SKYWEST INC 10-Q

ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis presents factors that had a material effect on the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three- and nine-month periods ended September 30, 2021, and 2020. Also discussed is our financial condition as of September 30, 2021, and December 31, 2020. You should read this discussion in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2021, including the notes thereto, appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of uncertainties, risks and assumptions associated with these statements. Cautionary Statement Concerning Forward-Looking Statements Certain of the statements contained in this Report should be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. Readers should keep in mind that all forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the uncertainty of the duration, scope and impact of COVID-19; a further spread or worsening of COVID-19; the consequences of the COVID-19 pandemic to global economic conditions, the travel industry and our major airline partners in general and our financial condition and results of operations in particular; the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel, including as a result of the COVID-19 pandemic; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on our operations; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest conducts flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; realization of manufacturer residual value guarantees on applicable SkyWest aircraft; residual aircraft values and related impairment charges; the impact of global instability; labor relations and costs; potential fluctuations in fuel costs, and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; and the ability to attract and retain qualified pilots, as well as other factors identified under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, under the heading “Risk Factors” in Part II, Item 1A of this Report, elsewhere in this Report, in our other filings with the Securities and Exchange Commission (the “SEC”) and other unanticipated factors. There may be other factors that may affect matters discussed in forward-looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law. Impact of the COVID-19 Pandemic COVID-19, which was declared a global health pandemic by the World Health Organization in March 2020, has had a significant, negative impact on our business and financial results beginning in March 2020 and has materially 23 Table of Contents and adversely affected our revenues, particularly under our prorate agreements. We operated 137,493 flights during the third quarter of 2020, which increased to 210,251 flights, or 52.9%, during the third quarter of 2021. However, we operated 219,272 flights during the third quarter of 2019 and we have not returned to pre-COVID flight levels as of September 30, 2021. The rate of recovery from the impact of COVID-19 and whether such recovery will be sustained are uncertain as factors outside of our control, including the distribution and efficacy of vaccines, government-imposed vaccine mandates, new variants of the virus, and continued or new government travel restrictions, cannot be estimated. Liquidity. At September 30, 2021, we had $953.5 million in total available liquidity, consisting of $912.5 million in cash and marketable securities and $41.0 million available under SkyWest Airlines’ line of credit. Overview We have the largest regional airline operation in the United States through our operating subsidiary SkyWest Airlines, Inc. (“SkyWest Airlines”). As of September 30, 2021, we offered scheduled passenger service with approximately 2,250 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. Our fleet of Embraer E175 regional jet aircraft (“E175”), Canadair CRJ900 regional jet aircraft (“CRJ900”) and Canadair CRJ700 regional jet aircraft (“CRJ700”) have a multiple-class seat configuration, whereas our CRJ200 aircraft have a single-class seat configuration. As of September 30, 2021, we had 615 total aircraft in our fleet, including 486 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ E175 CRJ900 CRJ700 CRJ200 Total United 90 ​ — ​ 19 ​ 112 ​ 221 Delta ​ 71 ​ 40 ​ 5 ​ 29 ​ 145 American 6 ​ — ​ 82 ​ — ​ 88 Alaska 32 ​ — ​ — ​ — ​ 32 Aircraft in scheduled service or under contract ​ 199 ​ 40 ​ 106 ​ 141 ​ 486 Leased to third parties — ​ 5 ​ 34 ​ — ​ 39 Other* — ​ 4 ​ 22 ​ 64 ​ 90 Total Fleet 199 ​ 49 ​ 162 ​ 205 ​ 615 *As of September 30, 2021, other aircraft include: supplemental spare aircraft supporting our code-share agreements and may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, or aircraft that are in the process of being parted out. Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements, typically in the form of capacity purchase agreements or prorate agreements, between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners. Our success is principally dependent on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics. From September 30, 2020, to September 30, 2021, we made several changes to our fleet count under our flying agreements, including the addition of ten new E175 aircraft, 20 used CRJ700 aircraft, one new CRJ900 aircraft, and seven used CRJ200 aircraft. Additionally, from September 30, 2020, to September 30, 2021, we increased the number of CRJ700 aircraft we leased to third parties from 13 aircraft to 34 aircraft and leases on four CRJ200 aircraft with third parties terminated. We anticipate our fleet will continue to evolve, as we are scheduled to add 14 new E175 aircraft with American by the end of 2022, nine new E175 aircraft with Alaska by the first half of 2023, 16 new E175 aircraft with Delta by the first half of 2023 and 19 used CRJ700 aircraft with American by 2023. The 16 E175 aircraft with Delta will replace 16 older SkyWest-owned or financed CRJ900 aircraft currently operating under contract with Delta. Under the terms of the contract with Delta, Delta has the right to purchase the 16 E175 aircraft at the end of the contract term at a price estimated to be the fair value at the end of the contract. Timing of these anticipated deliveries may be subject to change as we are coordinating with our major airline partners in response to the COVID-19 demand recovery or other factors. Our primary objective in the fleet changes is to improve our profitability by adding new E175 aircraft and used CRJ aircraft to capacity purchase agreements, and potentially removing older aircraft from service that typically require higher maintenance costs. 24 Table of Contents As of September 30, 2021, approximately 45.5% of our aircraft in scheduled service or under contract were operated for United, approximately 29.8% were operated for Delta, approximately 18.1% were operated for American and approximately 6.6% were operated for Alaska. Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee arrangements (referred to as “capacity purchase agreements”) and revenue-sharing arrangements (referred to as “prorate” agreements). For the nine months ended September 30, 2021, capacity purchase revenue and prorate revenue represented approximately 83.9% and 16.1%, respectively, of our total flying agreements revenue. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures, the number of aircraft under contract and other operating measures. On prorate routes, we have more control over scheduling, pricing and seat inventories, and we share passenger fares with our major airline partners according to prorate formulas. Our prorate revenue and profitability may fluctuate based on ticket prices and passenger loads, and we are responsible for the operating costs of the prorate flights, including fuel and airport costs. Third Quarter Summary We had total operating revenues of $744.8 million for the three months ended September 30, 2021, a 62.8% increase compared to total operating revenues of $457.5 million for the three months ended September 30, 2020. We had net income of $9.7 million, or $0.19 per diluted share, for the three months ended September 30, 2021, compared to net income of $33.7 million, or $0.66 per diluted share, for the three months ended September 30, 2020. The significant items affecting our revenue and operating expenses during the three months ended September 30, 2021, are outlined below: Revenue The number of aircraft we have in scheduled service and the number of block hours we incur on our flights are primary drivers to our flying agreements revenue under our capacity purchase agreements. The number of flights we operate and the corresponding number of passengers we carry are the primary drivers of our revenue under our prorate flying agreements. As a result of higher passenger demand compared to the onset of the COVID-19 pandemic, the number of aircraft we operated increased from 448 as of September 30, 2020, to 486 as of September 30, 2021; the number of block hours increased from 222,561 for the three months ended September 30, 2020, to 370,462 for the three months ended September 30, 2021, or by 66.5%; and the number of passengers we carried increased from 4.9 million for the three months ended September 30, 2020, to 10.9 million, or by 120.9%. As a result of increased flight schedules and additional aircraft operating under our capacity purchase agreements for the three months ended September 30, 2021, as compared to three months ended September 30, 2020, our capacity purchase revenue increased $206.5 million, or 53.7%. Additionally, we recognized $19.2 million of previously deferred revenue during the three months ended September 30, 2021, compared to deferring revenue of $29.6 million of fixed monthly payments received under our capacity purchase agreements for the three months ended September 30, 2020, as further described in the section of this report entitled “Results of Operations.” As a result of increased flight schedules and passengers carried on our prorate routes, our prorate revenue increased $67.5 million, or 111.1% for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. Operating Expenses Our total operating expenses increased $314.8 million, or 82.2% for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. This increase was primarily due to an increase in the number of flights we operated and a non-cash impairment charge of $84.6 million for the three months ended September 30, 2021. Departures increased from 137,493 for the three months ended September 30, 2020, to 210,251 for the three months ended September 30, 2021, or by 52.9%. During the three months ended September 30, 2021, we recorded a non-cash impairment charge of $84.6 million to write-down CRJ900 aircraft operating under Delta capacity purchase agreements to their estimated fair value. Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.” 25 Table of Contents Fleet Activity The following table summarizes our fleet scheduled for service or under contract as of: ​ ​ ​ ​ ​ ​ ​ Aircraft in Service or Under Contract September 30, 2021 December 31, 2020 September 30, 2020 E175s 199 193 189 CRJ900s 40 39 39 CRJ700s 106 90 86 CRJ200s 141 130 134 Total 486 452 448 ​ Subsequent IT Outage In October 2021, we identified malware on our system resulting from a cyberattack. We quarantined the malware without disruption to our operations and implemented remedial measures. In connection with these remedial measures, we experienced a server outage that resulted in approximately 1,700 flight cancelations. We estimate the adverse impact of these cancelations on our financial results for the three months ending December 31, 2021, will be $15 million to $20 million (pre-tax). Critical Accounting Policies Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2020, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2020. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, aircraft leases, long-lived assets, self-insurance and income tax. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and may differ materially, from such estimates. Results of Operations Three Months Ended September 30, 2021, and 2020 Operational Statistics The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below. The increase in block hours, departures and passengers carried during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, was due to the increase in demand related to the ongoing recovery from the COVID-19 pandemic. However, we completed 219,272 flights and incurred 375,933 block hours during the three months ended September 30, 2019, indicating our flight schedules have not returned to pre-COVID-19 levels. 26 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, Block hours by aircraft type: 2021 2020 % Change E175s 169,143 ​ 117,342 ​ 44.1 % CRJ900s ​ 34,031 ​ 12,861 ​ 164.6 % CRJ700s ​ 78,788 ​ 45,807 ​ 72.0 % CRJ200s 88,500 ​ 46,551 ​ 90.1 % Total block hours ​ 370,462 ​ 222,561 ​ 66.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Departures 210,251 ​ 137,493 ​ 52.9 % Passengers carried 10,862,343 ​ 4,916,403 ​ 120.9 % Passenger load factor 79.1 % 54.1 % 25.0 pts Average passenger trip length (miles) 537 ​ 503 ​ 6.8 % Operating Revenues The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, ​ 2021 2020 $ Change % Change Flying agreements ​ $ 719,084 ​ $ 445,048 ​ $ 274,036 ​ 61.6 % Lease, airport services and other ​ 25,699 ​ 12,445 ​ 13,254 ​ 106.5 % Total operating revenues ​ $ 744,783 ​ $ 457,493 ​ $ 287,290 62.8 % Flying agreements revenue primarily consists of revenue earned on flights we operate under our capacity purchase agreements and prorate agreements with our major airline partners. Lease, airport services and other revenues consist of revenue earned from leasing aircraft and spare engines to third parties separate from our capacity purchase agreements and providing airport counter, gate and ramp services. We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, ​ 2021 2020 $ Change % Change Capacity purchase agreements revenue: flight operations $ 308,273 $ 175,753 $ 132,520 75.4 % Capacity purchase agreements revenue: aircraft lease and fixed revenue ​ ​ 282,498 ​ ​ 208,516 ​ ​ 73,982 ​ 35.5 % Prorate agreements revenue ​ 128,313 ​ 60,779 ​ 67,534 111.1 % Flying agreements revenue $ 719,084 $ 445,048 $ 274,036 61.6 % The increase in “Capacity purchase agreements revenue: flight operations” of $132.5 million was primarily due to an increase in scheduled flights we operated under our contracts with our major airline partners as a result of the ongoing COVID-19 demand recovery. Our completed departures increased 52.9% and completed block hours increased 66.5% during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. We provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended September 30, 2021, and 2020 in response to the COVID-19 demand disruption impact to our partners. The increase in “Capacity purchase agreements revenue: aircraft lease and fixed revenue” of $74.0 million was primarily due to recognizing previously deferred revenue during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, combined with aircraft lease and fixed rate revenue generated from ten E175 aircraft added to our fleet since September 30, 2020. Under our capacity