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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 129 added, 312 removed, 171 unchanged (72% of the section changed)

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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.

(“SkyWest” “we” or “us”) during the three-month periods ended March 31, 2022 and 2021.

Also discussed is our financial condition as of March 31, 2022, and December 31, 2021.

You should read this discussion in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2022, including the notes thereto, appearing elsewhere in this Report.

This discussion and analysis contains forward-looking statements.

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the uncertainty of the duration, scope and impact of COVID-19;

a further spread or worsening of COVID-19;

a further spread or worsening of COVID-19 or other potential future outbreaks of infectious diseases or other health concerns;

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;

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residual aircraft values and related impairment charges;

the impact of global instability;

the impact of global instability, including the ongoing military conflict between Russia and the Ukraine;

labor relations and costs;

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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.

and the ability to attract and retain qualified pilots, as well as the 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, 2021, 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.

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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

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.

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.

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.

As of March 31, 2022, we offered scheduled passenger service with approximately 1,960 total daily departures to destinations in the United States, Canada, and Mexico.

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:

As of March 31, 2022, we had 633 total aircraft in our fleet, including 513 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 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.

* As of March 31, 2022, 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.

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 success is principally dependent on our ability to meet the needs of our major airline partners by providing a reliable and safe operation at attractive economics.

From March 31, 2021, to March 31, 2022, we made several changes to our fleet count under our flying agreements, primarily consisting of the addition of 22 new E175 aircraft and 16 used CRJ700 aircraft.

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

We also anticipate adding 11 used CRJ700 aircraft with American by the end of 2023.

Anticipated delivery and in-service dates may be subject to change as we are coordinating timing with our major airline partners.

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.

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.

As of March 31, 2022, approximately 42.9% of our aircraft in scheduled service or under contract were operated for United, approximately 29.0% were operated for Delta, approximately 21.1% were operated for American and approximately 7.0% 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.

For the three months ended March 31, 2022, capacity purchase revenue and prorate revenue represented approximately 88.8% and 11.2%, 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.

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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:

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.

First Quarter Summary

We had total operating revenues of $735.2 million for the three months ended March 31, 2022, a 37.5% increase compared to total operating revenues of $534.6 million for the three months ended March 31, 2021.

We had net income of $17.7 million, or $0.35 per diluted share, for the three months ended March 31, 2022, compared to net income of $35.9 million, or $0.71 per diluted share, for the three months ended March 31, 2021.

The significant items affecting our revenue and operating expenses during the three months ended March 31, 2022, are outlined below:

The number of aircraft we have in scheduled service and the number of block hours we incur on our flights are primary drivers of 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.

As a result of higher passenger demand, the number of aircraft we operated increased from 468 as of March 31, 2021, to 513 as of March 31, 2022;

the number of block hours increased from 276,182 for the three months ended March 31, 2021, to 310,993 for the three months ended March 31, 2022, or by 12.6%;

and the number of passengers we carried increased from 5.7 million for the three months ended March 31, 2021, to 8.8 million for the three months ended March 31, 2022, or by 53.9%.

As a result of increased flight schedules and additional aircraft operating under our capacity purchase agreements for the three months ended March 31, 2022, as compared to three months ended March 31, 2021, our capacity purchase revenue increased $186.4 million, or 42.1%.

Additionally, we provided temporary rate reductions to our major airline partners under our capacity purchase agreements during the three months ended March 31, 2021, in response to the COVID-19 demand reduction experienced by our major airline partners in 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended March 31, 2022.

As a result of increased passengers carried on our prorate routes, our prorate revenue increased $10.5 million, or 15.3%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

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.

Our total operating expenses increased $229.4 million, or 50.6%, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increase in operating expenses was primarily due to $193.2 million in payroll support program grants received from U.S.

Treasury reflected as an offset to operating expenses for the three months ended March 31, 2021, and an increase in the number of flights we operated for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

Departures increased from 154,894 for the three months ended March 31, 2021, to 176,211 for the three months ended March 31, 2022, or by 13.8%.

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

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Aircraft in Service or Under Contract

September 30, 2021

March 31, 2022

December 31, 2021

September 30, 2020

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.

March 31, 2021

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2021 and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are presented in our Annual Report on Form 10-K for the year ended December 31, 2021.

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, long-lived assets, 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.

There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2022.

Results of Operations

Three Months Ended September 30, 2021, and 2020

Three Months Ended March 31, 2022 and 2021

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.

For the three months ended September 30,

The increase in block hours, departures and passengers carried during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to demand recovery from reduced flight schedules in 2021 resulting from the COVID-19 pandemic.

For the three months ended March 31,

Block hours by aircraft type:

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The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):

For the three months ended September 30,

For the three months ended March 31,

Flying agreements

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We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands):

For the three months ended September 30,

For the three months ended March 31,

Capacity purchase agreements revenue:

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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.

flight operations” of $137.4 million was primarily due to an increase in scheduled flights we operated under our contracts with our major airline partners during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

Our completed departures increased 13.8% and completed block hours increased 12.6% during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

We did not provide our major airline partners temporary rate reductions during the three months ended March 31, 2022.

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.

aircraft lease and fixed revenue” of $48.9 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

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

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 for each reporting period.

Under our capacity purchase agreements, the performance obligation of each completed flight is measured in block hours incurred for each completed flight.

Based on the number of completed block hours during the three months ended March 31, 2022, we recognized $7.5 million of previously deferred revenue and $3.6 million of unbilled revenue on our capacity purchase agreements.

For the three months ended March 31, 2021, we deferred recognizing revenue on $21.2 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.

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.

Our total deferred revenue and unbilled revenue balances were $96.4 million and $12.0 million as of March 31, 2022, respectively.

Additionally, our aircraft lease and fixed rate revenue increased as a result of the 22 E175 aircraft added to our fleet since March 31, 2021.

The increase in prorate agreements revenue of $10.5 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 March 31, 2022, compared to the three months ended March 31, 2021.

Due to the ongoing COVID-19 demand recovery, our prorate passenger load factors increased during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, despite operating fewer prorate flights for the three months ended March 31, 2022.

The increase in lease, airport services and other revenues of $3.7 million was primarily due to 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 March 31, 2022, compared to the three months ended March 31, 2021.

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,

For the three months ended March 31,

Salaries, wages and benefits

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Depreciation and amortization

Airport-related expenses

Aircraft fuel

Airport-related expenses

Aircraft rentals

Special items - impairment charges

Payroll support grant

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Total airline expenses

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.

The $80.2 million, or 36.5%, increase in salaries, wages and benefits was due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the three months ended March 31, 2022, compared to the three months ended March 31, 2021 .

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.

The $55.4 million, or 27.2%, decrease in aircraft maintenance expense was primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, including engine maintenance expense throughout the 2021 year, including the three months ended March 31, 2021.

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.

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.

The $6.9 million, or 6.3%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated since March 31, 2021.

This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of 22 new E175 aircraft and spare engines since March 31, 2021.

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.

The $5.9 million, or 30.7%, increase in fuel cost was primarily due to an increase in our average fuel cost per gallon from $2.13 for the three months ended March 31, 2021, to $3.40 for the three months ended March 31, 2022, offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

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.

All fuel costs incurred under our capacity purchase agreements 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,

For the three months ended March 31,

(in thousands)

Fuel gallons purchased

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.

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.

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:

Total block hours

Passengers carried

Passenger load factor

Average passenger trip length (miles)

Operating Revenues

The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):

For the nine months ended September 30,

Flying agreements

Lease, airport services and other

Total operating revenues

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,

Capacity purchase agreements revenue:

flight operations

Capacity purchase agreements revenue:

aircraft lease and fixed revenue

Prorate agreements revenue

Flying agreements revenue

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.

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,

Salaries, wages and benefits

Aircraft maintenance, materials and repairs

Depreciation and amortization

Airport-related expenses.

Aircraft fuel

Aircraft rentals

Special items - impairment charges

Payroll support grant

Other operating expenses

Total operating expenses

Interest expense

Total airline expenses

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.

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

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)

Fuel gallons purchased

For clarity, our employee airport customer service labor costs are reflected in salaries, wages and benefits and the customer service labor costs we outsource to third parties are included in airport-related expenses.

The $5.2 million, or 21.4%, decrease in airport-related expenses for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to a decrease in subcontracted airport services and deicing events as a result of a decrease in the number of flights we operated under our prorate arrangements.

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.

The $0.5 million, or 3.3%, increase in aircraft rentals was primarily related to an additional aircraft leased from a third party since March 31, 2021.

Payroll support grant.

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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.

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.

We recognized $193.2 million in payroll support grant proceeds we received as a reduction to our operating expenses for the three months ended March 31, 2021.

We did not have a comparable payroll support grant during the three months ended March 31, 2022.

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.

The $17.1 million, or 31.4%, 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 March 31, 2022, compared to the three months ended March 31, 2021, 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.

The $2.8 million, or 8.8%, decrease in interest expense was primarily related to an overall lower effective interest rate during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

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.

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, comprised of our total operating expenses and interest expense, increased $226.6 million, or 46.7%, primarily due the payroll support program grant reflected as an offset to operating expenses for the three months ended March 31, 2021 and an increase in direct operating costs attributed to the higher number of completed flights during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

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 a 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.

Interest income increased $0.1 million, or 49.6%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

The increase in interest income was primarily related to an increase in average interest rates attributed to our marketable securities subsequent to March 31, 2021.

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.

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.

For the three months ended March 31, 2022 and 2021, our effective income tax rates were 28.4% and 28.2%, 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.

Primarily due to the factors described above, we generated net income of $17.7 million, or $0.35 per diluted share, for the three months ended March 31, 2022, compared to net income of $35.9 million, or $0.71 per diluted share, for the three months ended March 31, 2021.

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:

Three Months Ended March 31, 2022 and 2021

For the three months ended March 31, 2022, 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,

For the three months ended March 31,

(dollar amounts in thousands)

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Interest Income

Other Income (Expense), net

Other Income, net

Consolidated Income Before Taxes

NM = Not Meaningful

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

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.

SkyWest Airlines segment profit decreased $35.2 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

SkyWest Airlines block hour production increased to 310,993, or 12.6%, for the three months ended March 31, 2022, from 276,182 for the three months ended March 31, 2021, 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

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)

Operating Revenues:

SkyWest Airlines operating revenue

SkyWest Leasing operating revenues

Total Operating Revenues

Airline Expenses:

SkyWest Airlines airline expense

SkyWest Leasing airline expense

Total Airline Expenses (1)

Segment profit:

SkyWest Airlines segment profit (loss)

SkyWest Leasing profit

Total Segment Profit

Interest Income

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 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.

● 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 Airlines operating revenues increased $196.6 million, or 48.4%, from the three months ended March 31, 2021, to the three months ended March 31, 2022, 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 to our major airline partners under our capacity purchase agreements during the three months ended March 31, 2021.

Additionally, during the three months ended March 31, 2022, SkyWest Airlines recognized $7.5 million of previously deferred revenue and $3.6 million of unbilled revenue on our capacity purchase agreements, compared to deferring revenue of $21.2 million during the three months ended March 31, 2021.

SkyWest Airlines airline expense increased $231.8 million, or 59.3%, from the three months ended March 31, 2021, to the three months ended March 31, 2022, due to the following primary factors:

● SkyWest Airlines’ salaries, wages and benefits expense increased by $80.2 million, or 36.6%, primarily due to increased costs to retain aviation professionals and increased direct labor costs resulting from the higher number of flights we operated during the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

● SkyWest Airlines’ aircraft maintenance, materials and repairs expense decreased by $55.3 million, or 27.7%, primarily due to reliability improvement costs incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets, including engine maintenance expense throughout the 2021 year, including the three months ended March 31, 2021.

● SkyWest Airlines’ depreciation and amortization expense decreased by $2.6 million, or 5.2%, primarily due to certain CRJ200 aircraft that became fully depreciated since March 31, 2021, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft since March 31, 2021.

● SkyWest Airlines’ fuel expense increased $5.9 million, or 30.7%, due to an increase in our average fuel cost per gallon from $2.13 for the three months ended March 31, 2021, to $3.40 for the three months ended March 31, 2022 , offset by a decrease in the number of flights we operated under our prorate arrangements and the corresponding decrease in gallons of fuel we purchased.

● SkyWest Airlines recognized $193.2 million in payroll support grant proceeds as a reduction to our operating expenses for the three months ended March 31, 2021.

SkyWest Airlines did not have a comparable grant for the three months ended March 31, 2022.

● SkyWest Airlines’ remaining airline expenses increased $10.5 million, or 11.0%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated for the three months ended March 31, 2022, compared to the three months ended March 31, 2021 , 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.

SkyWest Leasing profit increased $9.2 million, or 27.0%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to the acquisition of 22 new E175 aircraft added to our fleet subsequent to March 31, 2021.

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.

As of March 31, 2022, we had $856.4 million in cash and cash equivalents and marketable securities.

As of March 31, 2022, we had $68.6 million available for borrowings under our line of credit.

Given our available liquidity as of March 31, 2022, 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 cash and marketable securities decreased from $860.4 million as of December 31, 2021, to $856.4 million as of March 31, 2022, or by $4.0 million.

At March 31, 2022, our total capital mix was 45.1% equity and 54.9% long-term debt, compared to 45.5% equity and 54.5% long-term debt at December 31, 2021.

As of March 31, 2022, and December 31, 2021, we had $61.4 million in letters of credit and surety bonds outstanding with various banks and surety institutions.

We had no restricted cash as of March 31, 2022, and December 31, 2021.

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,

The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the three months ended March 31, 2022 and 2021, and our total cash and marketable securities positions as of March 31, 2022, and December 31, 2021 (in thousands):

For the three months ended March 31,

Net cash provided by operating activities

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Net cash provided by (used in) financing activities

September 30,

Cash and cash equivalents

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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 cash flows provided by operating activities was $20.5 million for the three months ended March 31, 2022, compared to $231.6 million for the three months ended March 31, 2021.

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.

The decrease in our cash flow from operations for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to the timing of cash payments on our current liability accounts and changes in our deferred and unbilled revenue accounts for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, combined with a decrease in net income from $35.9 million for the three months ended March 31, 2021, to $17.7 million for the three months ended March 31, 2022.

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 cash flows used in investing activities was $124.7 million for the three months ended March 31, 2022, compared to cash flows used in investing activities of $121.4 million for the three months ended March 31, 2021.

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

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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 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

Cash used for the acquisition of property and equipment increased by $57.9 million from $56.1 million for the three months ended March 31, 2021, to $114.0 million for the three months ended March 31, 2022, primarily due to the purchase of four new E175 aircraft during the three months ended March 31, 2022, compared to the purchase of four used CRJ700 aircraft during the three months ended March 31, 2021.

Additionally, the reduction in the cash used in other long-term assets for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, resulted from the timing of payments received from our major airline partners attributed to our long-term 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.

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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 cash flows provided by financing activities was $91.7 million for the three months ended March 31, 2022, compared to cash used in financing activities of $94.9 million for the three months ended March 31, 2021.

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.

The $186.6 million increase in cash provided by financing activities for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily due to an increase of $145.8 million in proceeds from the issuance of long-term debt primarily related to the acquisition of four E175 aircraft and a $102.9 million promissory note executed during the three months ended March 31, 2022.

Additionally, cash used for principal payments on long-term debt decreased $41.0 million from the three months ended March 31, 2021 to the three months ended March 31, 2022, primarily due to paying off a portion of our long-term debt during the three months ended March 31, 2021.

Significant Commitments and Obligations

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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.

As of March 31, 2022, we had a firm purchase commitment for 25 new E175 aircraft from Embraer with delivery dates anticipated into the first half of 2023.

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.

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We intend to finance the firm purchase commitment for 25 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.

Aircraft Lease and Facility Obligations

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

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 eight years as of March 31, 2022.

Future minimum lease payments due under all long-term operating leases were approximately $280.8 million at March 31, 2022.

Assuming a 6.0% discount rate, which is the average incremental borrowing rate we anticipate we would have incurred on debt obtained over a similar term to acquire these assets, the present value of these lease obligations would have been equal to approximately $226.9 million at March 31, 2022.

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.

As of March 31, 2022, we had $2.9 billion of long-term debt obligations related to the acquisition of aircraft.

The average effective interest rate on those long-term debt obligations was approximately 3.9% at March 31, 2022.

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 and $102.9 million of long-term debt secured by spare engines.

Under our capacity purchase agreements, the major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis.

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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.

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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis