   |
| Diluted earnings per share      |       | $                                                          | 0.45       |                                                      | $          | 0.68 |   | $ | 1.55 |   | $ | 1.83 |   |
| Weighted average common shares: |       |                                                       |       |                                                      |       |   |   |   |   |
| Basic                           |       | 57,027                                                     |       | 61,942                                                    |       | 58,139 |   | 63,344 |   |
| Diluted                         |       | 57,682                                                     |       | 62,888                                                    |       | 59,014 |   | 64,657 |   |
|                            |       |                                                       |       |                                                      |       |   |   |   |   |
| Dividends declared per share    |       | $                                                          | 0.03       |                                                      | $          | 0.03 |   | $ | 0.09 |   | $ | 0.09 |   |

 

See accompanying notesto condensed consolidated financial statements.

 

5

----

Table of Contents

 

**SKYWEST, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(In Thousands)

 
| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                    |       |                                                    |       |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES               |       | $                                                       | 348,829    |   | $ | 366,134 |   |
|                                                    |       |                                                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                   |       |                                                    |       |   |   |
| Purchases of marketable securities                      |       | (1,023,604                                              | )          | (820,339 | ) |
| Sales of marketable securities                          |       | 976,340                                                 |       | 497,076 |   |
| Disposition (Acquisition) of property and  equipment:   |       |                                                    |       |   |   |
| Aircraft and rotable spare parts                        |       | (86,650                                                 | )          | (281,366 | ) |
| Deposits on aircraft                                    |       | —                                                  |       | (8,704 | ) |
| Buildings and ground equipment                          |       | (39,394                                                 | )          | (31,323 | ) |
| Proceeds from sales of property and  equipment          |       | 2,549                                                   |       | 11,290 |   |
| Increase in other assets                                |       | (2,978                                                  | )          | (7,751 | ) |
|                                                    |       |                                                    |       |   |   |
| NET CASH USED IN INVESTING ACTIVITIES                   |       | (173,737                                                | )          | (641,117 | ) |
| ** **                                              | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| CASH FLOWS FROM FINANCING ACTIVITIES:                   | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Tax benefit from exercise of common stock  options      |       | 161                                                     |       | 140 |   |
| Proceeds from issuance of long-term debt                |       | 17,680                                                  |       | 177,792 |   |
| Return of deposits on aircraft and rotable  spare parts |       | 226                                                     |       | 11,697 |   |
| Principal payments on long-term debt                    |       | (82,221                                                 | )          | (76,561 | ) |
| Purchase of treasury stock                              |       | (90,807                                                 | )          | (103,850 | ) |
| Net proceeds from issuance of common stock              |       | 14,844                                                  |       | 26,354 |   |
| Payment of cash dividends                               |       | (5,583                                                  | )          | (5,893 | ) |
|                                                    |       |                                                    |       |   |   |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES    |       | (145,700                                                | )          | 29,679 |   |
|                                                    |       |                                                    |       |   |   |
| Increase (decrease) in cash and cash  equivalents       |       | 29,392                                                  |       | (245,304 | ) |
| Cash and cash equivalents at beginning of  period       |       | 122,802                                                 |       | 415,454 |   |
|                                                    |       |                                                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD              |       | $                                                       | 152,194    |   | $ | 170,150 |   |
|                                                    |       |                                                    |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:      |       |                                                    |       |   |   |
|                                                    |       |                                                    |       |   |   |
| Cash paid during the year for:                          |       |                                                    |       |   |   |
| Interest, net of capitalized amounts                    |       | $                                                       | 80,971     |   | $ | 84,224 |   |
| Income taxes                                            |       | $                                                       | 23,759     |   | $ | 712 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

6

----

Table of Contents

 

**SKYWEST,INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

Note A —Condensed Consolidated Financial Statements

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest”or the “Company”) and its wholly-owned subsidiaries, SkyWest Airlines, Inc.(“SkyWest Airlines”) and Atlantic Southeast Airlines, Inc. (“ASA”)included herein have been prepared, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information anddisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations,although SkyWest believes that the following disclosures are adequate to makethe information presented not misleading. These condensed consolidatedfinancial statements reflect all adjustments that, in the opinion ofmanagement, are necessary to present fairly the results of operations for theinterim periods presented. All adjustments are of a normal recurring nature,unless otherwise disclosed. The Company suggests that these condensed consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007. The results of operations for the three and nine month periods ended September 30,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results will differ and maydiffer materially from those estimates and assumptions.

 

Note B —Passenger and Ground Handling Revenue

 

The Company recognizespassenger and ground handling revenues when the service is provided.  Under the Company’s contract and pro-rateflying agreements with Delta Air Lines, Inc. (“Delta”), United Air Lines, Inc.(“United”) and Midwest Airlines, Inc. (“Midwest”), revenue is consideredearned when the flight is completed. Revenue is recognized under the Company’s pro-rate flying agreementsbased upon the portion of the pro-rate passenger fare the Company anticipatesthat it will receive. SkyWest Airlines and ASA have each entered into a DeltaConnection Agreement with Delta, pursuant to which SkyWest Airlines and ASAprovide contract flight services for Delta. Among other provisions, those Delta Connection Agreements provide that,upon the third anniversary of the execution of the agreements (September 8,2008), the contractual rates under those agreements shall not exceed theaverage rate of all carriers within the Delta Connection Program. As of September 30,2008 SkyWest Airlines and ASA had not finalized the contractual rates withDelta. In the event that the contractual rates have not been finalized atquarterly or annual financial statement dates, the Company records revenuesbased on a prior period’s approved rates adjusted for the current contractnegotiations.

 

In the event the Companyhas a reimbursement dispute with a major partner, the Company evaluates thedispute under its established revenue recognition criteria and, provided therevenue recognition criteria have been met, the Company recognizes revenuebased on management’s estimate of the resolution of the dispute. During thequarter ended December 31, 2007, Delta notified the Company, SkyWestAirlines and ASA of a dispute under the Delta Connection Agreements executed byDelta with SkyWest Airlines and ASA. The dispute relates to allocation ofliability for certain irregular operations (“IROP”) expenses that are paid bySkyWest Airlines and ASA to their passengers under certain situations. As aresult, Delta withheld a combined total of approximately $25 million(pretax) from one of the weekly scheduled wire payments to SkyWest and ASAduring December 2007. Delta continues to withhold a portion of thefunds the Company believes are payable as weekly scheduled wire payments toSkyWest and ASA (See Note J for additional details).

 

The Delta Connection Agreements executed bySkyWest Airlines and ASA provide for fifteen-year terms, subject to earlytermination by Delta, SkyWest Airlines or ASA, as applicable, upon theoccurrence of certain events. Delta’s termination rights include (i) cross-terminationrights between the two Delta Connection Agreements, (ii) the right toterminate each of the Delta Connection Agreements upon the occurrence ofcertain force majeure events, including certain labor-related events, thatprevent SkyWest Airlines or ASA from performance for certain periods, and (iii) theright to terminate each of the Delta Connection Agreements if SkyWest Airlinesor ASA fails to maintain competitive base rate costs, subject to certainadjustment rights. In addition to the termination rights, Delta has the rightto extend 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 

 

7

----

Table of Contents

 

Delta, including the failure to cure payment defaults. SkyWest Airlinesand ASA also have cross-termination rights between the two Delta ConnectionAgreements.

 

Under the terms of the SkyWest Airlines DeltaConnection Agreement, Delta has agreed to compensate SkyWest Airlines for thedirect costs associated with operating the Delta Connection flights, plus apayment based on block hours flown. The SkyWest Airlines Delta ConnectionAgreement establishes a multi-year rate reset provision. In the SkyWestAirlines Delta Connection Agreement, the fixed-fee rates are specificallydefined through 2009.  The parties agreedthat on or after a specified date in 2010 the parties agree to reset such ratesto reflect SkyWest Airlines actual costs in 2010 (with a similar process oneach 5th year thereafter).  Under the terms of the ASA Delta ConnectionAgreement, Delta has agreed to compensate ASA for its direct costs associatedwith operating the Delta Connection flights, plus, if ASA completes a certainminimum percentage of its Delta Connection flights, an additional percentage ofsuch costs. Additionally, ASA’s Delta Connection Agreement provides for thepayment of incentive compensation upon satisfaction of certain performancegoals. The incentives are defined in the ASA Delta Connection Agreement asbeing measured and determined on a monthly and quarterly basis.  At the end of each quarter, the Companycalculates the incentives achieved during the quarter and recognizes revenueaccordingly.   Under the ASA DeltaConnection Agreement, excess margins over certain percentages must be returnedor shared with Delta, depending on various conditions. The parties to the DeltaConnection Agreements make customary representations, warranties and covenants,including with respect to various operational, marketing and administrativematters.

 

Effective July 31, 2003, SkyWestAirlines entered into a United Express Agreement, which sets forth theprincipal terms and conditions governing SkyWest Airlines’ United Expressoperations. Under the terms of the United Express Agreement, SkyWest Airlinesis compensated primarily on a fee-per-completed-block hour and departure basisand is reimbursed for fuel and other costs. Additionally, SkyWest Airlines iseligible for incentive compensation upon the achievement of certain performancecriteria.  The incentives are defined inthe United Express Agreement as being measured and determined on a monthlybasis.  At the end of each month, theCompany calculates the incentives achieved during the month and recognizesrevenue accordingly.

 

SkyWest Airlines and Midwest are parties toan Airlines Services Agreement entered into on December 20, 2006 (the “MidwestServices Agreement”). Under the terms of the Midwest Services Agreement,SkyWest Airlines has agreed to operate up to 25 Bombardier CRJ200 Regional Jets(“CRJ200s”) under Midwest’s code. In exchange for SkyWest Airlines’ obligationto provide the designated number of flights and performing other obligationsunder the Midwest Services Agreement, Midwest has agreed to pay SkyWestAirlines on a weekly basis a fixed-fee per completed block hour, fixed-fee percompleted departure, a fixed-fee for overhead, and a reimbursement of certaindirect costs when a new aircraft is delivered. The Midwest Services Agreementprovides for incentives or penalties based upon SkyWest Airlines’ performance,including on-time arrival performance and completion percentage rates.Additionally, Midwest has agreed to reimburse certain of SkyWest Airlines’operating costs, including costs related to fuel, landing fees, andcatering.  In June 2008, the Companywas notified that Midwest was in the process of organizing a financialrestructuring.  The Company reachedagreement with Midwest during the quarter to reduce the number of aircraftoperating under the Midwest Services Agreement from 21 aircraft to 12 aircraft.As part of the modified terms, the Company agreed to defer a portion of Midwest’sweekly payment obligations from July 1, 2008 through November 30,2008.  The amount the Company agreed todefer plus certain amounts Midwest owed to the Company at June 30, 2008,will be payable plus interest by Midwest in four equal quarterly paymentsstarting on August 31, 2009.  Thetotal amount the Company has agreed to defer through November 30, 2008 is$8.9 million. Because of the unique modified payment terms associated with thedeferred amounts, the Company did not recognize the revenue associated with thedeferred payments in the Company’s unaudited condensed consolidated statementsof income for the three and nine months ended September 30, 2008.   The Company did not recognize $4.6 millionand $7.7 million of deferred payments for the three and nine months ended September 30,2008, respectively.