purchase agreements, we are paid a fixed amount per month per aircraft over the contract term. We recognize the fixed amount per aircraft as revenue proportionately to the number of flights we complete, our performance obligation, for each reporting period. During the three months ended September 30, 2021, the increase in our flight schedules resulted in recognizing $19.2 million of previously deferred revenue. For the three months ended September 30, 2020, we deferred recognizing revenue on $29.6 million of fixed monthly cash payments we received under our capacity purchase agreements. Our deferred revenue 27 Table of Contents related to the fixed payments will adjust over the remaining contract term for each capacity purchase agreement based on the number of flights we complete each reporting period relative to the number of flights we anticipate completing over the remaining contract term of each capacity purchase agreement. The deferred revenue balance applicable to each contract will be recorded as revenue by the end of each respective contract term. Our total deferred revenue balance was $118.4 million as of September 30, 2021. The increase in prorate agreements revenue of $67.5 million was primarily due to the increase in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to the ongoing COVID-19 demand recovery. The increase in lease, airport services and other revenues of $13.3 million was primarily due an increase in the number of aircraft leased to third parties from 22 aircraft at September 30, 2020, to 39 aircraft at September 30, 2021, and an increase in airport service revenue due to the increase in the number of flights operated at locations where we were contracted to provide airport customer service during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Operating Expenses Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, ​ ​ 2021 ​ 2020 ​ $ Change ​ % Change Salaries, wages and benefits ​ $ 265,603 ​ $ 194,516 ​ $ 71,087 ​ 36.5 % Aircraft maintenance, materials and repairs ​ 209,795 ​ 150,148 ​ 59,647 39.7 % Depreciation and amortization ​ 109,597 ​ 121,467 ​ (11,870) (9.8) % Airport-related expenses ​ 25,992 ​ 18,003 ​ 7,989 44.4 % Aircraft fuel ​ 32,561 ​ 13,641 ​ 18,920 138.7 % Aircraft rentals ​ 16,098 ​ 15,785 ​ 313 2.0 % Special items - impairment charges ​ 84,592 ​ — ​ 84,592 NM ​ Payroll support grant ​ ​ (115,352) ​ ​ (190,200) ​ ​ 74,848 ​ (39.4) % Other operating expenses ​ 68,847 ​ 59,580 ​ 9,267 15.6 % Total operating expenses ​ $ 697,733 ​ $ 382,940 ​ $ 314,793 82.2 % Interest expense ​ 28,980 ​ 30,150 ​ (1,170) (3.9) % Total airline expenses ​ $ 726,713 ​ $ 413,090 ​ $ 313,623 75.9 % NM = Not Meaningful Salaries, wages and benefits. The $71.1 million, or 36.5%, increase in salaries, wages and benefits was due to the increase in direct labor costs that resulted from a significantly higher number of flights we operated during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Aircraft maintenance, materials and repairs. The $59.6 million, or 39.7%, increase in aircraft maintenance expense was primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets intended to extend the operational performance and reliability of its older aircraft, including increased engine maintenance expense during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Depreciation and amortization. The $11.9 million, or 9.8%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since September 30, 2020. This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of ten new E175 aircraft and spare engines since September 30, 2020, as well as the acquisition of 30 used CRJ700 aircraft since September 30, 2020. 28 Table of Contents Airport-related expenses. Airport-related expenses include airport-related customer service costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents. For clarity, our employee airport customer service labor costs are reflected in salaries, wages and benefits and customer service labor costs we outsource to third parties are included in airport-related expenses. The $8.0 million, or 44.4%, increase in airport-related expenses was primarily due to an increase in our prorate passengers. Aircraft fuel. The $18.9 million, or 138.7%, increase in fuel cost was primarily due to an increase in the number of flights we operated under our prorate agreements, corresponding increase in gallons of fuel we purchased and an increase in our average fuel cost per gallon from $1.75 for the three months ended September 30, 2020, to $2.55 for the three months ended September 30, 2021. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our capacity purchase contracts are either purchased directly by our major airline partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, (in thousands) 2021 2020 % Change Fuel gallons purchased ​ ​ 12,779 ​ ​ 7,785 ​ 64.1 % Fuel expense ​ $ 32,561 ​ $ 13,641 138.7 % ​ Aircraft rentals. The $0.3 million, or 2.0%, increase in aircraft rentals was primarily related to two additional aircraft leased from third parties since September 30, 2020. Special items - impairment charges . Special items for the three months ended September 30, 2021, consisted of a non-cash impairment charge on SkyWest Airlines’ CRJ900 aircraft of $84.6 million. During the three months ended September 30, 2021, SkyWest reached an agreement with Delta to place 16 new E175 aircraft under contract beginning in 2022. These E175 aircraft will replace 16 older SkyWest-owned or financed CRJ900 aircraft currently operating under contract with Delta. We do not anticipate extending the contract term with Delta on these 16 CRJ900 aircraft. These factors, combined with the market value of SkyWest’s CRJ900 fleet, resulted in a non-cash impairment charge of $84.6 million. Payroll support grant. In April 2021, we entered into an agreement with U.S. Treasury and received $250.0 million in emergency relief through the American Rescue Plan Act payroll support program, of which $205.0 million was in the form of payroll support grants that were recognized as a reduction in labor expense over the periods the grants intended to compensate. We recognized $115.4 million in payroll support grant proceeds we received as a reduction to our operating expenses for the three months ended September 30, 2021. We recognized $190.2 million in payroll support grant proceeds we received under similar agreements with U.S. Treasury as a reduction to our operating expenses for the three months ended September 30, 2020. As of September 30, 2021, we have recognized the full payroll support grant benefits received from the U.S. Treasury as a reduction to our operating expenses. Other operating expenses. Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, crew hotel costs and credit loss reserves. The $9.3 million, or 15.6%, increase in other operating expenses was primarily related to an increase in other operating costs that correspond to the higher number of flights we operated during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, such as crew per diem, crew hotel costs and simulator costs. Interest Expense. The $1.2 million, or 3.9%, decrease in interest expense was primarily related to an overall lower effective interest rate during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. ​ Total airline expenses. Our total airline expenses, comprised of our total operating expenses and interest expense, increased $313.6 million, or 75.9%, due to an increase in direct operating costs attributed to the higher number of completed flights during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, and due to the non-cash impairment charge of $84.6 million on SkyWest operated CRJ900 aircraft during the three months ended September 30, 2021. 