What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-22 · 155 added, 184 removed, 197 unchanged (63% of the section changed)

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We have the largest regional airline operation in the United States.

As of December 31, 2020, we offered scheduled passenger and air freight service with approximately 1,770 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean.

The number of flights we operated during 2020 was negatively impacted by the COVID-19 pandemic.

See Competition and Economic Conditions section for additional information regarding the COVID-19 impact on our operations on page 5.

As of December 31, 2020, we had 601 total aircraft in our fleet, including 452 aircraft in scheduled service under our code-share agreements, summarized as follows:

Aircraft in scheduled service

As of December 31, 2021, we offered scheduled passenger and air freight service with approximately 2,080 total daily departures to destinations in the United

States, Canada, Mexico and the Caribbean.

As of December 31, 2021, we had 629 total aircraft in our fleet, including 509 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:

Aircraft in scheduled service or under contract

Leased to third parties

*As of December 31, 2020, these aircraft have been removed from service and are in the process of being placed under a leasing arrangement with a third party, are aircraft transitioning between code-share agreements with our major airline partners and being used as supplemental spare aircraft, are available for future code-share agreements or are in the process of being parted out.

*As of December 31, 2021, other aircraft included:

supplemental spare aircraft supporting our code-share agreements which 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 scheduled to be disassembled for use as spare parts.

**The Company took delivery of the 18 E175 aircraft under its contract with American as of December 31, 2021.

The 18 E175 aircraft are scheduled to begin service in 2022.

Our business model is based on providing scheduled regional airline service under code-share agreements (commercial 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 centered on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics.

The COVID-19 pandemic had a significant impact to our operations including a reduction in the number of flights we were scheduled to operate during 2020 and changes we made to enhance the safety of our passengers and employees, including aircraft cleaning procedures and use of personal protective equipment.

During the 2020 calendar year, we made several changes to our fleet count under our flying agreements, including the addition of 37 new E175 aircraft, and the removal of four CRJ900 aircraft, four CRJ700 aircraft and 60 CRJ200 aircraft.

Additionally, during the 2020 calendar year, we increased the number of CRJ700 aircraft we leased to third parties from 10 aircraft to 34 aircraft.

The COVID-19 pandemic had a significant impact to our operations including a reduction in the number of flights we were scheduled to operate during 2020 and 2021 and changes we made to enhance the safety of our passengers and employees, including aircraft cleaning procedures and use of personal protective equipment.

During the 2021 calendar year, we made several changes to our fleet count under our flying agreements, including the addition of 18 new E175 aircraft, 24 used CRJ700 aircraft, one new and four used CRJ900 aircraft, and 10 used CRJ200 aircraft.

Leases on two CRJ200 aircraft with third parties terminated during 2021.

We anticipate our fleet will continue to evolve, as we are scheduled to add 20 new E175 aircraft with American, 25 used CRJ700 aircraft with American and one new CRJ900 aircraft with Delta by the end of 2022.

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 pandemic’s impact on demand.

Our primary objective in the fleet changes is to improve our profitability by adding new E175 aircraft to capacity purchase agreements, and potentially removing older aircraft from service that typically require more maintenance cost.

For the year ended December 31, 2020, approximately 47.1% of our aircraft in scheduled service were operated for United, approximately 31.4% were operated for Delta, approximately 14.4% were operated for American and approximately 7.1% were operated for Alaska.

We anticipate our fleet will continue to evolve, as we are scheduled to add two new E175 aircraft with American in 2022, 16 new E175 aircraft with Delta by the first half of 2023, and eleven new E175 aircraft with Alaska by the first half of 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 recovery, labor availability 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.

For the year ended December 31, 2021, approximately 43.2% of our aircraft in scheduled service or under contract were operated for United, approximately 29.3% were operated for Delta, approximately 21.2% were operated for American and approximately 6.3% 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 capacity purchase arrangements and our prorate flying arrangements.

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On prorate routes, we have more control over scheduling, pricing and seat inventories, we share passenger fares with our major airline partners according to prorate formulas and we are responsible for the operating costs of the prorate flights, including fuel and airport costs.

Our financial and operating results for the years ended December 31, 2018 and 2019 contained in this Report, include the financial results and position of ExpressJet through January 22, 2019 for those respective periods.

Financial Highlights

We had total operating revenues of $2.1 billion for the year ended December 31, 2020, a 28.4% decrease compared to total operating revenues of $3.0 billion for the year ended December 31, 2019.

We had a net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020, compared to net income of $340.1 million, or $6.62 per diluted share, for the year ended December 31, 2019.

We had total operating revenues of $2.7 billion for the year ended December 31, 2021, a 27.6% increase compared to total operating revenues of $2.1 billion for the year ended December 31, 2020.

We had net income of $111.9 million, or $2.20 per diluted share, for the year ended December 31, 2021, compared to a net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020.

The significant items affecting our revenue and operating expenses during the year ended December 31, 2021, are outlined below:

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The number of flights we operate and the corresponding number of passengers we carry are the primary drivers to our revenue under our prorate flying agreements.

As a result of lower passenger demand from the COVID-19 pandemic, the number of aircraft we operated decreased from 483 as of December 31, 2019 to 452 as of December 31, 2020;

the number of block hours decreased from 1.5 million in 2019 to 1.0 in 2020, or by 33.5%;

and the number of passengers we carried decreased from 43.7 million in 2019 to 21.3 in 2020, or by 51.3%.

As a result of reduced flight schedules and fewer aircraft operating under our capacity purchase agreements in 2020 compared to 2019, our capacity purchase revenue decreased $576.4 million, or 24.3% in 2020.