 

The Company’s passenger and ground handlingrevenues could be impacted by a number of factors, including changes to theCompany’s code-share agreements with Delta, United or Midwest, contractmodifications resulting from contract re-negotiations, the Company’s ability toearn incentive payments contemplated under the Company’s code-share agreementsand Midwest’s proposed financial restructuring and reimbursement disputes withour major partners.

 

#### Note C — StockCompensation

####  

The fair value of stock options granted bythe Company has been estimated as of the grant date using the Black-Scholesoption pricing model. The Company accounts for share-based compensation inaccordance with Statement of Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment*(“SFAS No. 123(R)”).  During the nine month period ended September 30,2008, the Company granted options to purchase 356,413 shares of common stockunder the SkyWest, Inc. Long-Term Incentive Plan (“2006 Incentive Plan”).  The Company did not grant any options topurchase shares of common 

 

8

----

Table of Contents

 

stock during the three months ended September 30, 2008. Thefollowing table shows the assumptions used and weighted average fair value forstock option grants during the nine months ended September 30, 2008.

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

 

During the nine-month period ended September 30,2008, the Company granted 295,919 shares of restricted stock to the Company’semployees under the 2006 Incentive Plan. The Company did not grant any shares of restricted stock during thethree months ended September 30, 2008. The shares of restricted stockgranted under the 2006 Incentive Plan have three-year vesting periods, duringwhich the recipients must remain employed with SkyWest or one of SkyWest’ssubsidiaries.  Additionally, during thenine months ended September 30, 2008, the Company granted 13,304fully-vested shares of common stock to the Company’s directors under the 2006Incentive Plan.  The weighted averagefair value of the shares of restricted stock issued to the Company’s directorson the date of grant was $25.74 per share.

 

As required by SFAS No. 123(R), theCompany records share-based compensation expense only for those options andshares of restricted stock that are expected to vest.  The Company amortizes the estimated fairvalue of the stock options over the vesting period of the respective stockoption grants.  During the three monthsended September 30, 2008 and 2007, the Company recorded pre-taxshare-based compensation expense of $2.9 million and $2.9 million,respectively.  During the nine monthsended September 30, 2008 and 2007, the Company recorded pre-taxshare-based compensation expense of $8.9 million and $10.5 million,respectively.

 

Note D — Net Income Per Common Share

 

Basic net income per common share (“Basic EPS”) excludes dilution andis computed by dividing net income by the weighted average number of commonshares outstanding during the period. Diluted net income per common share (“DilutedEPS”) reflects the potential dilution that could occur if stock options orother contracts to issue common stock were exercised or converted into commonstock. The computation of Diluted EPS does not assume exercise or conversion ofsecurities that would have an anti-dilutive effect on net income per commonshare. During the three months ended September 30, 2008 and 2007 optionsto acquire 4,211,000 and 1,390,000 shares, respectively, were excluded from thecomputation of Diluted EPS as their impact was anti-dilutive.  During the nine months ended September 30,2008 and 2007 options to acquire 3,503,000 and 591,000 shares, respectively,were excluded from the computation of Diluted EPS as their impact wasanti-dilutive.

 

The calculation of the weighted average number of common sharesoutstanding for Basic EPS and Diluted EPS for the periods indicated (inthousands, except per share data) is as follows:

 
| ** **                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                         | ** ** |
| **Numerator**                                                              |       |                                                     |       |                                                    |       |   |   |   |   |
| Net Income                                                                 |       | $                                                        | 26,156     |                                                    | $          | 42,927 |   | $ | 91,731 |   | $ | 118,338 |   |
|                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| **Denominator**                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding                      |       | 57,027                                                   |       | 61,942                                                  |       | 58,139 |   | 63,344 |   |
| Effect of outstanding stock compensation                                   |       | 655                                                      |       | 946                                                     |       | 875 |   | 1,313 |   |
| Weighted average number of shares for diluted  net income per common share |       | 57,682                                                   |       | 62,888                                                  |       | 59,014 |   | 64,657 |   |
|                                                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic earnings per share                                                   |       | $                                                        | 0.46       |                                                    | $          | 0.69 |   | $ | 1.58 |   | $ | 1.87 |   |
| Diluted earnings per share                                                 |       | $                                                        | 0.45       |                                                    | $          | 0.68 |   | $ | 1.55 |   | $ | 1.83 |   |

 

Note E —Comprehensive Income

 

The Company reports comprehensive income in accordance with SFAS No. 130,*Reporting**ComprehensiveIncome* (“SFAS 130”). SFAS 130 establishes standards forreporting and displaying comprehensive income and its components in the 

 

9

----

Table of Contents

 

Company’sfinancial statements. Comprehensive income includes charges and credits tostockholders’ equity that are not the result of transactions withshareholders.  Also, comprehensive incomeconsisted of net income plus changes in unrealized appreciation (depreciation)on marketable securities, net of tax, for the periods indicated (in thousands):

 
| ** **                                                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                         | ** ** |
| ** **                                                                  | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Income**                                                              |       | $                                                        | 26,156     |                                                    | $          | 42,927 |   | $ | 91,731 |   | $ | 118,338 |   |
| Unrealized appreciation (depreciation) on marketable securities, net of tax |       | (765                                                     | )          | 457                                                     |       | (901 | ) | 174 |   |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Comprehensive income**                                                    |       | $                                                        | 25,391     |                                                    | $          | 43,384 |   | $ | 90,830 |   | $ | 118,512 |   |

 

Note F —Long-term Debt

 

Long-term debt consisted of the following for the periods indicated (inthousands):

 
| ** **                                                                                                                                                                                                                    | ** ** | **September 30,   2008** | ** ** | **December 31,   2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                    | ** ** | **(Unaudited)**                    | ** ** | ** **                        | ** ** |
| Notes payable to banks, due in semi-annual  installments, variable interest based on LIBOR, or with interest rates  ranging from 2.75% to 5.60% through 2012 to 2020, secured by aircraft                                     |       | $                                  | 547,198    |                              | $          | 577,390 |   |
| Notes payable to a financing company, due  in semi-annual installments, variable interest based on LIBOR, or with  interest rates ranging from 2.98% to 7.52% through 2008 to 2021, secured by  aircraft                      |       | 606,256                            |       | 611,995                           |       |
| Notes payable to banks, due in semi-annual  installments plus interest at 6.06% to 7.18% through 2021, secured by  aircraft                                                                                                   |       | 253,346                            |       | 265,706                           |       |
| Notes payable to a financing company, due  in semi-annual installments plus interest at 5.78% to 6.23% through 2019,  secured by aircraft                                                                                     |       | 75,777                             |       | 80,585                            |       |
| Notes payable to a financing company, due  in monthly installments plus interest at 6.47% to 8.18% through 2025, secured  by aircraft                                                                                         |       | 264,401                            |       | 272,475                           |       |
| Notes payable to banks, due in monthly  installments plus interest of 6.05% through 2020, secured by aircraft                                                                                                                 |       | 26,330                             |       | 27,725                            |       |
| Notes payable to banks, due in semi-annual  installments, plus interest at 3.72% to 3.86%, net of the benefits of  interest rate subsidies through the Brazilian Export financing program,  through 2011, secured by aircraft |       | 6,938                              |       | 8,569                             |       |
| Notes payable to a bank, due in monthly  installments interest based on LIBOR through 2012, interest rate at 7.9%  secured by building                                                                                        |       | 6,163                              |       | 6,505                             |       |
| Long-term debt                                                                                                                                                                                                                |       | $                                  | 1,786,409  |                              | $          | 1,850,950 |   |
|                                                                                                                                                                                                                          |       |                               |       |                              |       |
| Less current maturities                                                                                                                                                                                                       |       | (125,012                           | )          | (118,202                          | )          |
|                                                                                                                                                                                                                          |       |                               |       |                              |       |
| Long-term debt, net of current maturities                                                                                                                                                                                     |       | $                                  | 1,661,397  |                              | $          | 1,732,748 |   |

 

At September 30, 2008, the three-month andsix-month LIBOR rates were 4.05% and 3.98%, respectively.   At December 31, 2007, the three-monthand six-month LIBOR rates were 4.70% and 4.60%, respectively.

 

10

----

Table of Contents

 

Note G —Commitments and Contingencies

 

The Company leases 285 aircraft, as well as airport facilities, officespace, and various other property and equipment under non-cancelable operatingleases which are generally on a long-term, net rent basis where the Companypays taxes, maintenance, insurance and certain other operating expensesapplicable to the leased property.  TheCompany expects that, in the normal course of business, leases that expire willbe renewed or replaced by other leases.  Thefollowing table summarizes future minimum rental payments required underoperating leases that have initial or remaining non-cancelable lease terms inexcess of one year as of September 30, 2008 (in thousands):

 
| October through December 2008 |   | $         | 86,391    |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| 2009                                    |   | 324,843   |      |
| 2010                                    |   | 309,221   |      |
| 2011                                    |   | 299,383   |      |
| 2012                                    |   | 299,858   |      |
| Thereafter                              |   | 1,771,288 |      |
|                                    |   | $         | 3,090,984 |   |

 

Note H — Fair Value Measurements

 

In September 2006, the FinancialAccounting Standards Board (the “FASB”) issued SFAS No. 157, *Fair Value Measurements** *(“SFAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the United States, and expands disclosuresabout fair value measurements. The Company adopted the provisions of SFAS No. 157as of January 1, 2008, for financial instruments. Although the adoption ofSFAS No. 157 did not materially impact the Company’s financial condition,results of operations or cash flows, SFAS 157 requires the presentation of thefollowing disclosures in these notes to condensed consolidated financialstatements.

 

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

 

*Level 1*- Quoted prices in active markets foridentical assets or liabilities.

 

*Level 2*-Observable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.  Some ofthe Company’s marketable securities primarily utilize broker quotes in anon-active market for valuation of these securities.

 

*Level 3*-Unobservable inputs that are supported by little or no market activity and thatare significant to the fair value of the assets or liabilities, thereforerequiring an entity to develop its own assumptions.

 

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

 

As of September 30, 2008, the Companyowned $8.9 million of auction rate security instruments.  The majority of the auction rate securityinstruments held by the Company at September 30, 2008 were tax-exemptmunicipal bond investments, for which the market has recently had a fewsuccessful auctions.  For the securitiesthat have announced call dates (approximately $6.3 million), the Company hasclassified these investments as current and has identified them as “Marketablesecurities” on the unaudited Consolidated Balance Sheet as of September 30,2008.  For the securities that have notannounced a call date (approximately $2.6 million), the Company has classifiedthe investments as non-current and has identified them as “Other assets” in theunaudited  Consolidated Balance Sheet asof September 30, 2008. The Company has classified these securities as noncurrent due to the Company’s belief that the market for these securities maytake in excess of twelve months to fully recover. As of September 30,2008, the Company continued to earn interest on all of its auction rate securityinstruments.  Any future fluctuations in fair value related to theseinstruments that the Company deems to be temporary, including any recoveries ofprevious write-downs, would be recorded to accumulated other comprehensive 

 

11

----

Table of Contents

 

income.  If the Company determines that any future valuationadjustment was other than temporary, it intends to record a charge to earningsas appropriate.

 

The Company’s assets measured at fair valueon a recurring basis subject to the disclosure requirements of SFAS No. 157at September 30, 2008, were as follows (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements as of September 30, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                                                               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                       |       |                                                                                    |       |   |   |   |   |   |   |
| Cash, Cash Equivalents and Restricted Cash |       | $                                                                                       | 162,912    |   | $ | 162,912 |   | $ | — |   | $ | — |   |
| Marketable Securities                      |       | 566,688                                                                                 |       | 28,474 |   | 531,917 |   | 6,297 |   |
| Other Assets                               |       | 2,600                                                                                   |       | — |   | — |   | 2,600 |   |
| Total Assets Measured at Fair Value        |       | $                                                                                       | 732,200    |   | $ | 191,386 |   | $ | 531,917 |   | $ | 8,897 |   |

 

Based on market conditions, the Company usesa discounted cash flow valuation methodology for auction rate securities.  Accordingly, for purposes of the foregoingcondensed consolidated financial statements, these securities were categorizedas Level 3 securities within SFAS No. 157’s hierarchy.

 

The following table presents the Company’sassets measured at fair value on a recurring basis using significantunobservable inputs (Level 3) as defined in SFAS 157 at September 30, 2008(in thousands):

 
| Fair Value Measurements Using Significant Unobservable Inputs   (Level 3) |   |
|-------------------------------------------------------------------------------------------------------------------|--------|

 
| ** **                                       | ** ** | **Auction Rate   Securities** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|
|                                             |       |                                    |       |
| Transferred in during the period of  adoption    |       | $                                       | 123,600    |   |
| Total realized and unrealized gains or  (losses) |       |                                    |       |
| Included in earnings                             |       | —                                  |       |
| Included in other comprehensive income           |       | (3                                      | )          |
| Settlements                                      |       | (114,700                                | )          |
| Balance at September 30, 2008               |       | $                                       | 8,897      |   |

 

Note I – Investment in Other Companies

 

On September 4, 2008, theCompany announced its intention to acquire a 20% interest in Brazilian regionalairline, Trip Linhas Aereas (“Trip”), for $30 million.  As of September 30, 2008, the Companymade an investment of $5 million for a 6.7% interest in Trip, which is recordedas an “Other assets” on the Company’s unaudited consolidated balancesheet.  If Trip meets or exceeds certainfinancial targets, the Company is scheduled to make an additional $15 millioninvestment on March 1, 2009 and another $10 million investment on March 1,2010.  The Company accounts for itsinterest in Trip using the equity method of accounting. The Company records itsequity in Trip’s earnings on a one-quarter lag.

 

12

----

Table of Contents

 

Note J — Legal Matters

 

The Company is subject to certain legalactions which it considers routine to its business activities. As of September 30,2008, management believes, after consultation with legal counsel, that theultimate outcome of such legal matters is not likely to have a material adverseeffect on the Company’s financial position, liquidity or results ofoperations.  However, the following is asignificant outstanding legal matter.

 

*ASA and SkyWest Airlines v. Delta Air Lines*

 

During the quarter ended December 31,2007, Delta notified the Company, SkyWest Airlines and ASA of a dispute underthe Delta Connection Agreements executed by Delta with SkyWest Airlines andASA. The dispute relates to allocation of liability for certain irregularoperations (“IROP”) expenses that are paid by SkyWest Airlines and ASA to theirpassengers under certain situations. As a result, Delta withheld a combinedtotal of approximately $25 million (pretax) from one of the weeklyscheduled wire payments to SkyWest and ASA during December 2007. Deltacontinues to withhold a portion of the funds the Company believes arepayable as weekly scheduled wire payments to SkyWest and ASA.  As of September 30, 2008, the Companyhad recognized a total of $32.4 million of revenue associated with the fundswithheld by Delta.  On February 1,2008, SkyWest Airlines and ASA filed a lawsuit in Georgia state court disputingDelta’s treatment of the matter (the “Complaint”).  Deltafiled an Answer to the Complaint and a Counterclaim against SkyWestAirlines and ASA on March 24, 2008. Delta’s Counterclaim alleges that ASA and SkyWest Airlines breached theDelta Connection Agreements by invoicing Delta for the IROP expenses that werepaid pursuant to Delta’s policies, and claims only a portion of those expensesmay be invoiced to Delta.  Delta seeksunspecified damages in its Counterclaim.

 

On March 24, 2008, Delta also fileda Motion to Dismiss the Complaint. A hearing on the Motion was held June 5, 2008.  In an order entered June 13, 2008, theCourt granted in part and denied in part the Motion to Dismiss.  The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint.  The Court denied in part the Motion toDismiss with respect to the action for declaratory judgment contained in theComplaint, and granted in part the Motion to Dismiss to the extent the Complaintseeks to read alternative or supplemental obligations created by prior conductinto the Connection Agreements.  TheCourt granted the Motion to Dismiss with respect to claims for estoppel,unilateral mistake, and mutual mistake contained in the Complaint.  SkyWestAirlines and ASA currently intend to vigorously pursue theirclaims set forth in the Complaint, to the extent permitted by the Court’sruling on the Motion to Dismiss, and their defenses to Delta’scounterclaims.

 

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

 

13

----

Table of Contents

 

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

** **

*The following discussion and analysispresents factors that had a material effect on the results of operations ofSkyWest, Inc. (“SkyWest” “we” or “us”) during the three and nine monthsended September 30, 2008 and 2007. Also discussed is our financialposition as of September 30, 2008 and December 31, 2007. You shouldread this discussion in conjunction with our condensed consolidated financial statementsfor the three and nine months ended September 30, 2008, including thenotes thereto, appearing elsewhere in this Report.  This discussion and analysis containsforward-looking statements. Please refer to the following section entitled “CautionaryStatement Concerning Forward-Looking Statements” and Part II. Item IA “RiskFactors” below for discussion of the uncertainties, risks and assumptionsassociated with these statements.*

 

**CautionaryStatement Concerning Forward-Looking Statements**

 

Certain of thestatements contained in this Report should be considered “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements may be identified by words such as “may,” “will,” “expect,” “intend,”“anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,”“likely,” and “continue” and similar terms used in connection with statementsregarding SkyWest’s outlook, the revenue environment, SkyWest’s contractrelationships, and SkyWest’s expected financial performance.  These statements include, but are not limitedto, statements about SkyWest’s future growth and development plans, includingSkyWest’s future financial and operating results, SkyWest’s plans for SkyWestAirlines and ASA, SkyWest’s objectives, expectations and intentions, and otherstatements that are not historical facts. You should also keep in mindthat all forward-looking statements are based on SkyWest’s existing beliefsabout present and future events outside of SkyWest’s control and on assumptionsthat may prove to be incorrect.  If oneor more 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 beother factors not identified above of which SkyWest is not currently aware thatmay affect matters discussed in the forward-looking statements, and may alsocause actual results 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.

 

**Overview**

 

Through our wholly-owned subsidiaries,SkyWest Airlines, Inc. (“SkyWest Airlines”) and Atlantic SoutheastAirlines, Inc. (“ASA”), we operate the largest regional airline in theUnited States.  As of September 30, 2008, SkyWest Airlines and ASA offeredscheduled passenger and air freight service with approximately 2,300 totaldaily departures to 218 destinations in the United States, Canada, Mexico andthe Caribbean.  Additionally, we provide ground handling services forapproximately eight other airlines.  Asof September 30, 2008, our consolidated fleet consisted of 440 aircraft,including 250 Bombardier CRJ200 Regional Jets (“CRJ200s”) (67 assigned toUnited Air Lines, Inc. (“United”), 162 assigned to Delta Air Lines, Inc.(“Delta”), 12 assigned to Midwest Airlines, Inc. (“Midwest”) and 9assigned to SkyWest Airlines, Inc.), 104 Bombardier CRJ700 Regional Jets (“CRJ700s”)(52 assigned to United and 52 assigned to Delta), 17 Bombardier CRJ900 RegionalJets (“CRJ900s”) (all assigned to Delta), 57 Embraer EMB-120 Brasiliaturboprops (“Brasilia turboprops”) (44 assigned to United and 13 assigned toDelta), and 12 Avions de Transport 72-210 turboprops (“ATR-72 turboprops”) (allassigned to Delta).  We believe oursuccess in attracting multiple contractual relationships with major airlinepartners is attributable to our delivery of high-quality customer service withan all cabin-class fleet at a competitive cost structure.  For the nine months ended September 30,2008, approximately 56.5% of our aggregate capacity was operated under theDelta code, approximately 39.8% was operated under the United code andapproximately 3.7% was operated under the Midwest code.

 

SkyWest Airlines has been a partner withDelta in Salt Lake City and United in Los Angeles since 1987 and 1997,respectively. In 1998, SkyWest Airlines expanded its relationship with Unitedto provide service in Portland, Seattle/Tacoma, San Francisco and additionalLos Angeles markets. In 2004, SkyWest Airlines expanded its United Expressoperations to provide service in Chicago. In December 2006, SkyWestAirlines and Midwest entered into an Airline Services Agreement  (the “Midwest Services Agreement”). SkyWestAirlines serves markets from Midwest’s hubs in Milwaukee and Kansas City. As ofSeptember 30, 2008, SkyWest Airlines operated as a Delta Connectioncarrier in Salt Lake City, a United Express carrier in Los Angeles, SanFrancisco, Denver, Chicago and the Pacific Northwest, and a Midwest Connectcarrier in Milwaukee and Kansas City operating more than 1,550 total dailyflights.

 

14

----

Table of Contents

 

ASA has been a code-share partner with Deltain Atlanta since 1984. ASA expanded its operations as a Delta Connectioncarrier to also include Cincinnati and Salt Lake City in September 2002and April 2003, respectively. ASA operates approximately 715 dailyflights, all in the Delta Connection system.

 

We provide a substantial majority of theregional airline service for Delta in Atlanta and Salt Lake City. In connectionwith our acquisition of ASA in September 2005, we established new,separate, but substantially similar, long-term fixed-fee Delta ConnectionAgreements with Delta for both SkyWest Airlines and ASA. We also obtained theright to use 29 gates in the Hartsfield-Jackson International Airport locatedin Atlanta, from which we currently provide service to Delta. Delta has alsoagreed that if Delta solicits requests for proposals to fly Delta Connectionregional aircraft, ASA will be permitted to bid to maintain the same percentageof total Delta Connection regional jet flights that it operated during 2007,and, if ASA does not achieve the winning bid for the proposed flying, ASA willbe permitted to match the terms of the winning bid to the extent necessary forASA to maintain its percentage of Delta Connection regional jet flying that itoperated during 2007.

 

Historically, multiple contractualrelationships have enabled us to reduce reliance on any single major airlinecode and to enhance and stabilize operating results through a mix of contractflying and our controlled or “pro-rate” flying. For the nine months ended September 30,2008, contract flying revenue and pro-rate revenue represented approximately97% and 3%, respectively, of our total passenger revenues. On contract routes,the major airline partner controls scheduling, ticketing, pricing and seatinventories and we are compensated by the major airline partner at contractedrates based on the completed block hours, flight departures and other operatingmeasures. On pro-rate flights, we control scheduling, ticketing, pricing andseat inventories and receive a pro-rated portion of passenger fares. As of September 30,2008, essentially all of our Brasilia turboprops flown for Delta were flownunder pro-rate arrangements, while approximately 59% of our Brasilia turbopropsflown in the United system were flown under contractual arrangements, with theremaining 41% flown under pro-rate arrangements.

 

**Financial Highlights**

 

We had revenues of $934.1 million for the three monthsended September 30, 2008, a 6.7% increase, compared to revenues of $875.6million for the three months ended September 30, 2007.  We had net income of $26.2 million for thethree months ended September 30, 2008, a decrease of 39.1%, or $0.45 perdiluted share compared to $42.9 million of net income or $0.68 per dilutedshare, for the three months ended September 30, 2007.

 

The significant items affecting our financial performance during thethird quarter of 2008 are outlined below:

 

In June 2008, we were notified that Midwest was in the process oforganizing a financial restructuring. We reached agreement with Midwest duringthe quarter to reduce the number of aircraft operating under the MidwestServices Agreement from 21 aircraft to 12 aircraft. As part of the modifiedterms, we agreed to defer a portion of Midwest’s weekly payment obligationsfrom July 1, 2008 through November 30, 2008.  The amount we agreed to defer plus certainamounts Midwest owed to us at June 30, 2008 will be payable plus interestby Midwest in four equal quarterly payments starting on August 31, 2009.Because of the unique modified payment terms associated with the deferred amounts,we did not recognize the revenue associated with the deferred payments in ourunaudited condensed consolidated statements of income for the three and ninemonths ended September 30, 2008.  We did not recognize $4.6 million and $7.7 million of deferred paymentsfor the three and nine months ended September 30, 2008, respectively.

 

Our operating subsidiaries, SkyWest Airlines and ASA, have experienceda reduction in the block hours scheduled by their major partners under theircode-sharing agreements. This reduction in block hours has reduced theprofitability of SkyWest Airlines and ASA under those agreements. The financialimpact of block hour reductions, imposed by our major partners, during thethree months ended September 30, 2008 was larger than we originallyanticipated.

 

We are at risk for increased fuel prices on our pro-rate flyingoperations, whereby we receive a pro-rated portion of the passenger fare asrevenue.  As of September 30, 2008,we operated a total of 33 Brasilia turboprops under separate pro-rateagreements with Delta and United. During the quarter ended September 30,2008, the cost of fuel associated with the pro-rate operations increasedapproximately $2.2 million (pre-tax) compared to the prior period.

 

Our maintenance costs increased $25.6 million, or 25.3%, during thethree months ended September 30, 2008, compared to the three months ended September 30,2007.  The increase was primarily relatedto the timing of engine overhaul events. Our engine overhaul expense increasedapproximately $16.1 million during the three months ended September 30,2008 compared to the three months ended September 30, 2007.  The majority of the engine overhauls relatedto aircraft operated under our Delta Connection Agreements and we werereimbursed for such engine overhaul costs by 

 

15

----

Table of Contents

 

Delta.  Such reimbursements arereflected as passenger revenue in our unaudited condensed consolidatedstatements of income.    The increase inmaintenance, excluding engine overhaul costs was principally due, in largepart, to other scheduled maintenance events. Additionally, since September 30,2007, we added four used CRJ200s and two used CRJ700s to our fleet. Compared tonew aircraft, used aircraft typically experience higher maintenance costsduring the first year of service.

 

We had revenues of $2.75 billion for the nine monthsended September 30, 2008, a 9.3% increase, compared to revenues of $2.52billion for the nine months ended September 30, 2007.  We had net income of $91.7 million for thenine months ended September 30, 2008, a decrease of 22.5%, or $1.55 perdiluted share compared to $118.3 million of net income or $1.83 per dilutedshare, for the nine months ended September 30, 2007.

 

Total ASMs for the nine months ended September 30,2008 decreased 7.1%, compared to the nine months ended September 30, 2007,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 nine months ended September 30, 2008, we generated 16.9 billionASMs, compared to 17.2 billion ASMs during the same period of 2007.

 

At September 30, 2008, we had approximately$729.6 million in cash and cash equivalents, restricted cash and marketablesecurities, compared to approximately $660.4 million as of December 31,2007.

 

**Outlook**

 

On October 12, 2007, we announced thatSkyWest Airlines plans to acquire 22 additional regional jet aircraft through2010, 18 of which SkyWest Airlines intends to operate for United Express, aspart of an aircraft transition plan. We believe this transition plan will allowUnited Express to remove 23 30-seat Brasilia turboprops from the contractreimbursement model in the United Express Agreement and add 66 seat regionaljet aircraft for United Express flying. Generally, the turboprop removals areintended to occur in conjunction with deliveries of new regional jet aircraftin order to ensure a smooth transition in existing markets. Additionally,SkyWest Airlines intends to exchange four 50-seat CRJ200s for four CRJ900sconfigured with 76 seats in its Delta Connection operations. On November 30,2007, we announced that we placed a firm order for 22 aircraft with BombardierAerospace (“Bombardier”). We are scheduled to take delivery of these aircraftbeginning in the fourth quarter of 2008 and continue through the first quarterof 2010.

 

**Critical Accounting Policies**

 

Our significant accounting policies aresummarized in Note 1 to our consolidated financial statements for the yearended December 31, 2007, which are presented in our Annual Report on Form 10-Kfiled with the SEC on February 26, 2008, except as updated below.  Critical accounting policies are thosepolicies that are most important to the preparation of our consolidatedfinancial statements and require management’s subjective and complex judgmentsdue to the need to make estimates about the effect of matters that areinherently uncertain. Our critical accounting policies relate to revenuerecognition, aircraft maintenance, aircraft leases, impairment of long-livedassets and intangibles and stock-based compensation expense. The application ofthese accounting policies involves the exercise of judgment and the use ofassumptions as to future uncertainties and, as a result, actual results willdiffer, and could differ materially from such estimates.

 

*Fair value*

 

We have adopted Statement of FinancialAccounting Standard (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”)as it applies to financial assets and liabilities effective January 1,2008.  SFAS 157 defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles (“GAAP”)and enhances disclosures about fair value measurements. Fair value is definedunder SFAS 157 as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date.   Foradditional information on the fair value of certain financial assets andliabilities, see Note H to our unaudited condensed consolidated financialstatements.

 

Under SFAS 157, we utilize several valuationtechniques in order to assess the fair value of our financial assets andliabilities. Our cash and cash equivalents primarily utilize quoted prices inactive markets for identical assets or liabilities.

 

We have valued non-auction rate marketable securities using quotedprices in active markets for identical assets or liabilities.  If a quoted price is not available, weutilize broker quotes in a non-active market for valuation of these securities.   For auction-rate security instruments,quoted prices in active markets are no longer available. As a result, we haveestimated the fair values of these securities utilizing a discounted cash flow.

 

16

----

Table of Contents

 

**Results ofOperations**

 

**ThreeMonths Ended September 30, 2008 and 2007**

 

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

 
| ** **                                    | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                                   | ** ** | **2007** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | ** **                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue passenger miles (000)                 |       | 4,435,755                                                                  |       | 4,811,282 |   | (7.8 | )% |
| Available seat miles (“ASMs”) (000) |       | 5,629,121                                                                  |       | 6,059,501 |   | (7.1 | )% |
| Block hours                                   |       | 348,522                                                                    |       | 376,999 |   | (7.6 | )% |
| Departures                                    |       | 225,253                                                                    |       | 235,974 |   | (4.5 | )% |
| Passengers carried                            |       | 8,738,704                                                                  |       | 9,137,212 |   | (4.4 | )% |
| Passenger load factor                         |       | 78.8                                                                       | %          | 79.4 | % | (0.6 | )pts |
| Revenue per available seat mile               |       | 16.6                                                                       | ¢     | 14.5 | ¢ | 14.5 | % |
| Cost per available seat mile                  |       | 15.9                                                                       | ¢     | 13.5 | ¢ | 17.8 | % |
| Fuel cost per available seat mile             |       | 6.5                                                                        | ¢     | 4.7 | ¢ | 38.3 | % |
| Average passenger trip length (miles)         |       | 508                                                                        |       | 527 |   | (3.6 | )% |

 

*Revenues.* Operating revenues increased $58.5 million, or 6.7% during the threemonths ended September 30, 2008, compared to three months ended September 30,2007.  We are reimbursed for our actualfuel costs by our major partners under our contract flying arrangements, whichwe record as revenue. Under the Delta Connection Agreements which SkyWestAirlines and ASA have entered into with Delta (the “Delta Connection Agreements”),we are reimbursed for our engine overhaul expenses, which we record as revenue.The following table summarizes the amount of fuel and engine overhaulreimbursements included in our passenger revenues (dollar amounts inthousands).

 
| ** **                                                            | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                            | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues                                                    |       | $                                                        | 926,193    |   | $ | 867,076 |   | $ | 59,117 |   | 6.8 | % |
| Less: Fuel reimbursement from major  partners                         |       | 353,154                                                  |       | 275,745 |   | 77,409 |   | 28.1 | % |
| Less: Engine overhaul reimbursement from  major partners              |       | 32,632                                                   |       | 19,186 |   | 13,446 |   | 70.1 | % |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                        | 540,407    |   | $ | 572,145 |   | $ | (31,738 | ) | (5.5 | )% |

 

*Passenger revenues.*Passenger revenues increased $59.1 million, or 6.8% during the three monthsended September 30, 2008 compared to the three months ended September 30,2007.  The increase in passenger revenueswas primarily due to the increase in our fuel and engine overhaulreimbursements from our major partners. The fuel reimbursement from our majorpartners increased $77.4 million, or 28.1%, during the three months ended September 30,2008, compared to the three months ended September 30, 2007.  Our passenger revenues, excluding fuel andengine overhaul reimbursements from major partners decreased $31.7 million, or5.5%, during the three months ended September 30, 2008, compared to thethree months ended September 30, 2007. In June 2008, we were notifiedthat Midwest was in the process of organizing a financial restructuring. Wereached agreement with Midwest during the quarter to reduce the number ofaircraft operating under the Midwest Services Agreement from 21 aircraft to 12aircraft. As part of the modified terms, we agreed to defer a portion ofMidwest’s weekly payment obligations from July 1, 2008 through November 30,2008.  The amount we agreed to defer,plus certain amounts Midwest owed to us at June 30, 2008, are payable,with interest, by Midwest in four equal quarterly payments starting on August 31,2009. Because of the unique modified payment terms associated with the deferredamounts, we did not recognize the revenue associated with the deferred paymentsin our unaudited consolidated statements of income for the three months ended September 30,2008.   We did not recognize $4.6 millionof the deferred payments for the three months ended September 30, 2008.The decrease in passenger revenues, excluding fuel and engine overhaul reimbursements,is generally consistent with the reduction in ASMs, block hours and departureswe experienced during the three-month period.

 

*Ground handling and other.* Total groundhandling and other revenues for the three months ended September 30, 2008decreased $0.6 million, or 7.1% during the three months ended September 30,2008, compared to the three months ended September 30, 2007. Revenueearned under other ground handling contracts where we provide ground handlingservices for 

 

17

----

Table of Contents

 

other airlinesis presented in the “Ground handling and other” line in our unauditedconsolidated statements of income.  Thedecrease was primarily related to lower volume of flights serviced under groundhandling contracts with United and Delta, whereby we perform ground handlingservices for several other regional airlines.

 

The following table sets forth information regarding our operatingexpense components for the three-month periods ended September 30, 2008and 2007.  We recognize that it is commonin the airline industry to classify statements of income and present MD&Aby major expense category rather than by functional work group.  The following table is intended to facilitatecomparison of our operating expenses to the operating expenses reported byother carriers.  The line items presentedin the following table are drawn from the following line items on ourconsolidated statements of income included in this Report:

 
| · |   | “Salary,  wages and employee benefits” presented in the table below includes the  salaries, wages and employee benefits presented in the “Flying Operations,”  “Customer Service,” “Maintenance” and “General and Administrative” lines in  our unaudited consolidated statements of income.                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | “Aircraft  costs” presented in the table below includes aircraft rentals presented in  the “Flying Operations,” and “Depreciation and Amortization” lines in our  unaudited consolidated statements of income.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | “Maintenance”  presented in the table below includes our direct maintenance costs and  maintenance overhead costs (except for maintenance-related salaries, wages  and employee benefits), which are presented in the “Maintenance” line in our  unaudited consolidated statements of income.                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | “Fuel”  presented in the table below includes the “Flying Operations” line in our  unaudited consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | “Other  airline expenses” presented in the table below includes other non-labor  flight operation costs, customer service costs and general and administrative  costs presented in the “Flying Operations,” “Customer Service” and “General  and Administrative” lines in our unaudited consolidated statements of income.  The primary items include property tax, hull and passenger insurance, crew  simulator training, crew hotels, station rents and landing fees. |

 

Individual expense components are also expressed in the following tableon the basis of “Cents per ASM.”  ASMsare a common metric used in the airline industry to measure an airline’spassenger capacity.  ASMs reflect boththe number of aircraft in an airline’s fleet and the seat capacity for theaircraft in the fleet.  As the size ofour fleet is the underlying driver of our operating costs, the primary basisfor our MD&A presentation is on a cost per ASM basis to discuss significantchanges in our costs not proportionate to the relative changes in our fleetsize (dollar amounts in thousands).

 
| ** **                            | ** ** | **Three months ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **$ Change** | ** ** | **%   Change** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **Amount**                                               | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **Cents   per   ASM** | ** ** | **Cents   Per   ASM** | ** ** |
| ** **                            | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages and employee benefits |       | $                                                        | 182,103    |   | $ | 181,959 |   | $ | 144 |   | 0.1 | % | 3.2 |   | 3.0 |   |
| Aircraft costs                        |       | 129,459                                                  |       | 127,305 |   | 2,154 |   | 1.7 | % | 2.3 |   | 2.1 |   |
| Maintenance                           |       | 99,294                                                   |       | 76,095 |   | 23,199 |   | 30.5 | % | 1.8 |   | 1.3 |   |
| Fuel                                  |       | 363,735                                                  |       | 284,129 |   | 79,606 |   | 28.0 | % | 6.5 |   | 4.7 |   |
| Other airline expenses                |       | 99,262                                                   |       | 113,644 |   | (14,382 | ) | (12.7 | )% | 1.7 |   | 1.9 |   |
| Total operating expenses              |       | 873,853                                                  |       | 783,132 |   | 90,721 |   | 11.6 | % | 15.5 |   | 13.0 |   |
| Interest                              |       | 23,872                                                   |       | 32,831 |   | (8,959 | ) | (27.3 | )% | 0.4 |   | 0.5 |   |
| Total airline expenses                |       | $                                                        | 897,725    |   | $ | 815,963 |   | $ | 81,762 |   | 10.0 | % | 15.9 |   | 13.5 |   |

 

*Salaries Wages and Employee Benefits. *Salaries, wages andemployee benefits increased $0.1 million, or 0.1%, during the three monthsended September 30, 2008, compared to the three months ended September 30,2007. The average number of full-time equivalent employees decreased 3.2% to13,784 for the three months ended September 30, 2008, from 14,234 for thethree months ended September 30, 2007.  The decrease in number ofemployees was due primarily to the decreases in flight departures and ASMs. BecauseASM production decreased 7.1% and salaries, wages and employee benefitsincreased 0.1%, the cost per ASM increased from 3.0 cents to 3.2 cents.

 

18

----

Table of Contents

 

*Aircraft Costs.*Aircraft costs increased $2.2 million or 1.7% during the three months ended September 30,2008 compared to the three months ended September 30, 2007. The increasewas due primarily to the depreciation of four used CRJ200s acquired since September 30,2007.

 

*Maintenance.*Maintenance costs increased $23.2 million, or 30.5%, during the three monthsended September 30, 2008, compared to the three months ended September 30,2007.  The increase was primarily relatedto the timing of engine overhaul events. Our engine overhaul expense increasedapproximately $16.1 million during the three months ended September 30,2008 compared to the three months ended September 30, 2007.  The majority of the engine overhauls relatedto aircraft operated under our Delta Connection Agreements and we werereimbursed for such engine overhaul costs by Delta.  Such reimbursements are reflected aspassenger revenue in our unaudited condensed consolidated statements of income. The increase in maintenance, excludingengine overhaul costs was principally due, in large part, to other scheduledmaintenance events. Additionally, since September 30, 2007, we added fourused CRJ200s and two used CRJ700s to our fleet. Compared to new aircraft, usedaircraft typically experience higher maintenance costs during the first year ofservice.

 

Under the United Express and Midwest ServicesAgreements, we recognize revenue at a fixed hourly rate for mature enginemaintenance on regional jet engines, which we record at the gross amount asrevenue in our unaudited consolidated statements of  income, and we recognize engine maintenanceexpense on our CRJ 200 regional jet engines on an as-incurred basis asmaintenance expense in our unaudited consolidated statements of income. As aresult, during the three months ended September 30, 2008, we collected andrecorded $7.8 million (pretax) of revenue in excess of our maintenanceexpense under the United Express Agreement and the Midwest Services Agreement,which is intended to compensate us for the expense of future engine maintenanceoverhauls.

 

*Fuel*.  Fuel costs increased $79.6 million, or 28.0%during the three months ended September 30, 2008, compared to the threemonths ended September 30, 2007. The average cost per gallon of fuelincreased to $3.92 per gallon during the three months ended September 30,2008 from $2.50 during the three months ended September 30, 2007. However,despite the increase in the average cost per gallon, subsequent to the threemonths ended September 30, 2007, United purchased additional fuel directlyfrom a fuel vendor for our United Express aircraft operated out of Chicago, SanFrancisco, Los Angeles and Denver.  Midwestpurchased all of its fuel directly from fuel vendors, which reduced our totalfuel costs and related passenger revenue. The following table summarizes the gallons of fuel we purchaseddirectly, and the change in fuel price per gallon on our fuel expense for the periodsindicated:

 
| ** **                                                             | ** ** | **For the three months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2008**                                                                   | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Fuel gallons consumed                                                  |       | 92,903                                                                     |       | 113,724 |   | (18.3 | )% |
| Average price per gallon                                               |       | $                                                                          | 3.92       |   | $ | 2.50 |   | 56.8 | % |
| Fuel expense                                                           |       | $                                                                          | 363,735    |   | $ | 284,129 |   | 28.0 | % |

 

We are at risk for the increase in fuel prices on our pro-rate flyingoperations, whereby we receive a pro-rated portion of the passenger fare asrevenue.  As of September 30, 2008,we operated a total of 33 Brasilia turboprops under separate pro-rateagreements with Delta and United. During the three months ended September 30,2008, the cost of fuel associated with our pro-rate operations increasedapproximately $2.2 million (pre-tax) compared to the three months ended September 30,2007.

 

*Other airline expenses.*  Other airline expense, primarily consistingof property tax, hull and liability insurance, crew simulator training, crewhotel costs, landing fees, station rentals and non employee station costs,  decreased $14.4 million , or 12.7% during thethree months ended September 30, 2008 compared to the three months ended September 30,2007. The decrease in other airline expense was primarily due to a decrease innon-employee station costs due to United transitioning 16 stations from SkyWestAirlines to other ground handlers during the second quarter of 2008 andpartially due to our major partners paying for certain station costs directly.

 

*Interest.*  Interest decreased $9.0 million, or 27.3%,during the three months ended September 30, 2008, compared to the threemonths ended September 30, 2007. The decrease in interest expense was substantially due to a decrease ininterest rates. At September 30, 2008, we had variable rate notesrepresenting 48.6% of our total long-term debt. The majority of our variable rate notes are based on the three-month andsix-month LIBOR rates.  At September 30,2008, the three-month and six-month LIBOR rates were 4.05% and 3.98%,respectively.  At September 30,2007, the three-month and six-month LIBOR rates were 5.23% and 5.13%,respectively.

 

*Total Airline Expenses.*Totalairline expenses (consisting of total operating and interest expenses)increased $81.8 million, or 10.0%, during the three months ended September 30,2008, compared to the three months ended September 30,

 

19

----

Table of Contents

 

2007.  We are reimbursed for our actual fuel costsby our major partners under our contract flying arrangements, which we recordas revenue. Under the SkyWest Airlines and ASA Delta Connection Agreements, weare reimbursed for our engine overhaul expense, which we record as revenue. Thefollowing table summarizes the amount of fuel and engine overhaul expenseswhich are included in our total airline expenses (dollar amounts in thousands).

 
| ** **                                                 | ** ** | **For the three months ended September 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                                   | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                       |       |                                                                       |       |   |   |   |   |   |   |
| Total airline expense                                      |       | $                                                                          | 897,725    |   | $ | 815,963 |   | $ | 81,762 |   | 10.0 | % |
| Less: Fuel expense                                         |       | 363,735                                                                    |       | 284,129 |   | 79,606 |   | 28.0 | % |
| Less: Engine overhaul reimbursement from  major partners   |       | 32,632                                                                     |       | 19,186 |   | 13,446 |   | 70.1 | % |
| Total airline expense excluding fuel and  engine overhauls |       | $                                                                          | 501,358    |   | $ | 512,648 |   | $ | (11,290 | ) | (2.2 | )% |

 

Excluding fuel and engine overhaul costs, our total airline expensedecreased $11.3 million, or 2.2%, during the three months ended September 30,2008, compared to the three months ended September 30, 2007.  The percentage decrease in total airlineexpenses excluding fuel and engine overhauls, was less than the percentagedecrease in ASMs, which is primarily due to increases in non-engine overhaulmaintenance expenses attributable to the increased age of our fleet.

 

*Net Income. *Primarily due to the factors described above,net income decreased to $26.2 million, or $0.45 per diluted share, for thethree months ended September 30, 2008, compared to $42.9 million, or $0.68per diluted share, for the three months ended September 30, 2007.

 

**Ninemonths ended September 30, 2008 and 2007**

 

*Operational Statistics. *The following table sets forth our major operational statistics and theassociated percentages-of-change for the periods identified below.

 
| ** **                                    | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue passenger miles (000)                 |       | 13,126,547                                                                |       | 13,497,141 |   | (2.7 | )% |
| Available seat miles (“ASMs”) (000) |       | 16,925,658                                                                |       | 17,156,421 |   | (1.3 | )% |
| Block hours                                   |       | 1,055,884                                                                 |       | 1,074,278 |   | (1.7 | )% |
| Departures                                    |       | 668,939                                                                   |       | 677,674 |   | (1.3 | )% |
| Passengers carried                            |       | 25,609,770                                                                |       | 25,892,757 |   | (1.1 | )% |
| Passenger load factor                         |       | 77.6                                                                      | %          | 78.7 | % | (1.1 | )pts |
| Revenue per available seat mile               |       | 16.3                                                                      | ¢     | 14.7 | ¢ | 10.9 | % |
| Cost per available seat mile                  |       | 15.5                                                                      | ¢     | 13.7 | ¢ | 13.1 | % |
| Fuel cost per available seat mile             |       | 6.0                                                                       | ¢     | 4.5 | ¢ | 31.4 | % |
| Average passenger trip length (miles)         |       | 513                                                                       |       | 521 |   | (1.5 | )% |

 

*Revenues.* Operating revenues increased $233.3 million, or 9.3%, during the ninemonths ended September 30, 2008, compared to the nine months ended September 30,2007.  We are reimbursed for our actualfuel costs by our major partners under our contract flying arrangements, whichwe record as revenue. Under the SkyWest Airlines and ASA Delta ConnectionAgreements, we are reimbursed for our engine overhaul expenses, which we recordas revenue. The following table summarizes the amount of fuel and engineoverhaul reimbursements included in our passenger revenues (dollar amounts inthousands).

 
| ** **                                                            | ** ** | **For the nine months ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                                            | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger revenues                                                    |       | $                                                                         | 2,728,922  |   | $ | 2,493,999 |   | $ | 234,923 |   | 9.4 | % |
| Less: Fuel reimbursement from major  partners                         |       | 993,148                                                                   |       | 759,544 |   | 233,604 |   | 30.8 | % |
| Less: Engine overhaul reimbursement from  major partners              |       | 84,517                                                                    |       | 48,344 |   | 36,173 |   | 74.8 | % |
| Passenger revenue excluding fuel and engine  overhauls reimbursements |       | $                                                                         | 1,651,257  |   | $ | 1,686,111 |   | $ | (34,854 | ) | (2.1 | )% |

 

*Passenger revenues.*Passenger revenues increased $234.9 million, or 9.4%, during the nine monthsended September 30, 2008, compared to the nine months ended September 30,2007.  The increase in passenger revenueswas 

 

20

----

Table of Contents

 

primarily due to an increase infuel and engine overhaul reimbursements from our major partners. The fuelreimbursement from our major partners increased $233.6 million or 30.8%, duringthe nine months ended September 30, 2008, compared to the nine monthsended September 30, 2007.  Ourpassenger revenues, excluding fuel and engine overhaul reimbursements frommajor partners, decreased $34.9 million, or 2.1%, during the nine months ended September 30,2008, compared to the nine months ended September 30, 2007. In June 2008,we were notified that Midwest was in the process of organizing a financialrestructuring. We reached agreement with Midwest during the quarter to reducethe number of aircraft operating under the Midwest Services Agreement from 21aircraft to 12 aircraft. As part of the modified terms, we agreed to defer aportion of Midwest’s weekly payment obligations from July 1, 2008 through November 30,2008.  The amount we agreed to defer,plus certain amounts Midwest owed us at June 30, 2008, are payable, withinterest, by Midwest in four equal quarterly payments starting on August 31,2009. Because of the unique modified payment terms associated with the deferredamounts, we did not recognize the revenue associated with the deferred paymentsin our unaudited condensed consolidated statements of income for the ninemonths ended September 30, 2008.  Wedid not recognize $7.7 million of deferred payments for the nine months ended September 30,2008, respectively. The decrease in passenger revenues, excluding fuel andengine overhauls reimbursements was greater than the corresponding decrease inASMs, primarily due to the Midwest restructuring.

 

*Ground handling and other.* Total groundhandling and other revenues decreased $1.6 million, or 6.2%, during the ninemonths ended September 30, 2008, compared to the nine months ended September 30,2007. Revenue earned under other ground handling contracts where we provideground handling services for other airlines is presented in the “Groundhandling and other” line in our unaudited consolidated 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.

 

The following table sets forth information regarding our operatingexpense components for the nine months ended September 30, 2008 and2007.  We recognize that it is common inthe airline industry to classify statements of income and present MD&A bymajor expense category rather than by functional work group.  The following table is intended to facilitatecomparison of our operating expenses to the operating expenses reported byother carriers.  The line items presentedin the following table are drawn from the following line items on our unauditedconsolidated statements of income included in this Report:.

 

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

 

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

 

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

 

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

 

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

 

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

 

21

----

Table of Contents

 
| ** **                            | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Cents Per** | ** ** | **Cents Per** | ** ** |
| ** **                            | ** ** | **Amount**                                              | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Percent** | ** ** | **ASM** | ** ** | **ASM** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries, wages and employee benefits |       | $                                                       | 548,675    |   | $ | 550,745 |   | $ | (2,070 | ) | (0.4 | )% | 3.2 |   | 3.2 |   |
| Aircraft costs                        |       | 386,325                                                 |       | 374,798 |   | 11,527 |   | 3.1 | % | 2.3 |   | 2.2 |   |
| Maintenance                           |       | 280,662                                                 |       | 217,653 |   | 63,009 |   | 28.9 | % | 1.7 |   | 1.2 |   |
| Fuel                                  |       | 1,022,590                                               |       | 778,336 |   | 244,254 |   | 31.4 | % | 6.0 |   | 4.5 |   |
| Other airline expenses                |       | 313,269                                                 |       | 337,185 |   | (23,916 | ) | (7.1 | )% | 1.8 |   | 2.0 |   |
| Total operating expenses              |       | 2,551,521                                               |       | 2,258,717 |   | 292,804 |   | 13.0 | % | 15.0 |   | 13.1 |   |
| Interest                              |       | 80,389                                                  |       | 95,134 |   | (14,745 | ) | (15.5 | )% | 0.5 |   | 0.6 |   |
| Total airline expenses                |       | $                                                       | 2,631,910  |   | $ | 2,353,851 |   | 278,059 |   | 11.8 | % | 15.5 |   | 13.7 |   |
|                                       |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Salaries Wages and Employee Benefits. *Salaries, wages andemployee benefits decreased $2.1 million, or 0.4%, during the nine months endedSeptember 30, 2008, compared to the nine months ended September 30,2007. The average number of full-time equivalent employees decreased 1.9% to14,493 for the nine months ended September 30, 2008, from 14,770 for thenine months ended September 30, 2007.  The decrease in number ofemployees and the decrease in the cost per ASM was significantly due to Deltaassuming responsibility from ASA in June 2007 for the performance ofcustomer service functions in Atlanta and United transitioning 16 stations fromSkyWest Airlines to other ground handlers during the second quarter of 2008.

 

*Aircraft Costs.*Aircraft costs increased $11.5 million or 3.1% during the nine months ended September 30,2008, compared to the nine months ended September 30, 2007. The increasewas primarily due to the depreciation of four used CRJ200s acquired since September 30,2007.

 

*Maintenance.*Maintenance costs increased $63.0 million, or 28.9%, during the nine monthsended September 30, 2008, compared to the nine months ended September 30,2007.  The increase was primarily relatedto the timing of engine overhaul events. Our engine overhaul expense increasedapproximately $39.5 million during the nine months ended September 30,2008 compared to the nine months ended September 30, 2007.  The majority of the engine overhauls relatedto aircraft operated under our Delta Connection Agreements and we werereimbursed for such engine overhaul costs by Delta.  Such reimbursements are reflected aspassenger revenue in our unaudited condensed consolidated statements ofincome.  The increase in maintenanceexcluding engine overhaul costs was principally due to other scheduledmaintenance events. Additionally, since September 30, 2007, we added sevenused CRJ200s and two used CRJ700s to our fleet. Compared to new aircraft, usedaircraft typically experience higher maintenance costs during the first year ofservice.

 

Under the United Express and Midwest ServicesAgreements, we recognize revenue at a fixed hourly rate for mature enginemaintenance on regional jet engines, which we record at the gross amount asrevenue in our unaudited consolidated statements of  income, and we recognize engine maintenanceexpense on our CRJ 200 regional jet engines on an as incurred basis asmaintenance expense in our unaudited consolidated statements of income. As aresult, during the nine months ended September 30, 2008, we collected andrecorded $25.1 million (pretax) of revenue in excess of our maintenanceexpense under the United Express Agreement and the Midwest Services Agreement,which is intended to compensate us for the expense of future engine maintenanceoverhauls.

 

*Fuel*.  Fuel costs increased $244.3 million, or 31.4%during the nine months ended September 30, 2008, compared to the ninemonths ended September 30, 2007. The average cost per gallon of fuel increased to $3.62 per gallon duringthe nine months ended September 30, 2008 from $2.30 during the nine monthsended September 30, 2007. However, despite the increase in the averagecost per gallon, during the nine months ended September 30, 2008, Unitedpurchased fuel directly from a fuel vendor for our United Express aircraftoperated out of Chicago, San Francisco, Los Angeles and Denver.  Midwest purchased all of its fuel directlyfrom fuel vendors, which reduced our total fuel costs and related passengerrevenue.  The following table summarizesthe gallons of fuel we purchased directly, and the change in fuel price pergallon on our fuel expense:

 
| ** **                                                             | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in thousands, except per gallon amounts)** | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **% Change** | ** ** |
| Fuel gallons consumed                                                  |       | 282,160                                                                   |       | 338,666 |   | (16.7 | )% |
| Average price per gallon                                               |       | $                                                                         | 3.62       |   | $ | 2.30 |   | 57.4 | % |
| Fuel expense                                                           |       | $                                                                         | 1,022,590  |   | $ | 778,336 |   | 31.4 | % |

 

We are at risk for the increase in fuel prices on our pro-rate flyingoperations, whereby we receive a pro-rated portion of the passenger fare asrevenue.  As of September 30, 2008,we operated a total of 35 Brasilia turboprops under separate pro-rateagreements with Delta and United. During the nine months ended September 30,2008, the cost of fuel associated with 

 

22

----

Table of Contents

 

the pro-rate operationsincreased approximately $9.1 million (pre-tax) compared to the nine monthsended September 30, 2007.

 

*Other airline expenses.*  Other airline expense, primarily consistingof property tax, hull and liability insurance, crew simulator training, crewhotel costs, landing fees and station rentals, decreased $23.9 million , or 7.1%, during the nine months ended September 30,2008, compared to the nine months ended September 30, 2007. The decreasein other airline expense was primarily due to the decrease in non-employeestation costs due to Delta assuming responsibility from ASA for the performanceof customer service functions in Atlanta and United transitioning 16 stationsfrom SkyWest Airlines to other ground handlers during the second quarter of2008, and partially due to our major partners paying for certain station costsdirectly.

 

*Interest.*  Interest decreased $14.7 million, or 15.5%during the nine months ended September 30, 2008 compared to the ninemonths ended September 30, 2007. The decrease in interest expense was substantially due to a decreasein  interest rates. At September 30,2008, we had variable rate notes representing 48.6% of our total long-term debt..  The majority of our variable ratenotes are based on the three-month and six-month LIBOR rates.  At September 30, 2008, the three-monthand six-month LIBOR rates were 4.05% and 3.98%, respectively.  At September 30, 2007, the three-monthand six-month LIBOR rates were 5.23% and 5.13%, respectively.

 

*Total Airline Expenses.*Totalairline expenses (consisting of total operating and interest expenses)increased $278.1 million, or 11.8%, during the nine months ended September 30,2008, compared to the nine months ended September 30, 2007.  We are reimbursed for our actual fuel costsby our major partners under our contract flying arrangements, which we recordas revenue. Under the SkyWest Airlines and ASA Delta Connection Agreements, weare reimbursed for our engine overhaul expense, which we record as revenue. Thefollowing table summarizes the amount of fuel and engine overhaul expenseswhich are included in our total airline expenses (dollar amounts in thousands).

 
| ** **                                                 | ** ** | **For the nine months ended September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                                                  | ** ** | **2007** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                       |       |                                                                      |       |   |   |   |   |   |   |
| Total airline expense                                      |       | $                                                                         | 2,631,910  |   | $ | 2,353,851 |   | $ | 278,059 |   | 11.8 | % |
| Less: Fuel expense                                         |       | 1,022,590                                                                 |       | 778,336 |   | 244,254 |   | 31.4 | % |
| Less: Engine overhaul reimbursement from  major partners   |       | 84,517                                                                    |       | 48,344 |   | 36,173 |   | 74.8 | % |
| Total airline expense excluding fuel and  engine overhauls |       | $                                                                         | 1,524,803  |   | $ | 1,527,171 |   | $ | (2,368 | ) | (0.2 | )% |

 

Excluding fuel and engine overhaul costs, our total airline expensedecreased $2.4 million, or 0.2%, during the nine months ended September 30,2008, compared to the nine months ended September 30, 2007.  The percentage decrease in total airlineexpenses excluding fuel and engine overhauls, was less than the percentagedecrease in ASMs, which is primarily due to increases in non-engine overhaulmaintenance expenses attributable to the increased age of our fleet.

 

*Other Income.* Duringthe nine months ended September 30, 2008, we negotiated the principalterms of a new Capacity Purchase Agreement with Continental, which was intendedto become effective if we had successfully completed our proposed acquisitionof the outstanding shares of capital stock of ExpressJet Holdings, Inc. (“ExpressJet”).  During the course of those negotiations,Continental agreed it would pay us a break-up fee under certain circumstancesin the event our efforts to acquire ExpressJet were not successful.  In June 2008, ExpressJet reached termsdirectly with Continental on a new capacity purchase agreement, andaccordingly, we were precluded from completing the acquisition ofExpressJet.  As a result, we received thebreak-up fee from Continental in June 2008.  The break-up fee, net of our directtransaction costs, was $6.3 million (pre-tax) and was recorded as other incomeduring the nine months ended September 30, 2008.

 

*Net Income. *Primarily due to factors described above, netincome decreased to $91.7 million, or $1.55 per diluted share, for the ninemonths ended September 30, 2008, compared to $118.3 million, or $1.83 perdiluted share, for the nine months ended September 30, 2007.

 

## **Liquidity and Capital Resources**

##  

We had working capital of $833.0 million anda current ratio of 3.0:1 at September 30, 2008, compared to workingcapital of $811.9 million and a current ratio of 3.0:1 at December 31,2007. The increase in working capital was principally attributable to cash wegenerated from operating activities of $348.8 million.

 

23

----

Tableof Contents

 

Our principal sources of cash during the ninemonths ended September 30, 2008 were $348.8 million provided by operatingactivities, issuance of $17.7 million of long-term debt, sale of $14.8 millionof common stock in connection with the exercise of stock options under ourstock option and employee stock purchase plans, $2.5 million of proceeds fromthe sale of equipment, $0.2 million from returns on aircraft deposits, and $0.2million in tax benefit from the exercise of options to purchase shares ofcommon stock.  We repurchased $90.8million of outstanding shares of our common stock,  invested $86.7 million in flight equipment,made principal payments on long-term debt of $82.2 million, completed netpurchases of $47.3 million of marketable securities, spent $39.4 million forbuildings and ground equipment, purchased $3.0 million in other assets and paid$5.6 million in cash dividends.  Thesefactors resulted in a $29.4 million increase in cash and cash equivalentsduring the nine months ended September 30, 2008.

 

On September 4,2008, we announced our agreement to purchase up to 20% of the equity of TripLinhas Aereas (“Trip”), a Brazilian regional airline, in a series of stagedinvestments aggregating up to for $30 million. As of September 30, 2008, we had made an investment of $5 millionfor a 6.7% interest in Trip, which is recorded as an “Other asset” on ourunaudited consolidated balance sheet. Provided Trip meets certain financial targets, we are scheduled to makean additional $15 million investment in Trip on March 1, 2009 and another$10 million investment in Trip on March 1, 2010.

 

In June 2008, we were notified thatMidwest was in the process of organizing a financial restructuring. We reachedagreement with Midwest during the quarter to reduce the number of aircraftoperating under the Midwest Services Agreement from 21 aircraft to 12 aircraft.As part of the modified terms, we agreed to defer a portion of Midwest’s weeklypayment obligations from July 1, 2008 through November 30, 2008.  The amount we agreed to defer plus certainamounts Midwest owed to us at June 30, 2008, is payable plus interest byMidwest in four equal quarterly payments starting on August 31, 2009. Thetotal amount the Company has agreed to defer through November 30, 2008 is$8.9 million.

 

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

 

Our position in marketable securities,consisting primarily of bonds, bond funds and commercial paper, increased to$566.7 million at September 30, 2008, compared to $522.9 million at December 31,2007.  The increase in marketablesecurities was due primarily to the items discussed above.

 

At September 30, 2008, our total capitalmix was 43.2% equity and 56.8% long-term debt, compared to 41.8% equity and58.2% long-term debt at December 31, 2007.

** **

**SignificantCommitments 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**  | ** ** | **Oct-Dec  2008** | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                      | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Firm aircraft commitments                                       |       | $          | 528,030    |              | $          | 97,780     |       | $          | 332,239    |       | $          | 98,011     |       | $              | —     |   | $ | — |   | $ | — |   |
| Operating lease payments for aircraft and  facility obligations |       | 3,090,984  |       | 86,391            |       | 324,843    |       | 309,221    |       | 299,383    |       | 299,858    |       | 1,771,288      |       |
| Interest commitments                                            |       | 712,822    |       | 30,001            |       | 92,927     |       | 86,570     |       | 79,941     |       | 72,194     |       | 351,189        |       |
| Principal maturities on long-term debt                          |       | 1,786,409  |       | 37,602            |       | 126,731    |       | 132,297    |       | 135,787    |       | 186,006    |       | 1,167,986      |       |
| Total commitments and obligations                               |       | $          | 6,119,245  |              | $          | 252,774    |       | $          | 876,740    |       | $          | 626,099    |       | $              | 515,111    |   | $ | 558,058 |   | $ | 3,290,463 |   |

 

*Purchase Commitments and Options*

 

On October 12, 2007, we announced thatSkyWest Airlines plans to acquire 22 additional regional jet aircraft through2010, 18 of which SkyWest Airlines intends to operate for United Express, aspart of an aircraft transition plan, 

 

24

----

Tableof Contents

 

allowing United Express to remove 23 30-seat Brasilia turboprops fromthe contract reimbursement model contemplated by the United Express Agreement andadd 66-seat regional jet aircraft for United Express flying. Generally, theturboprop removals under the United Express Agreement are intended to occur inconjunction with deliveries of new regional jet aircraft in order to facilitatea smooth transition in existing markets. Additionally, SkyWest Airlines intendsto exchange four 50-seat CRJ200s for four 76-seat CRJ900s seats in its DeltaConnection operations. These four 50-seat CRJ200s are scheduled to be placedinto service under other capacity purchase agreements. On November 30,2007, we announced that we placed a firm order with Bombardier for the 22 newaircraft. We are scheduled to take delivery of these aircraft beginning in thefourth quarter of 2008 and continuing through the first quarter of 2010. Totalexpenditures for these aircraft and related flight equipment, including amountsfor contractual price escalations, are estimated to be approximately$528.0 million through the first quarter of 2010. Additionally, ouragreement with Bombardier includes options for another 22 aircraft that can bedelivered in either 70 or 90-seat configurations. Delivery dates for theseaircraft remain subject to final determination as we agree upon with our majorpartners.

 

We have not historically funded a substantialportion of our aircraft acquisitions with working capital.  Rather, we have generally funded our aircraftacquisitions through a combination of operating leases and long-term debtfinancing.  At the time of each aircraftacquisition, we evaluate the financing alternatives available to us, and selectone or more of these methods to fund the acquisition.  In the event that alternative financingcannot be arranged at the time of delivery, Bombardier has typically financedour aircraft acquisitions until more permanent arrangements can be made.  Subsequent to this initial acquisition of anaircraft, we may also refinance the aircraft or convert one form of financingto another (e.g., replacing debt financing with leveraged lease financing).

 

At present, we intend to satisfy our 2008firm aircraft purchase commitment, as well as our acquisition of any additionalaircraft, through a combination of operating leases and debt financing,consistent with our historical practices. Based on current market conditions and discussions with prospectiveleasing organizations and financial institutions, we currently believe that wewill be able to obtain financing for our committed acquisitions, as well asadditional aircraft, without materially reducing the amount of working capitalavailable for our operating activities.****Nonetheless,recent disruptions in the credit markets have resulted in greater 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 leaseobligations primarily relating to our aircraft fleet.  At September 30, 2008, we had 285aircraft under lease with remaining terms ranging from one to 18 years.  Future minimum lease payments due under alllong-term operating leases were approximately $3.1 billion at September 30,2008.  Assuming a 7.4% discount rate,which is the rate we have used to approximate the implicit rates within theapplicable aircraft leases, the present value of these lease obligations wouldhave been equal to approximately $1.9 billion at September 30, 2008.

 

*Long-term Debt Obligations*

 

Our total long-term debt at September 30, 2008 was $1,786.4million, of which $1,780.2 million related to the acquisition of Brasiliaturboprop, CRJ200, CRJ700 and CRJ900 aircraft and $6.2 million related to ourcorporate office building.  The averageeffective rate on the debt related to the Brasilia turboprop, CRJ200, CRJ700and CRJ900 aircraft was approximately 5.33% at September 30, 2008.

 

*Fair ValueMeasurements*

 

As discussed in Note H to our unauditedcondensed consolidated financial statements, we adopted the provisions of  SFAS No. 157 effective January 1,2008.  We have determined that we utilize unobservable (Level 3)inputs in determining the fair value of our auction rate security investments,which totaled $8.9 million as of September 30, 2008.

 

Our auction rate security investments areclassified as available for sale securities and reflected at fairvalue.  In prior periods, due to the auction process which took placeevery 30-35 days for most securities, quoted market prices were readilyavailable, which would qualify as Level 1 under SFAS No. 157.  However,due to events in credit markets during the nine months ended September 30,2008, the auction events for most of these investments failed, and, therefore,we determined the estimated fair values of these securities utilizing adiscounted cash flow analysis as of September 30, 2008.  Theseanalyses consider, among other items, the collateralization underlying thesecurity investments, the expected future cash flows, including the finalmaturity, associated with the securities, and the expectation of the next timethe security is anticipated to have a successful auction. Due to theseevents, we reclassified these instruments as Level 3 during the first quarterof 2008.

 

25

----

Tableof Contents

 

In addition, our holdings of auction rate securities represented lessthan ten percent of our total cash, cash equivalent, and marketable securitiesbalance at September 30, 2008.

 

**Seasonality**

 

Our results of operations for any interimperiod are not necessarily indicative of those for the entire period, since theairline industry 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 decreased travelduring the months November through February and by inclement weatherwhich occasionally results in cancelled flights during the winter months.

 

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

** **

Aircraft Fuel

 

In the past, we have not experienced difficulties with fuel availabilityand we currently expect to be able to obtain fuel at prevailing prices inquantities sufficient to meet our future needs. Pursuant to our contract flying arrangements, United has agreed to bearthe economic risk of fuel price fluctuations on our contracted United Expressflights.  On our Delta Connectionregional jet flights, Delta has agreed to bear the economic risk of fuel pricefluctuations.  We bear the economic riskof fuel price fluctuations on our pro-rate operations.  As of September 30, 2008, essentiallyall of our Brasilia turboprops flown for Delta were flown under pro-ratearrangements while, approximately 41% of our Brasilia turboprops flown in theUnited system were flown under pro-rate arrangements. The average price pergallon of aircraft fuel increased 56.8% to $3.92 for the three months ended September 30,2008, from $2.50 for the three months ended September 30, 2007.  Forillustrative purposes only, we have estimated the impact of the market risk offuel on our pro-rate operations using a hypothetical increase of 25% in theprice per gallon we purchase. Based on this hypothetical assumption, we wouldhave incurred an additional $2.6 million in fuel expense for the three monthsended September 30, 2008.

 

Interest Rates

 

Our earnings are affected by changes in interest rates based on theamounts of variable rate long-term debt and the amount of cash and securitieswe hold during any given period.  Theinterest rates applicable to variable rate notes may rise and increase theamount of interest expense.  We wouldalso receive higher amounts of interest income on cash and securities held atthe time; however, the market value of our available-for-sale securities wouldlikely decline.  At September 30,2008, we had variable rate notes representing 48.6% of our total long-term debtcompared to 49.6% of our total long-term debt at December 31, 2007.  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 $2.2 million ininterest expense and received $1.7 million additional interest income for thethree months ended September 30, 2008. Based on this same hypothetical assumption, we would have incurred anadditional $6.7 million in interest expense and received $4.9 millionadditional interest income for the nine months ended September 30, 2008.

 

We currently intend to finance theacquisition of aircraft through manufacturer financing, third-party leases orlong-term borrowings. Changes in interest rates may impact the actual cost tous to acquire these aircraft. To the extent we place these aircraft in service underour code-share agreements with Delta and Midwest, our code-share agreementscurrently provide that reimbursement rates will be adjusted higher or lower toreflect changes in our aircraft rental rates.

 

Auction Rate Securities

 

We have investments in auction ratesecurities, which are classified as available for sale securities and reflectedat fair value.  Due primarily to instability in credit markets, wesold a portion of these investments, and ended second quarter 2008 withinvestments valued at a total of $8.9 million, of which $6.3 million wereclassified as Marketable Securities and $2.6 million were classified as OtherAssets in our unaudited condensed consolidated balance sheet as of September 30,2008.  Auction rate securities held at December 31, 2007, were$124 million, all of which were classified as MarketableSecurities.  For a more detailed discussion on auction ratesecurities, including our methodology for estimating their fair value, see NoteH to our unaudited condensed consolidated financial statements appearingelsewhere in this Report.

 

26

----

Table of Contents

 

**ITEM 4.   CONTROLS AND PROCEDURES**

** **

(a) Evaluation ofdisclosure controls and procedures

 

Our management, with the participation of ourchief executive officer and chief financial officer, performed an evaluation ofour disclosure controls and procedures as of September 30, 2008.  Our disclosure controls and procedures havebeen designed to provide reasonable assurance that the information we arerequired to disclose in the reports we file or submit under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), is accumulated andcommunicated to our management to allow timely decisions regarding requireddisclosure, and recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission.  Our chief executive officerand chief financial officer have concluded that the controls and procedureswere effective as of September 30, 2008 to reasonably ensure theachievement of these objectives. While our disclosure controls and proceduresprovide reasonable assurance that material information will be available on atimely basis, this assurance is subject to limitations inherent in any controlsystem, no matter how well it is designed or administered, including, withoutlimitation, resource constraints and the need for management to apply itsjudgment in evaluating the benefits of possible controls and proceduresrelative to their costs.

 

(b) Changes in Internal Control Over Financial Reporting

 

There were no significantchanges (including corrective actions with regard to material weaknesses) inour internal control over financial reporting that occurred during the periodcovered by this Report that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

*** ***

**PART II. OTHER INFORMATION**

** **

**ITEM 1.   LEGAL PROCEEDINGS**

** **

We are subject to certain legal actions whichwe consider routine to our business activities. As of September 30, 2008,our management believed, after consultation with legal counsel, that theultimate outcome of such legal matters is not likely to have a material adverseeffect on our financial position, liquidity or results of operations.  However, the following is a significantoutstanding legal matter.

 

*ASA and SkyWest Airlines v. Delta Air Lines*

 

During the quarter ended December 31,2007, Delta notified SkyWest, 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 we believe are payable as weekly scheduledwire payments to SkyWest and ASA.  As of September 30,2008, we had recognized a total of $32.4 million of revenue associated withfunds withheld by Delta.  On February 1,2008, SkyWest Airlines and ASA filed a lawsuit in Georgia state court disputingDelta’s treatment of the matter (the “Complaint”).  Deltafiled an Answer to the Complaint and a Counterclaim against SkyWestAirlines and ASA on March 24, 2008. Delta’s Counterclaim alleges that ASA and SkyWest Airlines breached theDelta Connection Agreements by invoicing Delta for the IROP expenses that werepaid pursuant to Delta’s policies, and claims only a portion of those expensesmay be invoiced to Delta.  Delta seeksunspecified damages in its Counterclaim.

 

On March 24, 2008, Delta also fileda Motion to Dismiss the Complaint. A hearing on the Motion was held June 5, 2008.  In an order entered June 13, 2008, theCourt granted in part and denied in part the Motion to Dismiss.  The Court denied the Motion to Dismisswith respect to the breach of contract claim contained in the Complaint.  The Court denied in part the Motion toDismiss with respect to the action for declaratory judgment contained in theComplaint, and granted in part the Motion to Dismiss to the extent theComplaint seeks to read alternative or supplemental obligations created byprior conduct into the Connection Agreements. The Court granted the Motion to Dismiss with respect to claims forestoppel, unilateral mistake, and mutual mistake contained in theComplaint.  SkyWest Airlines and ASA currently intend tovigorously pursue their claims set forth in the Complaint, to the extentpermitted by the Court’s ruling on the Motion to Dismiss, and theirdefenses to Delta’s counterclaims.

 

27

----

Table of Contents

 

We have evaluated the Delta dispute inaccordance with the provisions of Financial Accounting Standards Board No. 5(“FASB No.5”), Accounting for Contingencies. Based on the provisions of FASB No. 5,an estimated loss is accrued if the loss is probable and reasonably estimable.Because these conditions have not been satisfied, we have not recorded aloss in our condensed consolidated financial statements as of September 30,2008.

 

**ITEM 1A.   RISK FACTORS**

** **

Part I, Item 1A, “Risk Factors,” of ourAnnual Report on Form 10-K for the Year Ended December 31, 2007includes a detailed discussion of risks and uncertainties which could adverselyaffect our future results. The risk factors presented below reflect materialchanges to the risk factors in our Annual Report on Form 10-K for the YearEnded December 31, 2007.  The riskfactors below modify and supplement, and should be read in conjunction with,the risk factors and information disclosed in our Annual Report on  Form 10-K for the Year Ended December 31,2007.

 

**We may be negatively impacted by the troubledfinancial condition and restructuring of Midwest**

 

In June 2008, we were notified thatMidwest was in the process of organizing an out-of-court financialrestructuring.  In the event of a Midwestbankruptcy filing, Midwest may reject the Midwest Services Agreement in thebankruptcy proceedings. The Midwest Services Agreement currently provides forour operation of 12 CRJ200s. For the nine months ended September 30, 2008approximately 3.7% of our ASMs were generated by Midwest.  Midwest is currently working on a restructuringplan; and we have agreed to modify the payment terms of the Midwest ServicesAgreement, primarily to defer certain amounts payable to us by Midwest. Thereis no assurance that Midwest will ultimately succeed in its reorganizationefforts or will remain a going concern over the long term. In the event of aMidwest bankruptcy filing or in the event of a re-negotiated contract in anout-of-court financial restructuring arrangement, we have the residual aircraftownership risk.  Under such circumstancesif we are unable to operate the aircraft under alternative arrangements, suchevents would adversely affect our financial results.

 

**Economic and industry conditions constantlychange, and negative economic conditions in the United States and other countriesmay create challenges for us that could have a material adverse effect on ourbusiness and results of operations.**

 

Recent disruptions in the credit markets haveresulted in greater volatility, less liquidity, widening of credit spreads, anddecreased availability of financing. As a result of these factors, there can beno assurance that financing will be available to us on acceptable terms, if atall. An inability to obtain necessary additional financing on acceptable termswould have a material adverse impact on us and on our ability to sustain ouroperations.

 

28

----

Table of Contents

 
| **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 |

 

29

----

Table of Contents

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this Quarterly Report on Form 10-Q for thequarter ended September 30, 2008, to be signed on its behalf by theundersigned, thereunto duly authorized, on November 6, 2008.

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

 

30

----