29 Table of Contents As our interest expense is primarily attributed to debt associated with financing aircraft under our capacity purchase agreements and as revenue earned under our capacity purchase agreements is intended to compensate us for our aircraft ownership costs, including interest expense, we believe our total airline expense is meaningful expense measure for management discussion and analysis purposes. Summary of interest income, other income (expense) and provision for income taxes: Interest income. Interest income decreased $1.2 million, or 83.0%, during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. The decrease in interest income was primarily related to a decrease in average interest rates attributed to our marketable securities subsequent to September 30, 2020. Other income (expense), net. Other income primarily consisted of loss related to our investment in a joint venture with a third party. The loss was due to discrete engine overhaul expenses incurred by the joint venture party during the three months ended September 30, 2021. ​ Provision for income taxes. For the three months ended September 30, 2021, and 2020, our effective income tax rates were 31.9% and 27.2%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes and the impact of non-deductible expenses. The increase in the effective tax rate primarily relates to a greater impact related to non-deductible expenses for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, as a result of lower pre-tax earnings for the three months ended September 30, 2021, compared to the same period of 2020. Net income. Primarily due to the factors described above, we generated net income of $9.7 million, or $0.19 per diluted share, for the three months ended September 30, 2021, compared to net income $33.7 million, or $0.66 per diluted share, for the three months ended September 30, 2020. Nine Months Ended September 30, 2021, and 2020 Operational Statistics The following table sets forth our major operational statistics and the associated percentage changes for the periods identified below. The increase in block hours, departures and passengers carried during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was due to the increase in demand related to the ongoing recovery from the COVID-19 pandemic which began to negatively impact our operational statistics in the month of March 2020. We completed 627,799 flights and incurred 1,096,104 block hours during the nine months ended September 30, 2019, indicating our flight schedules have not returned to pre-COVID-19 levels. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, Block hours by aircraft type: 2021 2020 % Change E175s 446,867 ​ 311,476 ​ 43.5 % CRJ900s ​ 87,750 ​ 45,214 ​ 94.1 % CRJ700s ​ 215,263 ​ 144,547 ​ 48.9 % CRJ200s 220,809 ​ 204,573 ​ 7.9 % Total block hours ​ 970,689 ​ 705,810 ​ 37.5 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Departures 550,643 ​ 427,531 ​ 28.8 % Passengers carried 25,872,805 ​ 15,583,236 ​ 66.0 % Passenger load factor 72.0 % 56.7 % 15.3 pts Average passenger trip length (miles) 536 ​ 495 ​ 8.3 % ​ 30 Table of Contents Operating Revenues The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, ​ 2021 2020 $ Change % Change Flying agreements ​ $ 1,863,242 ​ $ 1,490,912 ​ $ 372,330 ​ 25.0 % Lease, airport services and other ​ 73,086 ​ 46,557 ​ 26,529 ​ 57.0 % Total operating revenues ​ $ 1,936,328 ​ $ 1,537,469 ​ $ 398,859 25.9 % Flying agreements revenue primarily consists of revenue earned on flights we operate under our capacity purchase agreements and prorate agreements with our major airline partners. Lease, airport services and other revenues consist of revenue earned from leasing aircraft and spare engines to third parties separate from our capacity purchase agreements and providing airport counter, gate and ramp services. We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, ​ ​ 2021 ​ 2020 ​ $ Change ​ % Change Capacity purchase agreements revenue: flight operations $ 792,501 $ 674,222 $ 118,279 17.5 % Capacity purchase agreements revenue: aircraft lease and fixed revenue ​ 770,548 ​ 619,354 ​ 151,194 24.4 % Prorate agreements revenue ​ 300,193 ​ ​ 197,336 ​ ​ 102,857 52.1 % Flying agreements revenue ​ $ 1,863,242 ​ $ 1,490,912 ​ $ 372,330 25.0 % The increase in “Capacity purchase agreements revenue: flight operations” of $118.3 million was primarily due to an increase in scheduled flights we operated under our contracts with our major airline partners as a result of the ongoing COVID-19 demand recovery. Our completed departures increased 28.8% and completed block hours increased 37.5% during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. We provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the nine months ended September 30, 2021, and 2020 in response to the COVID-19 demand disruption impact to our partners. The increase in “Capacity purchase agreements revenue: aircraft lease and fixed revenue” of $151.2 million was primarily due to a reduction in deferred revenue for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, combined with an increase in aircraft lease and fixed rate revenue generated from ten E175 aircraft added to our fleet since September 30, 2020. Under our capacity purchase agreements, we are paid a fixed amount per month per aircraft over the contract term. We recognize the fixed amount per aircraft as revenue proportionately to the number of flights we complete, our performance obligation, for each reporting period. We operated a materially lower number of flights during the nine months ended September 30, 2021, and 2020 compared to historical levels due to a reduction in flight schedules resulting from the COVID-19 pandemic. Due to the significantly reduced flight activity during the nine months ended September 30, 2021, and 2020, and based on an anticipated increase in future monthly flight volumes over the remaining contract terms, we determined the fixed amount per month per aircraft received during the nine months ended September 30, 2021, and 2020 was disproportionately high relative to the volume of flights operated during the nine months ended September 30, 2021, and 2020. Accordingly, we deferred recognizing revenue of $7.7 million and $98.6 million of fixed monthly cash payments we received under our capacity purchase agreements for the nine months ended September 30, 2021, and September 30, 2020, respectively. Our deferred revenue related to the fixed payments will adjust over the remaining contract term for each capacity purchase agreement based on the number of flights we complete each reporting period relative to the number of flights we anticipate completing over the remaining contract term of each capacity purchase agreement. The deferred revenue balance applicable to each contract will be recorded as revenue by the end of each respective contract term. Our total deferred revenue balance was $118.4 million as of September 30, 2021. The increase in prorate agreements revenue of $102.9 million was primarily due to the increase in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to the COVID-19 demand recovery. 31 Table of Contents The increase in lease, airport services and other revenues of $26.5 million was primarily due an increase in the number of aircraft leased to third parties from 22 aircraft at September 30, 2020, to 39 aircraft at September 30, 2021, and an increase in airport service revenue due to the increase in the number of flights operated at locations where we were contracted to provide airport customer service during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Operating Expenses Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, ​ ​ 2021 ​ 2020 ​ $ Change ​ % Change Salaries, wages and benefits ​ $ 718,868 ​ $ 613,895 ​ $ 104,973 ​ 17.1 % Aircraft maintenance, materials and repairs ​ 604,501 ​ 431,654 ​ 172,847 40.0 % Depreciation and amortization ​ 329,089 ​ 364,813 ​ (35,724) (9.8) % Airport-related expenses ​ 72,478 ​ 70,192 ​ 2,286 3.3 % Aircraft fuel ​ 77,622 ​ 45,875 ​ 31,747 69.2 % Aircraft rentals ​ 47,311 ​ 49,537 ​ (2,226) (4.5) % Special items - impairment charges ​ 84,592 ​ — ​ 84,592 NM ​ Payroll support grant ​ ​ (422,669) ​ ​ (342,138) ​ ​ (80,531) ​ 23.5 % Other operating expenses ​ 181,621 ​ 167,170 ​ 14,451 8.6 % Total operating expenses ​ $ 1,693,413 ​ $ 1,400,998 ​ $ 292,415 20.9 % Interest expense ​ 94,274 ​ 91,280 ​ 2,994 3.3 % Total airline expenses ​ $ 1,787,687 ​ $ 1,492,278 ​ $ 295,409 19.8 % NM = Not Meaningful Salaries, wages and benefits. The $105.0 million, or 17.1%, increase in salaries, wages and benefits was due to the increase in direct labor costs that resulted from a higher number of flights we operated during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Aircraft maintenance, materials and repairs. The $172.8 million, or 40.0%, increase in aircraft maintenance expense was primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. Depreciation and amortization. The $35.7 million, or 9.8%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated during 2020. This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of ten new E175 aircraft and spare engines since September 30, 2020, as well as the acquisition of 30 used CRJ700 aircraft since September 30, 2020. Airport-related expenses. Airport-related expenses include airport-related customer service costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents. For clarity, our employee airport customer service labor costs are reflected in salaries, wages and benefits and customer service labor costs we outsource to third parties are included in airport-related expenses. The $2.3 million, or 3.3%, increase in airport-related expenses was primarily due to an increase in our prorate passengers. Aircraft fuel. The $31.7 million, or 69.2%, increase in fuel cost was primarily due to an increase in the number of flights we operated under our prorate agreements and corresponding increase in gallons of fuel we purchased, and an increase in our average fuel cost per gallon from $1.92 for the nine months ended September 30, 2020, to $2.37 for the nine months ended September 30, 2021. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our capacity purchase contracts are either purchased directly by our major 32 Table of Contents airline partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, (in thousands) 2021 2020 % Change Fuel gallons purchased ​ ​ 32,771 ​ ​ 23,892 ​ 37.2 % Fuel expense ​ $ 77,622 ​ $ 45,875 69.2 % Aircraft rentals. The $2.2 million, or 4.5%, decrease in aircraft rentals was primarily related to a reduction of our fleet size that was financed through leases from third parties as a result of scheduled lease expirations subsequent to September 30, 2020. Special items - impairment charges . Special items for the nine months ended September 30, 2021, consisted of a non-cash impairment charge on SkyWest Airlines’ CRJ900 aircraft of $84.6 million. During the nine months ended September 30, 2021, SkyWest reached an agreement with Delta to place 16 new E175 aircraft under contract beginning in 2022. These E175 aircraft will replace 16 older SkyWest-owned or financed CRJ900 aircraft currently operating under contract with Delta. We do not anticipate extending the contract term with Delta on these 16 CRJ900 aircraft. These factors, combined with the market value of SkyWest’s CRJ900 fleet, resulted in a non-cash impairment charge of $84.6 million. Payroll support grant. In January 2021, we entered into an agreement with U.S. Treasury and received $233.1 million in emergency relief through the 2021 Appropriations Act payroll support program, of which $193.2 million was in the form of payroll support grants that were recognized as a reduction in labor expense over the periods the grants intended to compensate. Additionally, in April 2021, the Company received an additional $35.0 million in proceeds under the PSP Extension Agreement, of which $24.5 million was in the form of payroll support grants that were recognized as a reduction of labor expense during the period the grant was intended to compensate. In April 2021, we also entered into an agreement with U.S. Treasury and received $250.0 million in emergency relief through the American Rescue Plan Act payroll support program, of which $205.0 million was in the form of payroll support grants that were recognized as a reduction in labor expense over the periods the grants intended to compensate. We recognized $422.7 million in payroll support grant proceeds we received as a reduction to our operating expenses for the nine months ended September 30, 2021, compared to $342.1 million in payroll support grant proceeds we received under similar agreements with U.S. Treasury as a reduction to our operating expenses for the nine months ended September 30, 2020. Other operating expenses. Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, crew hotel costs and credit loss reserves. The $14.5 million, or 8.6%, increase in other operating expenses was primarily related to an increase in other operating costs that correspond to the higher number of flights we operated during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, such as crew per diem, crew hotel costs and simulator costs. Interest Expense. The $3.0 million, or 3.3%, increase in interest expense was primarily related to $3.6 million of deferred loan costs expense attributed to the payoff and termination of the secured loan agreement with U.S. Treasury during the nine months ended September 30, 2021, offset by an overall lower effective interest rate during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. ​ Total airline expenses. Our total airline expenses, comprised of our total operating expenses and interest expense, increased $295.4 million, or 19.8%, due to an increase in direct operating costs attributed to the higher number of completed flights during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, and due to the non-cash impairment charge of $84.6 million on SkyWest operated CRJ900 aircraft during the nine months ended September 30, 2021, offset by an increase in the payroll support grant benefit we recorded during the nine months ended September 30, 2021, compared to the benefit recorded for the nine months ended September 30, 2020. As our interest expense is primarily attributed to debt associated with financing aircraft under our capacity purchase agreements and as revenue earned under our capacity purchase agreements is intended to compensate us for our 33 Table of Contents aircraft ownership costs, including interest expense, we believe our total airline expense is meaningful expense measure for management discussion and analysis purposes. Summary of interest income, other income (expense) and provision for income taxes: Interest income. Interest income decreased $4.9 million, or 87.0%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The decrease in interest income was primarily related to a decrease in average interest rates attributed to our marketable securities subsequent to September 30, 2020. Other income (expense), net. Other income primarily consisted of income related to our investment in a joint venture with a third party. The loss was due to discrete engine overhaul expenses incurred by the joint venture party during the nine months ended September 30, 2021. ​ Provision for income taxes. For the nine months ended September 30, 2021, and 2020, our income tax provision rates were 26.1% and 27.1%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes and the impact of non-deductible expenses. The decrease in the effective tax rate primarily relates to a lesser impact related to non-deductible expenses for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, as a result of higher pre-tax earnings for the nine months ended September 30, 2021, compared to the same period of 2020, partially offset by a $1.4 million discrete tax benefit from excess tax deductions generated from employee transactions that occurred during the nine months ended September 30, 2020. Net income. Primarily due to the factors described above, we generated net income of 107.6 million, or $2.12 per diluted share, for the nine months ended September 30, 2021, compared to net income of $37.9 million, or $0.75 per diluted share, for the nine months ended September 30, 2020. Our Business Segments Three Months Ended September 30, 2021, and 2020 For the three months ended September 30, 2021, we had two reportable segments, which were the basis of our internal financial reporting: SkyWest Airlines and SkyWest Leasing. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief operating decision maker. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the three months ended September 30, ​ ​ (dollar amounts in thousands) ​ 2021 2020 $ Change % Change Operating Revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines operating revenue ​ $ 614,377 ​ $ 337,975 ​ $ 276,402 81.8 % SkyWest Leasing operating revenues ​ 130,406 ​ 119,518 ​ 10,888 9.1 % Total Operating Revenues ​ $ 744,783 ​ $ 457,493 ​ $ 287,290 62.8 % Airline Expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines airline expense ​ $ 635,307 ​ $ 306,009 ​ $ 329,298 107.6 % SkyWest Leasing airline expense ​ 91,406 ​ 107,081 ​ (15,675) (14.6) % Total Airline Expenses (1) ​ $ 726,713 ​ $ 413,090 ​ $ 313,623 75.9 % Segment profit: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines segment profit (loss) ​ $ (20,930) ​ $ 31,966 ​ $ (52,896) NM ​ SkyWest Leasing profit ​ 39,000 ​ 12,437 ​ 26,563 213.6 % Total Segment Profit ​ $ 18,070 ​ $ 44,403 ​ $ (26,333) (59.3) % Interest Income ​ 238 ​ 1,403 ​ (1,165) (83.0) % Other Income (Expense), net ​ (4,098) ​ 405 ​ (4,503) NM ​ Consolidated Income Before Taxes ​ $ 14,210 ​ $ 46,211 ​ $ (32,001) (69.2) % NM = Not Meaningful (1) Total Airline Expenses includes operating expense and interest expense 34 Table of Contents SkyWest Airlines Segment Profit (Loss). SkyWest Airlines segment profit decreased $52.9 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020. SkyWest Airlines block hour production increased to 370,462, or 66.5%, for the three months ended September 30, 2021, from 222,561 for the three months ended September 30, 2020, primarily due to demand recovery from reduced flight schedules in response to the COVID-19 pandemic. Significant items contributing to the SkyWest Airlines segment profit (loss) are set forth below. SkyWest Airlines operating revenues increased $276.4 million, or 81.8%, from the three months ended September 30, 2020, to the three months ended September 30, 2021, due to increased flight schedules, increased passenger demand under our prorate agreements, and more flights we handled under our airport service agreements, collectively as a result of the demand recovery from the COVID-19 pandemic. Additionally, during the three months ended September 30, 2021, SkyWest Airlines recognized $19.2 million of previously deferred revenue received under our capacity purchase agreements compared to deferring revenue of $29.6 million during the three months ended September 30, 2020. SkyWest Airlines also provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended September 30, 2021, and 2020. SkyWest Airlines airline expense increased $329.3 million, or 107.6%, from the three months ended September 30, 2020, to the three months ended September 30, 2021, due to the following primary factors: ● SkyWest Airlines’ salaries, wages and benefits expense increased by $71.2 million, or 36.8%, primarily due to an increase in direct labor costs that resulted from a significantly higher number of flights we operated during the three months ended September 30 , 2021, as a result of the ongoing COVID-19 demand recovery. ● SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $54.8 million, or 36.7%, primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets intended to extend the operational performance and reliability of its older aircraft, including increased engine maintenance expense for the three months ended September 30 , 2021, compared to the three months ended September 30 , 2020. ● SkyWest Airlines’ depreciation and amortization expense decreased by $6.3 million, or 10.5%, primarily due to certain CRJ200 aircraft that became fully depreciated during 2020, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since September 30 , 2020. ● SkyWest Airlines’ fuel expense increased $18.9 million, or 138.7%, due to an incre ase in the number of flights we operated under our prorate agreements and a corresponding increase in gallons of fuel we purchased and an increase in our average fuel cost per gallon from $1.75 for the three months ended September 30 , 2020, to $2.55 for the three months ended September 30 , 2021 . ● SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million. See the Operating Expenses section of “Results of Operations – Three months ended September 30, 2021, and 2020” for further discussion on the impairment charge recorded for the three months ended September 30, 2021. ● SkyWest Airlines recognized $115.4 million in payroll support grant proceeds as a reduction to our operating expenses for the three months ended September 30 , 2021, compared to $190.2 million recognized for the three months ended September 30, 2020 . ● SkyWest Airlines’ remaining airline expenses increased $31.2 million, or 39.0%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated for the three months ended September 30 , 2021, compared to the three months ended September 30 , 2020 , such as crew per diem, crew hotel costs and simulator costs. SkyWest Leasing Segment Profit. SkyWest Leasing profit increased $26.6 million, or 213.6%, during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the 35 Table of Contents increase in aircraft leased to third parties and the acquisition of ten new E175 aircraft added to our fleet subsequent to September 30, 2020. Nine Months Ended September 30, 2021, and 2020 For the nine months ended September 30, 2021, we had two reportable segments, which were the basis of our internal financial reporting: SkyWest Airlines and SkyWest Leasing. Our segment disclosure relates to components of our business for which separate financial information is available to, and regularly evaluated by, our chief operating decision maker. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, ​ ​ (dollar amounts in thousands) ​ 2021 2020 $ Change % Change Operating Revenues: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines operating revenue ​ $ 1,548,422 ​ $ 1,172,625 ​ $ 375,797 32.0 % SkyWest Leasing operating revenues ​ 387,906 ​ 364,844 ​ 23,062 6.3 % Total Operating Revenues ​ $ 1,936,328 ​ $ 1,537,469 ​ $ 398,859 25.9 % Airline Expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines airline expense ​ $ 1,509,713 ​ $ 1,181,999 ​ $ 327,714 27.7 % SkyWest Leasing airline expense ​ 277,974 ​ 310,279 ​ (32,305) (10.4) % Total Airline Expenses (1) ​ $ 1,787,687 ​ $ 1,492,278 ​ $ 295,409 19.8 % Segment profit: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SkyWest Airlines segment profit (loss) ​ $ 38,709 ​ $ (9,374) ​ $ 48,083 NM ​ SkyWest Leasing profit ​ 109,932 ​ 54,565 ​ 55,367 101.5 % Total Segment Profit ​ $ 148,641 ​ $ 45,191 ​ $ 103,450 228.9 % Interest Income ​ 732 ​ 5,652 ​ (4,920) (87.0) % Other Income (Expense), net ​ (3,802) ​ 1,205 ​ (5,007) NM ​ Consolidated Income Before Taxes ​ $ 145,571 ​ $ 52,048 ​ $ 93,523 179.7 % NM = Not Meaningful (1) Total Airline Expenses includes operating expense and interest expense SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $48.1 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. SkyWest Airlines block hour production increased to 970,689, or 37.5%, for the nine months ended September 30, 2021, from 705,810 for the nine months ended September 30, 2020, primarily due to demand recovery from reduced flight schedules in response to the COVID-19 pandemic. Significant items contributing to the SkyWest Airlines segment profit are set forth below. SkyWest Airlines operating revenues increased $375.8 million, or 32.0%, from the nine months ended September 30, 2020, to the nine months ended September 30, 2021, due to increased flight schedules, increased passenger demand under our prorate agreements, and more flights we handled under our airport service agreements, collectively as a result of the demand recovery from the COVID-19 pandemic. SkyWest Airlines deferred revenue of $7.7 million of payments received under our capacity purchase agreements during the nine months ended September 30, 2021, compared to deferred revenue of $98.6 million recorded during the nine months ended September 30, 2020. SkyWest Airlines also provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the nine months ended September 30, 2021, and nine months ended September 30, 2020. SkyWest Airlines airline expense increased $327.7 million, or 27.7%, from the nine months ended September 30, 2020, to the nine months ended September 30, 2021, due to the following primary factors: ● SkyWest Airlines’ salaries, wages and benefits expense increased by $105.4 million, or 17.2%, primarily due to an increase in direct labor costs that resulted from a significantly higher number of flights we operated during the nine months ended September 30 , 2021, as a result of the ongoing COVID-19 demand recovery. 36 Table of Contents ● SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $165.6 million, or 39.2%, primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense for the nine months ended September 30 , 2021, compared to the nine months ended September 30 , 2020. ● SkyWest Airlines’ depreciation and amortization expense decreased by $14.0 million, or 8.2%, primarily due to certain CRJ200 aircraft that became fully depreciated during 2020, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since September 30 , 2020. ● SkyWest Airlines’ fuel expense increased $31.7 million, or 69.2%, due to an incre ase in the number of flights we operated under our prorate agreements and a corresponding increase in gallons of fuel we purchased and an increase in our average fuel cost per gallon from $1.92 for the nine months ended September 30 , 2020, to $2.37 for the nine months ended September 30 , 2021 . ● SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million. See the Operating Expenses section of “Results of Operations – Nine months ended September 30, 2021, and 2020” for further discussion on the impairment charge recorded for the nine months ended September 30, 2021. ● SkyWest Airlines recognized $422.7 million in payroll support grant proceeds as a reduction to our operating expenses for the nine months ended September 30 , 2021, compared to $342.1 million recognized for the nine months ended September 30 , 2020. ● SkyWest Airlines’ remaining airline expenses increased $34.8 million, or 12.7%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated for the nine months ended September 30 , 2021, compared to the nine months ended September 30 , 2020 , such as crew per diem, crew hotel costs and simulator costs. SkyWest Leasing Segment Profit. SkyWest Leasing profit increased $55.4 million, or 101.5%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to the increase in aircraft leased to third parties and the acquisition of ten new E175 aircraft added to our fleet subsequent to September 30, 2020. Liquidity and Capital Resources As of September 30, 2021, we had $912.5 million in cash and cash equivalents and marketable securities. As of September 30, 2021, we had $41.0 million available for borrowings under our line of credit. Given our available liquidity as of September 30, 2021, and given the measures we have implemented to reduce the impact of the COVID-19 pandemic on our financial position and operations, we believe the working capital currently available to us will be sufficient to meet our present financial requirements, including planned capital expenditures, scheduled lease payments, debt service obligations for at least the next 12 months. Our total cash and marketable securities increased from $825.9 million as December 31, 2020, to $912.5 million as of September 30, 2021, or by $86.6 million. Our total long-term debt, including current maturities decreased from $3,203.7 million as of December 31, 2020, to $2,965.0 million as of September 30, 2021, or by $238.7 million. Thus, our total long-term debt, net of cash and marketable securities, decreased from $2,377.8 million as of December 31, 2020, to $2,052.5 million as of September 30, 2021, or $325.3 million. At September 30, 2021, our total capital mix was 46.5% equity and 53.5% long-term debt, compared to 43.3% equity and 56.7% long-term debt at December 31, 2020. As of September 30, 2021, and December 31, 2020, we had $59.5 million and $61.1 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions. We had no restricted cash as of September 30, 2021, and December 31, 2020. 37 Table of Contents Sources and Uses of Cash Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the nine months ended September 30, 2021, and 2020, and our total cash and marketable securities positions as of September 30, 2021, and December 31, 2020 (in thousands): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the nine months ended September 30, ​ 2021 2020 $ Change % Change Net cash provided by operating activities ​ $ 686,955 ​ $ 548,703 ​ $ 138,252 ​ 25.2 % Net cash used in investing activities ​ (396,785) ​ (261,447) ​ (135,338) 51.8 % Net cash provided by (used in) financing activities ​ (234,062) ​ 43,766 ​ (277,828) (634.8) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ ​ ​ ​ 2021 ​ 2020 ​ $ Change ​ % Change Cash and cash equivalents ​ $ 271,831 ​ $ 215,723 ​ $ 56,108 26.0 % Marketable securities ​ 640,673 ​ 610,185 ​ 30,488 5.0 % Total ​ $ 912,504 ​ $ 825,908 ​ $ 86,596 10.5 % Cash Flows provided by Operating Activities Our cash flows provided by operating activities was $687.0 million for the nine months ended September 30, 2021, compared to $548.7 million for the nine months ended September 30, 2020. Our operating cash flows are typically impacted by various factors including our net income, adjusted for non-cash expenses and gains such as depreciation expense, stock-based compensation expense, and gains or losses on the disposal of assets; and timing of cash payments and cash receipts attributed to our various current asset and liability accounts, such as accounts receivable, inventory, accounts payable, accrued liabilities, deferred revenue and deferred payroll support grant proceeds. The increase in our cash flow from operations for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily due an increase in net income from $37.9 million for the nine months ended September 30, 2020, to $107.6 million for the nine months ended September 30, 2021, and a non-cash impairment charge of $84.6 recorded during the nine months ended September 30, 2021. The cash provided by these operating activities were partially offset by a reduction in depreciation expense and deferred revenue, and changes in our current asset and liability accounts, primarily due to the timing of cash payments and cash receipts for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The operating cash flows for the nine months ended September 30, 2021, and 2020 also included the benefit from the payroll support grant of $422.7 million and $342.1 million, respectively, partially offset by temporary rate reductions provided to our major airline partners during the nine months ended September 30, 2021, and 2020. Cash Flows used in Investing Activities Our cash flows used in investing activities was $396.8 million for the nine months ended September 30, 2021, compared to cash flows used in investing activities of $261.4 million for the nine months ended September 30, 2020. Our investing cash flows are typically impacted by various factors including our capital expenditures, such as the acquisition of aircraft and spare engines; deposit payments and refunds of previously made deposits on new aircraft; purchase and sales of marketable securities; proceeds from the sale of assets; and timing of cash payments and cash receipts attributed to our various long-term asset and long-term liability accounts. The increase in our cash flow used in investing activities for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily due to an increase in cash used for purchases of marketable securities, net of sales of marketable securities, of $30.5 million for the nine months ended September 30, 2021, from $29.2 million in cash provided by sales of marketable securities, net of purchases of marketable securities, for the nine months ended September 30, 2020, an increase in deposits on aircraft from $0.6 million for the nine months ended September 30, 2020, to $100.1 million for the nine months ended September 30, 2021, offset by a decrease in our long-term assets resulting from timing of payments received from our major airline partners attributed to our long-term 38 Table of Contents receivables. In 2020, we amended certain debt agreements on our aircraft which suspended our obligation to make debt service payments for an approximately six-month period during 2020. Concurrently, we suspended required aircraft ownership payments due to us from our major airline partners under our capacity purchase agreements during the same period. We anticipate collecting the payments on these long-term receivables from our major airline partners over the remaining contract terms. Cash Flows provided by (used in) Financing Activities Our cash flows used in financing activities was $234.1 million for the nine months ended September 30, 2021, compared to cash provided by financing activities of $43.8 million for the nine months ended September 30, 2020. Our financing cash flows are typically impacted by various factors including proceeds from issuance of debt, principal payments on debt obligations, repurchases of our common stock and payment of cash dividends. The $277.8 million increase in cash used in financing activities for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was primarily due to an increase of $331.3 million in principal payments on long-term debt primarily due the additional E175 aircraft acquired subsequent to September 30, 2020, repayment of the $60 million U.S. Treasury secured loan, and early repayment of $80.1 million in aircraft debt. The increase was offset by a reduction in cash used to purchase treasury stock and payment of dividends by $20.0 million and $13.1 million, respectively, due to restrictions under our loan agreements with U.S. Treasury. Significant Commitments and Obligations General See Note 7, "Leases, Commitments and Contingencies," to the condensed consolidated financial statements for our commitments and obligations for each of the next five years and thereafter. Purchase Commitments and Options As of September 30, 2021, we had a firm purchase commitment for 39 new E175 aircraft from Embraer with delivery dates anticipated into the first half of 2023. We also have a firm purchase commitment to purchase seven used CRJ700 aircraft with anticipated delivery dates by the end of 2021. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition. In recent years, we have issued long-term debt to finance our new aircraft. At present, we intend to fund our aircraft purchase commitments through cash on hand and debt financing. Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed acquisitions, as well as additional aircraft. We intend to finance the firm purchase commitment for 39 E175 aircraft with approximately 80-85% debt and the remaining balance with cash. We intend to fund the purchase of the seven used CRJ700 aircraft through cash on hand. Long-term Debt Obligations As of September 30, 2021, we had $2.8 billion of long-term debt obligations related to the acquisition of aircraft and certain spare engines. The average effective interest rate on those long-term debt obligations was approximately 4.0% at September 30, 2021. We also had $200.6 million of long-term debt obligations under the Payroll Support Program Agreement, PSP Extension Agreement, and Payroll Support Program 3 Agreement with U.S. Treasury. Under our capacity purchase agreements, the major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement, but is intended to cover either our aircraft principal and interest debt service costs, our aircraft depreciation and interest expense or our aircraft lease expense costs while the aircraft is under contract. 39 Table of Contents Guarantees We have guaranteed the obligations of SkyWest Airlines under the United Express Agreement and the Delta Connection Agreement for the E175 aircraft. In addition, we have guaranteed certain other obligations under SkyWest Airlines’ aircraft financing and leasing agreements. Seasonality Our results of operations for any interim period are not necessarily indicative of those for an entire year, since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased travel on our prorate routes, historically occurring during the summer months, and unfavorably affected by decreased travel during the months November through February and by inclement weather, which may occasionally or frequently, depending on the severity of the inclement weather in any given winter, result in cancelled flights during the winter months. The COVID-19 pandemic is anticipated to continue to negatively impact our schedule compared to 2019 schedules (pre-COVID period). The magnitude of the impact will depend on various factors including passenger demand and the related flight schedules we are requested to operate by our major airline partners under our capacity purchase agreements.