Additionally, we deferred recognizing revenue on $110.7 million of fixed monthly payments received under our capacity purchase agreements during 2020 as a result of significant reductions to our flight schedules as further described in the section of this Report entitled “Results of Operations.” Also, as a result of a reduction in the number of aircraft operating under our prorate agreements and fewer passengers carried on our prorate routes, our prorate revenue decreased by $252.1 million, or 48.4% in 2020.

The negative impact to our revenues due to the COVID-19 pandemic and its associated effects on the travel industry is anticipated to continue in 2021 and may continue into subsequent periods.

As a result of higher passenger demand compared to the onset of the COVID-19 pandemic, the number of aircraft we operated increased from 452 as of December 31, 2020, to 509 as of December 31, 2021;

the number of block hours increased from 1.0 million in 2020 to 1.3 in 2021, or by 35.6%;

and the number of passengers we carried increased from 21.3 million in 2020 to 36.6 million in 2021, or by 72.2%.

As a result of increased flight schedules and additional aircraft operating under our capacity purchase agreements in 2021 compared to 2020, our capacity purchase revenue increased $413.5 million, or 23.1% in 2021.

Additionally, we recognized $6.8 million of previously deferred revenue and $8.4 million of unbilled revenue for the year ended December 31, 2021, compared to deferring revenue of $110.7 million of fixed monthly payments received under our capacity purchase agreements for the year ended December 31, 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 $140.8 million, or 52.4% in 2021, as compared to 2020.

Despite the ongoing COVID-19 demand recovery, the negative impact to our revenues due to the COVID-19 pandemic and its associated effects on the travel industry, including potential labor shortages that may negatively impact our future flight schedules, may continue in 2022.

Operating Expenses

Our total operating expenses decreased $441.4 million, or 17.9% for the year ended December 31, 2020 compared to the year ended December 31, 2019.

This decrease was primarily due to a significant reduction in the number of flights we operated as a result of the COVID-19 pandemic.

Departures decreased from 842,098 in 2019 to 585,257 in 2020, or by 30.5%.

Additionally, during 2020 we recorded $345.5 million in payroll support grants received from Treasury under the CARES Act as an offset to our operating expenses.

Additional details regarding the decrease in our operating expenses are described in the section of this Report entitled “Results of Operations.”

Our total operating expenses increased $419.3 million, or 20.8% for the year ended December 31, 2021, compared to the year ended December 31, 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 year ended December 31, 2021.

Departures increased from 585,257 in 2020 to 749,943 in 2021, or by 28.1%.

Additionally, we recorded $422.7 million in payroll support grants received from Treasury as an offset to our operating expenses for the year ended December 31, 2021, compared to $345.5 million recorded for the year ended December 31, 2020.

Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”

Fleet Activity

The following table summarizes our fleet activity for 2021:

Aircraft in Service

Aircraft in Service or Under Contract

December 31, 2020

December 31, 2021

During 2020, we took delivery of 37 new E175 aircraft and placed the aircraft into service under capacity purchase agreements.

We removed four CRJ900 aircraft from service, four (net) CRJ700 aircraft from service and 60 (net) CRJ200 aircraft from service.

We are evaluating alternative uses for the four CRJ900 aircraft removed from service and we anticipate placing the four (net) CRJ700 aircraft into service with American in 2021.

We returned 19 CRJ200s to the lessor and we anticipate storing the remaining 41 CRJ200s removed from service.

We own the 41 CRJ200 aircraft removed from service and the aircraft are fully depreciated with no outstanding financial obligations.

During 2021, we took delivery of 18 new E175 aircraft and one new CRJ900 aircraft and placed the aircraft into service or under contract under capacity purchase agreements.

We placed 24 (net) used CRJ700 aircraft, four used CRJ900 aircraft into service under capacity purchase agreements, and ten used CRJ200 aircraft into prorate service.

Results of Operations

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The following table sets forth our major operational statistics and the associated percentages of change for the periods identified below.

The decrease in block hours, departures and passengers carried during the year ended December 31, 2020, compared to the year ended December 31, 2019, was due to the decrease in demand related to the COVID-19 pandemic.

The increase in block hours, departures and passengers carried during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to demand recovery from reduced flight schedules in response to the COVID-19 pandemic.

For the year ended December 31,

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Average passenger trip length (miles)

NC = No Change

Operating Revenues

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Flying agreements revenue

The decrease in “Capacity purchase agreements revenue:

flight operations” of $593.1 million was due to a reduction in flights we were scheduled to operate by our major airline partners in 2020 as a result of decreased passenger demand in response to the COVID-19 pandemic.

Our completed departures decreased 30.5% and completed block hours decreased 33.5% during 2020 compared to 2019.

The increase in “Capacity purchase agreements revenue:

aircraft lease and fixed revenue” of $16.7 million was due to the incremental lease revenue generated from six new E175 aircraft that we acquired through debt added to capacity purchase agreements and increases to the fixed monthly rates made to certain existing capacity purchase agreements that were extended since December 31, 2019.

For clarity, we added a total of 37 new E175 to our capacity purchase agreements during 2020, however our major airline partners acquired 31 of these E175s and we have no aircraft ownership lease revenue associated with these 31 E175s.

flight operations” of $201.4 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 28.1% and completed block hours increased 35.6% for the year ended December 31, 2021, compared to year ended December 31, 2020.

The increase in “Capacity purchase agreements revenue:

aircraft lease and fixed revenue” in 2020 compared to 2019 was partially offset by deferred revenue we recorded in 2020 attributed to the fixed cash payments per aircraft we received under our capacity purchase agreements compared to 2019.

aircraft lease and fixed revenue” of $212.1 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the year ended December 31, 2021, compared to the year ended December 31, 2020, combined with aircraft lease and fixed rate revenue generated from 18 E175 aircraft added to our fleet since December 31, 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 2020 from previous levels due to a reduction in flight schedules resulting from the COVID-19 pandemic.

We also anticipate the future number of flights we will complete over the remaining capacity purchase agreements will significantly increase from 2020 levels.

Due to the materially reduced flight activity during 2020 from historical levels and based on anticipated increases in future monthly flight volumes over the remaining contract terms, we determined the fixed monthly cash payments per aircraft we received during 2020 was disproportionately high relative to the number of flights we operated during 2020.

Accordingly, we deferred recognizing revenue of $110.7 million of fixed monthly cash payments we received under our capacity purchase agreements during 2020.

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.

We recognize the fixed amount per aircraft as revenue

proportionately to the number of block hours we complete, our performance obligation, for each reporting period.

During the year ended December 31, 2021, the increase in our flight schedules resulted in recognizing $6.8 million of previously deferred revenue and $8.4 million in unbilled revenue on our capacity purchase agreements.

For the year ended December 31, 2020, we deferred recognizing revenue on $110.7 million of fixed monthly cash payments we received under our capacity purchase agreements.

Our deferred revenue and unbilled revenue related to the fixed payments will adjust over the remaining contract term for each capacity purchase agreement based on the number of block hours we complete each reporting period relative to the number of block hours 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.

The decrease in prorate agreements revenue of $252.1 million was due to the impact of COVID-19 and the corresponding decrease in passengers and passenger revenue we received on routes we operated under our prorate agreements during 2020 compared to 2019.

The decrease in lease, airport services and other revenues of $16.4 million was primarily due to the decrease in the number of flights operated at locations where we were contracted to provide airport customer service during 2020 compared to 2019.

Our total deferred revenue and unbilled revenue balances were $103.9 million and $8.4 million as of December 31, 2021, respectively.

The increase in prorate agreements revenue of $140.8 million was primarily due to the increase in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements during 2021, compared to 2020, due to the ongoing COVID-19 demand recovery.

The increase in lease, airport services and other revenues of $32.1 million was primarily due an increase in the number of flights operated at locations where we were contracted to provide airport customer service during 2021 compared to 2020 and we leased 34 CRJ700s to a third party for all of 2021, whereas we leased 34 to a third party for only a portion of 2020.

Operating Expenses

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Airport-related expenses

Aircraft rentals

Aircraft fuel

CARES Act payroll support grant

Aircraft rentals

Special items

Payroll support grant

Other operating expenses

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Total airline expenses

NM = Not Measurable

NM = Not Meaningful

Salaries, wages and benefits.

The $175.6 million, or 17.5%, decrease in salaries, wages and benefits was due to a reduction in direct labor costs that resulted from a significantly lower number of flights we operated during 2020 in response to the COVID-19 pandemic and reductions in overhead and other labor costs.

In response to the COVID-19 pandemic, we initiated various cost saving measures, including a reduction in various administrative and support positions, temporarily placed a freeze on hiring new employees, temporarily suspended all non-scale pay increases and offered voluntary unpaid leave to our employees.

The $160.6 million, or 19.4%, 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 2021 in response to demand recovery from the COVID-19 pandemic.

Aircraft maintenance, materials and repairs.

The $104.7 million, or 20.4%, increase in aircraft maintenance expense was primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ200 and CRJ700 fleet intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during 2020 compared to 2019.

The $198.8 million, or 32.1%, increase in aircraft maintenance expense was primarily due to an increase in direct maintenance costs, including the replacement of time-limited engine components, incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleet intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during 2021 compared to 2020.

Depreciation and amortization.

The $106.9 million, or 29.0%, increase in depreciation and amortization expense was primarily due to a shortened estimated useful life of our owned CRJ200 fleet that resulted in approximately $74.5 million of incremental depreciation expense during 2020.

During 2020, we removed 55 CRJ200 aircraft from a capacity purchase agreement with Delta, of which we returned 19 leased aircraft to the lessor and we own 36 aircraft.

We also removed seven CRJ200 aircraft that we own from a prorate agreement with American.

Prior to the COVID-19 pandemic, we were anticipating the agreement terms for these aircraft would have been extended beyond 2020.

As we were unable to extend the flying contracts on these CRJ200s with our major airline partners and given the age of these aircraft, we shortened the estimated useful life on these aircraft to coincide with the agreement termination dates.

Our depreciation also increased due to the acquisition of six new E175 aircraft and spare engines since December 31, 2019 .

The $34.8 million, or 7.3%, 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 18 new E175 aircraft and spare engines in 2021, as well as the acquisition of eleven used CRJ700 aircraft in 2021.

Airport-related expenses .

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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 $25.0 million, or 21.0%, decrease in airport-related expenses was primarily due to a decrease in airport service activities as a result of COVID-19 related flight schedule reductions.

Aircraft rentals.

The $6.7 million, or 9.3%, 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 December 31, 2019.

The $10.8 million, or 11.5%, increase in airport-related expenses was primarily due to an increase in airport service activities in response to an increase in our prorate passengers.

Aircraft fuel.

The $57.4 million, or 48.2%, decrease in fuel cost was primarily due to a decrease in the number of flights we operated under our prorate agreements and corresponding decrease in gallons of fuel we purchased and a decrease in our average fuel cost per gallon from $2.51 in 2019 to $1.89 in 2020.

The $45.3 million, or 73.4%, 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 $1.89 in 2020 to $2.49 in 2021.

We purchase and incur expense for all fuel on flights operated under our prorate agreements.

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Fuel gallons purchased

CARES Act payroll support grant.

In April 2020, we entered into an agreement with Treasury and received $450.7 million in emergency relief through the CARES Act payroll support program through 2020, of which $345.5 million was in the form of payroll support grants that are being recognized as a reduction in labor expense over the periods the grants are intended to compensate.

We recognized $345.5 million in payroll support grant proceeds we received as a reduction to our operating expenses in 2020.

We did not have a comparable payroll support grant in 2019.

Aircraft rentals.

The $2.0 million, or 3.0%, 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 during 2020.

Special items .

The $21.9 million special items expense for 2019 related to a non-cash write-off of $18.5 million in aircraft manufacturer part credits that we forfeited to settle future lease return obligations with the aircraft manufacturer.

The $18.5 million of expense was included in the SkyWest Airlines segment.

The special items expense also included $3.4 million of expense associated with a cash payout of certain ExpressJet employees’ stock equity grants as part of the sale of ExpressJet, which was reflected in the ExpressJet segment.

We did not incur comparable special items expense in 2020.

Special items for 2021 consisted of a non-cash impairment charge on SkyWest Airlines’ CRJ900 aircraft of $84.6 million.

During 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.

During 2020 and 2021, w e entered into three Payroll Support Program Agreements with U.S.

Treasury that provided certain payroll support relief payments 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 year ended December 31, 2021, a 22.3% increase compared to $345.5 million in payroll support grant proceeds we received as a reduction to our operating expenses for year ended December 31, 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 $20.9 million, or 8.6%, decrease in other operating expenses was primarily related to a reduction in other operating costs that correspond to the significantly lower number of flights we operated during 2020 compared to 2019, such as crew per diem, crew hotel costs and simulator costs.

These reductions were partially offset by an increase to our credit loss reserves of $30.8 million we recorded in 2020 following our adoption of the Financial Accounting Standards Board (“FASB”) “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”) on January 1, 2020.

The increase to our credit loss reserves in 2020 was primarily due to a reserve we recorded on a note receivable that originated from our sale of ExpressJet in 2019 that became uncertain during 2020 due to ExpressJet ceasing operations in 2020.

Our credit loss reserves also increased due to reductions in credit ratings during 2020 on certain entities for which we have outstanding accounts receivable or notes receivable.

The $33.1 million, or 14.9%, 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 2021 compared to 2020, such as crew per diem, crew hotel costs and simulator costs.

Interest Expense.

The $4.6 million, or 3.6%, decrease in interest expense related to an overall lower effective interest rate on our outstanding debt from 2019 to 2020.

Our average debt balance, for the 2019 calendar year and the 2020 calendar year was $3.1 billion for both periods (using the average of the beginning and ending balances of each year).

The $0.1 million, decrease 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 in 2021, offset by a decrease in interest expense due to a lower average effective interest rate in 2021 as compared to 2020.

Our average effective interest rate for 2021 and 2020 was 3.8% and 4.0%, respectively.

Total airline expenses.

Our total airline expenses, comprising of our total operating expenses and interest expense, decreased $446.0 million, or 17.2%, due to reduction in direct operating costs attributed to the reduced number of completed flights in 2020 compared to 2019 and due to the CARES Act payroll grant benefit we recorded in 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 aircraft ownership costs, including interest expense, we believe our total airline expense is meaningful expense measure for management discussion and analysis purposes.

Our total airline expenses, comprising of our total operating expenses and interest expense, increased $419.3 million, or 19.6%, due to an increase in direct operating costs attributed to the higher number of completed flights in 2021 compared to 2020 and due to the non-cash impairment charge of $84.6 million on SkyWest operated CRJ900 aircraft in 2021, offset by an increase in the payroll support grant benefit we recorded in 2021, compared to the benefit recorded in 2020.

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:

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Other income (expense), net.

During 2020, we had other income, net of $1.2 million primarily related to income earned from our investment in a joint venture with a third party.

During 2019, we had other income, net of $47.7 million primarily related to the gain on sale of ExpressJet.

Other income (expense), net decreased $4.4 million, compared to 2020.

Other income (expense), net primarily consists of income related to our investment in a joint venture with a third party.

In 2021, the joint venture incurred an increase in engine overhaul expenses compared to 2020.

Summary of provision for income taxes:

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For the year ended December 31, 2020, the lower effective tax rate was primarily due to pre-tax loss of $7.3 million and non-deductible expenses which resulted in a $1.2 million provision for income taxes.

Our income tax provision rate may fluctuate each reporting period based on various factors including but not limited to, the amount of our non-deductible operating expenses, such as a portion of or crew per diem expenses, relative to our income before income taxes.

Primarily due to the factors described above, we generated net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020, compared to a net income of $340.1 million, or $6.62 per diluted share, for the year ended December 31, 2019.

Our income tax provision rate may fluctuate each reporting period based on various factors including, but not limited to, the amount of our non-deductible operating expenses, relative to our income before income taxes.

Primarily due to the factors described above, we generated net income of $111.9 million, or $2.20 per diluted share, for the year ended December 31, 2021, compared to a net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020.

Our Business Segments 2021 compared to 2020 :

Prior to our sale of ExpressJet on January 22, 2019, our reporting segments consisted of the operations of SkyWest Airlines and ExpressJet, and the activities of SkyWest Leasing.

We concluded the sale of ExpressJet did not meet the criteria for a discontinued operation.

Following the sale of ExpressJet, our reporting segments include SkyWest Airlines and SkyWest Leasing.

For the years ended December 31, 2021 and 2020, our reporting segments included SkyWest Airlines and SkyWest Leasing.

Our chief operating decision maker analyzes the profitability of operating aircraft under our code-share agreements separately from the profitability of our financing new aircraft acquired through debt and cash placed under our capacity purchase agreements, currently consisting of our E175 fleet, and our return on such aircraft financing.

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The SkyWest Airlines segment includes all other revenue and operating expenses attributed to operating aircraft under our capacity purchase agreements and all revenue and operating expenses attributed to our prorate agreements and airport service agreements.

Corporate overhead expenses, primarily consisting of administrative labor costs, were allocated to the operating expenses of SkyWest Airlines, ExpressJet (prior to our sale of ExpressJet) and SkyWest Leasing.

Corporate overhead expenses, primarily consisting of administrative labor costs, were allocated to the operating expenses of SkyWest Airlines and SkyWest Leasing.

Overhead expenses allocated to SkyWest Leasing reflect our estimated labor expense incurred to support SkyWest Leasing activities.

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SkyWest Airlines operating revenue

ExpressJet operating revenues

SkyWest Leasing operating revenues

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SkyWest Airlines airline expense

ExpressJet airline expense

SkyWest Leasing segment expense

Total Airline Expense(1)

Segment profit (loss):

SkyWest Leasing airline expense

Total Airline Expenses (1)

Segment profit:

SkyWest Airlines segment profit (loss)

ExpressJet segment loss

SkyWest Leasing segment profit

Total Segment Profit (loss)

SkyWest Leasing profit

Total Segment Profit

Interest Income

Other Income, net

Consolidated Income (Loss) Before Taxes

(1) Total Airline Expense includes operating expense and interest expense

Other Income (Expense), net

Consolidated Income Before Taxes

NM = Not Meaningful

(1) Total Airline Expenses includes operating expense and interest expense

SkyWest Airlines Segment Profit.

SkyWest Airlines segment profit decreased $343.0 million, or 136.9%, during 2020, compared to 2019.

SkyWest Airlines block hour production decreased to 973,338, or 33.5%, for 2020 from 1,464,405 for 2019, primarily due to reduced flight schedules in response to the COVID-19 pandemic.

SkyWest Airlines segment profit increased $94.0 million during 2021, compared to 2020.

SkyWest Airlines block hour production increased to 1,319,628, or 35.6%, for 2021 from 973,338 for 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 decreased $841.9 million, or 34.0%, from 2019 to 2020 due to reduced flight schedules under our capacity purchase agreements, lower passenger demand and under our prorate agreements, and fewer flights we handled under our airport service agreements, collectively as a result of the COVID-19 pandemic.

SkyWest Airlines capacity purchase agreement revenue decreased $570.1 million from 2019 to 2020 due to the reduction in flight scheduled and block hours, which included deferred revenue of $110.7 million of payments received under our capacity purchase agreements during 2020.

SkyWest Airlines prorate and other revenue decreased $271.8 million from 2019 to 2020 due to decreased passenger demand and reduced flight schedules.

SkyWest Airlines airline expense decreased $499.0 million, or 22.4%, from 2019 to 2020 due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense decreased by $161.8 million, or 16.4%, primarily due to a reduction in direct labor costs that resulted from a significantly lower number of flights we operated during 2020 as a result the COVID-19 pandemic and reductions in overhead and other labor costs.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $107.7 million, or 21.6%, primarily due to an increase in direct maintenance costs incurred on a portion of SkyWest Airlines’ CRJ200 and CRJ700 fleet intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during 2020 compared to 2019.

● SkyWest Airlines’ depreciation and amortization expense increased by $53.0 million, or 31.5%, primarily due to a shortened estimated useful life of our owned CRJ200 fleet that resulted in incremental depreciation expense during 2020 .

● SkyWest Airlines’ fuel expense decreased $57.4 million, or 48.2%, due to a decrease in the number of flights we operated under our prorate agreements and a corresponding decrease in gallons of fuel we purchased and a decrease in our average fuel cost per gallon from $2.51 in 2019 to $1.89 in 2020 .

● SkyWest Airlines’ recognized $345.5 million in payroll support grant proceeds we received through the CARES Act payroll support program as a reduction to our operating expenses in 2020.

SkyWest Airlines did not have a comparable grant in 2019.

● SkyWest Airlines’ included special items related to a non-cash write-off of $18.5 million in aircraft manufacturer part credits that we forfeited to settle future lease return obligations with the aircraft manufacturer during 2019.

SkyWest Airlines did not have a comparable special items expense in 2020.

● SkyWest Airlines’ remaining airline expenses decreased $76.4 million, or 17.4%, primarily related to a reduction in other operating costs that correspond to the significantly lower number of flights we operated during 2020 compared to 2019, such as crew per diem, crew hotel costs and simulator costs.

SkyWest Airlines operating revenues increased $555.7 million, or 33.9%, from 2020 to 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 also provided temporary rate reductions for COVID relief to our major airline partners under our capacity purchase agreements during 2021 and 2020 in the same quarters we recognized payroll support grant proceeds from Treasury.

SkyWest Airlines airline expense increased $461.7 million, or 26.7%, from 2020 to 2021 due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $161.2 million, or 19.6%, primarily due to an increase in direct labor costs that resulted from a significantly higher number of flights we operated during 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $191.9 million, or 31.7%, primarily due to an increase in direct maintenance costs, including the replacement of time-limited engine components, 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 2021 compared to 2020.

● SkyWest Airlines’ depreciation and amortization expense decreased by $10.9 million, or 4.9%, 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 in 2021.

● SkyWest Airlines’ fuel expense increased $45.3 million, or 73.4%, 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 $1.89 in 2020 to $2.49 in 2021.

● SkyWest Airlines recognized $422.7 million in payroll support grant proceeds as a reduction to our operating expenses in 2021, a 22.3% increase compared to $345.5 million recognized in 2020.

● SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million in 2021.

See the Operating Expenses section of “Results of Operations” for further discussion on the impairment charge recorded in 2021.

SkyWest Airlines did not have a comparable charge in 2020.

● SkyWest Airlines’ remaining airline expenses increased $66.8 million, or 18.4%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated in 2021 compared to 2 020 , such as crew per diem, crew hotel costs and simulator costs.

SkyWest Leasing Segment Profit.

SkyWest Leasing profit decreased $60.6 million, or 43.7%, during 2020, compared to 2019, primarily related to credit loss reserves we recorded on a note receivable that originated from our sale of ExpressJet in 2019 that became uncertain during 2020 due to ExpressJet ceasing operations in 2020.

Our credit loss reserves also increased due to reductions in credit ratings during 2020 on certain entities for which we have an outstanding accounts receivable or notes receivable.

The reduction in the SkyWest Leasing segment was also due to additional depreciation expense resulting from a shortened estimated useful life of certain CRJ200 spare engines.

These reductions were partially offset by an additional six new E175 aircraft added to our fleet subsequent to December 31, 2019.

SkyWest Leasing profit increased $73.1 million, or 93.7%, during 2021, compared to 2020, primarily due to the acquisition of 18 new E175 aircraft added to our fleet in 2021.

Liquidity and Capital Resources

As of December 31, 2020, we had $825.9 million in cash and cash equivalents and marketable securities.

As of December 31, 2020, we had $665.0 million available for borrowings under the Treasury Loan Agreement and $39.5 million available for borrowings under our line of credit.

We have until May 28, 2021 to draw additional borrowings under the Treasury Loan Agreement.

If we do not increase our borrowings under the Treasury Loan Agreement before May 28, 2021, our pledged collateral under the $725 million facility will be significantly reduced and any excess pledged collateral will be released and available to use for new debt, if needed.

Given our available liquidity as of December 31, 2020 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 (including funds from government assistance provided or may be provided pursuant to the CARES Act and the 2021 Appropriations Act) 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.

As of December 31, 2021, we had $860.4 million in cash and cash equivalents and marketable securities and $43.6 million available for borrowings under our line of credit.

Additionally, we have approximately $1.5 billion in unpledged aircraft engines and aircraft parts that we temporarily used as collateral in 2020 and 2021.

Given our available liquidity as of December 31, 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, and debt service obligations for at least the next 12 months.

Our total of cash and marketable securities increased from $825.9 million as December 31, 2020, to $860.4 million as of December 31, 2021, or by $34.5 million.

Our total long-term debt, including current maturities increased from $2,993.1 million as of December 31, 2019 to $3,203.7 million as of December 31, 2020, or by $210.6 million.

Our total long-term debt, including current maturities decreased from $3,203.7 million as of December 31, 2020, to $3,109.2 million as of December 31, 2021, or by $94.5 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 $2,248.8 million as of December 31, 2021, or $129.0 million.

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Our cash flows provided by operating activities was $831.8 million in 2021, compared to $633.6 million in 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 and accrued liabilities.

The decrease in our cash flow from operations in 2020 compared to 2019 was primarily due to a reduction in our net income of $348.6 million, the difference between net income of $340.1 million in 2019 and a net loss of $8.5 million in 2020, partially offset by an increase in non-cash depreciation expense of $106.9 million in 2020 from 2019, a decrease in deferred income taxes of $103.6 million in 2020 from 2019, and due to timing cash payments and cash receipts related to our current assets and liabilities in 2020 compared to 2019.

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, asset impairment charges, 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 in 2021 compared to 2020, was primarily due an increase in net income of $120.4 million, the difference between a net loss of $8.5 million in 2020 and net income of $111.9 million in 2021, and a non-cash impairment charge of $84.6 recorded in 2021.

The cash provided by these operating activities were partially offset by a reduction in depreciation expense and deferred revenue, an increase in unbilled revenue, and changes in our current asset and liability accounts, primarily due to the timing of cash payments and cash receipts in 2021 compared to 2020.

The operating cash flows for 2021 and 2020 also included the benefit from the payroll support grant of $422.7 million and $345.5 million, respectively, partially offset by temporary COVID relief rate reductions provided to our major airline partners in 2021 and 2020.

Cash Flows used in Investing Activities

Our cash flows used in investing activities was $698.5 million in 2021, compared to $683.5 million in 2020.

Our investing cash flows are typically impacted by various factors including our capital expenditures, including the acquisition aircraft and spare engines;

deposit payments and receipts on new aircraft;

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;

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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 in 2020 compared to 2019 was primarily due to an increase cash used for purchases of marketable securities, net of sales of marketable securities, of $105.2 million in 2020 from $72.0 million in 2019 and an increase in our long-term assets resulting from an increase in long-term receivables from our major airline partners under our capacity purchase agreements.

We amended certain debt agreements on our aircraft which suspended our obligation to make debt service payments for an approximate a six-month period during 2020.

The increase in our cash flow used in investing activities in 2021 compared 2020, was primarily due to an increase in aircraft deposits and acquisition of aircraft, offset by the change in purchases and sales of marketable securities.

Cash used for aircraft deposits increased from $9.6 million in 2020 to $125.7 million in 2021 because of E175 aircraft purchase commitments.

We acquired 18 new E175 aircraft and eleven used CRJ700 aircraft in 2021 resulting in $537.6 million in cash used for purchases of aircraft and related parts, compared to 2020 when we acquired six new E175 aircraft and 22 used CRJ700 aircraft that resulted in cash used for purchases of aircraft and spare parts of $425.6 million.

Cash provided by sales of marketable securities, net of purchases of marketable securities in 2021 was $8.2 million, compared to cash used in purchases of marketable securities, net of sales of marketable securities of $177.2 million in 2020.

The increase in cash flows used in investing activities was also offset by an increase in our long-term assets resulting from timing of payments received from our major airline partners attributed to our long-term receivables and changes to our non-current deferred revenue.

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 these payments from our major airline partners over the remaining contract terms, which was the primary factor in the increase in our long-term other assets of $94.3 million from December 31, 2019 to December 31, 2020.

The increase in our cash flows used in investing activities was significantly offset by reduction in capital expenditures of $223.6 million in 2020 from $661.9 million in 2019.

During 2020, we acquired six new E175 aircraft

and 22 used CRJ aircraft compared to ten new E175 aircraft and 85 used CRJ aircraft in 2019, including 56 used CRJ aircraft purchased under an early lease buyout in 2019.

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 provided by financing activities was $178.4 million in 2020, compared to cash used for financing activities of $305.2 million in 2019.

Our investing cash flows are typically impacted by various factors including proceeds from issuance of debt, principal payments on debt obligations, repurchases our common stock and payment of cash dividends.

The $483.6 million increase in cash provided by financing activities included the additional proceeds from the issuance of long-term debt to Treasury of $105.2 million under the Payroll Support Program Agreement and $60.0 under the Treasury Loan Agreement during 2020.

Additionally, we amended certain debt agreements on our aircraft which suspended our obligation to make debt service payments for an approximate a six-month period during 2020, which was the primary factor to our reduction in principal payments on long-term debt of $195.0 million from 2019 to 2020.

See Significant Commitments and Obligations for our summary of principal maturities on our long-term debt for the next five years.

We also reduced our cash used to repurchase shares of our common stock, treasury stock and payment of dividends by $16.1 million, $52.3 million, and $10.4 million, respectively, due to restrictions under the Payroll Support Program Agreement and the Treasury Loan Agreement that began in April 2020.

Our cash flows used in financing activities was $90.6 million in 2021, compared to cash provided by financing activities of $178.4 million in 2020.

Our financing cash flows are typically impacted by various factors including proceeds from issuance of debt, principal payments on debt obligations, repurchases our common stock and payment of cash dividends.

The $269.0 million increase in cash used by financing activities was primarily due to an increase of $353.1 million in principal payments on long-term debt related to the additional E175 aircraft acquired subsequent to December 31, 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 proceeds from the issuance of long-term debt primarily due to the purchase of new E175

aircraft in 2021 and a reduction in 2021 of 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.

Significant Commitments and Obligations

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Firm aircraft and spare engine commitments

Interest commitments(A)

Interest commitments (1)

Principal maturities on long-term debt

Total commitments and obligations

(A) At December 31, 2020, all of our total long-term debt associated with aircraft had fixed interest rates.

(1) At December 31, 2021, all of our total long-term debt associated with aircraft had fixed interest rates.

Purchase Commitments and Options

We are coordinating with our major airline partners and aircraft manufacturers on the timing of upcoming fleet deliveries under previously announced deals in response to COVID-19 schedule reductions.

We are coordinating with our major airline partners and aircraft manufacturers on the timing of upcoming fleet deliveries under previously announced deals.

The anticipated future aircraft delivery dates are subject to change.

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We also have significant long-term lease obligations, primarily relating to our aircraft fleet.

Excluding aircraft financed by our major partners that we operate for them under contract, we had 41 aircraft under lease with remaining terms ranging from less than one to ten years as of December 31, 2020.

Excluding aircraft financed by our major airline partners that we operate for them under contract, we had 43 aircraft under lease with remaining terms ranging from two years to nine years as of December 31, 2021.

Future minimum lease payments due under all long-term operating leases were approximately $294.3 million at December 31, 2021.

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The average effective interest rate on those long-term debt obligations was approximately 3.8% at December 31, 2020.

We also had $165.2 million of long-term debt obligations under the Payroll Support Program Agreement and the Treasury Loan Agreement.

We also had $200.6 million of long-term debt obligations under the Payroll Support Program Agreements.

Under our capacity purchase arrangements, 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.

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.

We have guaranteed the obligations of SkyWest Airlines under the Delta Connection Agreement and the United Express Agreement for the E175 aircraft.

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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 as discussed below.

Our critical accounting policies relate to revenue recognition, long-lived assets, and income tax as discussed below.

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 could differ materially, from such estimates.

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A portion of our compensation under our capacity purchase agreements is designed to reimburse us for the use of the aircraft we provide under such agreements.

This compensation is deemed to be lease revenue, inasmuch as the agreements identify the “right of use” or a specific type and number of aircraft over the agreement term.

This compensation is deemed to be lease revenue, because the agreements identify the “right of use” or a specific type and number of aircraft over the agreement term.

The amount of compensation deemed to be lease revenue is determined from the agreed upon rates for the use of the aircraft included in each capacity purchase agreement, which we believe approximates fair value for the aircraft leases.

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We recognize revenue attributed to the Fixed Monthly Payments proportionate to the number of block hours complete during each reporting period, relative to the estimated number of block hours we anticipate completing over the remaining contract term.

Due to the material decrease in completed block hours in 2020 from historical levels and from anticipated future levels over the remaining contract terms, we determined the amount of Fixed Monthly Payments we received in 2020 was disproportionately high

relative to the number of block hours we completed during 2020.

As of December 31, 2020, we deferred recognizing revenue of $110.7 million in Fixed Monthly Payments we received during the 2020 calendar year.

We deferred recognizing revenue of $69.1 million during the second quarter of 2020 when we generated 126,026 block hours, $29.6 million during the third quarter of 2020 when we generated 222,561 block hours and $12.0 million during the fourth quarter of 2020 when we generated 267,528 block hours.

The amount of deferred revenue from Fixed Monthly Payments we recognize will increase or decrease in future reporting periods depending on the number of block hours we complete during such reporting period and our then-current forecast of block hours we anticipate completing over the remaining contract term based on information available to us as that time.

We anticipate we will continue to defer recognizing revenue into 2021 and may begin recognizing previously deferred amounts as revenue by late 2021 or in 2022, depending upon future block hour production and flight schedules.

Our revenues could be impacted by a number of factors, such as our flight schedules, passenger fares we receive under our prorate agreements, terminations, extensions or other amendments to our code-share agreements, our estimates used to determine the amount of revenue we defer under our capacity purchase agreements, and our ability to earn incentive payments contemplated under applicable agreements.

In 2020, we generated 973,338 block hours and we deferred recognizing revenue of $110.7 million in Fixed Monthly Payments we received during the 2020 calendar year.

In 2021, we generated 1,319,628 block hours and we recognized $6.8 million of previously deferred revenue and $8.4 million of unbilled revenue.

The amount of deferred revenue and unbilled revenue from Fixed Monthly Payments we recognize will increase or decrease in future reporting periods depending on the number of block hours we complete during such reporting period and our then-current forecast of block hours we anticipate completing over the remaining contract term based on information available to us as that time.

We currently anticipate we will recognize previously deferred revenue in 2022, depending upon future block hour production and flight schedules each reporting period in 2022.

Our revenues could be impacted by several factors, such as our flight schedules, passenger fares we receive under our prorate agreements, terminations, extensions or other amendments to our code-share agreements, our estimates used to determine the amount of revenue we defer under our capacity purchase agreements, and our ability to earn incentive payments contemplated under applicable agreements.

In the event contracted rates are not finalized at a quarterly or annual financial statement date, we record that period’s revenues based on the lower of the prior period’s approved rates or our estimate of rates that will be implemented upon completion of negotiations.

Also, in the event we have a reimbursement dispute with a major airline partner at a quarterly or annual financial statement date, we evaluate the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute.

Also, in the event we have a reimbursement dispute with a major airline partner at a quarterly or annual financial statement date, we evaluate

the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute.

Our rates were finalized under our code-share agreements as of December 31, 2021.

Aircraft Leases

As of December 31, 2020, our fleet of aircraft in scheduled service included 41 aircraft under lease, excluding 58 aircraft financed by our major partners that we operate for them under contract.

In order to determine the proper classification of our leased aircraft, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments.

These estimates are utilized by management in making computations as required by existing accounting standards that determine the lease classification.

All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases.

Under the majority of our operating leases, we are required to meet certain lease return conditions with the aircraft, which presumes a certain percent of the eligible flight time for certain components since the last overhaul remains when the aircraft is returned to the lessor.

A liability for probable lease return costs is recorded after the aircraft has completed its last maintenance cycle prior to being returned.

Several factors can impact the estimated liability for lease return costs including, but not limited to, timing of scheduled maintenance events and anticipated condition of the aircraft at the end of the lease term.

We believe it is unlikely that materially different estimates for lease return obligations would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made.

Long-Lived Assets

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Asset groupings are done at the fleet type or contract level.

In 2021, we entered into an agreement with Delta to purchase and operate 16 new E175 aircraft under a multi-year capacity purchase agreement.

The 16 new E175 aircraft will replace 16 SkyWest-owned or financed CRJ900 aircraft currently under its Delta contract with expirations ranging from the second half of 2022 to early 2023.

As of December 31, 2021, we only operated the CRJ900 aircraft under a flying agreement with our major airline partner Delta.

As a result of this fleet transition beginning in 2022 and the uncertainty about our ability to redeploy the CRJ900 aircraft with another major airline partner, we concluded that indicators of impairment existed and therefore, we evaluated our CRJ900 fleet and related CRJ900 assets for impairment.

In 2021, the Company recorded a non-cash impairment charge of $84.6 million to write-down the CRJ900 aircraft operating under the Delta contracts to their estimated fair value.

The impairment analysis required us to identify applicable asset groups, perform a recoverability test using undiscounted cash flows and estimate the fair value of the asset group through the use of third-party valuations.

Judgment was required to determine the impairment loss.

The amounts we ultimately realize from the disposal of our CRJ900 long-lived assets may vary from our 2021 fair value assessment.

Factors that may impact our estimates used for depreciation include anticipated useful lives of each aircraft type and estimated residual values of each aircraft.

As we operate all of our aircraft under code-share agreements with our major airline partners, changes in anticipated demand by our major airline partners for regional aircraft may impact our estimated useful lives and residual values for our aircraft, spare engines and other long-lived

At December 31, 2020, we had 108 aircraft that were not in scheduled service with our partners, including 74 CRJ200s, 30 CRJ700s, and 4 CRJ900s.

The CRJ200 aircraft that were removed from the Delta and American agreements were fully depreciated as of December 31, 2020.

The remaining aircraft are in the process of being placed under a leasing arrangement with a third party, are aircraft transitioning between code-share agreements with our major airline partners and being used as supplemental spare aircraft or are available for future code-share agreements.

Self-Insurance

We use a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks, including workers’ compensation, healthcare benefits, general liability, product liability, property insurance and directors’ and officers’ liability insurance.

Liabilities associated with risks retained by us are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.

Our workers’ compensation liability includes estimated outstanding losses of unpaid claims and allocated loss adjustment expenses (“ALAE”), which includes case reserves, the development of known claims and incurred but not reported claims.

ALAE are the direct expenses for settling specific claims.

The amounts reflect per occurrence and annual aggregate limits maintained by us.

The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.

We believe that the liability recorded at December 31, 2020 is adequate to cover all workers' compensation claims incurred through December 31, 2020.

If the actual costs of such claims and related expenses exceed the amount estimated, additional reserves may be required which could have a material negative effect on our operating results.

Holding other factors constant, a 10 percent increase in our estimated workers compensation liability as of December 31, 2020, would have resulted in additional expense of approximately $2.1 million for the year ended December 31, 2020.

The liability related to our self-insured group medical insurance plans includes an estimate for claims incurred but not paid.

This estimate is created using general actuarial principles and our historical claims experience.

The cost of general liability, product liability and commercial auto liability is accrued based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience.

At December 31, 2021, we had 81 aircraft that were not in scheduled service with our partners, including 63 CRJ200 aircraft and 18 CRJ700 aircraft.

The CRJ200 aircraft not in scheduled service are nearly fully depreciated as of December 31, 2021.

The remaining aircraft are scheduled to be placed under contract by 2023 or will be used as supplemental spare aircraft.

Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis