-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QP+Z60KGWYX9UyAEaqeSJw4ghdml/d5hLb1p1hrBFHPxnma039a8D/7MzS6B5n+p xLNdC90Y7Hyfb30b5Xchgw== 0000950149-99-001198.txt : 19990629 0000950149-99-001198.hdr.sgml : 19990629 ACCESSION NUMBER: 0000950149-99-001198 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SKYWEST INC CENTRAL INDEX KEY: 0000793733 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 870292166 STATE OF INCORPORATION: UT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-14719 FILM NUMBER: 99654022 BUSINESS ADDRESS: STREET 1: 444 S RIVER RD CITY: ST GEORGE STATE: UT ZIP: 84790 BUSINESS PHONE: 8016343000 MAIL ADDRESS: STREET 1: 444 SOUTH RIVER ROAD CITY: ST GEORGE STATE: UT ZIP: 84790 10-K405 1 SKYWEST, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 0-14719 SKYWEST, INC. Incorporated under the Laws of Utah 87-0292166 (IRS Employer ID No.) 444 South River Road St. George, Utah 84790 (435) 634-3000 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price of the Common Stock on the NASDAQ National Market System) on June 17, 1999, was approximately $440,954,689. As of June 17, 1999, there were 24,508,658 shares of Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended March 31, 1999, are incorporated by reference in Part II as specified. Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies to be voted at the Registrant's 1999 Annual Meeting of Shareholders, to be filed with the Commission, are incorporated by reference in Part III as specified. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] 2 SKYWEST, INC. FISCAL 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
Page No. -------- Item 1. Business.........................................................................3 Item 2. Properties.......................................................................8 Item 3. Legal Proceedings................................................................9 Item 4. Submission of Matters to a Vote of Security Holders..............................9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................................................10 Item 6. Selected Financial Data.........................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................10 Item 8. Financial Statements and Supplementary Data.....................................11 Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.............11 PART III Item 10. Directors and Executive Officers of the Registrant..............................11 Item 11. Executive Compensation..........................................................11 Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................................11 Item 13. Certain Relationships and Related Transactions..................................11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................................................12
3 PART I ITEM 1. BUSINESS GENERAL SkyWest, Inc. (the "Company"), through its wholly-owned subsidiary, SkyWest Airlines, Inc. ("SkyWest"), operates one of the larger regional airlines in the United States. SkyWest provides passenger and air freight service and completes nearly 1,000 daily flights. Pursuant to a joint marketing and code sharing agreement with Delta Airlines, Inc. (?Delta?), SkyWest operates as a Delta Connection in certain SkyWest markets. In October 1995, SkyWest entered into a marketing and code sharing agreement with Continental Airlines, Inc. (?Continental?) which allowed SkyWest to operate as a Continental Connection in certain markets which operated in and out of Los Angeles. SkyWest ceased using the Continental code effective July 15, 1998. Effective October 1, 1997, SkyWest entered into a new code-sharing agreement ("United Express Agreement") with United Airlines, Inc. ("United") and began operating as United Express in Los Angeles, California. On January 19, 1998, SkyWest executed an addendum to the United Express Agreement to provide service as United Express in San Francisco, California, which began June 1, 1998. On February 9, 1998, SkyWest executed another addendum to the United Express Agreement to provide service as United Express in United's Portland and Seattle/Tacoma markets and in additional Los Angeles markets, which began April 23, 1998. Prior to October 1, 1998, 97 percent of SkyWest's traffic was carried under the Delta code and 3 percent was carried under the Continental code. In addition, all of SkyWest's flights operated under the Delta code and certain flights operating out of Los Angeles operated under both Delta and Continental codes. As of May 31, 1999, 47 percent of SkyWest's traffic was carried under the Delta code, and 53 percent was carried under the United code. Additionally, 23 percent of SkyWest's flights operated under the Delta code and 77 percent operated under the United code. With principal hubs located at the Los Angeles, Salt Lake City, San Francisco, Portland and Seattle/Tacoma, SkyWest offers a convenient and frequent flight schedule designed to maximize connecting and origin-destination traffic for its major code-sharing partners. SkyWest currently operates a fleet of 89 turboprop aircraft and 11 regional jet aircraft. Founded in 1972, the Company has experienced significant growth. During the past five fiscal years, consolidated operating revenues have increased at a compounded annual growth rate of 20.4 percent, from $184.7 million in fiscal 1995 to $388.6 million in fiscal 1999. Total passengers carried by SkyWest have increased from approximately 2,074,000 to approximately 4,901,000 over the same period. In fiscal 1999, the Company achieved record levels of passengers carried, record consolidated operating revenues of $388.6 million, and net income increased 90.6 percent to $41.8 million or $1.69 per diluted share. The Company is also engaged in another transportation business, through its wholly-owned subsidiary, National Parks Transportation, Inc. ("NPT"). NPT provides car rental services through a fleet of Avis vehicles located at six airports. NPT accounted for less than one percent of consolidated revenues in fiscal 1999. During fiscal 1999, the Company sold the operations of its wholly-owned subsidiary, Scenic Airlines, Inc. ("Scenic"). Scenic provided air tours and general aviation services to the scenic regions of Northern Arizona and Southern Utah. The Scenic operations have been reflected as "Discontinued Operations" in the Company's consolidated financial statements incorporated herein by reference. The revenues of Scenic amounted to $28.0 million for fiscal 1999. JOINT MARKETING AND CODE SHARING AGREEMENTS Since April 1987, SkyWest has operated as a Delta Connection in certain SkyWest markets pursuant to the terms of a joint marketing and code sharing agreement with Delta. On July 1, 1990, SkyWest and Delta entered into a revised Delta Connection Agreement (the "Delta Connection Agreement"), modified on April 1, 1997 and May 24,1999, under which SkyWest coordinates with Delta to facilitate interline connections at Salt Lake City International Airport. The primary benefit of this affiliation is the use of the Delta designation code (DL) in listing flights in the Official Airline Guide and in the computerized reservation systems used throughout the industry. SkyWest's code sharing arrangement allocates to SkyWest, on certain flights, a portion of the passenger fare on a formula or other basis, subject to periodic adjustments. This code sharing agreement also provides for negotiated minimum payments per 3 4 flight departure and incentives related to passenger volumes and levels of customer service, on certain flights. SkyWest also participates in cooperative advertising and marketing activities with Delta, including Delta's Frequent Flyer Program, the Delta Meeting Network and Delta Dream Vacations. The Company believes the arrangement created between SkyWest and Delta is similar to those which exist between other major and regional airlines. The Delta Connection Agreement is subject to termination in various circumstances, including upon 180 days' advance notice by either party for any or no reason. Delta currently owns approximately 13 percent of the Company's outstanding common stock. Pursuant to a Stock Option Agreement between Delta and the Company, Delta holds preemptive rights and registration rights (two demand rights and unlimited "piggy-back" rights) with respect to the Common Stock owned by Delta, as well as the right to designate one nominee for the Company's Board of Directors, so long as Delta owns at least ten percent of all Common Stock. Effective April 1, 1997, W. Martin Braham, Delta's designated Board member resigned from the Board, at Delta's request. All Delta designated board members of other regional airlines with similar arrangements also resigned. However, so long as Delta is the owner of 10% or more of the Company's outstanding Common Stock, the Company is required to include a designee of Delta reasonably acceptable to the Company on the slate of nominees for election of directors nominated by the Company's Board of Directors and to use its best efforts to assure the election of the designee to the Board of Directors. Delta has not designated a nominee to replace Mr. Braham and the Company does not otherwise intend to nominate a replacement for the vacancy created by Mr. Braham's resignation. Since October 1995, SkyWest had operated as a Continental Connection, in Southern California markets which utilized Los Angeles as a connecting hub, pursuant to the terms of a marketing and code sharing agreement (the "Continental Connection Agreement") with Continental. The benefits under this agreement were similar to those described under the Delta Connection Agreement. As of October 24, 1997, the Continental Connection Agreement terminated, however, SkyWest had continued to provide service as a Continental Connection. Effective July 15, 1998, SkyWest terminated all service as a Continental Connection. Effective October 1, 1998, SkyWest began operating as a United Express carrier in Los Angeles, under a United Express Agreement. The benefits under this agreement are similar to those described under the Delta Connection and Continental Connection agreements. This agreement terminates on September 30, 2002, however, may be terminated earlier based on certain provisions in the agreement. United may also terminate the agreement for convenience upon 180 days written notice; however, written notice shall not be given earlier than September 30, 1999. The amendment agreements executed on January 19, 1998 and February 9, 1998, terminate on May 31, 2008, however, may be terminated earlier based on certain provisions in the agreements. The additional flights in Los Angeles covered in the February 9, 1998 agreement terminate on the same day as those in the agreement dated October 1, 1998. United may also terminate these agreements for convenience upon 180 days written notice. On United Express routes, United controls scheduling, ticketing, pricing and seat inventories with SkyWest receiving from United negotiated minimum payments per flight departure and incentives related to passenger and volumes and levels of customer service. By entering this agreement with United, it has enabled SkyWest to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of SkyWest-controlled flying and contract flying as previously described. ROUTES SkyWest's flight schedules are structured to facilitate the connection of its passengers with flights of Delta and United at the airports it serves. The following table shows selected information about the cities served by SkyWest as of June 17, 1999. 4 5
Served State and City Since(1) - -------------- -------- Arizona: Yuma..........................................................1979 California: San Diego.....................................................1968 Palm Springs..................................................1970 Los Angeles...................................................1977 Imperial......................................................1979 Ontario.......................................................1981 Santa Maria...................................................1982 Santa Barbara.................................................1983 Bakersfield...................................................1983 Fresno........................................................1985 Sacramento....................................................1986 San Francisco.................................................1995 San Jose......................................................1986 San Luis Obispo...............................................1986 Orange County.................................................1986 Monterey......................................................1987 Cresent City..................................................1998 Eureka........................................................1998 Redding.......................................................1998 Chico.........................................................1998 Santa Rosa....................................................1998 Modesto.......................................................1998 Merced........................................................1998 Visalia.......................................................1998 Inyokern......................................................1998 Oxnard........................................................1998 Carlsbad......................................................1998 Colorado: Grand Junction................................................1983 Colorado Springs..............................................1995 Idaho: Pocatello.....................................................1980 Idaho Falls...................................................1982 Twin Falls....................................................1983 Boise.........................................................1988 Sun Valley....................................................1990
5 6
Served State and City Since(1) - -------------- -------- Montana: West Yellowstone..............................................1986(2) Helena........................................................1988(2) Bozeman.......................................................1988 Billings......................................................1988 Butte.........................................................1988 Missoula......................................................1998 Nebraska: Omaha.........................................................1998 New Mexico: Albuquerque...................................................1995 Nevada: Las Vegas.....................................................1974 Elko..........................................................1982 Reno..........................................................1982 Oregon: Eugene........................................................1995 Portland......................................................1995 Redmond.......................................................1998 Medford.......................................................1998 South Dakota: Rapid City....................................................1994 Utah: Cedar City....................................................1972 Salt Lake City................................................1972 St. George....................................................1972 Vernal........................................................1982 Washington: Pasco.........................................................1996 Yakima........................................................1998 Bellingham....................................................1998 Seattle.......................................................1998 Spokane.......................................................1999 Wyoming: Jackson Hole..................................................1986 Casper........................................................1994 Cody..........................................................1995 Canada: Vancouver B.C.................................................1997 Calgary.......................................................1999
(1) Refers to the calendar year service was initiated. (2) Service is provided on a seasonal basis. 6 7 GOVERNMENT REGULATION All interstate air carriers, including SkyWest, are subject to regulation by the FAA. The FAA requires operating, air worthiness and other certificates; FAA approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. SkyWest operates under a FAR Part 121 certificate. SkyWest also operates under a Canadian Foreign Air Operator Certificate issued by the Minister of Transport Canada. The Company believes it is operating in compliance with FAA regulations and holds all necessary operating and air worthiness certificates and licenses. The Company's flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. The Company does not operate at any airports where landing slots are restricted. All air carriers are required to comply with federal law and regulations pertaining to noise abatement and engine emissions. All air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. Management believes that the Company is in compliance in all material respects with these laws and regulations. COMPETITION The airline industry is highly competitive. SkyWest not only competes with other regional airlines, some of which are owned by or are operated as code sharing partners of major airlines, but also faces competition from major airlines on certain routes. SkyWest is the dominant regional airline operating out of the Salt Lake City and San Francisco International Airports. Competition in the southern California markets, which are serviced by SkyWest from its hub in Los Angeles, is particularly intense, with a variety of carriers in these markets. In its markets served from the Los Angeles International Airport, SkyWest's principal competitors include Wings West, Inc. (operating as "American Eagle"), and Trans States, Inc. (operating as "USAir Express" and "Trans World Express"). In its Pacific Northwest markets, SkyWest's principal competitor is Horizon Air Industries, Inc. (operating as "Horizon Airlines"). SkyWest also faces indirect low-fare competition from carriers such as Southwest Airlines and Shuttle by United. The Company believes that the principal competitive factors affecting decisions by travelers in SkyWest's markets are the frequency, convenience and reliability of flights and, to a lesser extent, the level of fares. EMPLOYEES As of June 17, 1999, the Company employed 3,243 full-time equivalent employees consisting of 1,282 pilots and flight attendants, 408 maintenance personnel, 1,328 customer service personnel, 20 reservation and marketing personnel, and 205 employees engaged in accounting, administration and other functions. The Company's employees are not represented by any union. The Company is aware, however, that collective bargaining group organization efforts among its employees occur from time to time and are expected to continue in the future. The Company has never experienced any work stoppages and considers its relationship with its employees to be very good. YEAR 2000 COMPLIANCE The Company is currently modifying computer systems and application programs, as well as imbedded technology in the Company's equipment, for year 2000 compliance, with project completion scheduled for September 30, 1999. The Company believes that the cost to modify its systems or applications will not have a material effect on its financial position or results of operations. Any expenditures will be funded through operating cash flows while any costs for new software will be capitalized and amortized over the software's useful life. Although the Company is working cooperatively with third parties with systems upon which the Company must rely, the Company can not give any assurances that the systems of other parties will be year 2000 compliant on a timely basis. Systems operated by others which the Company would use and/or rely on would include: Federal Aviation Administration Air Traffic Control, computer reservation systems for travel agent sales as well as Delta and United 7 8 reservation, passenger check-in and ticketing systems. The failure of the systems or equipment of the Company or third parties (which the Company believes is the most likely worst case scenario) could result in the reduction or suspension of the Company's operations and could have a material adverse effect on the Company's financial condition and results of operations. The Company is reviewing and revising its business interruption contingency plans. The review, together with any necessary revisions, will be completed concurrent with the modifications to existing systems and application programs by September 30, 1999. The review of these plans will include how to maintain safety as well as performing certain functions and processes manually. Due to the uncertainty, related to year 2000 issues, the Company's contingency plan will be ongoing in nature and may require further modifications to existing systems as new information is made available and the Company further assess the readiness of third parties upon which the Company relies. SEASONALITY As is common in the airline industry, SkyWest's operations are favorably affected by increased travel, historically occurring in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. However, SkyWest does expect some mitigation of the historical seasonal trends due to an increase in the portion of its operations in contract flying. FORWARD-LOOKING STATEMENTS This form 10-K contains various forward-looking statements and information that are based on management's belief, as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "estimate," "project," "expect," and similar expressions are intended to identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on the Company's operating results include, among other things, changes in SkyWest's code-sharing relationships, fluctuations in the economy and the demand for air travel, the degree and nature of competition and SkyWest's ability to expand services in new and existing markets and to maintain profit margins in the face of pricing pressures. ITEM 2. PROPERTIES FLIGHT EQUIPMENT As of June 17, 1999, SkyWest owned or leased the following types of aircraft:
NUMBER OF SCHEDULED AVERAGE AIRCRAFT FLIGHT CRUISING AVERAGE ----------------- PASSENGER RANGE SPEED AGE TYPE OF AIRCRAFT OWNED LEASED CAPACITY (MILES) (MPH) (YEARS) - ---------------- ----- ------ --------- --------- -------- ------- Brasilia......................... 21 68 30 300 300 5.5 Canadair Regional Jet............ -- 11 50 850 530 4.6
8 9 SkyWest's aircraft are turboprop and jet pressurized aircraft designed to operate more economically over short-haul routes with lower passenger load factors than larger jet aircraft. These factors make it economically feasible for SkyWest to provide high frequency service in markets with relatively low volumes of passenger traffic. Passenger comfort features of these aircraft include stand-up headroom, a lavatory, overhead baggage compartments and flight attendant service. Fiscal year 1995 marked the introduction of the Canadair Regional Jet ("CRJs"). SkyWest operates eleven of these aircraft on stage lengths up to 850 miles. During fiscal 1998, SkyWest entered into an agreement to purchase 20 new Brasilia aircraft, related spare parts inventory and support equipment. Two of these aircraft were delivered in fiscal 1998 and 13 were delivered in fiscal 1999. At March 31, 1999, SkyWest had agreed to purchase the remaining five Brasilia aircraft, related spare parts inventory and support equipment at an aggregate cost of approximately $40.0 million, including estimated cost escalations. SkyWest also has options to acquire 30 additional Brasilia aircraft at fixed prices (subject to cost escalations and delivery schedules) exercisable through fiscal 2000. During fiscal 1999, SkyWest Airlines entered into an agreement to acquire 25 CRJs and related spares parts inventory and support equipment together with options on 25 additional aircraft. Subsequent to March 31, 1999, SkyWest Airlines entered into an agreement to acquire an additional 10 CRJs and secured options for an additional 20 aircraft. This brings the total firm order to 35 jet aircraft and 35 options at an aggregate cost of approximately $787.5 million. The options to acquire 35 additional CRJs are at fixed prices (subject to cost escalations) and delivery schedules and are exercisable through July 2003. GROUND FACILITIES Employees of SkyWest perform substantially all routine airframe and engine maintenance and periodic inspection of equipment. Maintenance is performed primarily at facilities in Palm Springs, California, Salt Lake City, Utah, and Fresno, California. SkyWest owns a 56,600 square foot maintenance facility in Palm Springs, California and leases a 90,000 square foot aircraft maintenance and training facility at the Salt Lake International Airport. The facility consists of a 40,000 square foot maintenance hangar and 50,000 square feet of training and other facilities to support SkyWest's growing hub operations. The facility was constructed and is owned by the Salt Lake City Airport Authority. SkyWest is leasing the facility under an operating lease arrangement over a 36-year term. The Company also leases a 90,000 square foot maintenance hanger and 15,000 square foot office facility in Fresno, California. SkyWest leases ticket counters, check-in, and boarding and other facilities in the passenger terminal areas in the majority of the airports it serves and staffs these facilities with SkyWest personnel. Delta and United provide ticket handling and/or ground support services for SkyWest in 30 of the 64 airports it serves. The Company's corporate headquarters are located in a 63,000 square foot building in St. George, Utah. Management deems the Company?s facilities as being suitable and necessary to support existing operations and believes the Company's facilities are adequate for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine legal proceedings incident to its business. In the opinion of management, none of such proceedings are expected to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1999. 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded over-the-counter and quoted in the NASDAQ National Market System under the symbol "SKYW." At June 17, 1999, there were approximately 1,061 stockholders of record. Securities held of record do not include shares held in securities position listings. The following table sets forth the range of high and low closing sales prices for the Company's Common Stock.
Fiscal 1999 Fiscal 1998 ----------- ----------- Quarter High Low High Low ------- ------ ------ ----- ------ First $29.75 $17.69 $8.50 $ 6.00 Second 34.00 15.00 10.32 7.69 Third 32.69 16.06 14.81 10.13 Fourth 38.00 25.13 21.06 14.75
The transfer agent for the Company's Common Stock is Zions First National Bank, Salt Lake City, Utah. During fiscal 1999 and 1998, the Board of Directors declared regular quarterly dividends of $.03 each quarter. On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. On May 4, 1999, the Company's Board of Directors declared a regular quarterly cash dividend of $.03 per share payable to stockholders of record on June 30, 1999, distributable July 14, 1999. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page 1 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1999, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to pages 12 through 16 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1999, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K. 10 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company included on pages 17 through 30 of the Company's Annual Report to Shareholders for the fiscal year ended March 31, 1999, furnished herewith to the Commission as Exhibit 13.1 to this report on Form 10-K, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III All items in Part III are incorporated herein by reference to the Company's Proxy Statement for its 1999 annual stockholders meeting to be held August 10, 1999, to be filed with the Commission.
Headings in Proxy Statement --------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS "Election of Directors" and OF THE REGISTRANT. "Executive Officers" ITEM 11. EXECUTIVE COMPENSATION. "Executive Compensation" and "Report of the Compensation Committee" ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL "Election of Directors" and OWNERS AND MANAGEMENT. "Security Ownership of Certain Beneficial Owners and Management" ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. "Certain Relationships and Related Transactions"
11 12 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed: 1. Financial Statements. The following consolidated financial statements of SkyWest, Inc., included in the Annual Report to Shareholders for the year ended March 31, 1999, are incorporated herein by reference in Item 8 of this report on Form 10-K. - Report of independent public accountants - Consolidated balance sheets as of March 31, 1999 and 1998 - Consolidated statements of income for the years ended March 31, 1999, 1998 and 1997 - Consolidated statements of stockholders' equity for the years ended March 31, 1999, 1998 and 1997 - Consolidated statements of cash flows for the years ended March 31, 1999, 1998 and 1997 - Notes to consolidated financial statements 2. Financial Statement Schedules. The following consolidated financial statement schedule of SkyWest, Inc. is included in Item 14(d) hereof. - Report of independent public accountants on financial statement schedule - Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended March 31, 1999. (c) Exhibits.
Incorporated by Filed Number Exhibit Reference Herewith - ------ ------- --------------- -------- 3.1 Restated Articles of Incorporation................................(1) 3.2 Amended By-Laws...................................................(6) 4.1 Articles IV and VI of Restated Articles of Incorporation describing the Common Shares and shareholders rights (included in Exhibit 3.1)......................................................(1)
12 13
Incorporated by Filed Number Exhibit Reference Herewith - ------ ------- --------------- -------- 4.2 Article II of the Amended By-Laws defining the rights of Common Shareholders (included in Exhibit 3.2).......................................................(6) 10.1 SkyWest, Inc. Amended and Combined Incentive and Non-Statutory Stock Option Plan....................................(6) 10.2 Delta Connection agreement dated January 13, 1987 between Delta Air Lines, Inc. and SkyWest Airlines, Inc......................................................(2) 10.3 Stock Option agreement dated January 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc.......................................................(2) 10.13 Lease Agreement dated December 1,1989 between Salt Lake City Corporation and SkyWest Airlines, Inc................................................................(7) 10.15 Purchase Agreement dated July 23,1993 between Bombardier Regional Aircraft Division and SkyWest Airlines, Inc..............................................(9) 10.16 Purchase agreement No. DSP/AJV-042/95 dated June 9, 1995 between Embraer - Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc.............................................(10) 10.17 SkyWest, Inc. 1995 Employee Stock Purchase Plan...............................................(10) 10.18 Marketing and Code Sharing Agreement dated October 24, 1996 between Continental Airlines, Inc. and SkyWest Airlines, Inc....................................(11) 10.19 Purchase agreement No. GCT-008/98 dated March 26, 1998 between Embraer-Empresa Brasileira de Aeronautica S.A. and SkyWest Airlines, Inc..........(12) 10.20 Purchase agreement No. PA-0428 dated January 15, 1999 between Bombardier, Inc. and SkyWest Airlines, Inc...................................X 13.1 Certain portions of the Annual Report to Shareholders for the year ended March 31, 1999, are incorporated by reference into this report on Form 10-K...........................................X
13 14
Incorporated by Filed Number Exhibit Reference Herewith - ------ ------- --------------- -------- 22.1 Subsidiaries of the Registrant....................................(1) 24.1 Consent of independent public accountants...........................................X 27.1 Financial Data Schedule.............................................................x
- -------------- (1) Incorporated by reference to Registration Statement on Form S-1, File No. 33-5823. (2) Incorporated by reference to Registrant's 10-Q filed for the quarter ended December 31, 1986. (3) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1987. (4) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1989. (5) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1990. (6) Incorporated by reference to Registration Statement on Form S-8, File No. 33-41285. (7) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1992. (8) Incorporated by reference to Registration Statement on Form S-2, File No. 33-61958. (9) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1994. (10) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1995. (11) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31, 1996. (12) Incorporated by reference to Registrant's Form 10-K filed for the year ended March 31,1998. 14 15 (d) Financial Statement Schedule. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To SkyWest, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in SkyWest, Inc.'s Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated May 19, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 (a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------------------- Arthur Andersen LLP Salt Lake City, Utah May 19, 1999 15 16 SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Additions Balance at Charged To Balance Beginning Costs and at End Description of Year Expenses Deductions of Year --------- ---------- ---------- --------- Year Ended March 31, 1999: Allowance for obsolescence $ 180,000 $ 200,000 $ -- $ 380,000 Allowance for doubtful accounts receivable 123,768 100,000 (21,094) 202,674 --------- --------- --------- --------- $ 303,768 $ 300,000 $ (21,094) $ 582,674 ========= ========= ========= ========= Year Ended March 31, 1998: Allowance for obsolescence $ 280,000 $ -- $(100,000) $ 180,000 Allowance for doubtful accounts receivable 103,978 77,728 (57,938) 123,768 --------- --------- --------- --------- $ 383,978 $ 77,728 $(157,938) $ 303,768 ========= ========= ========= ========= Year Ended March 31, 1997: Allowance for obsolescence $ 180,000 $ 100,000 $ -- $ 280,000 Allowance for doubtful accounts receivable 221,345 44,686 (162,053) 103,978 --------- --------- --------- --------- $ 401,345 $ 144,686 $(162,053) $ 383,978 ========= ========= ========= =========
16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SKYWEST, INC. By /s/ Jerry C. Atkin -------------------------------------------- Jerry C. Atkin Chairman, President and Chief Executive Officer Pursuant to the requirement of the Securities Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Names Capacities Date ----- ---------- ---- /s/ Jerry C. Atkin Chairman of the Board, President and June 17, 1999 - ------------------------- Chief Executive Officer Jerry C. Atkin /s/ Sidney J. Atkin Vice Chairman of the Board June 17, 1999 - ------------------------- and Director Sidney J. Atkin Executive Vice President, June 17, 1999 /s/ Bradford R. Rich Chief Financial Officer and Treasurer - ------------------------- (principal financial and Bradford R. Rich accounting officer) /s/ J. Ralph Atkin Director June 17, 1999 - ------------------------- J. Ralph Atkin Director - ------------------------- Mervyn K. Cox Director - ------------------------- Ian M. Cumming Director - ------------------------- Steven F. Udvar-Hazy /s/ Henry J. Eyring Director June 17, 1999 - ------------------------- Henry J. Eyring /s/ Hyrum W. Smith Director June 17, 1999 - -------------------------- Hyrum W. Smith
17 EX-10.20 2 PURCHASE AGREEMENT 1 EXHIBIT 10.20 MASTER PURCHASE AGREEMENT NO. PA-0428 BETWEEN BOMBARDIER INC. AND SKYWEST AIRLINES, INC. -1- 2 TABLE OF CONTENTS
ARTICLE ------- 1 INTERPRETATION 2 SUBJECT MATTER OF SALE 3 AIRLINE SUPPORT SERVICES AND WARRANTY 4 PRICE 5 PAYMENT 6 DELIVERY PROGRAM 7 BUYER INFORMATION 8 CERTIFICATION FOR EXPORT 9 ACCEPTANCE PROCEDURE 1 10 TITLE AND RISK 11 CHANGES 12 BUYER'S REPRESENTATIVES AT MANUFACTURE SITE 13 EXCUSABLE DELAY 14 NON-EXCUSABLE DELAY 15 LOSS OR DAMAGE 16 TERMINATION 17 NOTICES 18 INDEMNITY AGAINST PATENT INFRINGEMENT 19 LIMITATION OF LIABILITY AND INDEMNIFICATION 20 ASSIGNMENT 21 SUCCESSORS 22 APPLICABLE LAW'S 23 CONFIDENTIAL NATURE OF AGREEMENT 24 AGREEMENT EXHIBITS -------- I CERTIFICATE OF ACCEPTANCE II BILL OF SALE III CERTIFICATE OF RECEIPT OF AIRCRAFT IV CHANGE ORDER ANNEXES ------- A AIRLINE SERVICES B. WARRANTY AND SERVICE LIFE POLICY
-2- 3 This Master Purchase Agreement is made on the 15th day of January, 1999 BY AND BETWEEN: BOMBARDIER INC., a Canadian corporation represented by BOMBARDIER AEROSPACE, REGIONAL AIRCRAFT having an office at 123 Garratt Boulevard, Downsview, Ontario, Canada ("Bombardier") AND: SkyWest Airlines, Inc., a Utah corporation having its offices at 444 South River Road, St. George, Utah, 84790, USA ("Buyer") WHEREAS Buyer man in future desire to purchase new Aircraft (as defined in Article 1.4 of this Master Purchase Agreement) and related data, documents, and services under this Agreement (as defined in Article 1.4 of this Master Purchase Agreement) from Bombardier, and the parties desire to agree in advance on the terms that will govern such purchase; and WHEREAS This Master Purchase Agreement and any subsequent amendments thereto, together with the Supplement(s) that may be executed from time to time, will be the governing document for any future transactions between Bombardier and Buyer relating to the purchase and sale of new Bombardier products, currently being offered for sale by Bombardier Aerospace, Regional Aircraft. NOW THEREFORE, in consideration of the mutual covenants herein contained, Buyer and Bombardier agree as follows: -3- 4 ARTICLE I - INTERPRETATION 1.1 The recitals above have been inserted for convenience only and do not form part of this Agreement. 1.2 The headings in this Agreement are included for convenience only and shall not be used in the construction and interpretation of this Agreement. 1.3 In this Agreement, unless otherwise expressly provided, the singular includes the plural and vice-versa. 1.4 In this Agreement the following expressions shall, unless otherwise expressly provided, mean: (a) "Acceptance Period" shall have the meaning attributed to it in Article 9.3; (b) "Acceptance Date" shall have the meaning attributed to it in Article 9.7(a); (c) "Agreement" means this Master Purchase Agreement and Supplements, if any, including their Exhibits, Annexes, Schedules and Appendices, if any, either attached hereto (each of which is incorporated in the -Agreement by this reference) or subsequently agreed by the parties, hereto, pursuant to the provisions of this Agreement; (d) "Aircraft" shall have the meaning attributed to it in the applicable Supplement; (e) "Aircraft Purchase Price" shall have the meaning attributed to it in the applicable Supplement; (f) "Base Price" shall have the meaning attributed to it in the applicable Supplement; (g) "Bill of Sale" shall have the meaning attributed to it in Article 9.7(c); (h) "Buyer Selected Optional Features" shall have the meaning attributed to it in the applicable Supplement; (i) "Delivery Date" shall have the meaning attributed to it in Article 9.7(c); (j) "Economic Adjustment Formula", if applicable, shall have the meaning attributed to it in the applicable Supplement; -4- 5 (k) "Excusable Delay" shall have the meaning attributed to it in Article 13.1; (l) "FAA" shall have the meaning attributed to it in Article 8.1; (m) "Non-Excusable Delay" shall have the meaning attributed to it in Article 14.1; (n) "Notice" shall have the meaning attributed to it in Article 17.1; (o) "Other Patents' shall have the meaning attributed to it in Article 18.1; (p) "Permitted Change" shall have the meaning attributed to it in Article 11.2; (q) "Readiness Date" shall have the meaning attributed to it in Article 9.1; (r) "Regulatory Change" shall have the meaning attributed to it in Article 8.4; (s) "Scheduled Delivery Date" shall have the meaning attributed to it in the applicable Supplement; (t) "Specification" shall have the meaning attributed to it in the applicable Supplement; (u) "Supplement" means a supplementary agreement to this Agreement entered into by the parties for the purchase of specific products currently offered for sale by Bombardier Aerospace, Regional Aircraft; (v) "Taxes" shall have the meaning attributed to it in Article 4.2; and (w) "TC" shall have the meaning attributed to it in Article 8.1. 1.5 All dollar amounts in this Agreement are in United States Dollars. -5- 6 ARTICLE 2 - SUBJECT MATTER OF SALE 2.1 A description of the Aircraft being purchased and sold under the terms of this Agreement and the related Bombardier specification document number(s) will be set out in the applicable Supplement. Until a Supplement, in the form of Supplement No. PA-428-1 attached hereto, is executed between the parties hereto, neither party shall have any obligation under the terms of this Agreement. 2.2 This Agreement shall be applicable to the purchase of Aircraft completed during a period of three (3) years from the date hereof as evidenced by the execution of a Supplement. -6- 7 ARTICLE 3 - CUSTOMER SUPPORT SERVICES AND WARRANTY 3.1 Bombardier shall provide to Buyer the customer support services pursuant to the provisions of Annex A attached hereto and the applicable Supplement. 3.2 Bombardier shall provide to Buyer the warranty and the service life policy described in Annex B attached hereto and the applicable Supplement which shall be the exclusive warranty applicable to the Aircraft. 3.3 Unless expressly stated otherwise, the services referred to in 3.1 and 3.2 above and the applicable Supplement are incidental to the sale of the Aircraft and are included in the Aircraft Purchase Price. -7- 8 ARTICLE 4 - PRICE 4.1 (a) The base price for each of the Aircraft is set out in the applicable Supplement. (b) The base price of the Buyer Selected Optional Features is set out in the applicable Supplement. 4.2 The Aircraft Purchase Price (as defined in the applicable Supplement) does not include any taxes, fees or duties including, but not limited to, sales, use, value added (including the Canadian Goods and Services Tax), personal property, gross receipts, franchise, excise taxes, assessments or duties ("Taxes") which are-or may be imposed by law upon Bombardier, any affiliate of Bombardier, Buyer or the Aircraft whether or not there is an obligation for Bombardier to collect same from Buyer, by any taxing authority or jurisdiction occasioned by, relating to or as a result of the execution of this Agreement or the sale, lease, delivery, storage, use or other consumption of any Aircraft or any other matter, good or service provided under or in connection with this Agreement. According to legislation as of the date hereof, Canadian taxes, duties and Goods and Services Tax are not applicable to aircraft sold and immediately exported from Canada. 4.3 If any Taxes (other than Canadian income taxes charged on the income of Bombardier) are imposed upon Buyer or become due or are to be collected from Bombardier by any taxing authority, Bombardier shall notify Buyer and Buyer shall promptly, but no later than ten (10) working days after receiving such notice, pay such Taxes directly to the taxing authority, or reimburse Bombardier for such Taxes, as the case may be, including interest and penalties. 4.4 Upon Bombardier's request, Buyer shall execute and deliver to Bombardier any documents that Bombardier deems necessary or desirable in connection with any exemption from or reduction of or the contestation of or the defense against any imposition of Taxes. -8- 9 ARTICLE 5 - PAYMENT 5.1 The terms of payment for the Aircraft purchased and sold under the terms of this Agreement shall be set-out in the applicable Supplement. 5.2 Subject to the provisions of Article 9.9 hereof, should Buyer fail to make any of the payments required under the applicable Supplement on or before the stipulated date and Buyer does not correct the failure within a period of thirty (30) days thereafter, Buyer shall be in default and any Supplement and this Agreement as it relates thereto shall automatically terminate and Bombardier shall have no further obligation to Buyer under any Supplement and this Agreement as it relates thereto, including the obligation to proceed further with the manufacture of the Aircraft on behalf of Buyer or the sale and/or delivery of the Aircraft to Buyer. Notwithstanding the preceding sentence Bombardier shall have the option (but not the obligation) of waiving such termination should Buyer make arrangements satisfactory to Bombardier for such payment and all future payments within ten (10) calendar days of Buyer's default. 5.3 Buyer shall pay Bombardier daily interest on late payments, from the date that any payment becomes due up to and including the day prior to receipt of payment, at a rate of two percent (2%) per annum over the prime rate charged by the National Bank of Canada from time to time, calculated and compounded monthly. Bombardier's right to receive such interest is in addition to any other right or remedy Bombardier has at law as a result of Buyer's failure to make payments when due. 5.4 Buyer shall make all payments due under this Agreement and/or any applicable Supplement in immediately available United States Dollars by deposit on or before the due date, to Bombardier's account, in the manner set out in the applicable Supplement. 5.5 All amounts due with respect to each Aircraft shall be paid on or prior to the Delivery Date of the respective Aircraft. 5.6 All payments provided for under this Agreement and/or any applicable Supplement shall be made so as to be received by Bombardier in immediately available funds on or before the dates stipulated herein. 5.7 Bombardier shall remain the exclusive owner of the Aircraft, free and clear of all rights, liens, charges or encumbrances created by or through Buyer, until such time as all payments referred to in this Article 5 have been received in full by Bombardier. -9- 10 ARTICLE 6 - DELIVERY PROGRAM 6.1 The Aircraft shall be offered for inspection and acceptance to Buyer at Bombardier's facility and during the month(s) set forth in the applicable Supplement. -10- 11 ARTICLE 7 - BUYER INFORMATION 7.1 During the manufacture of the Aircraft, Buyer shall provide to Bombardier on or before the date required by Bombardier, all information as Bombardier may reasonably request to manufacture the Aircraft including, without limitation, the selection of furnishings, internal and external colour schemes. Buyer will, not less that the number of months set forth in the applicable Supplement, prior to the delivery of the first Aircraft governed by such Supplement: (a) provide Bombardier with an external paint scheme agreed on by the parties; (b) select interior colours (from Bombardier's standard colours); and (c) provide to Bombardier, on drawings which will be forwarded to Buyer, language translations for interior and exterior Aircraft labels. Failure of Buyer to comply with these requirements may result in an increase in price, a delay in delivery of the Aircraft, or both. -11- 12 ARTICLE 8 - CERTIFICATION FOR EXPORT 8.1 Bombardier has obtained or will obtain from Transport Canada, Airworthiness ("TC"), a TC Type Approval or Certificate (Transport Category) and from the Federal Aviation Administration of the United States ("FAA") an FAA Type Certificate for the type of aircraft purchased under this Agreement and any applicable Supplement. 8.2 Bombardier shall provide to Buyer a TC Certificate of Airworthiness (Transport Category) for Export to the United States of America, on or before the Delivery Date. 8.3 Bombardier shall not be obligated to obtain any other certificates or approvals as part of this Agreement. The obtaining of any import license or authority required to import or operate the Aircraft into any country outside of Canada shall be the responsibility of Buyer. Bombardier shall, to the extent permitted by law, and with Buyer's assistance, seek the issuance of a Canadian export license to enable Buyer to export the Aircraft from Canada subject to prevailing export control regulations in effect on the Delivery Date. 8.4 If any addition or change to, or modification or testing of the Aircraft is required by any law or governmental regulation or requirement or interpretation thereof by any governmental agency having jurisdiction in order to meet the requirements of Article 8.2 (a "Regulatory Change"), such Regulatory Change shall be made to the Aircraft prior to Delivery Date, or at such other time after the Delivery Date as the parties may agree upon. 8.5 The Regulatory Change shall be made without additional charge to Buyer unless such Regulatory Change is: (a) necessary to comply with any requirement of the country specified in the TC Certificate of Airworthiness for Export, which varies from or is in addition to its regulation, requirement or interpretation in effect on the date hereof for the issuance of a Certificate of Airworthiness in said country, in which case Buyer shall pay Bombardier's reasonable charges for such Regulatory Change, or (b) required by any governmental law or regulations or interpretation thereof promulgated by TC, or the FAA as applicable, which is effective subsequent to the date of this Agreement but before the Delivery Date and which is applicable to all aircraft in general or to all aircraft of the same category as the Aircraft, in which case Buyer shall pay Bombardier's reasonable charges for such Regulatory Change incorporated in any such Aircraft. 8.6 If delivery of the Aircraft is delayed by the incorporation of any Regulatory Change, such -12- 13 delay shall be an Excusable Delay within the meaning of Article 13. 8.7 Bombardier shall issue a Change Order, reflecting any Regulatory Change required to be made under this Article 8, which shall set forth in detail the particular changes to be made and the effect, if any, of such changes on design, performance, weight, balance, time of delivery, Base Price and Aircraft Purchase Price. Any Change Orders issued pursuant to this Article shall be effective and binding upon the date of Bombardier's transmittal of such Change Order. 8.8 If the use of any of the certificates identified in this Article 8 are discontinued during the performance of this Agreement, reference to such discontinued certificate shall be deemed a reference to any other certificate or instrument which corresponds to such certificate or, if there should not be any such other certificate or instrument, then Bombardier shall be deemed to have obtained such discontinued certificate(s) upon demonstrating that the Aircraft complies substantially with the Specification. 8.9 Reference to a regulatory authority shall include any succeeding department or agency then responsible for the duties of said regulatory authority. -13- 14 ARTICLE 9 - ACCEPTANCE PROCEDURE 9.1 Bombardier shall give Buyer at least thirty (30) days advance notice, by facsimile or telegraphic communication or other expeditious means, of the projected date of readiness of each Aircraft for inspection and delivery. Bombardier shall give Buyer at least ten (10) working days advance notice, by facsimile or telegraphic communication or other expeditious means, of the date on which an Aircraft will be ready for Buyer's inspection, flight test and acceptance (the "Readiness Date"). 9.2 Within two (2) days following receipt by Buyer of the notice of Readiness Date Buyer shall: (a) provide notice to Bombardier as to the source and method of payment of the balance of the Aircraft Purchase Price; (b) identify to Bombardier the names of Buyer's representatives who will participate in the inspection, flight test and acceptance; and (c) provide evidence of the authority of the designated persons to execute the Certificate of Acceptance and other delivery documents on behalf of Buyer. 9.3 Buyer shall have three (3) consecutive working days commencing on the Readiness Date in which to complete the inspection and flight test (such three (3) working day period being the "Acceptance Period"). 9.4 Up to four (4) representatives of Buyer may participate in Buyer's ground inspection of the Aircraft and two (2) representatives of Buyer may participate in the flight test. Bombardier shall, if requested by Buyer, perform an acceptance flight of not less than one (1) and not more than three (3) hours duration. Ground inspection and flight test shall be conducted in accordance with Bombardier's acceptance procedures (a copy of which shall be provided to Buyer at least 30 days prior to the Scheduled Delivery Date of the first Aircraft governed by the applicable Supplement hereunder) and at Bombardier's expense. At all times during ground inspection and flight test, Bombardier shall retain control over the Aircraft. 9.5 If no Aircraft defect or discrepancy is revealed during the ground inspection or flight test, Buyer shall accept the Aircraft on or before the last day of the Acceptance Period in accordance with the provisions of Article 9.7. 9.6 If any material defect or discrepancy in the Aircraft is revealed by Buyer's ground -14- 15 inspection or flight test, the defect or discrepancy will promptly be corrected by Bombardier, at no cost to Buyer, which correction may occur during or after the Acceptance Period depending on the nature of the defect or discrepancy and of the time required for correction. To the extent necessary to verify such correction, Bombardier shall perform one (1) or more further acceptance flights. 9.7 Upon completion of the ground inspection and acceptance flight of the Aircraft and correction of any defects or discrepancies: (a) Buyer will sign a Certificate of Acceptance (in the form of Exhibit I hereto ) for the Aircraft. Execution of the Certificate of Acceptance by or on behalf of Buyer shall be evidence of Buyer having examined the Aircraft and found it in accordance with the provisions of this Agreement. The date of signature of the Certificate of Acceptance shall be the "Acceptance Date"; (b) Bombardier will supply a TC Certificate of Airworthiness for Export, and (c) Buyer shall pay Bombardier the balance of the Aircraft Purchase Price and any other amounts due, at which time Bombardier shall issue a bill of sale (in the form of Exhibit 11 hereto) passing to Buyer good title to the Aircraft free and clear of all liens, claims, charges and encumbrances except for those liens, charges or encumbrances created by or claimed through Buyer (the "Bill of Sale"). The date on which Bombardier delivers the Bill of Sale and Buyer takes delivery of the Aircraft shall be the "Delivery Date". Delivery of the Aircraft shall be evidenced by the execution and delivery of the Bill of Sale and of the Certificate of Receipt of Aircraft (in the form of Exhibit III hereto ). 9.8 Provided that Bombardier has met all of its obligations under this Article 9, should Buyer not accept, pay for and take delivery of any of the Aircraft governed by the applicable Supplement within ten (10) calendar days after the end of the Acceptance Period of such Aircraft, Buyer shall be deemed to be in default of the terms of this Agreement with respect to all the undelivered Aircraft governed by the applicable Supplement. -15- 16 9.9 Buyer shall promptly, upon demand, reimburse Bombardier for all costs and expenses reasonably incurred by Bombardier as a result of Buyer's failure to accept or take delivery of the Aircraft, including but not limited to reasonable amounts for storage, insurance, taxes, preservation or protection of the Aircraft. Provided that Bombardier has met all of its obligations under this Article 9, should Buyer not accept, pay for and/or take delivery of any one of the Aircraft governed by a Supplement within thirty (30) calendar days following the end of the Acceptance Period, the present Agreement, with respect to all Aircraft governed by such Supplement shall automatically terminate. Bombardier shall however, have the option (but not the obligation) of waiving such termination should Buyer, within ten (10) calendar days following such termination, make arrangements satisfactory to Bombardier to accept delivery and provide payment for all amounts owing or to become due pursuant to this Agreement and the applicable Supplement. -16- 17 ARTICLE 10 - TITLE AND RISK 10.1 Title to the Aircraft and risk of loss of or damage to the Aircraft passes to Buyer when Bombardier presents the Bill of Sale to Buyer on the Delivery Date. 10.2 If, after transfer of title on the Delivery Date, the Aircraft remains in or is returned to the care, custody or control of Bombardier, Buyer shall retain risk of loss of, or damage to the Aircraft and for itself and on behalf of its insurer(s) hereby waives and renounces to, and releases Bombardier and any of Bombardier's affiliates from any claim, whether direct, indirect or by way of subrogation, for damages to or loss of the Aircraft arising out of, or related to, or by reason of such care, custody or control. -17- 18 ARTICLE 11 - CHANGES 11.1 Other than a Permitted Change as described in Article 11.2, or a Regulatory Change as described in Article 8.4, any change to the Aircraft (including without limitation the Specification) or any features, changing such Aircraft from that described in the Specification, requested by Buyer, and as may be mutually agreed upon by the parties hereto, shall be made using it change order ("Change Order) substantially in the format of Exhibit IV hereto. Should Buyer request a change, Bombardier shall advise Buyer, to the extent reasonably practiced, of the effect, if any, of such change request on: (a) the Scheduled Delivery Date; (b) the price and payment terms applicable to the Change Order; and (c) any other material provisions of this Agreement which will be affected by the Change Order. Such Change Order shall become effective and binding on the parties hereto when signed by a duly authorized representative of each party. 11.2 Bombardier, prior to the Delivery Date and without a Change Order or Buyer's consent, may: (a) substitute the kind, type or source of any material, part, accessory or equipment with any other material, part, accessory or equipment of like, equivalent or better kind or type; or (b) make such change or modification to the Specification as it deems appropriate to: 1) improve the Aircraft, its maintainability or appearance, or 2) to prevent delays in manufacture or delivery, or 3) to meet the delivery requirements of Articles 2, 6 and 8, other than with respect to a Regulatory Change to which the provisions of Articles 8.4 and 8.5 shall apply, provided that such substitution, change or modification shall not affect the Aircraft Purchase Price or materially affect the Scheduled Delivery Date, interchangeability or replaceability of spare parts or performance characteristics of the Aircraft. Any change made in accordance with the provisions of this Article 11.2 shall be deemed to be a "Permitted Change" and the cost thereof shall be borne by Bombardier. -18- 19 ARTICLE 12 - BUYER'S REPRESENTATIVES AT MANUFACTURE SITE 12.1 From time to time, commencing with the date which is thirty (30) days prior to the Scheduled Delivery Date of the first Aircraft governed by the applicable Supplement, and ending with the Delivery Date of the last Aircraft purchased hereunder, Bombardier shall furnish, without charge, office space at Bombardier's facility for one (1) representative of Buyer. Buyer shall be responsible for all expenses of its representative and shall notify Bombardier at least thirty (30) days prior to the first scheduled visit of such representative and three (3) days for each subsequent visit. 12.2 Bombardier's and Bombardier's affiliates' facilities shall be accessible to Buyer's representative during normal working hours. Buyer's representative shall have the right to periodically observe the work at Bombardier's or Bombardier's affiliates' facilities where the work is being carried out provided there shall be no disruption in the performance of the work. 12.3 Bombardier shall advise Buyer's representative of Bombardier's or Bombardier's affiliates' rules and regulations applicable at the facilities being visited and Buyer's representative shall conform to such rules and regulations. 12.4 At any time prior to delivery of the Aircraft, Buyer's representative may request, in writing, correction of parts or materials which they reasonably believe are not in accordance with the Specification. Bombardier shall provide a written response to any such request. Communication between Buyer's representative and Bombardier shall be solely through Bombardier's Contract Department or its designate. 12.5 BUYER HEREBY RELEASES AND AGREES TO DEFEND, INDEMNIFY AND HOLD HARMLESS BOMBARDIER, ITS ASSIGNEES AND AFFILIATES AND THEIR OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND ABILITIES, DAMAGES, CONTRACTORS FROM AND AGAINST ALL LIABILITIES LOSSES, COSTS AND EXPENSES RESULTING FROM INJURIES TO OR DEATH OF OR LOSS OF OR DAMAGE TO PROPERTY OF BUYER OR BUYER'S REPRESENTATIVES WHILE AT BOMBARDIER'S OR BOMBARDIER'S AFFILIATES OR SUBCONTRACTOR'S FACILITIES AND/OR DURING INSPECTION, FLIGHT TEST OR ACCEPTANCE OF THE AIRCRAFT, WHETHER OR NOT CAUSED BY THE ACTIVE, PASSIVE OR IMPUTED NEGLIGENCE OR STRICT PRODUCTS LIABILITY OF BOMBARDIER, ITS ASSIGNEES, AFFILIATES OR THEIR OFFICERS, DIRECTORS, AGENTS, EMPLOYEES OR CONTRACTORS. -19- 20 ARTICLE 13 - EXCUSABLE DELAY 13.1 In the event of a delay-on the part of Bombardier in the performance of its obligations or responsibilities under the provisions of this Agreement or any applicable Supplement due directly or indirectly to a cause which is beyond the reasonable control or without the fault or negligence of Bombardier (an "Excusable Delay"), Bombardier shall not be liable for, nor be deemed to be in default under this Agreement nor under the applicable Supplement on account of such delay in delivery of the Aircraft or other performance hereunder and the time fixed or required for the performance of any obligation or responsibility in this Agreement or the applicable Supplement shall be extended for a period equal to the period during which any such cause or the effect thereof persist. Excusable Delay shall be deemed to include, without limitation, delays occasioned by the following causes: (a) force majeure or acts of God; (b) war, warlike operations, act of the enemy, armed aggression, civil commotion, insurrection, riot or embargo; (c) fire, explosion, earthquake, lightning, flood, draught, windstorm or other action of the elements or other catastrophic or serious accidents; (d) epidemic or quarantine restrictions; (e) any legislation, act, order, directive or regulation of any governmental or other duly constituted authority; (f) strikes, lock-out, walk-out, and/or other labour troubles causing cessation, slow- down or interruption of work; (g) lack or shortage or delay in delivery of supplies, materials, accessories, equipment, tools or parts; (h) delay or failure of carriers, subcontractors or suppliers for any reason whatsoever; or (i) delay in obtaining type certification or any airworthiness approval or certificate, or any equivalent approval or certification, by reason of any law or governmental order, directive or regulation or any change thereto, or interpretation thereof, by a governmental agency, the effective date of which is subsequent to the date of the applicable Supplement, or by reason of any change or addition made by Bombardier or its affiliates as a result of a request of or requirement made by a governmental .agency to the compliance program of Bombardier or of its affiliate, or any part thereof, as same may have been approved by TC, or change to the interpretation thereof to obtain any such airworthiness approval or certificate. 13.2 (a) If Bombardier concludes, based on its appraisal of the facts and normal scheduling procedures, that due to Excusable Delay delivery-of an Aircraft will be delayed for more than twelve (12) months after the originally Scheduled Delivery Date or any -20- 21 revised date agreed to in writing by the parties, Bombardier shall promptly notify Buyer in writing and either party may then terminate the applicable supplement and the Agreement as it relates thereto with respect to such Aircraft by giving written notice to the other within fifteen (15) days after receipt by Buyer of Bombardier's notice. (b) If, due to Excusable Delay, delivery of an Aircraft is delayed for more than twelve (12) months after the Scheduled Delivery Date, either party may terminate the applicable Supplement and the Agreement as it relates thereto with respect to such Aircraft by giving written notice to the other within fifteen (15) days after the expiration of such twelve (12) month period. 13.3 Termination under Article 13.2 shall discharge all obligations and liabilities of Buyer and Bombardier hereunder with respect to such delayed Aircraft and all related undelivered items and services, except that Bombardier shall promptly repay to Buyer, and Bombardier's sole liability and responsibility shall be limited to the repayment to Buyer, of all advancements for such Aircraft received by Bombardier less, any amount due by Buyer to Bombardier. 13.4 The termination rights set forth in Article 13.2 are in substitution for any and all other rights of termination or contract lapse arising by operation of law in connection with Excusable Delays. -21- 22 ARTICLE 14 - NON-EXCUSABLE DELAY 14.1 If delivery of the Aircraft is delayed by causes- not excused under Article 13.1 (a "Non-Excusable Delay"), Bombardier shall pay Buyer, as liquidated damages and not as a penalty, the amount as set forth in the applicable Supplement for each day of Non-Excusable Delay in excess of a grace period of the number of days set forth in the applicable Supplement, to a maximum of the amount set forth in the applicable Supplement for any such delayed Aircraft. 14.2 Any right Buyer might otherwise have to refuse to accept delivery of an Aircraft when offered by Bombardier for inspection and acceptance following a Non-Excusable Delay is included within the rights and remedies for which the liquidated damages provided pursuant to Article 14.1 are the exclusive right and remedy. Buyer will not have the right to refuse to take delivery of any Aircraft because of a Non-Excusable Delay unless and until the aggregate duration of the Non-Excusable Delay for such Aircraft exceeds the period as set forth in the applicable Supplement. If Bombardier has not offered an Aircraft for inspection and acceptance before the end of that period as set forth in the applicable Supplement, Buyer may terminate the Agreement as to such Aircraft by giving notice to Bombardier. If, no such notice having been given, Bombardier offers such Aircraft, for inspection and acceptance and Buyer refuses to take delivery of such Aircraft because of Non-Excusable Delay, Buyer will be deemed to have terminated the Agreement and the applicable Supplement as to such Aircraft. Buyer shall, effective upon such termination, be entitled to recover from Bombardier, as liquidated damages and not as a penalty, the aggregate amount of liquidated damages calculated under Article 14.1 to the date of termination. In addition Bombardier shall promptly repay to Buyer all advance payments for such Aircraft plus daily simple interest thereon from the date of receipt to the date of repayment at the prime rate charged by the National Bank of Canada from time to time, calculated and compounded monthly. -22- 23 ARTICLE 15 - LOSS OR DAMAGE 15.1 In the event that prior to the Delivery Date of any Aircraft, the Aircraft is lost, destroyed or damaged beyond repair due to any cause, Bombardier shall promptly notify Buyer in writing. Such notice shall specify the earliest date reasonably possible, consistent with Bombardier's other contractual commitments and production schedule, by which Bombardier estimates it would be able to deliver a replacement for the lost, destroyed or damaged Aircraft. The applicable Supplement and this Agreement as it relates thereto shall automatically terminate with respect to such Aircraft unless Buyer gives Bombardier written notice, within thirty (30) days of Bombardier's notice, that Buyer desires a replacement for such Aircraft. If Buyer gives such notice to Bombardier, the parties shall execute an amendment to the applicable Supplement which shall set forth the Delivery Date for such replacement aircraft and corresponding new replacement Aircraft Purchase Price; provided, however, that nothing herein shall obligate Bombardier to manufacture and deliver such replacement aircraft if it would require the reactivation or acceleration of its production line for the model of aircraft purchased hereunder. The terms and conditions of this Agreement and the applicable Supplement applicable to the replaced Aircraft shall apply to the replacement aircraft. -23- 24 ARTICLE 16 - TERMINATION 16.1 Any Supplement hereto and this Agreement as it relates thereto may be terminated, in whole or in part, with respect to any or all of the Aircraft governed by such Supplement before the applicable Delivery Date by Bombardier or Buyer by notice of termination to the other party upon the occurrence of any of the following events: (a) a party makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts or generally does not pay its debts as they become due; or (b) a receiver or trustee is appointed for a party or for substantially all of such party's assets and, if appointed without such party's consent, such appointment is not discharged or stayed within thirty (30) calendar days thereafter; or (c) proceedings or action under any law relating to bankruptcy, insolvency or the reorganization or relief of debtors are instituted by or against a party, and, if contested by such party, are not dismissed or stayed, within thirty (30) calendar days thereafter; or (d) any writ of attachment or execution or any similar process is issued or levied against a party or any significant part of its property and is not released, stayed, bonded or vacated within thirty (30) calendar days after its issue or levy. 16.2 In addition, any Supplement hereto and this Agreement as it relates thereto may be terminated, in whole or in part, before the Delivery Date with respect to any or all undelivered Aircraft governed by the applicable Supplement: (a) as otherwise provided in this Agreement or the applicable Supplement; or (b) by Bombardier, if Buyer is in default or breach of any material term or condition of this Agreement or the applicable Supplement and Buyer does not cure such default or breach within thirty (30) calendar days after receipt of notice from Bombardier specifying such default or breach. (c) by Buyer, if Bombardier is in default or breach of any material term or condition of this Agreement or the applicable Supplement and such breach remains uncured for a period of sixty (60) calendar days following receipt of a notice from Buyer specifying the nature of default or breach. 16.3 In case of termination under Articles 5.2 or 9.9, or by Bombardier pursuant to Articles 16.1 or 16.2: -24- 25 (a) all rights (including property rights), if any, which Buyer or its assignee may have or may have had in or to this Agreement and the applicable Supplement or any or all of the undelivered Aircraft governed by such Supplement shall become null and void with immediate effect; (b) Bombardier may sell, lease or otherwise dispose of such Aircraft to another party free of any claim by Buyer; and (c) all amounts paid by Buyer with respect to the applicable undelivered Aircraft governed by the applicable Supplement shall be retained by Bombardier and shall be applied against the costs, expenses, losses and damages incurred by Bombardier as a result of Buyer's default and/or the termination of this Agreement and the applicable Supplement. Buyer hereby acknowledges and recognizes that such costs, expenses, losses and damages will aggregate not less than the amount previously paid by Buyer with respect to such undelivered Aircraft. 16.4 Subject to Article 14.1, in the event of termination of this Agreement and the applicable Supplement by Buyer, Buyer's sole rights, remedies and recourses against Bombardier and Bombardier's obligations to Buyer shall be limited to only the return by Bombardier of those amounts paid by Buyer to Bombardier hereunder on account of the undelivered Aircraft governed by the applicable Supplement. -25- 26 ARTICLE 17 - NOTICES 17.1 Any notice, request, approval, permission, consent or other communication ("Notice"), to be given or required under this Agreement or a Supplement shall be provided in writing, by registered mail, facsimile, courier, telegraphic or other electronic communication providing reasonable proof of transmission, except that no notice shall be sent by mail if disruption of postal service exists or is threatened either in the country of origin or of destination, by the party giving the Notice and shall be addressed as follows: (a) Notices to Bombardier shall be addressed to: Bombardier Inc. Bombardier Aerospace, Regional Aircraft 123 123 Garratt Boulevard Downsview, Ontario Canada M3K 1Y5 Attention: Director of Contracts Facsimile: (416) 375-4533 (b) Notices to Buyer shall be addressed to: SkyWest Airlines, Inc. 444 South River Road St. George, Utah USA, 84790 Attention: Vice-President, Planning Facsimile: (435) 634-3305 17.2 Notice given in accordance with Article 17.1 shall be deemed sufficiently given to and received by the addressees: (a) if delivered by hand, on the day when the same shall have been so delivered; or (b) if mailed or sent by courier on the day indicated on the corresponding acknowledgment of receipt; or (c) if sent by telex or facsimile on the day indicated by the acknowledgment or the answer back of the-receiver in provable form. -26- 27 ARTICLE 18 - INDEMNITY AGAINST PATENT INFRINGEMENT 18.1 In the case of any actual or alleged infringement of any Canadian or United States patent or, subject to the conditions and exceptions set forth below, any patent issued under the laws of any other country in which Buyer from time to time may lawfully operate the Aircraft ("Other Patents"), by the Aircraft, or by any system, accessory, equipment or part installed in such Aircraft at the time title to such Aircraft passes to Buyer, Bombardier shall indemnify, protect and hold harmless Buyer from and against all claims, suits, actions, liabilities, damages and costs resulting from the infringement, excluding any indirect, punitive incidental or consequential damages (which include without limitation loss of revenue or loss of profit) and Bombardier shall, at its option and expense: (a) procure for Buyer the right under such patent to use such system, accessory, equipment or part; or (b) replace such system, accessory, equipment or part with one of the similar nature and quality that is non-infringing; or (c) modify such system, accessory, equipment or part to make same non-infringing in a manner such as to keep it otherwise in compliance with the requirements of this Agreement. Bombardier's obligation hereunder shall extend to Other Patents only if from the time of design of the Aircraft, system, accessory, equipment or part until the alleged infringement claims are resolved: (d) such other country and the country in which the Aircraft is permanently registered have ratified and adhered to and are at the time of the actual or alleged infringement contracting parties to the Chicago Convention on International Civil Aviation of December 7, 1944 and are fully entitled to all benefits of Article 27 thereof, and (e) such other country and the country of registration shall each have been a party to the International Convention for the Protection of Industrial Property (Paris Convention) or have enacted patent laws which recognize and give adequate protection to inventions made by the nationals of other countries which have ratified, adhered to and are contracting parties to both of the forgoing conventions. 18.2 The foregoing indemnity does not apply to BFE, or to avionics, engines or any system, accessory, equipment or part that was not manufactured to Bombardier's detailed design or to any. system, accessory, equipment or part manufactured by a third party to Bombardier's detailed design without Bombardier's authorization. -27- 28 18.3 Buyer's remedy and Bombardier's obligation and liability under this Article are conditional upon (i) Buyer giving Bombardier written notice within ten (10) days after Buyer receives notice of a suit or action against Buyer alleging infringement or within twenty (20) days after Buyer receives any other written claim of infringement (ii) Buyer uses reasonable efforts in full cooperation with Bombardier to reduce or mitigate any such expenses, damages, costs or royalties involved, and (iii) Buyer finishes promptly to Bombardier all data, papers and records in its possession or control necessary or useful to resist and defend against such claim or suit. Bombardier may at its option conduct negotiations with any party claiming infringement and may intervene in any suit or action. Whether or not Bombardier intervenes, Bombardier shall be entitled at any stage of the proceedings to assume or control the defense. Buyer's remedy and Bombardier's obligation and liability are further conditional upon Bombardier's prior approval of Buyer's payment or assumption of any liabilities, expenses, damages, royalties or costs for which Bombardier may be held liable or responsible. 18.4 THE INDEMNITY, OBLIGATIONS AND LIABILITIES OF BOMBARDIER AND REMEDIES OF BUYER SET OUT IN THIS ARTICLE ARE EXCLUSIVE AND ACCEPTED BY BUYER TO BE IN LIEU OF AND IN SUBSTITUTION FOR, AND BUYER HEREBY WAIVES, RELEASES AND RENOUNCES, ALL OTHER INDEMNITIES, OBLIGATIONS AND LIABILITIES OF BOMBARDIER AND OF ITS AFFILIATES AND ALL OTHER RIGHTS, REMEDIES AND CLAIMS, INCLUDING CLAIMS FOR DAMAGES, DIRECT, INDIRECT, PUNITIVE INCIDENTAL OR CONSEQUENTIAL, OF BUYER AGAINST BOMBARDIER AND ITS AFFILIATES EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY ACTUAL OR ALLEGED PATENT INFRINGEMENT BY THE AIRCRAFT OR ANY INSTALLED SYSTEM, ACCESSORY, EQUIPMENT OR PART. -28- 29 ARTICLE 19 - LIMITATION OF LIABILITY AND INDEMNIFICATION 19.1 BOMBARDIER SHALL HAVE NO OBLIGATION OR LIABILITY (AT LAW OR IN EQUITY), WHETHER ARISING IN CONTRACT (INCLUDING WITHOUT LIMITATION, WARRANTY), IN TORT (INCLUDING THE ACTIVE, PASSIVE OR IMPUTED NEGLIGENCE, OR GROSS NEGLIGENCE OR WILLFUL. MISCONDUCT, OR STRICT PRODUCTS LIABILITY OF BOMBARDIER OR ITS AFFILIATES), OR OTHERWISE, FOR ANY CLAIM CAUSE OF ACTION, OR MATTER OF ANY KIND ARISING UNDER, IN CONNECTION WITH OR PURSUANT TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREIN, FOR LOSS OF USE, REVENUE OR PROFIT OR FOR ANY OTHER INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE. 19.3 THE WARRANTIES, LIABILITIES AND OBLIGATIONS OF BOMBARDIER, AND THE REMEDIES OF BUYER SET FORTH IN THIS AGREEMENT) ARE EXCLUSIVE AND IN SUBSTITUTION FOR, AND BUYER HEREBY WAIVES, RELEASES AND RENOUNCES ALL OTHER WARRANTIES, GUARANTEES, OBLIGATIONS, REPRESENTATIONS AND LIABILITIES OF, AND RIGHTS, CLAIMS, REMEDIES, DAMAGES, COSTS AND EXPENSES AGAINST, BOMBARDIER OR ANY SUCCESSOR OR PERMITTED ASSIGNEE, EXPRESSED OR IMPLIED ARISING IN FACT, IN LAW, IN EQUITY, IN CONTRACT, IN TORT OR OTHERWISE, INCLUDING BUT NOT LIMITED TO (a) ANY IMPLIED WARRANTY OR CONDITIONS OF MERCHANTABILITY OR FITNESS, (b) ANY IMPLIED WARRANTY OR CONDITION ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (c) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR NON-CONFORMANCE OR DEFECT OR FAILURE OF ANY KIND OR LOSS OF OR DAMAGE TO ANY AIRCRAFT OR PART THEREOF, ANY SPARE PARTS OR ANY TECHNICAL DATA, PRODUCT, DOCUMENT OR SERVICE PROVIDED UNDER THIS AGREEMENT, (d) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY AIRCRAFT, ANY BRAD PARTS, ANY VENDOR PARTS, ANY SPARE PARTS OR ANY TECHNICAL DATA. -29- 30 19.3 BUYER HEREBY RELEASES AND AGREES TO DEFEND, INDEMNIFY AND HOLD HARMLESS BOMBARDIER, ITS SUBSIDIARIES, AFFILIATES, SUBCONTRACTORS AND LESSORS, AND THEIR RESPECTIVE EMPLOYEES, DIRECTORS, OFFICERS AND AGENTS, AND EACH OF THEM, FROM AND AGAINST ALL LIABILITIES, CLAIMS, DAMAGES, LOSSES, COSTS AND EXPENSES FOR LOSS OF OR DAMAGE TO PROPERTY INCLUDING ANY AIRCRAFT, AND LOSS OF USE THEREOF, OR INJURIES TO OR DEATH OF ANY AND ALL PERSONS (INCLUDING BUYER'S DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES BUT EXCLUDING BOMBARDIER'S DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES), ARISING DIRECTLY OR INDIRECTLY OUT OF OR IN CONNECTION WITH ANY SERVICE PROVIDED UNDER THIS AGREEMENT. -30- 31 ARTICLE 20 - ASSIGNMENT 20.1 Either party may assign, sell, transfer or dispose of (in whole or in part) any of its rights and obligations hereunder or a Supplement to a wholly owned subsidiary or affiliate provided that there is no increase to the liability and/or responsibility of the non-assigning party and that the assigning party remains jointly and severally liable with any assignee for the performance of its obligation under this Agreement. 20.2 Except as provided in Article 20.1, Buyer shall not assign, sell, transfer or dispose of (in whole or in part) any of its rights or obligations hereunder or a Supplement without Bombardier's prior written consent. In the event of such assignment, sale, transfer or disposition Buyer shall remain jointly and severally liable with any assignee for the performance of all and any of Buyer's obligations under this Agreement and Bombardier reserves the right as a condition of its consent to amend one or more of the terms and conditions of this Agreement and (including for more certainty) the applicable Supplement. 20.3 Notwithstanding Article 20.2 above, Buyer may assign, after transfer of title of the Aircraft, its rights under this Agreement, save and except for any rights of Buyer which are expressly stated to be personal to Buyer, to a third party purchaser of any one of the Aircraft, provided said third party acknowledges in writing to be bound by the applicable terms and conditions of this Agreement, and provided that there is no increase to the liability and/or responsibility of Bombardier. 20.4 Bombardier may assign any of its rights to receive money hereunder without the prior consent of Buyer. 20.5 Notwithstanding the other provisions of this Article 20, Bombardier shall, at Buyer's cost and expense, if so requested in writing by Buyer, take any action reasonably required for the purpose of causing any of the Aircraft to be subjected (i) to, after the Delivery Date, an equipment trust, conditional sale or lien, or (ii) to another arrangement for the financing of the Aircraft by Buyer, providing, however, there shall be no increase to the liability and/or responsibility of Bombardier arising through such financing. -31- 32 ARTICLE 21 - SUCCESSORS 21.1 This Agreement shall inure to the benefit of and-be binding upon each of Bombardier and Buyer and their respective successors and permitted assignees. -32- 33 ARTICLE 22 - APPLICABLE LAWS 22.1 THIS AGREEMENT (AND INCLUDING FOR MORE CERTAINTY ANY APPLICABLE SUPPLEMENTS) SHALL BE SUBJECT TO AND CONSTRUED IN ACCORDANCE WITH AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY THE DOMESTIC LAWS OF THE PROVINCE OF ONTARIO, CANADA, EXCLUDING THE CHOICE OF LAW RULES, AND THE PARTIES HAVE AGREED THAT THE APPLICATION OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS IS HEREBY EXCLUDED. 22.2 Bombardier's obligations under this Agreement shall be subject to and apply only to the extent permitted by applicable laws, regulations, directives an/or orders regarding export controls. -33- 34 ARTICLE 23 - CONFIDENTIAL NATURE OF AGREEMENT 23.1 This Agreement is confidential between the parties and shall not, without the prior written consent of the other party, be disclosed by either party in whole or in part to any other person or body except: iii) as may be required by financial institutions or arrangers involved with the financing of the Aircraft, and then only subject to such person or body agreeing to execute the other party's confidentiality agreement. It is the disclosing party's responsibility to have such form executed with any third party prior to disclosure of any such information and to provide such form to the other party for approval. The foregoing does not apply where the disclosing party or the applicable third party is required to disclose such information by law or compelled by court order to do so, and iv) as may be required by United Airlines Inc. ("United"), and then only after a request in writing from United and only subject to specified receiving personnel of United agreeing to execute a confidentiality agreement in a form reasonably acceptable to Bombardier. 23.2 Except as may be reasonably required for the normal operation, maintenance, overhaul and repair of the Aircraft, Buyer shall hold confidential all technical data and information supplied by or on behalf of Bombardier. Buyer shall not reproduce any technical data or information or divulge the same to any third party without the prior written consent of Bombardier. 23.3 Either party may announce the signing of this Agreement by means of a notice to the press provided that the content and date of the notice has been agreed to by the other party. 23.4 In the event that this Agreement is required to be filed as an exhibit to a registration statement under the Securities Act of 1933 as amended, (the "Securities" Act) or a periodic report under the Exchange Act of 1934, as amended (the "Exchange" Act) Buyer shall notify Bombardier, by written notice, at least forty-five (45) days prior to the date of such anticipated filing of such determination and the reasons therefor, and shall use its best efforts to work with Bombardier to prepare and file with the Securities and Exchange Commission (the "Commission") a request for confidential treatment pursuant to Rule 24b-2 under the Exchange Act or Rule 406 under the Securities Act, as the case may be, with respect to information in this Agreement, and such other information as Bombardier may reasonably request. -34- 35 Subject to compliance with the foregoing, and notwithstanding the other provisions of this Article, portions of this Agreement or a Supplement hereto may be filed as exhibits to such registration statement or periodic report to the extent required by the Commission and such filing shall not constitute a breach hereof by Buyer. This provision shall survive until the latter of (i) the complete performance by Buyer of its obligation hereunder or (ii) two (2) years from the date hereof. -35- 36 ARTICLE 24 - AGREEMENT 24.1 This Agreement including any Supplements pursuant hereto, as same may be amended from time to time, and the matters referred to herein constitute the entire Agreement between Bombardier and Buyer with respect to the Bombardier products governed by the applicable Supplements and supersede and cancel all prior representations, brochures, alleged warranties, statements, negotiations, undertakings, letters, memoranda of agreement, proposals, acceptances, agreements, understandings, contracts and communications, whether oral or written, between Bombardier and Buyer or their respective agents, with respect to or in connection with the subject matter of this Agreement and the applicable Supplement and no agreement or understanding varying the terms and conditions hereof shall be binding on either Bombardier or Buyer hereto unless an amendment to this Agreement or the applicable Supplement is issued and duly signed by their respective authorized representatives. In the event of any inconsistencies between this Agreement and a Supplement or other documents referred to herein, the provisions of the Supplement shall prevail. 24.2 If any of the provisions of this Agreement or a Supplement are for any reason declared by judgment of a court of competent jurisdiction to be unenforceable or ineffective, those provisions shall be deemed severable from the other provisions of this Agreement/the Supplement and the remainder of this Agreement/the Supplement shall remain in full force and effect. 24.3 THE BENEFIT OF THE WAIVER, RELEASE, RENUNCIATION AND EXCLUSION OF LIABILITY IN ARTICLE 19, EXTENDS ALSO TO THE OTHER DIVISIONS, OTHER SUBSIDIARIES, AND OTHER AFFILIATES OF BOMBARDIER INC. (COLLECTIVELY THE "BOMBARDIER GROUP") AND TO THE OFFICERS, DIRECTORS, EMPLOYEES AND REPRESENTATIVES OF THE BOMBARDIER GROUP. 24.4 Bombardier and Buyer confirm to each other they have each obtained the required authorizations and fulfilled any conditions applicable to enable each of them to enter into this Agreement and any Supplement. -36- 37 24.5 Buyer and Bombardier agree that this Agreement has been the subject of discussion and negotiation and is fully understood by the parties hereto and that the other mutual agreements of the parties set forth herein were arrived at in consideration of the provisions contained in Articles, 12.5, 18.4, 19, Annex A Article 2.9.4.5 and Annex B Article 5.1. In witness whereof this Agreement was signed on the date written hereof: For and on behalf of For an on behalf of SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt --------------------------- ----------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen --------------------------- Eric Christensen Vice President, Planning -37- 38 ANNEX A AIRLINE SERVICES TECHNICAL SUPPORT, SPARE PARTS, TRAINING AND TECHNICAL DATA The following Airline Services are those services to which reference is made in Article 3 of the Agreement. ARTICLE I - TECHNICAL SUPPORT 1.2 FACTORY SERVICE Bombardier agrees to maintain or cause to be maintained the capability to respond to Buyer's technical inquiries, to conduct investigations concerning repetitive maintenance problems and to issue findings and recommend action thereon. This service shall be provided for as long as ten (10) of the Aircraft type(s) purchased under this Agreement remain in commercial air transport service. 1.2 FIELD SERVICE REPRESENTATIVE 1.2.1 SERVICES Bombardier shall assign one (1) or more Field Service Representative ("FSW") to Buyer's main base of operation or other location as may be mutually agreed, all as provided in the applicable Supplement. 1.2.2 TERM The FSR term is as set out in the applicable Supplement. 1.2.3 RESPONSIBILITY The FSR's responsibility shall be to provide technical advice to Buyer for the line maintenance and operation of the Aircraft systems and troubleshooting during scheduled and unscheduled maintenance by Buyer's designated personnel ("FSR Services"). -38- 39 1.2.4 TRAVEL If requested by Buyer, the FSR may, at Buyer's expense, travel to another location to provide technical advice to Buyer. 1.2.5 OFFICE FACILITIES Buyer shall furnish the FSR, at no charge to Bombardier, suitable and private office facilities and related equipment including desk, file cabinet, access to two telephone lines, facsimile and photocopy equipment conveniently located at Buyer's main base of operation or other location as may be mutually agreed. 1.2.6 ADDITIONAL EXPENSES Buyer shall reimburse Bombardier (net of any additional taxes on such reimbursement) the amount of any and all taxes (except Canadian taxes on the income of the FSR) and fees of whatever nature, including any customs duties, withholding taxes or fees together with any penalties or interest thereon, paid or incurred by Bombardier or the FSR or other Bombardier employee as a result of or in connection with the rendering of the services. 1.2.7 RIGHT TO STOP WORK Bombardier shall not be required to commence or continue the FSR Services when: (a) there is a labour dispute or work stoppage in progress at Buyer's facilities; (b) there exist war, risk of war or warlike operations, riots or insurrections; (c) there exist conditions that are dangerous to the safety or health of the FSR or other Bombardier employee; or (d) the Government of the country where Buyer's. facilities are located or where Buyer desires the FSR to travel refuses the Bombardier employee permission to enter said country or Buyer's base of operations. 1.2.8 WORK PERMITS AND CLEARANCES Buyer shall arrange for all necessary work permits and airport security clearances required for the FSR or other Bombardier employee to permit timely accomplishment of the FSR services. -39- 40 1.3 MAINTENANCE PLANNING SUPPORT 1.3.1 SCHEDULED MAINTENANCE TASK CARDS As described in the applicable Supplement, Bombardier shall provide Buyer Bombardier's standard format scheduled maintenance task cards that shall conform Aircraft at the Delivery Date. At Buyer's request Bombardier shall provide a proposal for task cards produced to Buyer's format. 1.3.2 IN-SERVICE MAINTENANCE DATA Buyer agrees to provide to Bombardier in-service maintenance data in order to provide updates to Bombardier's recommended maintenance program. Buyer and Bombardier shall agree on standards and frequency for communication of such data. 1.4 ADDITIONAL SERVICES At Buyer's request Bombardier shall provide a proposal to provide such additional support services as the parties may agree upon, which may include special investigations, maintenance and repair of the Aircraft. -40- 41 ARTICLE 2 - SPARE PARTS, GSE, TOOLS AND TEST EQUIPMENT 2.1.1 DEFINITIONS a. "BOMBARDIER PARTS": any spare parts, ground support equipment, tools and test equipment which bear an inhouse Cage Code number in the Bombardier Provisioning Files (as that expression is defined in ATA Specification 2000). b. "POWER PLANT PARTS": any power plant or power plant part or assembly carrying the power plant manufacturer's part number or any part furnished by the power plant manufacturer for incorporation on the Aircraft. c. "VENDOR PARTS": any spare parts, ground support equipment, tools and test equipment for the Aircraft which are not Bombardier Parts or Power Plant Parts. d. "SPARE PARTS": all materials, spare parts, assemblies, special tools and items of equipment, including ground support equipment, ordered for the Aircraft by Buyer from Bombardier. The term Spare Parts includes Bombardier Parts, Power Plant Part and Vendor Parts. e. "ORDER": any order for Spare Parts issued by Buyer to Bombardier; and f. "Technical Data": shall have the meaning attributed to it in the applicable Supplement. 2.1 TERM AND APPLICABILITY The term of this Annex A Article-2 shall become effective on the date hereof and shall remain in full force and effect with respect to the purchase and sale of Spare Parts for each Aircraft so long as at least ten (10) of the Aircraft remain in commercial air transport service. The provisions of Annex A Articles 2.2, and 2.6.5 shall survive expiration or termination of this Agreement. -41- 42 2.2 ORDER TERMS Terms and conditions hereof shall apply to all Orders placed by Buyer with Bombardier in lieu of any terms and conditions in Buyer's purchase orders. 2.3 PURCHASE AND SALE OF SPARE PARTS 2.3.1 AGREEMENT TO MANUFACTURE AND SELL Bombardier shall manufacture, or procure, and make available for sale to Buyer suitable Spare Parts in quantities sufficient to meet the reasonably anticipated needs of Buyer for normal maintenance and normal spares inventory replacement for each Aircraft. During the term specified in Annex A Article 2.1 above, Bombardier shall also maintain a shelf stock of certain Bombardier Parts selected by Bombardier to ensure reasonable re-order lead times and emergency support. Bombardier shall maintain a reasonable quantity of Bombardier Insurance parts. Insurance parts as used herein shall include, but not be limited to, dispatch-essential parts such as major flight control surfaces. 2.4 AGREEMENT TO PURCHASE BOMBARDIER PARTS 2.4.1 PURCHASE OF BOMBARDIER PARTS In consideration of Bombardier's obligation under Annex A Article 2.3.1, during the term stated in Annex A Article 2.1, Buyer agrees to purchase Bombardier Parts only from Bombardier or from airlines operating the same type aircraft purchased herein. Buyer may however purchase Bombardier Parts from any source whatsoever, redesign Bombardier Parts, or have them redesigned, manufacture Bombardier Parts, or have them manufactured, under the following conditions: (a) When less than ten (10) aircraft of the type purchased under this Agreement are operated in scheduled commercial air transport service; (b) Any time Bombardier Parts are needed to effect emergency repairs on the Aircraft, provided that such purchase, redesign or manufacture by or from sources other than Bombardier allows Buyer to obtain Bombardier Parts in less time than Bombardier requires to furnish them; or (c) If Buyer has notified Bombardier in writing that any Bombardier Parts are defective or unsatisfactory in use and if within a reasonable period thereafter -42- 43 Bombardier has not provided a satisfactory resolution or made redesigned Bombardier Parts available. 2.4.2 BUYER'S RIGHT TO PURCHASE, REDESIGN OR MANUFACTURE Buyer's right to purchase, redesign or to have redesigned or manufacture or to have manufactured Bombardier Parts under the preceding Article shall not be construed as a granting of a license by Bombardier and shall not obligate Bombardier to disclose to anyone Technical Data or other information nor to the payment of any license fee or royalty or create any obligation whatsoever to Bombardier and Bombardier shall be relieved of any obligation or liability with respect to patent infringement in connection with any such redesigned part. Buyer shall be responsible for obtaining all regulatory authority approvals required by Buyer to repair the Aircraft using redesigned or manufactured Bombardier Parts as described in the preceding Article. Any such redesigned part shall be identified with Buyer's part number only. 2.4.3 NOTICE TO BOMBARDIER OF REDESIGNED PARTS If Buyer redesigns or has had any Bombardier Parts redesigned, Buyer shall immediately thereafter advise Bombardier and make available to Bombardier and its affiliates any such redesigned part or manufacturing process therefor or drawings thereof. If Bombardier requests, Buyer shall negotiate with Bombardier, within sixty (60) calendar days after such redesigned part or manufacturing process therefor or drawings thereof are made available to Bombardier, for the granting to Bombardier of the exclusive manufacturing rights of the redesigned part. 2.5 PURCHASE OF VENDOR PARTS & POWER PLANT PARTS Bombardier shall not be obligated to maintain a stock of Vendor Parts or Power Plant Parts. Bombardier may elect to maintain a spares stock of selected Vendor Parts at its own discretion to support provisioning and replenishment sales. Bombardier agrees to use reasonable efforts to require its vendors to comply with the terms and conditions of this Annex A Article 2 as they apply to Vendor Parts. Vendor Parts shall be delivered in accordance with the vendor's quoted lead time plus Bombardier's internal processing time. 2.6 SPARE PARTS PRICING 2.6.1 SPARE PARTS PRICE CATALOGUE -43- 44 Prices for commonly used Bombardier Parts and Vendor Parts stocked by Bombardier shall be published in the spare parts price catalogue ("Spare Parts Price Catalogue"). Bombardier shall hold the published prices firm for catalogue stock class items for a period of twelve (12) months and shall provide at least ninety (90) calendar days notice prior to changing the published price. 2.6.2 BOMBARDIER PRICES FOR VENDOR PARTS If Buyer orders Vendor Parts from Bombardier, the price shall be as published in the Spare Parts Price Catalogue. 2.6.3 QUOTATIONS Price and delivery quotations for items not included in the Spare Parts Price Catalogue shall be provided at Buyer's request by Bombardier. Price quotations will be held firm for a period of ninety (90) calendar days or as otherwise specified by Bombardier. Responses to quotation requests will be provided within ten (10) calendar days. 2.6.4 PRICE APPLICABILITY The purchase price of Bombardier Parts shall be the applicable price set forth in the Spare Parts Price Catalogue at time of receipt by Bombardier of Buyer's Order or as quoted by Bombardier to Buyer upon request. If Buyer requests accelerated delivery or special handling for Bombardier Parts not included in the Spare Parts Price Catalogue, Bombardier may increase the price from the original quotation to cover any additional costs to Bombardier. 2.6.5 CURRENCY AND TAXES All Spare Parts Price Catalogue and quotation prices shall be in U.S. dollars and exclusive of transportation, taxes, duties and licenses. Buyer shall pay to Bombardier upon demand the amount of any sales, use, value-added, excise or similar taxes imposed by any federal, provincial or local taxing authority within Canada, and the amount of all taxes imposed by any taxing authority outside Canada, required to be paid by Bombardier as a result of any sale, use, delivery, storage or transfer of any Spare Parts. If Bombardier has reason to believe that any such tax is applicable, Bombardier shall separately state the amount of such tax in its invoice. If a claim is made against Bombardier for any such tax, Bombardier shall promptly notify Buyer. -44- 45 In addition, Buyer shall pay to Bombardier on demand the amount of any customs duties required to be paid by Bombardier with respect to the importation by Buyer of any Spare Parts. 2.6.6 VENDOR PRICING Bombardier shall use reasonable efforts to require its major vendors to maintain any published price for their parts for a period of at least twelve (12) months with a ninety (90) calendar day notice period prior to changing a published price. 2.7 PROVISIONING 2.7.1 PRE-PROVISIONING/PROVISIONING CONFERENCE Pre-provisioning and provisioning conferences shall be convened on dates to be mutually agreed between Buyer and Bombardier in order to: (i) discuss the operational parameters to be provided by Buyer to Bombardier which Bombardier considers necessary for preparing its quantity recommendations for initial provisioning of Spare Parts to be purchased from Bombardier or vendors ("Provisioning Items"); (ii) review Buyer's ground support equipment and special tool requirements for the Aircraft; (iii) discuss the format of the provisioning documentation to be provided to Buyer from Bombardier for the selection of Provisioning Items; and (iv) arrive at a schedule of events for the initial provisioning process, including the establishment of a date for the initial provisioning conference ("Initial Provisioning Conference") which shall be scheduled where possible at least twelve (12) months prior to delivery of the first Aircraft under an applicable Supplement. The time and location of the pre-provisioning conference shall be mutually agreed upon between the parties; however, Bombardier and Buyer shall use their best efforts to convene such meeting within thirty (30) days after execution of the applicable Supplement. 2.8 INITIAL PROVISIONING DOCUMENTATION Initial provisioning documentation for Bombardier Parts and Vendor Parts shall be -45- 46 provided by Bombardier as follows: (a) Bombardier shall provide, as applicable to Buyer, no later than eighteen (18) months prior to the Scheduled Delivery Date of the first Aircraft under the applicable Supplement or as may be mutually agreed, the initial issue of provisioning files as required by ATA Specification 2000, Chapter I (as may be amended by Bombardier); Revisions to this provisioning data shall be issued by Bombardier every ninety (90) calendar days until ninety (90) calendar days following the Delivery Date of the last Aircraft under the applicable Supplement or as may be mutually agreed; (b) Bombardier shall provide, as required by Buyer, all data files defined in Chapter 1 of ATA Specification 2000; and (c) the Illustrated Parts Catalogue designed to support provisioning shall be issued concurrently with provisioning data files and revised at ninety (90) calendar day intervals. 2.8.1 OBLIGATION TO SUBSTITUTE OBSOLETE SPARE PARTS In the event that, prior to delivery of the first Aircraft under an applicable Supplement, any Spare Part purchased by Buyer from Bombardier is rendered obsolete or unusable due to the redesign of the Aircraft or of any accessory, equipment or part thereto (other than a redesign at Buyer's request), Bombardier shall deliver to Buyer new and usable Spare Parts in substitution for such obsolete or unusable Spare Parts upon return of such Spare Parts to Bombardier by Buyer. Bombardier shall credit Buyer's account with Bombardier with the price paid by Buyer for any such obsolete or unusable Spare Part and shall invoice Buyer for the purchase price of any such substitute Spare Part delivered to Buyer. 2.8.2 DELIVERY OF OBSOLETE SPARE PARTS AND SUBSTITUTES Obsolete or unusable Spare Parts returned by Buyer pursuant to Annex A Article 2.8.1. shall be delivered to Bombardier at its plant in Ontario or Quebec, or such other destination as Bombardier may reasonably designate. Spare Parts substituted for such returned obsolete or unusable Spare Parts shall be delivered to Buyer from Bombardier's plant in Ontario or Quebec, or such other Bombardier shipping point as Bombardier may reasonably designate. Bombardier shall pay the freight charges for the shipment from Buyer to Bombardier of any such obsolete or unusable Spare Part and for the shipment from Bombardier to Buyer of any such substitute Spare Part. -46- 47 2.8.3 OBLIGATION TO REPURCHASE SURPLUS PROVISIONING ITEMS During a period commencing one (1) year after the Delivery Date of the first Aircraft under an applicable Supplement, and ending five (5) years after such Delivery Date, Bombardier shall, upon receipt of Buyer's written request and subject to the exceptions in Annex A Article 2.8.4, repurchase unused and undamaged Provisioning Items which: (i) were recommended by Bombardier as initial provisioning for the Aircraft, (ii) were purchased by Buyer from Bombardier, and (iii) are surplus to Buyer's needs. 2.8.4 EXCEPTIONS Bombardier shall not be obligated under Annex A Article 2.8.3 to repurchase any of the following: (i) quantities of Provisioning Items in excess of those quantities recommended by Bombardier in its Recommended Spare Parts List ("RSPL") for the Aircraft, (ii) Power Plant Parts, QEC Kits, standard hardware, bulk and raw materials, ground support equipment and special tools, (iii) Provisioning Items which have become obsolete or have been replaced by other Provisioning Items as a result of (a) Buyer's modification of the Aircraft or (b) design improvement by the Aircraft manufacturer or the vendor (other than Provisioning Items which have become obsolete because of a defect in design if such defect has not been remedied by an offer by Bombardier or the vendor to provide no charge retrofit kits or replacement parts which correct such defect), and (iv) Provisioning Items which become surplus as a result of a change in Buyer's operating parameters provided to Bombardier pursuant to Annex A Article 2.7, which were the basis of Bombardier's initial provisioning recommendations for the Aircraft. 2.8.5 NOTIFICATION AND FORMAT Buyer shall notify Bombardier, in writing, when Buyer desires to return Provisioning Items which Buyer's review indicates are eligible for repurchase by Bombardier under the provisions of Annex A Article 2.8.3. Buyer's notification shall include a detailed summary, in part number sequence, of the Provisioning Items Buyer desires to return. Such summary shall be in the form of listings as may be mutually agreed between Bombardier and Buyer, and shall include part number, nomenclature, purchase order number, purchase order date and quantity to be returned. Within five (5) business days after receipt of Buyer's notification Bombardier shall advise Buyer, in writing, when Bombardier's review of such summary from Buyer will be completed. -47- 48 2.8.6 REVIEW AND ACCEPTANCE BY BOMBARDIER Upon completion of Bombardier's review of any detailed summary submitted by Buyer pursuant to Annex A Article 2.8.5., Bombardier shall issue to Buyer a Material Return Authorization notice ("MRA") for those Provisioning Items Bombardier agrees are eligible for repurchase in accordance with Annex A Article 2.8.3. Bombardier will advise Buyer of the reason that any Provisioning Items included in Buyer's detailed summary are not eligible for return. The MRA notice shall state the date by which Provisioning Items listed in the MRA notice must be redelivered to Bombardier and Buyer shall arrange for shipment of such Provisioning Items accordingly. 2.8.7 PRICE AND PAYMENT The price of each Provisioning Item repurchased by Bombardier pursuant to Annex A Article 2.8.6 will be the original invoice price thereof. Bombardier shall pay the repurchase price by issuing a credit memorandum in favour of Buyer which may be applied against amounts due Bombardier for the purchase of Spare Parts and services.. 2.8.8 RETURN OF SURPLUS PROVISIONING ITEMS Provisioning Items repurchased by Bombardier pursuant to Annex A Article 2.8.6 shall be delivered to Bombardier Free Carrier (Incoterms), at its plant in Ontario or Quebec, or other such destination as Bombardier may reasonably designate. 2.8.9 OBSOLETE SPARE PARTS AND SURPLUS PROVISIONING ITEMS - TITLE AND RISK OF LOSS Title to and risk of loss of any obsolete or unusable Spare Parts returned to Bombardier pursuant to Annex A Article 2.8.8 shall pass to Bombardier upon delivery thereof to Bombardier. Title to and risk of loss of any Spare Parts substituted for an obsolete or unusable Spare Part pursuant to Annex A Article 2.8.1 shall pass to Buyer upon delivery thereof to Buyer. Title to and risk of loss of any Provisioning Items repurchased by Bombardier pursuant to Annex A Article 2.8.3 shall pass to Bombardier upon delivery thereof to Bombardier. With respect to the obsolete or unusable Spare Parts which may be returned to Bombardier and the Spare Parts substituted therefor, pursuant to Annex A Article 2.8.1, and the Provisioning Items which may be repurchased by Bombardier, pursuant to Annex A Article 2.8.3, the party which has the risk of loss of any such Spare Part or Provisioning Item shall have the responsibility, of providing any insurance coverage thereon desired by such party. -48- 49 2.9 PROCEDURE FOR ORDERING SPARE PARTS Orders for Spare Parts may be placed by Buyer to Bombardier by any method of order placement (including but not limited to SITA, ARINC, telecopier, letter, telex, facsimile, telephone or hard copy purchase order). 2.9.1 REQUIREMENTS Orders shall include at a minimum order number, part number, nomenclature, quantity, delivery schedule requested, shipping instructions and Bombardier's price, if available. Buyer agrees that orders placed with Bombardier shall conform to the requirements and procedures contained in ATA Specification 2000, as applicable to Buyer. 2.9.2 PROCESSING OF ORDERS Upon acceptance of any Order, unless otherwise directed by Buyer, Bombardier shall, if the Spare Parts are in stock, proceed immediately to prepare the Spare Parts for shipment to Buyer. If Bombardier does not have the Spare Parts in stock, Bombardier shall proceed immediately to acquire or manufacture the Spare Parts. Purchase order status and actions related to the shipment of Spare Parts shall be generally consistent with the provisions of the World Airline Suppliers Guide and the applicable portions of ATA Specification 2000, as applicable to Buyer. 2.9.3 CHANGES Bombardier reserves the right, without Buyer's consent, to make any necessary corrections or changes in the design, part number and nomenclature of Spare Parts covered by an Order, to substitute Spare Parts and to adjust prices accordingly, provided that interchangeability is not affected and the unit price is not increased by more than 10% or $50.00, whichever is less. Bombardier shall promptly give Buyer written notice of corrections, changes, substitutions and consequent price adjustments. Corrections, changes, substitutions and price adjustments which affect interchangeability or exceed the price limitations set forth above may be made only with Buyer's consent, which consent shall conclusively be deemed to have been given unless Buyer gives Bombardier written notice. of objection within fifteen (15) business days after receipt of Bombardier's notice. In case of any objection, the affected Spare Part will be deemed to be deleted from Buyer's Order. -49- 50 2.9.4 ELECTRONIC DATA INTERCHANGE Bombardier is not currently using EDI, however, if and when Bombardier has the capability and equipment to utilize EDI Bombardier will offer EDI transactions in accordance to the parameters set forth below. -50- 51 2.9.4.1 USE OF ELECTRONIC DATA INTERCHANGE (EDI) The SPEC 2000 Protocol shall be used for any EDI transaction. Buyer and Bombardier shall implement security procedures to ensure proper use of this communication. A message will be considered received only at the point where it is in a format which can be accepted by the receiving computer according to ATA SPEC 2000 rules on transmissions. If garbled transmissions are received, the receiver shall promptly notify the sender through use of the SI REJECT command. 2.9.4.2 ACCEPTANCE OF EDI TRANSACTIONS The SIBOOKED transaction creates an obligation on the part of Buyer to purchase the material and quantities as specified in the transmission. Bombardier is obliged to sell the material and quantities as specified except as may be identified in a subsequent SIORDEXC message. With respect to a SIQUOTES transaction, Buyer and Bombardier are bound to respect the prices quoted in the transmission in 'any resultant SIBOOKED order transaction based upon that SIQUOTES message within the validity period of the SIQUOTES message. An SINVOICE message will be considered as the official commercial invoice for the goods shipped. An SISTOCKS, SISHIPPD, SIPOSTAT or SIPNSTAT message creates no obligations on either the Buyer or Bombardier. If an SIBOOKED acknowledgment is not sent within 24 hours by Bombardier then Buyer shall resend the original message. Any document which has been properly received shall not give rise to any obligation unless and until the party receiving such document has properly transmitted in return an acknowledgment document according to SPEC 2000 Protocol. 2.9.4.3 SYSTEMS OPERATIONS Buyer and Bombardier, at their own expense, shall provide and maintain the equipment, software, services and testing necessary to effectively and reliably transmit and receive documents. 2.9.4.4 VALIDITY OF DOCUMENTS Annex A Article 2.9.4 has been agreed to by Buyer and Bombardier to -51- 52 evidence their mutual intent to create binding purchase and sale obligations pursuant to the electronic transmission and receipt of documents as described herein. Such documents properly transmitted pursuant to this Annex A Article 2.9.4 shall be considered, in connection with any transaction or any other agreement, to be a "writing" or "in writing" and shall be deemed for all purposes (a) to have been "signed" and (b) to constitute an "original" when printed from electronic files or records established and maintained in the normal course of business. Buyer and Bombardier agree not to contest the validity or enforceability of signed documents under the provisions of any applicable law relating to whether certain agreements are to be in writing or signed by either party to be bound thereby. Signed documents, if introduced as evidence on paper in any judicial, arbitration, mediation or administrative proceedings, will be admissible as between Buyer and Bombardier to the same extent and under the same conditions as other business records originated and maintained in documentary form. Neither Buyer nor Bombardier shall contest the admissibility of copies of signed documents under either the business records exception to the hearsay rule or the best evidence rule on the basis that the signed documents were not originated or maintained in documentary form. 2.10 PACKING All Spare Parts ordered shall receive standard commercial packing suitable for export shipment via air freight. Such standard packing will generally be to ATA 300 standards as amended from time to time. All AOG orders will be handled, processed, packed and shipped separately. 2.11 PACKING LIST Bombardier shall insert in each shipment a packing list/release note itemized to show: (i) the contents of the shipment, (ii) the approved signature of Bombardier's TC authority attesting to the airworthiness of the Spare Parts. (iii) value of the shipment for customs clearance if required. -52- 53 2.12 CONTAINER MARKS Upon Buyer's request each container shall be marked with shipping marks as specified on the Order. In addition Bombardier shall, upon request, include in the markings: gross weight and cubic measurements. 2.13 DELIVERY, TITLE AND RISK OF LOSS 2.13.1 DELIVERY POINT Spare Parts shall be delivered to Buyer in one of the following manners at Bombardier's sole option: (i) Free Carrier (Incoterrns 1990) Bombardier's plant in either Ontario or Quebec, Canada; or (ii) Free Carrier (Incotenns 1990) other Bombardier depots or shipping points; or (iii) Free Carrier (Incoterms 1990) vendor's or subcontractor's plant. 2.13.2 DELIVERY TIME Bombardier shall use reasonable efforts so that shipment of Bombardier Parts to Buyer be as follows: (a) AOG ORDERS Ship AOG Orders within four (4) hours of receipt of Order. Buyer's affected Aircraft factory production number shall be required on AOG Orders; (b) CRITICAL ORDERS (A1) Ship critical Orders within twenty-four (24) hours of order receipt; (c) EXPEDITE ORDERS (A2) Ship expedite Orders within seven (7) calendar days of order receipt; (d) INITIAL PROVISIONING ORDERS Prior to the Delivery Date of the first Aircraft under an applicable Supplement or as may be mutually agreed; and -53- 54 (e) OTHER ORDERS Shipment of stock items shall be approximately thirty (30) calendar days after Bombardier's receipt of Buyer's Order. Shipment of non-stock items shall be in accordance with quoted lead times or lead times published in the current Spare Parts Price Catalogue, procurement data, or provisioning data. 2.14 COLLECT SHIPMENTS Where collect shipments are not deemed practicable by Bombardier, charges for shipment, insurance, prepaid freight charges and all other costs paid by Bombardier shall be paid by Buyer promptly upon presentation to Buyer of invoices covering the same. 2.15 FREIGHT FORWARDER If Buyer elects to use the services of a freight forwarder for the onward movement of Spare Parts, Buyer agrees to release Bombardier from and indemnify it for any liability for any fines or seizures of Spare Parts imposed under any governmental Goods in Transit regulations. Any such fines levied against Bombardier will be invoiced to Buyer and any Spare Parts seized under such regulations will be deemed to be received, inspected, and accepted by Buyer at the time of seizure. 2.16 REIMBURSEMENT OF EXPENSES If Bombardier gives Buyer written notice that an Order is ready for shipment and shipment is delayed more than thirty (30) days at Buyer's request or without Bombardier's fault or responsibility, Buyer shall promptly reimburse Bombardier upon demand for all costs and expenses, including but not limited to reasonable amounts for storage, handling, insurance and taxes, incurred by Bombardier as a result of such delay. 2.17 TITLE AND RISK OF LOSS Property and title to the Spare Parts will pass to Buyer upon payment for the Spare Parts in full. Until payment in full for Spare Parts, (a) title to them will not pass to Buyer, and (b) Bombardier maintains a purchase money security interest in them. Risk of loss of the Spare Parts will pass to the Buyer upon delivery by Bombardier. With respect to Spare Parts rejected by Buyer pursuant to Annex A Article 2.19, risk of loss shall remain with Buyer until such Spare Parts are re-delivered to Bombardier. Bombardier agrees to notify Buyer when material is shipped and shall provide carrier's reference information (i.e., waybill number). -54- 55 2.18 INSPECTION AND ACCEPTANCE All Spare Parts shall be subject to inspection by Buyer at destination. Use of Spare Parts or failure of Buyer to give notice of rejection within thirty (30) days after receipt shall constitute acceptance. Acceptance shall be final and Buyer waives the right to revoke acceptance for any reason, whether or not known to Buyer at the time of acceptance. Buyer's remedies for defects discovered before acceptance are exclusively provided for in Annex A Article 2.19 herein. 2.19 REJECTION Any notice of rejection referred to in Annex A Article 2.18 shall specify the reasons for rejection. If Bombardier concurs with a rejection, Bombardier shall, at its option, correct, repair or replace the rejected Spare Parts. Buyer shall, upon receipt of Bombardier's written instructions and Material Return Authorization ("MRA") number, return the rejected Spare Parts to Bombardier at its specified plant, or other destination as may be mutually agreeable. The return of the rejected Spare Parts to Bombardier and the return or delivery of a corrected or repaired rejected Spare Part or any replacement for any such Spare Part to Buyer shall be at Bombardier's expense. Any corrected, repaired or replacement Spare Parts shall be subject to the provisions of this Agreement including any applicable Supplement.. 2.20 PAYMENT Except as provided in Annex A Article 2.22 below, payment terms shall be net thirty (30) calendar days of invoice date for established open accounts. Any overdue amount shall bear interest from the due date until actual payment is received by Bombardier at an annual rate of interest equal to the U.S. prime interest rate as established from time to time by the National Bank of Canada, plus two percent (2%) calculated and compounded monthly. 2.21 PAYMENT FOR PROVISIONING ITEMS Payment for Provisioning Items shall be made by Buyer as follows: Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -55- 56 2.22 MODIFIED TERMS OF PAYMENT Bombardier reserves the right to alter the terms of payment: (i) at any time by giving Buyer thirty (30) days' prior written notice of the new terms, and (ii) without prior notice if Buyer fails to pay when due an amount Buyer owes under any agreement with Bombardier. 2.23 REGULATIONS Buyer shall comply with all applicable monetary and exchange control regulations and shall obtain any necessary authority from the governmental agencies administering such regulations to enable Buyer to make payments at the time and place and in the manner specified herein. 2.24 CANCELLATION OF ORDERS Except as otherwise may apply to initial provisioning, if Buyer cancels an Order, Bombardier, at its option, shall be entitled to recover actual damages, but not less than the following cancellation charges or more than the purchase price of the Spare Parts covered by the Order: (a) if work accomplished on the Order has been limited to Bombardier Spares Department, or the part has been identified as "shelf stock" in the Spare Parts Price Catalogue, no cancellation charges shall be made; (b) if production planning has been completed on the Order and shop orders have been written, but no shop time or material charges have been made against the Order, the cancellation charge shall be ten percent (10%) of the price but not to exceed $100 per unit; (c) if shop time or material charges have been made against the Order, the cancellation charge shall be based on the cost of such time and materials, plus overhead; and (d) if the Spare Parts covered by the Order can be absorbed into Bombardier's inventory without increasing Bombardier's normal maximum stock level, no cancellation charges shall be made. 2.25 LEASE -56- 57 Bombardier shall select and make available certain parts for lease, subject to availability Buyer has the option to negotiate a lease agreement with Bombardier separate from this Agreement and the applicable Supplement. 2.26 ADDITIONAL TERMS AND CONDITIONS Bombardier's conditions of sale are deemed to incorporate the terms and conditions stated herein, and within an applicable Supplement. Additional terms and conditions applicable at time of receipt of each order from Buyer may be added providing such terms and conditions do not conflict with the terms and conditions provided herein and within an applicable Supplement. Such additional terms and conditions shall be provided to Buyer at least ninety (90) calendar days prior to their effective date. -57- 58 ARTICLE 3 - TRAINING 3.1 GENERAL TERMS 3.1.1 The objective of the training programs (the "Programs") described in this Agreement and the applicable Supplement is to familiarize and assist Buyer's personnel in the introduction, operation, and maintenance of the Aircraft. 3.1.2 Bombardier shall offer the Programs to Buyer in the English language, at a Bombardier designated facility. The Programs shall be completed prior to the Delivery Date of the last Aircraft purchased under the applicable Supplement. 3.1.3 Buyer shall be responsible for all travel and living expenses (including local transportation) of Buyer's personnel incurred in connection with the Programs. 3.1.4 The Programs shall be designed to reflect the model and/or configuration of the Aircraft and may include differences training to identify such configuration or model. Manuals or other training material which are provided during the Programs exclude revision service. 3.1.5 The Programs are designed for candidates who meet the following minimum prerequisites: Pilots (a) hold airplane multi-engine land rating; (b) have recent multi-crew experience; (c) hold valid instrument flight rating; (d) hold valid medical certificate; (e) have a functional comprehension of the English language; (f) captains hold current and valid ATP license or equivalent (minimum of 3,000 hours recommended); and (g) first officers hold current and valid commercial license or equivalent (minimum of 1,500 hours recommended). Flight Attendants (a) qualified flight attendant with previous experience; or (b) hold recent flight attendant training course certificate including fire fighting training, first aid training, in-flight emergency training, safety procedures training and crew communications training; and (c) have a functional comprehension of the English language. Flight Dispatchers -58- 59 (a) qualified flight dispatcher with previous experience; or (b) familiar with aircraft performance, weight and balance and flight planning; and (c) have a functional comprehension of the English language. Maintenance Technician (a) hold a valid AME license or equivalent, or have sufficient knowledge and experience (minimum 3 years experience recommended); (b) have experience with digital communications, glass cockpit and built-in test equipment; and (c) have a functional comprehension of the English language. 3.1.6 Prior to commencement of the Programs, upgrade training can be arranged for Buyer's personnel who do not meet the above minimum requirements. Any such upgrade training shall be provided upon terms and conditions to be mutually agreed. 3.1.7 Should any of Buyer's personnel who do not meet the above minimum requirements encounter problems during their training, any additional training or costs (such as costs for interpreters) shall be bourne by Buyer. 3.1.8 A training conference shall be held, if practicable, no later than twelve (12) months prior to the Scheduled Delivery Date of the first Aircraft to Buyer, or as may be otherwise agreed, to establish the content and schedule of the Programs. 3.1.9 Buyer may convert any of the Programs to any other of the Programs for equivalent value. 3.2 FLIGHT CREW TRAINING 3.2.1 TRAINING ALLOTMENTS AND COURSE DESCRIPTIONS Flight crew training allotments and course descriptions are set out in the applicable Supplement. 3.2.2. RECURRENT TRAINING At Buyer's request, Bombardier shall assist Buyer to obtain recurrent training as set forth in the applicable Supplement -59- 60 3.3 MAINTENANCE TRAINING 3.3.1 TRAINING ALLOTMENTS AND COURSE DESCRIPTIONS Maintenance training allotments and course descriptions are set out in the applicable Supplement. 3.3.2 SPECIALIST COURSES At Buyer's request, Bombardier shall assist Buyer to obtain specialist courses as set forth in the applicable Supplement. 3.3.3 RECURRENT TRAINING At Buyer's request, Bombardier shall assist Buyer to obtain recurrent training as set forth in the applicable Supplement. 3.3.4 VENDOR TRAINING At Buyer's request, Bombardier shall assist Buyer to obtain vendor maintenance training. 3.4 INSURANCE 3.4.1 Only in the event that such insurance is applicable, Buyer shall at all times during flight training in Buyer's Aircraft secure and maintain in effect, at its own expense, insurance policies covering the Aircraft including without limitation: Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 3.4.2 The liability policy shall name Bombardier (and its affiliates) as additional insured. The hull policy shall contain a waiver of subrogation in favour of Bombardier (and its affiliates). All insurance policies shall provide for payments despite any misrepresentations or breach of warranty by any person (other than the assured receiving payments) and shall not be subject to any offset by any other insurance -60- 61 carried by Bombardier except that -Buyer shall not be required to provide insurance with respect to the manufacturing, repair and maintenance activities of Bombardier (and of its affiliates) and the related potential liability (product or otherwise) arising therefrom. -61- 62 ARTICLE 4 - TECHNICAL DATA 4.1 TECHNICAL DATA PROVIDED Bombardier shall furnish to Buyer the Technical Data described in the applicable Supplement (the "Technical Data"). The Technical Data shall be in the English language and shall provide information on items manufactured according to Bombardier's detailed design and in those units of measure used in the Specification or as may otherwise be required to reflect Aircraft instrumentation, as may be mutually agreed. 4.2 SHIPMENT Except for the Airplane Flight Manual, Quick Reference Handbook, Flight Crew Operating Manual, and Weight and Balance Manual which will be provided with each Aircraft at time of delivery, all Technical Data provided hereunder shall be shipped to Buyer Free Carrier (Incoterms) Bombardier's designated facilities. Buyer's shipping address and contact information is as follows: SkyWest Airlines 444 South River Road St. George, Utah 84790-2086 Attention: Sheree Adams Facsimile: 435 634 3607 Telephone: 435 634 3610 4.3 REVISION SERVICE Bombardier will provide Buyer with a revision service, free of charge, for a period of six (6) months following the Delivery Date of Buyer's last Aircraft. This revision service shall apply to the Technical Data only. Subsequent to this six (6) month period, Buyer shall be responsible for any revision services provided by Bombardier, at Bombardier's then current list prices. Revisions to the Technical Data to reflect the Aircraft configuration at delivery shall be provided to Buyer within six (6) months following the Delivery Date of each respective Aircraft. -62- 63 Provided the revision service is being supplied under the terms of this Agreement or by subsequent purchase order, Bombardier shall incorporate all applicable Bombardier originated Service Bulletins into the appropriate Technical Data documents (in a regular revision cycle), following formal notification by Buyer that such Service Bulletins have been or shall be incorporated on Buyer's Aircraft. The Technical Data shall then contain both the original and revised Aircraft configuration until Buyer advises Bombardier in writing that one configuration is no longer required. 4.4 PROPRIETARY TECHNICAL DATA It is understood and Buyer acknowledges that the Technical Data provided herein and any revisions thereto is proprietary to Bombardier and all rights to copyright belong to Bombardier and the Technical Data shall be kept confidential by Buyer. Buyer agrees to use the Technical Data solely to maintain, operate, overhaul or repair the Aircraft or to make installation or alteration thereto allowed by Bombardier Technical Data shall not be disclosed to third parties or used by Buyer or furnished by Buyer for the design or manufacture of any aircraft or Spare Parts including Bombardier Parts or items of equipment, except when manufacture or redesign is permitted under the provisions of Annex A Article 2.4 of the Agreement, and then only to the extent and for the purposes expressly permitted therein, and provided further the recipient shall provide a non-disclosure undertaking acceptable to Bombardier. Buyer may convert any of the Technical Data to any other of the Technical Data for equivalent value. -63- 64 ANNEX B WARRANTY AND SERVICE LIFE POLICY ARTICLE 1 - WARRANTY The following warranty is that to which reference is made in Article 3 of the Agreement. 1.1 WARRANTY 1.1.1 Subject to Annex B Articles 1.9, 1.10, and 2.0, Bombardier warrants that, at the date of delivery of the Aircraft or Bombardier Part, as applicable: (a) the Aircraft shall conform to the Specification, except that any matter stated in the Specification as type characteristics, estimates or approximations is excluded from this Warranty; (b) the Aircraft shall be free from defects caused by the failure of Bombardier to install a Vendor Part or Powerplant Part in accordance with reasonable instructions of the vendor; (c) the Bombardier Parts shall be free from defects in material or workmanship; and (d) the Bombardier Parts shall be free from defects in design, having regard to the state of the art as of the date of such design, and (e) the Aircraft computer systems (hardware and software) that process date data shall do so correctly in the year 2000. 1.1.2 The Warranty set forth in Annex B Article 1.1.1(c) and (d) above shall also be applicable to Bombardier Parts purchased as Spare Parts. 1.1.3 Bombardier further warrants that, at the time of delivery, the Technical Data shall be free from error. 1.2 WARRANTY PERIOD 1.2.1 The Warranty set forth in Annex B Article 1.1. shall remain in effect for any defect covered by the Warranty (a "Defect") becoming apparent during the following -64- 65 periods (individually, the "Warranty Period"): (a) for failure to conform to the Specification and in the installation referred to in Annex B Article 1.1.1(a) and 1.1.1(b), the number of months set forth in the applicable Supplement from the Delivery Date; (b) for those Defects in material or workmanship in Bombardier Parts referred to in Annex B Article 1.1.1(c) and 1.1.2, the number of months set forth in the applicable Supplement from the date of delivery of such parts; (c) for those Defects in design referred to in Annex B Article 1.1.1(d), the number of months set forth in the applicable Supplement from the date of delivery of such parts; (d) for Defects in the Aircraft computer systems that process date data referred to in Annex B Article 1.1.1(e), from January 1, 2000 to December 31, 2000; and (e) for errors in the Technical Data referred to in Annex B Article 1.1.3, twelve (12) months from the date of delivery of the applicable Technical Data. 1.3 Repair, Replacement or Rework As to each matter covered by this Warranty Bombardier's sole obligation and liability under this Warranty is expressly limited to, at Bombardier's election, correction by the repair, replacement or rework of the defective part or item of Technical Data. The repaired, replaced or reworked part or item of Technical Data which is the subject of the Warranty claim shall then be warranted under the same terms and conditions for the then unexpired portion of the Warranty Period. In the case of a Defect relating to non-conformance with the Specification, Bombardier shall correct that Defect in the equipment item or part in which the Defect appears, except that Bombardier will not be obligated to correct any Defect which has no material adverse effect on the maintenance, use or operation of the Aircraft. 1.4 Claims Information Bombardier's obligations hereunder are subject to a Warranty claim to be submitted in writing to Bombardier's warranty administrator, which claim shall include but not be limited to the following information: (a) the identity of the part or item involved, including the Part number, serial number if -65- 66 applicable nomenclature and the quantity claimed to be defective; (b) the manufacturer's serial number of the Aircraft from which the part was removed; (c) the date the claimed Defect became apparent to Buyer; (d) the total flight hours (and cycles if applicable) accrued on the part at the time the claimed Defect became apparent to Buyer; and (e) a description of the claimed Defect and the circumstances pertaining thereto. 1.5 Bombardier's Approval Within ten (10) working days following receipt of Buyer's Warranty claim for a Defect accompanied by Buyer's request for permission as applicable to correct a Defect, Bombardier shall notify Buyer of its decision on the request. Approval under this Article shall not constitute a determination as to the existence of a Defect as described in Annex B Article 1. 1 above. 1.6 Timely Corrections Bombardier shall make the repair, replacement or rework, following receipt of the defective part or item, with reasonable care and dispatch. 1.7 Labour Reimbursement For correction of Defects Bombardier shall establish a reasonable estimate for the labour hours required for the repair, replacement or rework of the defective Bombardier Part and, if the repair, replacement or rework is performed by Buyer, Bombardier shall reimburse Buyer for Bombardier estimated hours or for Buyer's actual labour hours, whichever is less, for the repair, replacement or rework of the defective Bombardier Part excluding any work necessary to gain access to said Bombardier Part. Such reimbursement shall be based upon Buyer's direct labour rate per man-hour plus burden rate of fifty percent (50%), subject to annual review and adjustment of such labour rate as mutually agreed; provided, however, that this amount shall not exceed fifty percent (50%) of the Bombardier published selling labour rate. 1.8 Approval, Audit, Transportation and Waiver All Warranty claims shall be subject to audit and approval by Bombardier. Bombardier will use reasonable efforts to advise in writing the disposition of Buyer's Warranty claim within thirty (30) days following the receipt of the claim and (if requested) return of the -66- 67 defective Bombardier Part to Bombardier's designated facility. Bombardier shall notify Buyer of Bombardier's disposition of each claim. Buyer shall pay all costs of transportation of the defective part from Buyer to Bombardier and shall pay all costs of transportation of the repaired, corrected or replacement parts back to Buyer. 1.9 Limitations 1.9.1 Bombardier shall be relieved of and shall have no obligation or liability under this Warranty if (a) the Aircraft was operated with any products or parts not specifically approved by Bombardier, unless Buyer furnishes reasonable evidence acceptable to Bombardier that such products or parts were not a cause of the Defect; or (b) the Aircraft was not operated or maintained in accordance with the Technical Data and the manufacturer's documentation furnished to Buyer (including Service Bulletins and airworthiness directives) unless Buyer furnishes reasonable evidence acceptable to Bombardier that such operation or maintenance was not a cause of the Defect; or (c) the Aircraft was not operated under normal airline use, unless Buyer furnishes reasonable evidence acceptable to Bombardier that such operation was not a cause of the Defect; or (d) Buyer does not 1) report the Defect in writing to Bombardier's Warranty administrator within thirty (30) calendar days following such Defect becoming apparent, and 2) retain the Bombardier Part claimed to be defective until advised by Bombardier to return such Bombardier Part to Bombardier's designated facility in order for Bombardier to finalize its evaluation of the Warranty claim or to otherwise dispose of such Bombardier Part; or (e) Buyer does not submit reasonable proof to Bombardier within thirty (30) calendar days after the Defect becomes apparent that the, Defect is due to a matter covered within this Warranty; or -67- 68 (f) Buyer does not allow Bombardier reasonable opportunity to be present during the disassembly and inspection of the Bombardier Part claimed to be defective. 1.10 Normal Usage Normal wear and tear and the need for regular maintenance and overhaul shall not constitute a Defect or failure under this Warranty. 1.11 Overhaul of Warranty Parts Bombardier's liability for a Bombardier Part which has a Defect and is overhauled by Buyer within the Warranty Period shall be limited only to that portion of the labour and material replacement related to the Defect. 1.12 No Fault Found In the event that a Bombardier Part returned under a Warranty claim is subsequently established to be serviceable then Bombardier shall be entitled to charge and recover from Buyer any reasonable costs incurred by Bombardier in connection with such Warranty claim. Providing, however, in the event that repetitive in-service failure occurs on the particular Bombardier Part which is subsequently identified by Bombardier on a repeated basis to be "no fault found", then Bombardier and Buyer shall discuss and mutually agree a course of further action to help identify the problem. In the event the fault is ultimately confirmed to be a legitimate Warranty claim then the above mentioned costs incurred by Bombardier and charged to Buyer shall be waived. -68- 69 ARTICLE 2 - VENDOR WARRANTIES 2.1 Warranties from Vendors The Warranty provisions of this Annex B apply to Bombardier Parts only. However, Bombardier has made or shall make reasonable efforts to obtain favourable warranties from vendors, with respect to Vendor Parts and Power Plant Parts. Except as specifically provided under this Annex B Article 2, Bombardier shall have no liability or responsibility for any such Vendor Parts and Power Plant Parts and the warranties for those Vendor Parts and Power Plant Parts shall be the responsibility of the vendor and a matter as between Buyer and vendor. 2.2 Vendor Warranty Backstop For those Vendor Parts installed on the Aircraft at the Delivery Date or subsequently purchased through Bombardier, excluding the Powerplant or the Power Plant Parts, in the event the parties agree that a vendor is in default in the performance of any material obligation under any applicable warranty obtained by Bombardier from such vendor pursuant to Annex B Article 2.1 above, the warranties and all other terms and conditions of Annex B Article I shall become applicable as if the Vendor Parts had been a Bombardier Part, except that the warranty period shall be the Warranty Period as set forth herein or by the vendor's warranty, whichever is shorter and all transportation costs associated with the Vendor Parts shall be borne by Buyer. 2.3 Bombardier's Interface Commitment In the event of a dispute in the application of a Vendor Part warranty, at Buyer's request addressed to Bombardier's warranty administrator, Bombardier shall, without charge, conduct an investigation and analysis of any such dispute resulting from a technical interface problem to determine, if possible, the cause of the interface problem and then recommend feasible corrective action. Buyer shall furnish to Bombardier all data and information in Buyer's possession relevant to the interface problem and shall cooperate with Bombardier in the conduct of its investigation and such tests as may be required. Bombardier, at the conclusion of its investigation, shall advise Buyer in writing of Bombardier's opinion as to the cause of the problem and Bombardier's recommended corrective action. -69- 70 ARTICLE 3 - SERVICE LIFE POLICY 3.1 Applicability The Service Life Policy ("SLP") described in this Annex B, Article 3 shall apply if fleetwide and repetitive failures occur in any Covered Component which is defined in Annex B Article 3.7 below. 3.2 Term 3.2.1 Should such failures occur in any Covered Component within one hundred and forty-four (144) months following delivery of the Aircraft containing such Covered Component, Bombardier shall, as promptly as practicable and at its option; (a) design and/or furnish a correction for such failed Covered Component; or (b) furnish a replacement Covered Component (exclusive of standard parts such as bearings, bushings, nuts, bolts, consumables and similar low value items). 3.3 Price Any Covered Component which Bombardier is required to furnish under this SLP shall be provided for at a price calculated in accordance with the following formula: P = C x T ----- 144 Where: P = Price of Covered Component to Buyer; C = Bombardier's then current price for the Covered Component; T = The total time to the nearest month since the Aircraft containing the Covered Component was delivered by Bombardier. 3.4 Conditions and Limitations 3.4.1 The following general conditions and limitations shall apply to the SLP: (a) the transportation cost for the return to Bombardier's designated facility, if practicable, of any failed Covered Component necessary for failure -70- 71 investigation or redesigning studies shall be borne by Buyer; (b) Bombardier's obligations under this SLP are conditional upon the submission of reasonable proof acceptable to Bombardier that the failure is covered hereby; (c) Buyer shall report any failure of a Covered Component in writing to Bombardier's Warranty administrator within two (2) months after such failure becomes evident. Failure to give this required notice shall excuse Bombardier from all obligations with respect to such failure; (d) the provisions of Annex B Article 1.9 of the Warranty (except for subparagraphs (d) and (e) thereof) are incorporated by this reference and shall condition Bombardier's obligations under this SLP with respect to any Covered Component; (e) Bombardier's obligations under this SLP shall not apply to an, Aircraft which has not been correctly modified in accordance with the specifications or instructions contained in the relevant Service Bulletins which are furnished to Buyer prior to receipt by Bombardier from Buyer of any notice of an occurrence which constitutes a failure in a Covered Component. The provisions of this subparagraph shall not apply in the event that Buyer furnishes reasonable evidence acceptable to Bombardier that such failure was not caused by Buyer's failure to so modify the Aircraft; (f) this SLP shall not apply to a failure of a Covered Component if Bombardier determines that such failure may not reasonably be expected to occur on a fleetwide and repetitive basis; and (g) this SLP shall not apply to a Covered Component where the failure results from an accident, abuse, misuse, degradation, negligence or wrongful act or omission, unauthorized repair or modification adversely affecting a Covered Component, impact or foreign object damage, to any Covered Component. 3.5 Coverage This SLP is neither a warranty, performance guarantee nor an agreement to modify the Aircraft to conform to new developments in design and manufacturing art. Bombardier's obligation is only to provide correction instructions to correct a Covered Component or furnish replacement at a reduced price as provided in this SLP. -71- 72 3.6 Assignment Buyer's rights under this SLP shall not be assigned, sold, leased, transferred or otherwise alienated by contract, operation of law or otherwise, without Bombardier's prior written consent. Any unauthorized assignment, sale, lease, transfer, or other alienation of Buyer's rights under the SLP shall immediately void all of Bombardier's obligations under the SLP. 3.7 Covered Component Only those items or part thereof listed in the applicable Supplement shall be deemed to be a Covered Component, and subject to the provisions of this SLP. -72- 73 ARTICLE 4 - GENERAL 4.l It is agreed that Bombardier shall not be obligated to provide to Buyer any remedy which is a duplicate of any other remedy which has been provided to Buyer under any other part of this Annex B. -73- 74 ARTICLE 5 - DISCLAIMER 5.1 BOMBARDIER SHALL HAVE NO OBLIGATION OR LIABILITY (AT LAW OR IN EQUITY) IN CONTRACT (INCLUDING, WITHOUT LIMITATION, WARRANTY), IN TORT (WHETHER OR NOT ARISING FROM THE ACTIVE, PASSIVE OR IMPUTED NEGLIGENCE OR STRICT PRODUCTS LIABILITY OF BOMBARDIER OR ITS AFFILIATES) OR OTHERWISE, FOR ANY INDIRECT,. PUNITIVE, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF USE, LOSS OF REVENUE OR LOSS OF PROFIT, WITH RESPECT TO: 1) ANY DEFECT IN THE SPARE PARTS OR ANY OTHER THING DELIVERED UNDER ANNEX B TO THIS AGREEMENT; 2) ANY DELAY IN DELIVERY OR COMPLETE FAILURE TO DELIVER ANY PRODUCT OR SERVICES, INCLUDING SPARE PARTS, FOR ANY REASON WHATSOEVER; OR 3) ANY FAILURE TO PERFORM ANY OF ITS OTHER OBLIGATIONS UNDER ANNEX B TO THIS AGREEMENT. NOTHING IN THIS ARTICLE SHALL BE CONSTRUED TO ALTER OBLIGATIONS EXPRESSLY ASSUMED BY BOMBARDIER IN OTHER PROVISIONS OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION THE PROVISIONS OF ANNEX "B". -74- 75 EXHIBIT 1 TO THE AGREEMENT CERTIFICATE OF ACCEPTANCE The undersigned hereby acknowledges on behalf of Buyer acceptance of the Aircraft bearing manufacturer's serial number fitted with two (2) /General Electric CF-34-3AI/3BI/8CI turbofan [Canadair Regional Jet]/ Pratt & Whitney of Canada, Ltd. PWC-120/121/123/150 turboprop [Dash SI/ engines bearing serial numbers and /and two (2) (Hamilton Standard 14SF-/7/15/23/) (Dowty R408) propellers/ as being in accordance with the terms and conditions of this Agreement signed on the day of 19 between Bombardier Aerospace, Regional Aircraft and Buyer. Place: Date: ---------------------- ----------------------------------- Signed for and on behalf of [Buyer's name] Per: ------------------------------ Title: ---------------------------- -75- 76 EXHIBIT II TO THE AGREEMENT BILL OF SALE 1. FOR VALUABLE CONSIDERATION, BOMBARDIER AEROSPACE, REGIONAL AIRCRAFT, OWNER OF THE FULL LEGAL AND BENEFICIAL TITLE OF THE AIRCRAFT DESCRIBED AS FOLLOWS: ONE CANADAIR REGIONAL JET MODEL /CL-600-2B19/CL-600-2C10/ [CANADAIR REGIONAL JET] DE HAVILLAND DHC-8-100/200/300/400/ [DASH 8] AIRCRAFT BEARING: MANUFACTURER'S SERIAL NO.:_________________________________________ WITH: CF34-3A1/3B1/8C1 [CANADAIR REGIONAL JET] / PWC -/120/121/123/150/ [DASH 8] ENGINES SERIAL NOS.:________________________, AND AUXILIARY POWER UNIT NO.: _________________________________ DOES THIS _________ DAY OF __________19__ HEREBY SELL, GRANT, TRANSFER AND DELIVER ALL RIGHT TITLE AND INTEREST IN AND TO SUCH AIRCRAFT UNTO: [BUYER'S NAME]. BY VIRTUE OF THE EXECUTION OF THIS BILL OF SALE, BOMBARDIER HEREBY DIVESTS ITSELF OF ALL ITS RIGHT, TITLE AND INTEREST OF ANY KIND IN THE AIRCRAFT, IN FAVOUR OF BUYER. BUYER: PLACE: TIME: ------------------------------ ---------------------------------- For and on behalf of BOMBARDIER INC. Bombardier Aerospace, Regional Aircraft Per: -------------------------------- Title: ------------------------------ -76- 77 EXHIBIT III TO THE AGREEMENT CERTIFICATE OF RECEIPT OF AIRCRAFT THE UNDERSIGNED HEREBY ACKNOWLEDGES TO HAVE RECEIVED FROM BOMBARDIER AEROSPACE, REGIONAL AIRCRAFT, AT/ THE DOWNSVIEW AIRPORT, ADJACENT TO BOMBARDIER'S PLANT IN DOWNSVIEW, PROVINCE OF ONTARIO, CANADA [DASH 8]/ DORVAL AIRPORT, ADJACENT TO BOMBARDIER'S PLANT IN DORVAL, PROVINCE OF QUEBEC, CANADA, [CANADAIR REGIONAL JET]/ ON THE ____________ DAY OF____________, AT THE HOUR OF_______________ O'CLOCK, ONE (1) / CANADAIR REGIONAL JET MODEL /CL-600-2B19/CL-600-2C10/ SERIES 100/200/700/ de HAVILLAND DHC-8-/100/200/300/400/ AIRCRAFT, BEARING SERIAL NUMBER__________, INCLUDING WITH THE AIRCRAFT TWO (2) /CF34- 3A1/3B1/8C1 TURBOFAN / PWC-/120/121/123/150 TURBOPROP / ENGINES BEARING MANUFACTURER'S SERIAL NUMBERS ______________ & ______________AND TWO (2) [HAMILTON STANDARD 14SF-/7/15/23] [DOWTY R408 ] PROPELLERS AND OTHER MAJOR REPLACEABLE ACCESSORIES ATTACHED TO THE AIRCRAFT AND ENGINES. Signed for and on behalf of [Buyer's name]: Per: -------------------------------- Title: ------------------------------ -77- 78 EXHIBIT IV TO THE AGREEMENT CHANGE ORDER (PRO FORMA) CONTRACT CHANGE ORDER PURCHASER: PURCHASE AGREEMENT NO.: AIRCRAFT TYPE: C.C.O. NO.: DATED: PAGE ___ of ___ REASON FOR CHANGE: DESCRIPTION OF CHANGE: ALL OTHER TERMS AND CONDITIONS OF THE AGREEMENT WILL REMAIN UNCHANGED For administrative purposes only, a consolidation of the amendments contained in this CCO is attached. In the event of inconsistencies between the consolidation and this CCO, this CCO shall prevail. - -------------------------------------------------------------------------------- FOR AND ON BEHALF OF: FOR AND ON BEHALF OF: Bombardier Aerospace [BUYER] Regional Aircraft Signed: Signed: ---------------------------- --------------------------------- Date: Date: ---------------------------- --------------------------------- -78- 79 SUPPLEMENT NO. PA-428-1 TO MASTER PURCHASE AGREEMENT NO. PA-0428 BETWEEN BOMBARDIER INC. AND SKYWEST AIRLINES, INC. This Supplement when accepted and agreed to by SkyWest Airlines, Inc. (the "Buyer") will become part of the Master Purchase Agreement No. PA-0428 entered into between BOMBARDIER INC., a Canadian corporation represented by Bombardier Aerospace, Regional Aircraft having offices at 123 Garratt Boulevard, Downsview, Ontario, Canada ("Bombardier") and SkyWest Airlines, Inc.("Buyer") dated the 15th day of January, 1999 (the "Agreement') and will evidence our further agreement with respect to the matters set forth below. The provisions of the Agreement shall apply to the Bombardier products purchased and sold in accordance with this Supplement. All capitalized terms herein, unless defined herein, shall have the same respective meanings as in the Agreement. This Supplement is subject to the provisions of the Agreement, all of which are incorporated herein, provided that in the event of any inconsistency between the provision of the Agreement and the provisions of this Supplement, the latter shall take precedence. ARTICLE 1 SUBJECT MATTER OF SALE Article 1 supplements to Article 2 of the Agreement. 1.1 Aircraft Subject to the provisions of the Agreement and this Supplement, Bombardier will sell and Buyer will purchase Twenty Five (25) aircraft model CL-600-2B19 Canadair Regional Jet Series 200 aircraft manufactured pursuant to Type Specification number RAD-601R-157 issue NC dated January 1999 noted in Schedule I hereto as same may be modified from time to time in accordance with the Agreement and this Supplement (the "Specification") as supplemented to reflect the incorporation of the Buyer selected optional features ("Buyer Selected Optional Features") set forth in Schedule 2 hereto (collectively the "Aircraft"). -1- 80 ARTICLE 2.0 PRICE Article 2 supplements Article 4 of the Agreement. Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. The Aircraft base price shall be the base price for the Aircraft as stated in paragraph (a), plus the base price of the Buyer Selected Optional Features as stated in paragraph (b) ("Base Price"). 2.2 The price of the Aircraft for the Scheduled Delivery Date shall be the Base Price adjusted for changes made pursuant to Article 11 of the Agreement and any Regulatory Changes pursuant to Article 8.4 of the Agreement, and further adjusted to the Delivery Date to reflect economic fluctuations during the period from July 1, 1998 to the Delivery Date of each Aircraft ("Aircraft Purchase Price"). Such adjustments shall be based on the economic adjustment formula attached hereto as Schedule 3 ("Economic Adjustment Formula") but when adjusted, the Aircraft Purchase Price shall in no case be lower than the Aircraft Base Price, as stipulated in Article 3.1 herein. Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -2- 81 ARTICLE 3.0 PAYMENT Articles 3.1 and 3.2 supplement Article 5.1 of the Agreement. Article 3.3 supplement Article 5.4 of the Agreement. 3.1 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 3.2 Terms of payment for each Aircraft are as follows: (a) Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. (b) the Aircraft Purchase Price on or before the Delivery Date of such Aircraft to Buyer. The advance payment referred to in 3.2 (a) will be retained by Bombardier and returned to Buyer, without interest, in equal amounts upon delivery of each Aircraft. 3.3 Buyer shall make all payments due under this Agreement and this Supplement in immediately available United States Dollars by deposit on or before the due date, to Bombardier's account in the following manner: Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this -3- 82 Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -4- 83 ARTICLE 4.0 DELIVERY PROGRAM ARTICLE 4.0 SUPPLEMENTS ARTICLE 6.0 OF THE AGREEMENT. 4.1 The Aircraft shall be offered for inspection and acceptance to Buyer at Bombardier's facility in Montreal, Quebec during the months set forth as follows (the "Scheduled Delivery Dates"): Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -5- 84 ARTICLE 5.0 BUYER INFORMATION Article 5.0 supplements Article 7.0 of the Agreement. 5.1 Pursuant to Article 7.1 of the Agreement, Buyer shall provide the information set forth in Article 7.1 of the Agreement, at least fifteen (15) months prior to the Scheduled Delivery Date of the first Aircraft. -6- 85 ARTICLE 6.0 NON-EXCUSABLE DELAY Article 6.1 supplements Article 14.1 of the Agreement. 6.1 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. Article 6.2 supplements Article 14.1 of the Agreement. 6.2 The period of days referred to is sixty (60) days in Article 14.1 of the Agreement. -7- 86 ARTICLE 7.0 TECHNICAL SUPPORT Article 7.0 supplements Annex A, Article 1.0 of the Agreement. 7.1 The FSR term referred to in Annex A, Article 1.2.2 is as follows: Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -8- 87 ARTICLE 8.0 TRAINING Article 8.0 supplements Annex A, Article 3.2 and 3.3 of the Agreement. 8.1. Flight Crew 8.1.1 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 8.1.2 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 8.2. Maintenance 8.2.1 Intentionally left blank. 8.2.2 Intentionally left blank. 8.3 Course Training Material Bombardier shall provide three (3) sets (one each of AME-E, AME-M and flight crew) of the training materials (without revision service) used to conduct Bombardier's standard training as detailed herein: i) 35 mm slides; ii) Lesson Guides; iii) Overhead Projection Transparencies; and -9- 88 one (1) set for Computer Based Training ("CBT") devices (without revision service) capable of operating ten (10) work stations as follows: iv) a license for CBT software for maintenance training (both AME-M and AME-E), including: (for AME-M) OHPS transparencies; videos walk-around; set of manuals; flight deck book; engine run up manual; large cockpit layout, and one (1) full course instructor training, or (for AME-E) Collins video; TCAS video; set of manuals; large cockpit layout, and one (1) full course instructor training; and v) a license for CBT software for flight crew, including: OHPS transparencies; videos walk-around; set-of manuals; flight deck book; large cockpit layout, and one (1) full course instructor training. The course training materials set forth above shall be available to Buyer during the first quarter 2000. Bombardier shall promptly advise Buyer of the date of release of such training materials. The course training materials are for the internal use of Buyer only. -10- 89 ARTICLE 9.0 TECHNICAL DATA LIST OF TECHNICAL DATA COLUMN HEADING EXPLANATION OF CODES ITEM 1 DOC DOCUMENT Title of Technical Data provided. 2 CONFIG CONFIGURATION G = Contains data common to all aircraft of the same type (Generic). C = Contains data unique to Buyer's Aircraft (Customized). 3 MEDIUM Buyer selects one of the following media specified in the table: 1 = Print two sides 2 = Microfilm 3 = Print one side 4 = Laminated Cardboard 5 = CD ROM (single) 6 = CD ROM (network) 4 REVISION Y = Periodic revision service applies N = Revision service not applicable S = Revised as required by Bombardier 5 QUANTITY (Number) = Quantity per the Agreement (Number) PER = Quantity per Aircraft 6 DELIVERY ATD = At time of the Delivery Date of the first Aircraft. PTD = Prior to the Delivery Date of each or the first Aircraft (as applicable). 7 ATA Y = Document is per ATA Specification 100, Revision 26. N = Document is to Bombardier's existing commercial practices. -11- 90 With the delivery of the first Aircraft, Bombardier will provide to Buyer at no additional charge one set of the technical manuals listed below
- ---------------------------------------------------------------------------------------------------------- ITEM DOC CONF MEDIUM QTY REV DEL ATA REMARKS - ---------------------------------------------------------------------------------------------------------- 1. AIRCRAFT MAINTENANCE MANUAL (AMM) G 1 or 5 12 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 1A AIRCRAFT MAINTENANCE MANUAL (AMM) G 6 2 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 2. ILLUSTRATED PARTS MANUAL/CATALOG (IPC) G 1 or 5 12 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 2A ILLUSTRATED PARTS MANUAL/CATALOG (IPC) G 6 2 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 3. STRUCTURAL REPAIR MANUAL (SRM) G 1, 2 4 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 4. COMPONENT MAINTENANCE MANUAL (CMM) G 1, 2 4 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 5. POWER PLANT BUILD-UP MANUAL G 1, 2 4 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 6. WIRING DIAGRAM MANUAL C 1 or 5 12 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 6A. WIRING DIAGRAM MANUAL C 6 2 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 7. ILLUSTRATED TOOL & EQUIPMENT MANUAL G 1, 2 4 Y PTD Y (ITEM) - ---------------------------------------------------------------------------------------------------------- 8. SERVICE BULLETINS G 1 1 S PTD Y SEE NOTE 1 - ---------------------------------------------------------------------------------------------------------- 9. NON DESTRUCTIVE TEST MANUAL (NDT) G 1 4 Y PTD Y - ---------------------------------------------------------------------------------------------------------- 10. MAINTENANCE PROGRAM DOCUMENT (MPD) G 1 4 S PTD Y SEE NOTE 2 - ---------------------------------------------------------------------------------------------------------- 11. FAA OR DOT AIRPLANE FLIGHT MANUAL (AFM) C 1 27 S ATD N - ---------------------------------------------------------------------------------------------------------- 12. WEIGHT & BALANCE MANUAL G 1 1 PER Y ATD Y - ---------------------------------------------------------------------------------------------------------- 13. MASTER MINIMUM EQUIPMENT LIST (MMEL) G 1 1 S ASAP N - ---------------------------------------------------------------------------------------------------------- 14. QUICK REFERENCE HANDBOOK C 1 27 S ATD N - ---------------------------------------------------------------------------------------------------------- 15. FLIGHT CREW OPERATING MANUAL (FCOM) C 1 27 S ATD N - ---------------------------------------------------------------------------------------------------------- 16. MAINTENANCE TASK CARDS C 3 4 S PTD N - ---------------------------------------------------------------------------------------------------------- 17. FLIGHT PLANNING & CRUISE CONTROL MANUAL G 1 4 S ASAP N - ---------------------------------------------------------------------------------------------------------- 18. AIRCRAFT CHARACTERISTICS FOR AIRPORT G 1 4 N ASAP N SEE NOTE 3 PLANNING - ---------------------------------------------------------------------------------------------------------- 19. ON-BOARD WIRING DIAGRAM BOOK C 3 A/R N ATD N SEE NOTE 4 - ---------------------------------------------------------------------------------------------------------- 20. MAINTENANCE FACILITIES & EQUIPMENT G 1 4 S ASAP N PLANNING MANUAL - ---------------------------------------------------------------------------------------------------------- 21. SYSTEM SCHEMATIC MANUAL (SSM) G 1, 2 4 Y ATD Y - ---------------------------------------------------------------------------------------------------------- 22. PASSENGER INFORMATION SHEET G 3 1 S ATD N SEE NOTE 5 - ---------------------------------------------------------------------------------------------------------- 23. PILOT CHECKLIST C 4 27 S ATD N - ---------------------------------------------------------------------------------------------------------- 24. CRASH CREW CHART G 4 1 PER S ATD N - ---------------------------------------------------------------------------------------------------------- 25. FAULT ISOLATION MANUAL G 1 25 S ATD N - ---------------------------------------------------------------------------------------------------------- 26. DISPATCH DEVIATION GUIDE G 1 4 S PTD N - ----------------------------------------------------------------------------------------------------------
NOTE 1: SERVICE BULLETINS -12- 91 Aperture cards of the service drawing(s) will be provided in lieu of drawings when practical. NOTE 2: MAINTENANCE PROGRAM DOCUMENT This manual provides the basis for Buyer's initial maintenance program. NOTE 3: AIRCRAFT CHARACTERISTICS FOR AIRPORT PLANNING This manual contains data on Aircraft ground maneuver and handling. NOTE 4: ON-BOARD WIRING DIAGRAM BOOK This book contains wiring diagrams for interim reference until the Wiring Diagram Manual is revised to reflect the Aircraft at the Delivery Date. NOTE 5: PASSENGER INFORMATION CARDS Bombardier will provide one (1) reproducible master for the preparation of passenger information cards. For an additional cost, subject to negotiation, Bombardier will provide full colour laminated passenger information cards in quantities required. NOTE 6: TECHNICAL DATA EXCHANGE Buyer has the ability to adjust the quantities of Technical Data and revision services in accordance to the permitted parameters specified in the manual chart of this Article 9 in this Supplement for equivalent value of other Technical Data or revision services. NOTE 7: REVISION SERVICES Bombardier will provide revision services for a period of three (3) years. -13- 92 ARTICLE 10.0 WARRANTY Article 10.0 below supplements Annex B, Article 1.0 of the Agreement. Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -14- 93 ARTICLE 11.0 SLP COVERED COMPONENTS Article 11.0 supplements Annex B, Article 3.7 of the Agreement. 11.1 WING a. Upper and lower integral stringer machined wing planks. b. Machined spar, including auxiliary spars. c. Caps, webs and stiffeners on fabricated spars. d. Front spar to rear spar wing box ribs. e. Main landing gear (MLG) machined trunnion rib. f. MLG side stay machined attachment fittings. g. Wing/fuselage machined attachment fittings. 11.2 FUSELAGE a. Window and windshield frame structure, but excluding the windows and windshield. Exterior skins, doublers, circumferential frames but excluding all systems, fairings, insulation, lining and decorative clips and brackets. b. Engine mount support box structure and machined pylon attachment fittings. Primary structure frames around body openings for passenger door, baggage door, avionics door, flying control access door, APU access door and emergency exits. c. Nose landing gear well structure, including wheel well walls, ceiling, pressure bulkheads and pressure floor structural components at fuselage wing cutout. 11.3 VERTICAL STABILIZER a. All spars. b. Horizontal to vertical stabilizer machined attachment fittings. -15- 94 c. Front spar to fuselage frame machined attachment fittings. d. Exterior skins, ribs, stringers between front and rear spars and machined closing rib. 11.4 HORIZONTAL STABILIZER Front and rear spars and exterior skins, rib and stringers between front and rear spars. -16- 95 In witness whereof this Supplement was signed on the date written hereof: For and on behalf of For and on behalf of SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ------------------------- ------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ------------------------- Eric Christensen Vice President, Planning -17- 96 SCHEDULE 1 TO SUPPLEMENT NO. PA-428-1 TYPE SPECIFICATION NUMBER RAD-60IR-157 ISSUE NC JANUARY 1999 -18- 97 SCHEDULE 2 TO SUPPLEMENT NO. PA-428-1 BUYER SELECTED OPTIONAL FEATURES Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -19- 98 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -20- 99 SCHEDULE 3 TO SUPPLEMENT NO. PA-428-1 ECONOMIC ADJUSTMENT FORMULA Pursuant to the provision of Article 4 of the Agreement, economic adjustment will be calculated using the following Economic Adjustment Formula: Pp = PO(O.28 LD+0.35 ED+0.20 CD+0.15 MD+0.02 FD) -- -- -- -- -- LO EO co MO OF Where: Pp = Aircraft Purchase Price; Po = Base Price; LD = the Canadian tabour index based upon arithmetic the average of the indices for the fourth, fifth and sixth months prior to the month of delivery of the relevant Aircraft; LO = 19.93 being the arithmetic average of the Canadian labour index for the months of January, February and March 1998; ED = the U.S. tabour index based upon arithmetic the average of the indices for the fourth, fifth and sixth months prior to the month of delivery of the relevant Aircraft; EO = 18.99 being the arithmetic average of the U.S. labor index for the months of January, February and March 1998; CD the Industrial Commodities index based upon the arithmetic average of the indices for the fourth, fifth and sixth months prior to the month of delivery of the relevant Aircraft; CO 125.40 being the arithmetic average of the Industrial Commodities index for the months of January, February and March 1998; MD the Material index based upon the average of the arithmetic indices for the fourth, fifth and sixth months prior to the month of delivery of the relevant Aircraft; and MO 129.87 being the arithmetic average of the Material index which for the months of January, February and March 1998. -21- 100 FD = the fuel index based upon the average of the arithmetic indices for the fourth, fifth and sixth months prior to the month of delivery of the relevant Aircraft; and OF = 76.6 being the arithmetic average of the Fuel index which for the months of January, February and March 1998. For the purpose of the, Economic Adjustment Formula and the calculation of the economic adjustment: (a) the Canadian labour index shall be the index provided in the Standard Industrial Classification (S.I.C.) Code 321 for Average Hourly Earnings (including overtime) for the Aircraft and Parts Industry (Canada) published by Statistics Canada in "Employment Earnings and Hours" Table 3. 1. (b) the U.S. labour index shall be the index provided in the Bureau of Labor Statistics (B.L.S.) Code 372 Gross Hourly Earnings of production and non-supervisory workers in the Aircraft and Aircraft Parts Industry as published by the U.S. Department of Labor, Bureau of Labor Statistics in "Employment and Earnings" Table C-2. (c) the Industrial Commodities index shall be the index provided in the Producer Price Index as Industrial Commodities as published by the U.S. Department of Labor, Bureau of Labor Statistics in "Producer Prices and Price Indexes" Table 6. (d) the material index shall be the index provided in the Producer Price Index for Code 10 Metals and Metals Products as published by the U.S. Department of Labor, Bureau of Labor Statistics in "Producer Prices and Price Indexes" Table 6. (e) the fuel index shall be the index provided in the Bureau of Labor Statistics (B.L.S.) Code 5 "Fuel and Related Products and Power" Table 6 as published by the U.S. Department of Labor. (f) in the event that Bombardier shall be prevented from calculating the Aircraft Purchase Price of each Aircraft due to any delay in the publication of the required indices, Bombardier shall use the last provisionally published indices, and in the event that provisional indices are not available, Bombardier shall extrapolate from the last three (3) months of published indices and such calculation of the Aircraft Purchase Price shall be accepted by the parties as final. -22- 101 (g) the indices used in the Economic Adjustment Formula and the weighting assigned to them represent the projection by Bombardier of the manner in which Bombardier will incur cost in the production of the Aircraft. In the event there is a change in circumstances which materially affects the indices chosen or the weighting assigned to them, the indices and/or the weighting shall be amended accordingly. The change in circumstances referred to above shall include but not be limited to: 1) Any change in the basis upon which the chosen indices have been calculated or if any of said indices are discontinued or withdrawn from publication, 2) Any change in manufacturing plan involving the letting of a new subcontract or the termination of an existing sub-contract, and 3) Any change in the escalation or economic adjustment formula used in a vendor or sub-contractor contract with Bombardier; and In the calculation of the Aircraft Purchase Price the following guidelines in respect of decimal places shall apply: (a) All indices in the Economic Adjustment Formula shall be used to the second decimal place, (b) The Economic Adjustment Formula shall be calculated to four decimal places, and (c) The Aircraft Purchase Price resulting from the Economic Adjustment Formula shall be corrected to the nearest dollar. -23- 102 SCHEDULE 4 TO SUPPLEMENT NO. PA-428-1 OPTION AIRCRAFT 1.0 Bombardier hereby agrees to grant Buyer the option to purchase an additional Twenty Five (25) Canadair Regional Jet Series 200 aircraft as described in Article 1 of this Supplement (the "Option Aircraft") for the benefit of Buyer under the following general conditions: Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -24- 103 The advance payment referred to in 1.5 (a), will be retained by Bombardier and returned to Buyer, without interest, in equal amounts upon delivery of the respective Option Aircraft. Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -25- 104 2.0 Upon exercise of Buyer's right to purchase the Option Aircraft, the parties shall deem all definitions, terms and conditions of the Agreement and this Supplement as being applicable to the purchase of the Option Aircraft, unless expressly noted otherwise. 3.0 The provisions of this Schedule are personal to Buyer and shall not be assigned or otherwise disposed of by Buyer without the prior written consent of Bombardier. 4.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ----------------------------- --------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ----------------------------- Eric Christensen Vice President, Planning -26- 105 SCHEDULE 5 TO SUPPLEMENT NO. PA-428-1 CONVERSION RIGHTS Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -27- 106 6.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. SkyWest Airlines, Inc. BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -28- 107 SCHEDULE 6 TO SUPPLEMENT NO. PA428-1 FINANCING ASSISTANCE Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -29- 108 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -30- 109 SkyWest Airlines, Inc. BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -31- 110 SCHEDULE 7 TO SUPPLEMENT NO. PA-428-1 DISPATCH RELIABILITY GUARANTEE 1.0 Intent The intent of the Dispatch Reliability Guarantee ("DRG") is to achieve the full potential of the inherent technical reliability of the Aircraft through the joint efforts of Bombardier and Buyer. To that end, Bombardier agrees to take action as specified below and Buyer agrees to set its Aircraft fleet dispatch reliability target equal to or greater than 0.4% above the Guarantee Value so that both Buyer and Bombardier's technical staff can pursue attainment of the Guarantee Value (as defined in Article 3.0 below) For the purpose of this Guarantee, the dispatch reliability shall be for the Aircraft purchased under the Supplement. It is understood by Bombardier and Buyer that this Guarantee does not replace, cancel or extend similar dispatch reliability guarantees agreed upon in previous agreements between the parties, which guarantees -shall remain in force and effect pursuant to their respective terms and conditions, 2.0 Definition As defined in World Airlines Technical Operations Glossary (W.A.T.O.G.), a chargeable technical delay shall be any delay greater than fifteen (I 5) minutes beyond scheduled revenue departure time caused by malfunction of equipment affecting any of the Aircraft ("Chargeable Technical Delay") and a cancellation shall be the deletion of the flight from Buyer's operating schedule, provided that no more than one (1) delay or cancellation shall be charged to a specific malfunction ("Cancellation"). 3.0 Guarantee Value Bombardier guarantees that the Aircraft dispatch reliability with respect to avoidance of Chargeable Technical Delays or Cancellations shall, at the end of the period indicated below, meet the guarantee value percentages specified below ("Guarantee Value")
Period Guarantee Value (%) ------ ------------------- Months six to twelve 97.5 Months thirteen to eighteen 98.0 Months nineteen twenty-four 98.5 Months twenty-five to thirty-six 99.0
-32- 111 4.0 Term of Guarantee The term of this guarantee shall commence on the date of start of revenue service of Buyer's first delivered Aircraft and shall expire three (3) years thereafter or whenever the ninety-nine percent (99%) dispatch reliability is achieved for six (6) consecutive months, whichever comes first. 5.0 Formula As the term is used herein, "dispatch reliability" shall be a six (6) month moving average numerical value (expressed as a percentage) which shall be calculated by application of the following formula: DR = 100(l - CD/SD) Where: DR = Dispatch Reliability (expressed as percentage) CD = Total Chargeable Technical Delays and Cancellations SD = Total Scheduled Revenue Departures 6.0 Assumptions The Guarantee Value is predicated on a revenue flight length of ninety (90) minutes, a minimum turnaround time of forty (40) minutes and a minimum through stop time of twenty (20) minutes. Bombardier reserves the right to renegotiate the Guarantee Value in the event of deviation in the aforemade assumptions. -33- 112 7.0 Conditions and Limitations 7.1 Any delay or cancellation due to any one or more of the following causes shall not be considered a Chargeable Technical Delay or Cancellation in computing compliance with this DRG: a) Delay or cancellation due to operation or maintenance of equipment in the Aircraft not being in accordance with the approved Technical Data; b) Delay or cancellation due to acts or omissions of Buyer including but not limited to unavailability of serviceable spare parts, ground support equipment or personnel, and not dispatching in accordance with the approved Minimum Equipment List; c) Delay or cancellation caused by problems that have had relevant recommended Service Bulletins or Airworthiness Directives issued against them, if Buyer has not incorporated the bulletin on the Aircraft in question, provided that Buyer has had reasonable time to incorporate said bulletin or directive consistent with Buyer's maintenance program; d) Delay or cancellation caused by BFE of Buyer or Buyer designated equipment (equipment designated by Buyer and purchased by Bombardier on behalf of Buyer); e) Delay or cancellation caused by Power Plant Parts; f) Delay or cancellation due to any modifications to the Aircraft made by Buyer without Bombardier's written approval unless Buyer furnishes reasonable evidence that such modification was not a prime cause of the delay; or g) Any delay or cancellation due to acts of God or acts of third parties or force majeure. 7.2 Reporting Buyer shall provide to Bombardier not later than thirty (30) days after the last day of each month all reports as required by Buyer's regulatory authority. Buyer shall also provide a report to Bombardier of the corrective action for such Chargeable Technical Delays or Cancellations, and- the information on modifications or Service Bulletins relevant to such Chargeable Technical -34- 113 Delays or Cancellations accomplished during each month. Buyer shall also provide Bombardier such other information and data as Bombardier may reasonably request for the purpose of analyzing Chargeable Technical Delays or Cancellations. Bombardier shall respond to the data in a timely manner and shall provide Buyer with a summary of fleetwide reliability reports on a monthly basis. 7.3 Master Record The master record of dispatch reliability will be maintained by Bombardier based upon information provided by Buyer's maintenance control program as requested herein. Bombardier shall format the data into Bombardier's format. 8.0 Corrective Action 8.0 Corrective Action 8.1 In the event the achieved dispatch reliability, as reported to Buyer by Bombardier, fails to equal the Guarantee Value for the applicable period, Bombardier and Buyer will jointly review the performance for that period to identify improvement changes required. Bombardier shall also provide, at no charge, if requested by Buyer: a) Technical service support to analyze Buyer's operating procedures, maintenance practices, training programs, manuals and publications and related procedures, practices, policies and programs that can have an adverse effect on dispatch reliability and recommend any changes in such procedures, practices, policies and programs reasonably indicated to improve the dispatch reliability; b) Review of data related to parts, material, components, accessories and equipment incorporated in, and used in connection with, the Aircraft and furnish technical advice and information to Buyer for the purpose of improving the dispatch reliability of the Aircraft; c) Corrective Bombardier engineering design changes and modification kits of Bombardier Parts and material for the Aircraft which will, in the joint opinion of Buyer and Bombardier, cause-the performance of the Aircraft upon Buyer's installation, to meet or exceed the dispatch reliability guarantee. The modification kits and design changes supplied by Bombardier which provide added value to Buyer beyond that required to reach the specified guarantee value- will be negotiated by Bombardier and Buyer to define the cost allocation of the "Added -35- 114 Value". Bombardier will pay for direct labour hours incurred based on Bombardier's estimated labour hours or Buyer's actual labour hours, whichever is less, for the percentage as determined above of the installation cost necessary to meet the Guarantee Value. Buyer and Bombardier agree that Buyer's obligations to install such modification kits shall be consistent with Buyer's maintenance program. Thereafter, failure by Buyer to install a Bombardier change shall result in the exclusion of the associated malfunction from the dispatch reliability computation, unless Buyer can demonstrate to Bombardier's reasonable satisfaction that the change would not have eliminated the malfunction; and d) Bombardier shall use its reasonable efforts to require its suppliers to provide corrective action at no charge to Buyer to the extent required when Chargeable Technical Delays or Cancellations exceed the guaranteed dispatch reliability as a direct result of failure of equipment designed by such suppliers. 8.2 Bombardier's liability to investigate and provide corrective action under the terms of this DRG shall be dependent upon the quality, extent and regularity of information and data reported to Bombardier by Buyer. 9.0 Implementation of Changes Buyer may, at its option, decline to implement any change proposed by Bombardier under Article 8.0 above. If Buyer so declines, Bombardier may adjust the number of Chargeable Technical Delays or Cancellations by an amount consistent with the expected reduction in Chargeable Technical Delays or Cancellations based on reasonable substantiation to Buyer and on other operator experience, if any, as if such change has been incorporated. Bombardier shall not make adjustments when Buyer has demonstrated to Bombardier's reasonable satisfaction that such change is not cost effective to Buyer. 10.0 Duplicate Remedies It is agreed that Bombardier shall not be obligated to provide to Buyer any remedy which is a duplicate of any other remedy which has been provided to Buyer elsewhere under the Agreement, by the Power Plant manufacturer or by any vendor. 11.0 The provisions of this Schedule are personal to Buyer and shall not 'be assigned or otherwise disposed of by Buyer without the prior written consent of Bombardier. -36- 115 13.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc. BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -37- 116 SCHEDULE 8 TO SUPPLEMENT NO. PA-428-1 PERFORMANCE GUARANTEE 1.0 Aircraft Configuration The guarantees listed below are based on the Aircraft configuration as defined in Supplement NO.PA-428-1. Appropriate adjustments shall be made for any changes to the specifications of the Aircraft which have been approved by Buyer and Bombardier and which cause changes to the performance of the Aircraft. 2.0 Performance Guarantee 2.1 Take-off Performance FAR take-off field length, at a take-off gross weight of 53,000 lb (24,040 kg) at the start of ground run, at sea level with zero runaway slope, no obstacles, zero wind, ISA conditions, shall be not more than 6,305 ft (1,922 m). 2.2 Landing Performance FAR landing field length at a landing weight of 47,000 lb (21,319 kg), sea level, ISA conditions, no obstacles, shall be not more than 4,850 ft (1,478 m). 2.3 Speed Level flight airspeed at 46,000 lb (20,865 kg) gross weight at a pressure altitude of 35,000 ft, using maximum cruise thrust with A.C.U. bleed only, in ISA conditions shall be not less than 0.79 M, 455 Kts TAS (843 km/hr). 2.4 Specific Air Range The nautical air miles per pound of fuel in ISA conditions, at 35,000 ft altitude, at an aircraft gross weight of 46,000 lb (20,865 kg), at a true Mach number of 0.74 M shall be not less than 0. 1 85 nam/lb (.755 km/kg). 2.5 Mission Performance For a mission with an equivalent still air range (stage length) of 1,600 nautical miles, when operated under the conditions specified below,. the block fuel burnt shall be not more than 10,217 lb (4,634 kg) when carrying a fixed payload of 10,250 lb (4,649 kg) representative of 50 passengers at 205 lb (90.3 kg) per passenger. -38- 117 The mission is flown at ISA conditions throughout. Climb is made starting at sea level to 35-000 ft pressure altitude using a climb speed schedule of 250 KCAS / 0.70 M. Initial cruise is at 35,000 feet pressure altitude at a cruise Mach number of 0.74 M. Step climb is made starting at 35,000 feet to 37,000 feet pressure altitudes using a climb speed schedule of 250 KCAS/0.70m. Final cruise is at 37,000 feet pressure altitude at a cruise Mock of 0.74m. Thrust during both cruise is not to exceed maximum cruise thrust. Descent is made from 37,000 feet pressure altitude to sea level using a descent speed schedule of 0.70 M / 250 KCAS. For the purpose of this guarantee the following are fixed quantities and allowances: - 10 minute engine start and taxi fuel is 13 3 lb (60 kg). - 1 minute take-off fuel including acceleration to initial climb speed is 107 lb (49 kg). - Usable reserve fuel remaining upon completion of descent phase, based on the reserve profile specified below is 1,866 lb (846 kg). 1) 100 nm (185 km) diversion including: i) climb from sea level to 22,000 ft at a speed of 250 KCAS ii) cruise at 22,000 ft at long range cruise speed iii) descent to sea level at a speed of 250 KCAS 2) plus fuel equivalent to 45 minute hold at 22,000 feet at minimum drag speed (Vmo). The stage length is defined as the sum of the climb, cruise and descent distances. M denotes true Mach number. Block fuel includes engine start, taxi, take-off, climb, cruise and descent. -39- 118 The fuel burn guarantee is based on the fixed estimated OWE of 30,800 lb (13,971 kg). 3.0 Weights 3.1 Maximum Zero Fuel Weight Guarantee The Maximum Zero Fuel Weight (MZFW) shall not be less than 44,000 lb (19,958 kg). 3.2 Maximum Landing Weight Guarantee The maximum landing Weight (MLW) shall not be less than 47,000 lb (21,319 kg). 3.3 Maximum Take-Off Weight Guarantee The Maximum Take-Off Weight (MTOW) shall not be less than 53,000 lb (24,040 kg). 4.0 Performance Guarantee Conditions 4.1 All guaranteed performance data are based on the ICAO International Standard Atmosphere unless noted otherwise. Altitudes are pressure altitudes. 4.2 FAR take-off and landing performance are based on the requirements of FAR 25 as defined in Transport Canada data sheet A-131, Issue 13. 4.3 Take-off and landing performance guarantees are based on operation from hard surfaced, level and dry. runways with no wind, no line-up allowance or no obstacles unless noted otherwise and with anti-skid and automatic spoilers operative. 4.4 When establishing the take-off performance, no air shall be bled from the engine(s) for cabin air conditioning or anti-icing and APR shall be armed and available when one engine fails. The APU shall be off. 4.5 Speed, specific air range, and the climb, cruise, and descent portion of the mission guarantee include allowance for normal engine bleed and power extraction. Normal engine bleed is defined as that bleed required to maintain a cabin pressure altitude not exceeding 8,000, ft at the maximum operating -40- 119 altitude with an average cabin ventilation rate of not less than 570 cu.ft./min. (I 6.3 m3/min) and a cabin temperature of 72(degree)F (22(degree)C). 4.6 Normal power extraction assumes the use of electrical services such as to require a power level 24 Kilowatts, total, to be provided with both engines operative and of 15 Kilowatts to be provided with one engine inoperative. 4.7 Fuel density is assumed to be 6.70 lb/US gallon (0.803 kg/1). All performance guarantees are based on the use of a fuel with a lower heating value (LHV) of 18,550 BTU/lb (43,147 kilojoules/kg) and on an Aircraft centre of gravity location of 25% of the mean aerodynamic chord. 4.8 All guarantees are contingent upon engine acceptance test performance acceptable to BOMBARDIER and are applicable to a new airframe - engine combination only. 5.0 Guarantee Compliance 5.1 Compliance with take-off and landing performance guarantees shall be demonstrated by reference to the approved DOT Airplane Flight Manual adjusted to reflect any differences due to change in certification requirements of interpretation thereof. 5.2 Compliance with speed, specific air range and mission performance guarantees shall be established by calculations based on flight test data obtained for an aircraft configuration similar to that defined by this specification and should be demonstrated by reference to the Flight Planning and Cruise Control Manual. 5.3 Data derived from tests shall be adjusted as required by conventional methods of correction, interpolation or extrapolation in accordance with established aeronautical practices to show compliance with the performance guarantees. 6.0 Remedies 6.1 In the event of a shortfall in the guarantees contained in this Letter Agreement, BOMBARDIER shall endeavor and shall use its reasonable efforts to develop corrective measures. Such measures shall be developed within a period of twelve (12) months from the delivery of the first Airerdft under the Agreement (or such other longer period as is required in view of the corrective measures involved). -41- 120 7.0 The provisions of this Letter Agreement are personal to Buyer and shall not be assigned or otherwise disposed of by Buyer without the prior written consent of BOMBARDIER. 8.0 This Letter Agreement constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. SkyWest Airlines, Inc. BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Bradford R. Rich ---------------------------- Eric Christensen Vice President, Planning -42- 121 SCHEDULE 9 TO SUPPLEMENT NO. PA-428-1 AIRFRAME DIRECT MAINTENANCE COST GUARANTEE 1.0 Intent 1.1 The intent of the Airframe direct maintenance cost guarantee is to achieve the full potential of the maintainability of the Aircraft through the joint efforts of Bombardier and Buyer. To that end, Bombardier agrees to provide credits pursuant to the terms and conditions hereof and Buyer agrees to provide data defined below. 1.2 The "Airframe" shall mean the Aircraft excluding Power Plant Parts, related maintenance activities (such as overhaul, hot section inspection, basic unscheduled repairs, LCF components, scheduled and unscheduled line replaceable unit repair and overhaul), Buyer Furnished Equipment (BFE) and Ground Support Equipment (GSE). 2.0 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -43- 122 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 3.0 Calculation of Cost 3.1 Airframe Direct Maintenance Labour ("ADMUL) The ADML shall be defined as the annual man-hours, in Buyer's cost allocation system assigned to collect direct labour charges, without burden, expended in direct maintenance of the Aircraft. Notwithstanding Buyer's internal cost allocation system, all elements of indirect labour such as shop cleaning, workplace maintenance, material handling, overtime premium, idle time and inventory control or labour resulting from damage, misdiagnosis (no fault found) or misuse shall be excluded from the calculation of Airframe direct maintenance man-hours; and -44- 123 [Original contains blank page] -45- 124 3.2 Airframe Direct Maintenance Material Cost ("ADMMC") The ADMMC is defined as the annual cost of material consumed, which excludes initial provisioning purchases, for the direct airframe maintenance of the Aircraft, -less any transportation, duties, taxes or license fees. Notwithstanding Buyer's internal cost allocation system, all elements of indirect material such as cleaning supplies, consumable tools, hydraulic fluids, oils and greases, welding supplies, sealants, paints, protective coatings, adhesives or material resulting from damage, misdiagnosis (no fault found) or misuse are excluded from the calculation of ADMMC. 3.3 Airframe Direct Outside Service Cost ("ADOSO The ADOSC is defined as the annual cost expended in outside services for direct airframe maintenance of the Aircraft. The ADOSC shall include the total outside service charges of both labour and material costs, but excluding transportation and taxes. 3.4 Hourly Airframe Direct Maintenance Cost ("ADMC") The following formula shall be used to calculate the annual hourly ADMC: ADMC = (ADML)(LC) + ADMMC + ADOSC -------------------------- T Where: ADML = Airframe Direct Maintenance Labour expressed in man-hours, LC = Labour cost from Appendix A, item 4, ADMMC = Airframe Direct Maintenance Material Cost, ADOSC = Airframe Direct Outside Service Cost, T = Total flight hours for the Aircraft recorded for the applicable year. 4.0 Credit Calculation 4.1 The ADMC calculated in accordance with sub paragraph 3.4 hereof, shall be compared by Bombardier against the ADMCG on an annual basis. -46- 125 4.2 If the ADMC exceeds the ADMCG by more than ten percent (10%) Buyer's balance account will be credited with a compensation credit ("Qb") calculated in accordance with the following formula: Qb = 0.5 (ADMC - ADMCG) T Where: Qb-@ = Buyer's compensation credit in dollars when Qb is positive, ADMC = The ADMC values for the relevant year, ADMCG = Airframe Direct Maintenance Cost Guarantee defined in sub paragraph 2.1 hereof, T = Same meaning as used in Article 3.4, above 4.3 If the ADMC is less than the ADMCG, Bombardier shall accrue an incentive credit ("Qs") which shall be used as an offset against any potential liabilities of Bombardier during the term of this Schedule in accordance with the following formula: Qs 0.5 (ADMCG - ADMC) T Where: Qs Bombardier's incentive credit in dollars when Qs is positive. ADMC, ADMCG and T shall have the same meaning as used in Article 4.2 above. 5.0 Credit Payment 5.1 At the end of the term of this guarantee, the sum of Buyer's compensation credit calculated pursuant to Article 4.2 above, and the sum of Bombardier's incentive credit calculated pursuant to Article 4.3 above, shall be compared by the following formula to determine if a credit is due to Buyer. Credit due Buyer = EQb - YQs Qb and Qs shall have the same meaning as used in Article 4.2 and Article 4.3 above. -47- 126 5.2 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 5.3 If the credit due to Buyer is negative, Buyer will be under no obligation to compensate Bombardier, nor shall Bombardier owe any compensation to Buyer. 6.0 Audit Upon five (5) business days prior written notification by Bombardier to Buyer and at Bombardier's expense, Bombardier shall have the right during normal business hours to audit all charges reported under this Schedule, Buyer's applicable maintenance practices and procedures, and applicable Aircraft records, where normally and customarily maintained, relative to maintenance, Service Bulletin incorporation and modification of the Aircraft. Such audit shall not interfere with the conduct of business by Buyer nor shall Buyer be required to undertake or incur additional liability or obligations with respect to the audit. 7.0 Reporting 7.1 Bombardier shall provide a quarterly report to Buyer on the status of the Airframe direct maintenance cost based on data submitted by Buyer and approved by Bombardier. Failure of Buyer to provide the required data, in spite of Bombardier's notice and within thirty (30) days thereof, shall void this Schedule. 7.2 The Airframe Direct Maintenance Cost Guarantee was based upon the assumptions outlined in the Appendix to this Schedule. Any deviation from the assumptions outlined in the. Appendix shall cause a modification in the Airframe Direct Maintenance Cost Guarantee by Bombardier. 8.0 The provisions of this Schedule are personal to Buyer and shall not be assigned or otherwise disposed of by Buyer without the prior written consent of Bombardier. 9.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. -48- 127 Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -49- 128 APPENDIX A AIRFRAME DIRECT MAINTENANCE COST GUARANTEE Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -50- 129 Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -51- 130 Appendix B ADMCG Economic Adjustment Formula The ADMCO economic adjustment will be calculated using the following Guarantee Adjustment (GA) Formula. The ADMCG term is specified in Section 2. 1.1 of the Schedule. GA = GI - GO Where GI=GO[0.60(LI/LO)+0.40(MI/MO)] GA = ADMCG Value Adjustment G0 = ADMCG Value GI = ADMCG Value adjusted to the final year L1 = the current year index for labour obtained by calculating the arithmetic average of the labour indexes published by the United States Department of Labour Statistics - Employer and Earnings Index for the fourth, fifth and sixth months prior to the month in the current year which defines the ADMCG term. L0 = the delivery year index for labour obtained by calculating the arithmetic average of the labour indexes published by the United States Department of Labour Statistics - Employer and Earnings Index for the fourth, fifth and sixth months prior to the date specified in Appendix A, Article 3 of this Schedule. M1 = the current year index for material obtained by calculating the arithmetic average of the material indexes published by the United States Department of Labour - Material Industrial Commodities, Producer Price Index, for the fourth, fifth and sixth months prior to the month in the current year which defines the ADMCG term. M0 = the delivery year index for material obtained by calculating the arithmetic average of the material indexes published by the United States Department of Labour - Material Industrial Commodities, Producer Price Index, for the fourth, fifth and sixth months prior- to the date specified in Appendix A, Article 3 of this Schedule. If, during any economic adjustment period, L1 is less than L0, L1 will be deemed to equal L0 and if M1 is less than M0, M1 will be deemed to equal M0. -52- 131 SCHEDULE 10 TO SUPPLEMENT NO. PA-428-1 CREDIT MEMORANDA Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. -53- 132 Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -54- 133 SCHEDULE 11 TO SUPPLEMENT NO. PA428-1 TERMINATION 1.0 Buyer may terminate the Agreement for any reason whatsoever by written notice to Bombardier by midnight in St. George, Utah, United States of America on Wednesday, January 20, 1999. Receipt of such notice will make the Agreement null and void and neither party shall have any obligation or liability to other. If no such notice is received, the Agreement shall be in full force and effect. 2.0 The provisions of this Schedule are personal to Buyer and shall not be assigned or otherwise disposed of by Buyer without the prior written consent of Bombardier. 3.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Director of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -55- 134 SCHEDULE 12 TO SUPPLEMENT NO. PA-428-1 EVENT OF DEFAULT 1.0 Notwithstanding the provisions of Article 16.3 of the Agreement, in consideration of Buyer having entered into the Agreement, Bombardier agrees that: (a) should Buyer be in default or breach of a material term or condition of the Agreement and such default or breach remains uncured as provided in Article 16.2 of the Agreement, other than a default under Article 9.8 of the Agreement, (b) should, as a result of a default or breach referred to -in (a) above, Bombardier terminate the Agreement, and Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. 2.0 Nothing herein contained shall limit any of Bombardier's rights with respect to a default resulting in a termination less than eighteen (I 8) months prior to the Scheduled Delivery Dates of the sixteenth to twenty fifth Aircraft, as applicable. 3.0 Without prejudice to Bombardier's rights to seek additional damages above such retained amounts incurred as a direct result of Buyer's default, the balance of any of Buyer's advance payments mode with respect to terminate Aircraft than held by Bombardier over the amount Bombardier is permitted to retain under this Schedule shall be returned to Buyer without interest by wire transfer of immediately available funds within five (5) business days of the affective date of transaction. 4.0 In the event of a termination to which reference is made to in Article I hereof, Buyer's rights into or with respect to any undelivered Aircraft and into and with respect to any Option Aircraft shall immediately terminate and be null and void. 5.0 In the event of the termination of the Agreement, this Schedule shall become automatically null and void. -56- 135 6.0 The provisions of this Schedule are personal to Buyer and shall not be assigned or otherwise disposed of by Buyer without the prior written consent of Bombardier. 7.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ /Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -57- 136 SCHEDULE 13 TO SUPPLEMENT NO. PA-428-1 CREDIT RECONCILLIATION 1.0 Notwithstanding the provisions of Schedule 10 of the Agreement, in consideration of Buyer having entered into the Agreement, Bombardier agrees: 2.0 In consideration of Buyer having entered into the Agreement for the purchase of twenty five (25) Aircraft, five (5) years after the last Aircraft is delivered to Buyer, at the request of Buyer, Bombardier will liquidate in Buyer's favour, any credit memoranda amounts issued pursuant to this Agreement and remaining outstanding following reconciliation of any payments due to Bombardier at the time. 3.0 This Schedule constitutes an integral part of the Agreement and subject to the terms and conditions contained therein. Should there be any inconsistency between this Schedule and the Agreement with respect to the subject matter covered by the terms hereof, then this Schedule shall prevail. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planrung. -58- 137 SCHEDULE 14 TO SUPPLEMENT NO. PA-428-1 CONDITIONAL PAYMENT Disclosure Regarding Confidential Information: Portions of pages 55 and 60 of the Purchase Agreement and portions of pages 2-5, 7-9, 14, 19, 20, 24-27, 29, 30, 43, 44, 48, 50, 51, 53, 56 and 59 of the Supplements and Schedules thereto of the Purchase Agreement have been omitted from this Exhibit 10.20 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") by SkyWest, Inc. The omitted portions, which are the subject of an application for confidential treatment and have been filed separately with the Commission, are identified in this exhibit by the placement of this legend. SkyWest Airlines, Inc BOMBARDIER INC. Bombardier Aerospace Signed: /s/ Bradford R. Rich Signed: /s/ H. Anne Woodyatt ---------------------------- ---------------------------------- Bradford R. Rich H. Anne Woodyatt Executive Vice President Manager of Contracts CFO, and Treasurer Regional Aircraft Signed: /s/ Eric Christensen ---------------------------- Eric Christensen Vice President, Planning -59- EX-13.1 3 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13.1 SUMMARY FINANCIAL AND OPERATING DATA
Year Ended March 31, - ------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Operating revenues (000) $ 388,626 $ 266,135 $ 245,766 $ 212,483 $ 184,701 Operating income (000) $ 64,305 $ 32,819 $ 16,025 $ 5,636 $ 18,239 Net income (000)(1) $ 41,835 $ 21,944 $ 10,111 $ 4,366 $ 13,701 Net income per common share(2): Basic $ 1.73 $ 1.06 $ .50 $ .21 $ .62 Diluted $ 1.69 $ 1.04 $ .50 $ .21 $ .61 Weighted average shares (000)(2): Basic 24,199 20,799 20,170 20,568 22,224 Diluted 24,787 21,168 20,248 20,736 22,428 Total assets (000) $ 417,660 $ 318,914 $ 231,934 $ 226,996 $ 187,063 Current assets (000) $ 216,684 $ 189,771 $ 89,336 $ 75,908 $ 70,525 Current liabilities (000) $ 74,326 $ 46,662 $ 44,058 $ 43,090 $ 24,486 Long-term debt (000) $ 61,830 $ 41,109 $ 47,337 $ 53,736 $ 29,553 Stockholders' equity (000) $ 256,256 $ 211,133 $ 124,552 $ 115,800 $ 117,684 Return on average equity 17.9% 14.8% 8.3% 3.7% 11.1% OPERATING DATA Passengers carried 4,900,921 2,989,062 2,656,602 2,340,366 2,073,885 Revenue passenger miles (000) 1,015,872 745,386 717,322 617,136 488,901 Available seat miles (000) 1,844,123 1,463,975 1,413,170 1,254,334 976,095 Load factor 55.1% 50.9% 50.8% 49.2% 50.1% Break-even load factor 46.3% 45.0% 47.9% 48.4% 45.5% Yield per revenue passenger mile 37.5c 34.8c 33.3c 33.2c 36.3c Revenue per available seat mile 21.0c 18.1c 17.3c 16.9c 18.8c Cost per available seat mile 17.6c 16.0c 16.3c 16.6c 17.1c Average passenger trip length 207 249 270 264 236 Number of aircraft at end of year 99 60 60 63 60
2 QUARTERLY FINANCIAL AND STOCK PRICE DATA
Fiscal Year 1999 - ------------------------------------------------------------------------------------------------ First Second Third Fourth Year ------- -------- -------- -------- -------- Operating revenues (000) $81,959 $101,229 $102,255 $103,183 $388,626 Operating income (000) $13,502 $ 17,708 $ 15,276 $ 17,819 $ 64,305 Net income (000)(1) $ 9,741 $ 12,854 $ 8,525 $ 10,715 $ 41,835 Net income per common share(2): Basic $ .41 $ .53 $ .35 $ .44 $ 1.73 Diluted $ .40 $ .52 $ .34 $ .43 $ 1.69 Stock price data(2): High $ 29.75 $ 34.00 $ 32.69 $ 38.00 $ 38.00 Low $ 17.69 $ 15.00 $ 16.06 $ 25.13 $ 15.00
Fiscal Year 1998 - -------------------------------------------------------------------------------------------- First Second Third Fourth Year ------- ------- ------- ------- -------- Operating revenues (000) $63,322 $68,813 $66,975 $67,025 $266,135 Operating income (000) $ 5,708 $ 9,536 $ 8,406 $ 9,169 $ 32,819 Net income (000) $ 4,345 $ 7,510 $ 5,422 $ 4,667 $ 21,944 Net income per common share(2): Basic $ .22 $ .37 $ .27 $ .21 $ 1.06 Diluted $ .22 $ .37 $ .26 $ .21 $ 1.04 Stock price data(2): High $ 8.50 $ 10.32 $ 14.81 $ 21.06 $ 21.06 Low $ 6.00 $ 7.69 $ 10.13 $ 14.75 $ 6.00
(1) During fiscal 1999, the Company sold the operations of Scenic Airlines, Inc., and recorded related losses of $793,000, or $(.03) per diluted share. The Scenic Operations have been reflected as Discontinued Operations in the accompanying consolidated financial statements, with corresponding reclassifications to previously reported information. (2) On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. All common shares and per share information in the accompanying consolidated financial statements have been retroactively adjusted to reflect this stock dividend. As of April 30, 1999, there were 1,060 holders of common stock. Cash dividends of $.12 and $.10 per share of outstanding common stock were paid in fiscal years 1999 and 1998, respectively. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company through SkyWest Airlines, Inc. ("SkyWest"), operates a regional airline offering scheduled passenger service with approximately 1,000 daily departures to 64 cities in 13 western states and Canada. Total operating revenues and passengers carried have grown consistently from fiscal 1994 through fiscal 1999, at compounded annual growth rates of approximately 19.7 percent and 23.1 percent, respectively. In fiscal 1994, SkyWest generated approximately 727 million available seat miles ("ASMs") and had a fleet of twenty-eight 19-seat Metroliners, twenty-three 30-seat Brasilias and four Canadair Regional Jets ("CRJs") at fiscal year end. As a result of additional aircraft acquisitions, SkyWest generated approximately 1.8 billion ASMs in fiscal 1999 with a fleet of 88 Brasilias and 11 CRJs at fiscal year end. The transition out of the Metroliner aircraft enabled SkyWest to upgrade its aircraft to an all cabin-class fleet of Brasilias and CRJs, which offer increased passenger acceptance and capacity and higher operating efficiencies. The transition resulted in one-time pre-tax fleet restructuring and transition expenses of $6.2 million, or $.19 per share, in fiscal 1996. In fiscal 1999, the Company generated net income of $41.8 million, compared to $21.9 million in fiscal 1998 and $10.1 million in fiscal 1997. During fiscal 1999, the Company sold the operations of Scenic Airlines, Inc., and recorded a net loss of $.8 million. The amount has been reflected as Discontinued Operations in the accompanying consolidated financial statements. The improvement since fiscal 1996 reflects, among other factors, the addition of United Airlines, Inc. ("United") as a code sharing partner and the completion of SkyWest's transition to an all cabin-class fleet. SkyWest has been a code-sharing partner with Delta Air Lines, Inc. ("Delta") and United Airlines, Inc. ("United") since 1987 and 1997, respectively. In February 1998, SkyWest executed an amendment to the United Express Agreement to provide service as United Express in United's Portland and Seattle/Tacoma markets and in additional Los Angeles markets which began in April 1998. In January 1998, SkyWest executed an addendum to the United Express Agreement, expanding SkyWest's operations to serve as the United Express carrier in San Francisco which began in June 1998. SkyWest operates as the Delta Connection in Salt Lake City and as United Express in Los Angeles, San Francisco and in the Pacific Northwest. SkyWest believes that its success in attracting multiple code-sharing relationships is attributed to its delivery of high quality customer service with an all cabin-class fleet. Multiple code-sharing relationships have enabled SkyWest to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of SkyWest-controlled flying and contract flying. On SkyWest-controlled flights, SkyWest controls scheduling, ticketing, pricing and seat inventories and receives a prorated portion of passenger fares. On contract routes, the major partner controls scheduling, ticketing, pricing and seat inventories with SkyWest receiving from United negotiated payments per flight departure and incentives related to passenger volumes and levels of customer service. As of April 4, 1999, approximately 60 percent of SkyWest's capacity was in contract flying and 40 percent was in SkyWest-controlled flying. Another benefit of the multiple code-sharing relationship is the ability to grow within two major airline systems. The Company has agreements to acquire an additional 35 CRJs with options for an additional 35 aircraft with deliveries beginning in June 2000. These aircraft will be allocated between the United Express and Delta Connection operations. The Company has continued to emphasize cost management and better utilization of existing resources. During fiscal 1999, SkyWest experienced a 17 percent decrease in the average passenger trip length, however cost per ASM increased only 10 percent from 16.0c in fiscal 1998 to 17.6c in fiscal 1999. Cost per ASM increased at a lower rate due to efficiencies gained from having an all-Brasilia turboprop fleet. 4 RESULTS OF OPERATIONS The following table sets forth information regarding the Company's operating expense components. Airline operating expenses are expressed as a percentage of total airline operating revenues. Nonairline expenses are expressed as a percentage of total nonairline revenues. Total operating expenses and interest are expressed as a percentage of total consolidated revenues.
Fiscal Year Ended March 31, ------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------------ Percent Cents Percent Cents Percent Cents of per of per of per Amount Revenue ASM Amount Revenue ASM Amount Revenue ASM -------- ------- ----- -------- ------- ----- -------- ------- ----- Salaries, wages and employee benefits .......................... $101,243 26.2% 5.5c $ 67,591 25.5% 4.6c $ 60,759 24.8% 4.3c Aircraft costs ....................... 70,561 18.2 3.8 52,357 19.8 3.6 49,822 20.4 3.5 Maintenance .......................... 36,563 9.5 2.0 20,535 7.8 1.4 20,929 8.6 1.4 Fuel ................................. 29,477 7.6 1.6 28,510 10.8 2.0 30,713 12.6 2.2 Other airline expenses ............... 84,712 21.9 4.6 62,701 23.7 4.3 66,323 27.0 4.7 Interest ............................. 2,376 .6 .1 1,639 .6 .1 2,431 1.0 .2 -------- ---- ---- -------- ---- ---- -------- ----- ---- Total airline expenses ............... 324,932 84.0 17.6c 233,333 88.3 16.0c 230,977 94.4 16.3c -------- ---- ==== -------- ---- ==== -------- ----- ==== Other ................................ 1,765 94.1 1,622 93.6 1,194 106.6 -------- ---- -------- ---- -------- ----- Total operating expenses and interest .......................... $326,697 84.1% $234,955 88.3% $232,171 94.5% ======== ==== ======== ==== ======== =====
FISCAL 1999 COMPARED TO FISCAL 1998 During fiscal 1999, SkyWest dramatically expanded its code-sharing agreements with United Airlines and added a record number of aircraft to the fleet. As a result, SkyWest experienced high growth factors in available seat miles ("ASMs"), revenue passenger miles ("RPMs"), passengers carried and load factors. In fiscal 1999, net income increased 90.6 percent to $41.8 million, or $1.69 per diluted share, compared to $21.9 million, or $1.04 per diluted share in fiscal 1998. Consolidated operating revenues increased 46.0 percent to a record $388.6 million in fiscal 1999 compared to $266.1 million in fiscal 1998. Passenger revenues, which represented 98.1 percent of total operating revenues, increased 47.1 percent to $381.4 million in fiscal 1999 compared to $259.3 million or 97.4 percent of total operating revenues in fiscal 1998. The increase is due to a 36.3 percent increase in RPMs and a 7.8 percent increase in yield per RPM. Effective April 23, 1998, SkyWest expanded its code-sharing relationship with United, as United Express, and began operating flights to/from Seattle and Portland. SkyWest also expanded their United Express operations at Los Angeles at the same time. Effective June 1, 1998, SkyWest further expanded its United Express operations and began operating flights to/from San Francisco. The increase in yield per RPM is also the result of improved revenue management resulting from schedule refinements and fleet rationalization. SkyWest also continues to maximize revenue by use of a state-of-the-art revenue management and control system which utilizes historical booking data and trends to optimize revenue. Together, these factors increased revenue per ASM 16.0 percent to 21.0c in fiscal 1999 compared to 18.1c in fiscal 1998. During fiscal 1999, total airline operating revenues increased 46.3 percent and total airline operating expenses increased only 39.0 percent. As a result, total airline operating expenses and interest were 84.0 percent of total airline operating revenues in fiscal 1999 compared to 88.4 percent in fiscal 1998. Salaries, wages and employee benefits increased as a percentage of airline operating revenues to 26.2 percent in fiscal 1999 from 25.5 percent in fiscal 1998. The increase is primarily the result of incentive payments to employees, which are based on SkyWest's profitability. The average number of employees was 3,092 for fiscal 1999 compared to 1,915 for fiscal 1998. The large increase is due to the addition of personnel required for SkyWest's expansion. Salaries, wages and employee benefits per ASM increased to 5.5c in fiscal 1999 from 4.6c in fiscal 1998. 5 Aircraft costs, including aircraft rent and depreciation, decreased slightly as a percentage of airline operating revenues to 18.2 percent in fiscal 1999 from 19.8 percent in fiscal 1998. The decrease is due to airline operating revenues increasing at a faster rate than aircraft costs. Aircraft costs per ASM were 3.8c in fiscal 1999 compared to 3.6c in fiscal 1998. Maintenance expense increased slightly as a percentage of airline operating revenues to 9.5 percent in fiscal 1999 from 7.8 percent in fiscal 1998. The increase is due to the Company incurring initial heavy maintenance charges to bring the acquired used Brasilias up to SkyWest's maintenance standards. Maintenance cost per ASM was 2.0c in fiscal 1999, compared to 1.4c in fiscal 1998. Fuel costs decreased as a percentage of airline operating revenues to 7.6 percent in fiscal 1999 from 10.8 percent in fiscal 1998. The decrease is due to primarily to a decrease in the average cost of fuel per gallon to 64c in fiscal 1999 from 81c in fiscal 1998. As a result, fuel costs per ASM decreased to 1.6c in fiscal 1999 from 2.0c in fiscal 1998. Other expenses, which consist primarily of commissions, landing fees, station rents, computer reservation systems and hull and liability insurance, decreased as a percentage of airline operating revenues to 21.9 percent in fiscal 1999 compared to 23.7 percent in fiscal 1998. The decrease is primarily the result of the Company not incurring commissions on United Express related passenger revenues. However, due to a 17 percent decrease in the average passenger trip length, cost per ASM increased to 4.6c in fiscal 1999 from 4.3c in fiscal 1998. FISCAL 1998 COMPARED TO FISCAL 1997 In fiscal 1998, consolidated net income increased 117.0 percent to $21.9 million, or $1.04 per diluted share compared to $10.1 million, or $.50 per diluted share in fiscal 1997. Consolidated operating revenues increased to $266.1 million in fiscal 1998 compared to $245.8 in fiscal 1997. Passenger revenues, which represented 97.4 percent of total operating revenues, increased 8.4 percent to $259.3 million in fiscal 1998 compared to $239.2 million or 97.3 percent of total operating revenues in fiscal 1997. The increase was due to a 4.5 percent increase in yield per RPM and a 3.9 percent increase in RPMs. SkyWest entered into a new code-sharing relationship with United and began operating as United Express in Los Angeles beginning October 1, 1997. This operation resulted in both increased RPMs and increased yield per RPM. The 4.5 percent increase in yield per RPM also resulted from an increase in the Company's portion of prorated fares with Delta in certain markets. SkyWest also acquired a new state-of-the-art revenue management and control system which utilizes historical booking data and trends to optimize revenue. The combination of these factors resulted in an increase in revenue per ASM to 18.1c in fiscal 1998 compared to 17.3c in fiscal 1997. Management continued its efforts to reduce airline operating costs per ASM and as a percentage of airline operating revenues. Total airline operating expenses and interest were 88.4 percent of total airline operating revenues in fiscal 1998 compared to 94.4 percent in fiscal 1997. This percentage decrease was due to an 8.1 percent increase in total airline operating revenues and only a 1.2 percent increase in total airline operating expenses. This improvement was primarily the result of the increase in revenues from the new United Express flying as well as the Company not incurring expenses such as traffic commissions and certain traffic handling expenses related to this flying. Airline operating costs per ASM decreased to 16.0c in fiscal 1998 from 16.3c in fiscal 1997. Salaries, wages and employee benefits increased as a percentage of airline operating revenues to 25.5 percent in fiscal 1998 from 24.8 percent in fiscal 1997. The increase was primarily the result of incentive payments to employees, which are based on the Company's profitability. The average number of employees was 1,915 for fiscal 1998 compared to 1,852 for fiscal 1997. The increase was due to the addition of crew members required for the Company's expansion. Salaries, wages and employee benefits per ASM increased to 4.6c in fiscal 1998 from 4.3c in fiscal 1997. Aircraft costs, including aircraft rent and depreciation, decreased slightly as a percentage of airline operating revenues to 19.8 percent in fiscal 1998 from 20.4 percent in fiscal 1997. The decrease was due to airline operating revenues increasing at a faster rate than aircraft costs. Aircraft costs per ASM were 3.6 cents in fiscal 1998 compared to 3.5c in fiscal 1997. 6 Maintenance expense decreased slightly as a percentage of airline operating revenues to 7.8 percent in fiscal 1998 from 8.6 percent in fiscal 1997. The decrease was due to airline operating revenues increasing while maintenance expenses decreased, in fiscal 1998, due to the utilization of newer Brasilia aircraft. Maintenance cost per ASM was 1.4c in fiscal 1998 and 1997. Fuel costs decreased as a percentage of airline operating revenues to 10.8 percent in fiscal 1998 from 12.6 percent in fiscal 1997. The decrease was due to airline operating revenues increasing 8.1 percent while fuel costs decreased 7.2 percent in fiscal 1998 compared to fiscal 1997. The decrease in fuel costs was due to a reduction in the average fuel price per gallon from 95c in fiscal 1997 to 81c in fiscal 1998. As a result, fuel costs per ASM decreased to 2.0c in fiscal 1998 from 2.2c in fiscal 1997. Other expenses, which consist primarily of commissions, landing fees, station rents, computer reservation systems and hull and liability insurance, decreased as a percentage of airline operating revenues to 23.7 percent in fiscal 1998 compared to 27.0 percent in fiscal 1997. The decrease was primarily the result of the Company not incurring commissions on United contract related passenger revenues. Due to the decrease in other expenses, cost per ASM decreased to 4.3c in fiscal 1998 from 4.7c in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES The Company had working capital of $142.4 million and a current ratio of 2.9:1 at March 31, 1999 compared to working capital of $143.1 million and a current ratio of 4.1:1 at March 31, 1998. The decrease in the current ratio is the result of the Company paying $41.4 million in deposits on aircraft orders which are recorded in long-term assets. The principal sources of funds during fiscal 1999 were $78.0 million generated from operations, $29.2 million from the issuance of long-term debt, $21.2 million from the sale of Scenic, $5.0 million from the sale of common stock, $2.9 million of proceeds from the sale of property and equipment, and $1.2 million of tax benefit from exercise of common stock options. During fiscal 1999, the Company invested $94.9 million in available-for-sale securities, $58.8 million in flight equipment, and, $41.4 million in deposits on aircraft, and $10.4 million in buildings, ground equipment and other assets. The Company also reduced long-term debt by $16.7 million and paid $2.8 million in cash dividends. These factors resulted in an $87.5 million decrease in cash and cash equivalents during fiscal 1999. The Company's position in available-for-sale securities, consisting primarily of bonds, bond funds and commercial paper, increased to $109.6 million at March 31, 1999 compared to $14.6 million at March 31, 1998. During fiscal 1998, SkyWest entered into an agreement to purchase 20 new Brasilia aircraft, related spare parts inventory and support equipment. Two of these aircraft were delivered in fiscal 1998 and 13 were delivered in fiscal 1999. At March 31, 1999, SkyWest had agreed to purchase the remaining five Brasilia aircraft, related spare parts inventory and support equipment at an aggregate cost of approximately $40.0 million, including estimated cost escalations. During fiscal 1999, SkyWest entered into an agreement to acquire 25 CRJs and related spares parts inventory and support equipment together with options on 25 additional aircraft. Subsequent, to year-end, SkyWest entered into an agreement to acquire an additional 10 CRJs and secured options for an additional 20 aircraft. This brings the total firm order to 35 jet aircraft and 35 options at an aggregate cost of approximately $787.5 million. The options to acquire 35 additional CRJs are at fixed prices (subject to cost escalations) and delivery schedules and are exercisable through July 2003. The Company has significant long-term lease obligations primarily relating to its aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in the Company's consolidated balance sheets. At March 31, 1999, the Company leased 78 aircraft with remaining lease terms ranging from 1 to 15 years. Future minimum lease payments due under all long-term operating leases were approximately $583.0 million at March 31, 1999. The Company's long-term debt was incurred in connection with the acquisition of Brasilia aircraft and certain amounts are supported by continuing subsidy payments through the export support program of the Federative Republic of Brazil. The subsidy payments reduce the stated interest rates to an average effective rate of approximately 3.90 percent on $41.1 million of the long-term debt, at March 31, 1999. The continuing subsidy payments are at risk to the Company if the Federative Republic of Brazil does not meet its obligations under the export support program. While the Company has no reason to believe, based on information currently available, that the 7 Company will not continue to receive these subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur. On the remaining long-term debt of $29.2 million, the average effective rate is 3.80 percent at March 31, 1999 and the lender has assumed the risk of the subsidy payments. The Company expended approximately $36.7 million for non-aircraft capital expenditures during the year ended March 31, 1999, consisting primarily of aircraft engine overhauls, ground and ramp equipment and rotable spares related to the expansion, aircraft modifications to be made pursuant to industry-wide FAA directives, buildings and ground equipment and rental vehicles. The Company has available $10.0 million in an unsecured bank line of credit with interest payable at the bank's base rate less one-quarter percent, which was a net rate of 7.50 percent at March 31, 1999. The Company believes that in the absence of unusual circumstances the working capital available to the Company will be sufficient to meet its present requirements, including expansion, capital expenditure, lease payment and debt service requirements for at least the next 12 months. YEAR 2000 COMPLIANCE The Company is currently modifying computer systems and application programs, as well as imbedded technology in the Company's equipment, for year 2000 compliance, with project completion scheduled for September 30, 1999. The Company believes that the cost to modify its systems or applications will not have a material effect on its financial position or results of operations. Any expenditures will be funded through operating cash flows while any costs for new software will be capitalized and amortized over the software's useful life. Although the Company is working cooperatively with third parties with systems upon which the Company must rely, the Company can not give any assurances that the systems of other parties will be year 2000 compliant on a timely basis. Systems operated by others which the Company would use and/or rely on would include: Federal Aviation Administration Air Traffic Control, computer reservation systems for travel agent sales as well as Delta and United reservation, passenger check-in and ticketing systems. The failure of the systems or equipment of the Company or third parties (which the Company believes is the most likely worst case scenario) could result in the reduction of suspension of the Company's operations and could have a material adverse effect on the Company's financial condition and results of operations. The Company is reviewing and revising its business interruption contingency plans. The review, together with any necessary revisions, will be completed concurrent with the modifications to existing systems and application programs by September 30, 1999. The review of these plans will include how to maintain safety as well as performing certain functions and processes manually. Due to the uncertainty, related to year 2000 issues, the Company's contingency plan will be ongoing in nature and may require further modifications to existing systems as new information is made available and the Company further assess the readiness of third parties upon which the Company relies. SEASONALITY As is common in the airline industry, the Company's operations are favorably affected by increased travel, historically occurring in the summer months and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months. However, the Company does expect some mitigation of the historical seasonal trends due to an increase in contract flying operations. 8 REPORT OF MANAGEMENT The integrity and objectivity of the information presented in this annual report are the responsibility of SkyWest, Inc. management. The consolidated financial statements contained in this report have been audited by Arthur Andersen LLP, independent public accountants, whose report appears below. The Company maintains a system of internal controls that provide reasonable assurance as to the integrity and reliability of the financial statements, the safeguarding of its assets against loss or unauthorized use and the prevention and detection of fraudulent financial reporting. The board of directors pursues its responsibility for these statements through its audit committee, which consists solely of directors who are neither officers nor employees of the Company. The audit committee meets periodically with the independent public accountants, the internal auditors and representatives of management to discuss internal accounting control, auditing and financial reporting matters. /s/ Jerry C. Atkin /s/ Bradford R. Rich - ---------------------------------- ---------------------------------- Jerry C. Atkin Bradford R. Rich Chairman, President and Executive Vice President Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To SkyWest, Inc.: We have audited the accompanying consolidated balance sheets of SkyWest, Inc. (a Utah corporation) and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SkyWest, Inc. and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - -------------------------- Salt Lake City, Utah May 19, 1999 9 SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ================================================================================ ASSETS
March 31, March 31, 1999 1998 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 52,237 $ 139,772 Available-for-sale securities 109,580 14,627 Receivables, less allowance for doubtful accounts of $203 in 1999 and $124 in 1998 13,273 8,984 Inventories 13,863 8,361 Prepaid aircraft rents 18,755 12,145 Other current assets 8,976 4,286 Net current assets of discontinued operations -- 1,596 --------- --------- Total current assets 216,684 189,771 --------- --------- PROPERTY AND EQUIPMENT, at cost: Aircraft and rotable spares 225,233 167,482 Buildings and ground equipment 39,418 33,785 Deposits on aircraft 41,463 -- Rental vehicles 4,603 3,137 --------- --------- 310,717 204,404 Less-accumulated depreciation and amortization (111,793) (89,716) --------- --------- 198,924 114,688 --------- --------- NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS -- 12,647 --------- --------- OTHER ASSETS 2,052 1,808 --------- --------- $ 417,660 $ 318,914 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 10 CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands) ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, March 31, 1999 1998 --------- --------- CURRENT LIABILITIES: Current maturities of long-term debt $ 8,497 $ 6,300 Trade accounts payable 45,630 30,110 Accrued salaries, wages and benefits 10,471 7,317 Income taxes payable 5,937 -- Taxes other than income taxes 2,372 1,698 Air traffic liability 1,419 1,237 --------- --------- Total current liabilities 74,326 46,662 --------- --------- LONG-TERM DEBT, net of current maturities 61,830 41,109 --------- --------- DEFERRED INCOME TAXES PAYABLE 25,248 20,010 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4) STOCKHOLDERS' EQUITY: Preferred stock, 5,000,000 shares authorized; none issued Common stock, no par value, 40,000,000 shares authorized; 27,418,594 and 26,959,110 shares issued, respectively 162,116 155,917 Retained earnings 114,425 75,501 Treasury stock, at cost, 2,949,200 shares (20,285) (20,285) --------- --------- Total stockholders' equity 256,256 211,133 --------- --------- $ 417,660 $ 318,914 ========= =========
11 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the year ended March 31, 1999 1998 1997 ------------ ------------ ------------ Operating revenues: Passenger $ 381,409 $ 259,314 $ 239,222 Freight and other 7,217 6,821 6,544 ------------ ------------ ------------ Total operating revenues 388,626 266,135 245,766 ------------ ------------ ------------ Operating expenses: Flying operations 137,231 103,636 101,689 Aircraft, traffic and passenger service 58,826 38,957 37,044 Maintenance 51,370 29,299 29,149 Promotion and sales 29,432 25,505 29,606 Depreciation and amortization 23,237 19,305 18,481 General and administrative 22,460 14,992 12,577 Other 1,765 1,622 1,195 ------------ ------------ ------------ Total operating expenses 324,321 233,316 229,741 ------------ ------------ ------------ Operating income 64,305 32,819 16,025 ------------ ------------ ------------ Other income (expense): Interest expense (2,376) (1,639) (2,431) Interest income 7,553 4,090 2,328 Gain (loss) on sales of property and equipment 419 (45) 936 ------------ ------------ ------------ Total other income 5,596 2,406 833 ------------ ------------ ------------ Income before provision for income taxes 69,901 35,225 16,858 Provision for income taxes 27,273 13,565 6,856 ------------ ------------ ------------ Income from continuing operations 42,628 21,660 10,002 ------------ ------------ ------------ Discontinued operations, net of income taxes: (Loss) income from operations of Scenic Airlines (168) 284 109 Loss on disposition of Scenic Airlines (625) -- -- ------------ ------------ ------------ (793) 284 109 ------------ ------------ ------------ Net income $ 41,835 $ 21,944 $ 10,111 ============ ============ ============ Income from continuing operations per common share: Basic $ 1.76 $ 1.04 $ .49 Diluted $ 1.72 $ 1.02 $ .49 (Loss) income from discontinued operations per common share: Basic $ (.03) $ .02 $ .01 Diluted $ (.03) $ .02 $ .01 Net income per common share: Basic $ 1.73 $ 1.06 $ .50 Diluted $ 1.69 $ 1.04 $ .50 Weighted average number of common shares outstanding: Basic 24,199,000 20,799,000 20,170,000 Diluted 24,787,000 21,168,000 20,248,000
The accompanying notes are an integral part of these consolidated statements. 12 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Common Stock Treasury Stock ------------------------- Retained -------------------------- Shares Amount Earnings Shares Amount ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1996 23,043,616 $ 88,183 $ 47,902 (2,949,200) $ (20,285) Net income -- -- 10,111 -- -- Exercise of common stock options (at a price of $2.75 per share) 102,500 282 -- -- -- Sale of common stock under employee stock purchase plan 103,506 588 -- -- -- Tax benefit from exercise of common stock options -- 93 -- -- -- Cash dividends ($.12 per share) -- -- (2,322) -- -- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1997 23,249,622 89,146 55,691 (2,949,200) (20,285) Net income -- -- 21,944 -- -- Exercise of common stock options (at prices ranging from $6.32 to $16.63 per share) 383,420 3,465 -- -- -- Sale of common stock under employee stock purchase plan 106,068 663 -- -- -- Sale of common stock, net of offering costs of $3,648 3,220,000 61,557 -- -- -- Tax benefit from exercise of common stock options -- 1,086 -- -- -- Cash dividends ($.10 per share) -- -- (2,134) -- -- ---------- ---------- ---------- ---------- ---------- Balance at March 31, 1998 26,959,110 155,917 75,501 (2,949,200) (20,285) Net income -- -- 41,835 -- -- Exercise of common stock options (at prices ranging from $6.88 to $16.63 per share) 399,606 3,905 -- -- -- Sale of common stock under employee stock purchase plan 59,878 1,062 -- -- -- Tax benefit from exercise of common stock options -- 1,232 -- -- -- Cash dividends ($.12 per share) -- -- (2,911) -- -- ---------- ---------- ---------- ---------- ---------- Balance at March 31,1999 27,418,594 $ 162,116 $ 114,425 (2,949,200) $ (20,285) ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
For the year ended March 31, ------------------------------------- 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 41,835 $ 21,944 $ 10,111 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,237 19,305 18,481 Nonairline depreciation and amortization 1,026 4,848 3,585 Maintenance expense related to disposition of rotable spares 259 322 286 Gain on sales of property and equipment (419) (374) (1,113) Loss on disposition of Scenic Airlines 992 -- -- Increase (decrease) in allowance for doubtful accounts 79 20 (117) Increase in deferred income taxes 5,238 4,023 1,617 Amortization of deferred credits -- -- (1,614) Changes in operating assets and liabilities: (Increase) decrease in receivables (4,368) 132 2,159 Increase in inventories, net of dispositions (5,502) (1,749) (1,064) Increase in other current assets (11,300) (2,802) (2,681) Decrease in net current assets of discontinued operations 1,596 -- -- Increase in trade accounts payable 15,386 1,896 4,965 Decrease in fleet restructuring accrual -- (290) (3,498) Increase in other current liabilities 9,947 1,132 854 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 78,006 48,407 31,971 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities (94,953) -- -- Proceeds from sale of available-for-sale securities -- 3,343 1,127 Acquisition of property and equipment: Aircraft and rotable spares (58,780) (22,812) (11,979) Deposits on aircraft and rotable spares (41,463) -- -- Buildings and ground equipment (5,633) (4,572) (4,886) Rental vehicles (4,989) (2,392) (2,850) Proceeds from sales of property and equipment 2,899 11,238 2,945 Proceeds from sale of Scenic Airlines 21,141 -- -- Decrease in deposits on aircraft and rotable spares -- -- 3,603 Increase in net long-term assets of discontinued operations 914 -- -- (Increase) decrease in other assets (616) (29) 413 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (181,480) (15,224) (11,627) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 4,967 65,685 870 Tax benefit from exercise of common stock options 1,232 1,086 93 Payment of cash dividends (2,778) (2,041) (1,814) Reduction of long-term debt (16,700) (7,427) (6,236) Proceeds from issuance of long-term debt 29,218 11,500 -- --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 15,939 68,803 (7,087) --------- --------- --------- (Decrease) increase in cash and cash equivalents (87,535) 101,986 13,257 Cash and cash equivalents at beginning of year 139,772 37,786 24,529 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 52,237 $ 139,772 $ 37,786 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,601 $ 3,012 $ 2,399 Income taxes 18,233 8,221 3,950
The accompanying notes are an integral part of these consolidated statements. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying consolidated financial statements include the accounts of SkyWest, Inc. (a Utah corporation) and its wholly owned subsidiaries, SkyWest Airlines, Inc. ("SkyWest"), Scenic Airlines, Inc. ("Scenic") and National Parks Transportation, Inc. ("NPT"), collectively (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. During fiscal 1999, the Company consummated two agreements for the sale of Scenic. As a result, certain reclassifications have been made in the accompanying consolidated financial statements to reflect the impact of these sales and to classify the operations of Scenic as Discontinued Operations (see Note 7). USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. AVAILABLE-FOR-SALE SECURITIES The Company's investments in debt and equity securities have been classified as available-for-sale securities and are recorded at fair market value. The Company's position in available-for-sale securities consists primarily of bonds, bond funds, and commercial paper. Significant unrealized holding gains and losses will be recorded as a separate component of stockholders? equity. INVENTORIES Inventories include expendable parts, fuel and supplies and are valued at weighted average cost less an allowance for obsolescence. Expendable parts are charged to expense as used. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows: Aircraft and rotable spares 3 - 14 years Buildings and ground equipment 3 - 39.5 years Rental vehicles 4 years
MAINTENANCE The Company operates under an FAA approved continuous inspection and maintenance program. The normal cost of recurring maintenance is charged to expense when incurred. The Company uses the deferred method of accounting for EMB-120 engine overhauls and uses the accrual method of accounting for regional jet engine overhauls. 15 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PASSENGER AND FREIGHT REVENUES Passenger and freight revenues are recognized when service is provided. Passenger tickets sold but not used and the liability to other airlines are recorded as air traffic liability. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. As of March 31, 1999 and 1998, the Company had recorded current deferred tax assets of $6,789,000 and $2,065,000, respectively (which are included in other current assets), and deferred tax liabilities of $25,248,000 and $20,010,000, respectively. NET INCOME PER COMMON SHARE Basic net income per common share ("Basic EPS") excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the fiscal year. Diluted net income per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net income per common share. Net income per common share amounts and share data have been restated for all periods presented to reflect Basic and Diluted EPS as a result of the stock dividend described in Note 5. Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented (in thousands, except per share amounts):
Year ended March 31, 1999 1998 1997 - -------------------------------------------------------------------------------- Numerator: Net income $41,835 $21,944 $10,111 ======= ======= ======= Denominator: Weighted average common shares outstanding 24,199 20,799 20,170 Effect of options 588 369 78 ------- ------- ------- 24,787 21,168 20,248 ======= ======= ======= Basic EPS $ 1.73 $ 1.06 $ .50 Diluted EPS $ 1.69 $ 1.04 $ .50 ======= ======= =======
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, available-for-sale securities, receivables and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. The fair value of the Company?s long-term debt is estimated based on current rates offered to the Company for similar debt and approximates $63,573,000 as of March 31, 1999, as compared to the carrying amount of $70,327,000. SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement requires disclosures related to components of a company for which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and in assessing performance. As a result of the sale of Scenic in fiscal 1999, (see Note 7), management believes that the Company has only one operating segment in accordance with SFAS No. 131 because the Company's core remaining business consists of scheduled airline passenger service. 16 (2) LONG-TERM DEBT Long-term debt consists of the following:
As of March 31, 1999 1998 ------- -------- (in thousands) Notes payable to bank, due in semi-annual installments plus interest at 3.72% to 3.85%, net of the benefits of interest rate subsidies through the Brazilian Export financing program, through February 2011, secured by aircraft $29,218 $ -- Notes payable to banks, due in monthly installments including interest at 6.70% to 7.37% through January 2006, secured by aircraft 20,734 23,342 Notes payable to bank and financing company, due in quarterly installments plus interest at 7.64% to 8.58% through March 2005, secured by aircraft 7,410 8,464 Note payable to bank, due in monthly installments plus interest at 6.36% through November 2000, balloon payment of $3,937,000 due December 2000, secured by aircraft 5,274 6,046 Note payable to bank, due in quarterly installments plus interest based on three month LIBOR (6.70% at March 31, 1999) through September 2003, secured by aircraft 3,010 3,679 Note payable to bank, due in monthly installments plus interest based on one month LIBOR (6.75% at March 31, 1999) through June 2003, secured by aircraft 2,790 3,446 Note payable to bank, due in semi-annual installments plus interest at 8.50% through May 2002, secured by aircraft 1,891 2,432 ------- -------- 70,327 47,409 Less current maturities (8,497) (6,300) ------- -------- $61,830 $41,109 ======= =======
The aggregate amounts of principal maturities of long-term debt as of March 31, 1999, are as follows (in thousands):
Year ending March 31, --------------------- 2000 $ 8,497 2001 8,804 2002 9,131 2003 9,209 2004 7,771 Thereafter 26,915 ------- $70,327 =======
17 2. LONG-TERM DEBT (continued) The Company's long-term debt was incurred in connection with the acquisition of Brasilia aircraft and certain amounts are supported by continuing subsidy payments through the export support program of the Federative Republic of Brazil. The subsidy payments reduce the stated interest rates to an average effective rate of approximately 3.90 percent, on $41.1 million of the long-term debt, at March 31, 1999. The continuing subsidy payments are at risk to the Company if the Federative Republic of Brazil does not meet its obligations under the export support program. While the Company has no reason to believe, based on information currently available, that the Company will not continue to receive these subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur. On the remaining long-term debt of $29.2 million, the lender has assumed the risk of the subsidy payments which has reduced the average effective rate on this debt to approximately 3.80 percent at March 31, 1999. As of March 31, 1999, the Company had available $10,000,000 in an unsecured bank line of credit with interest payable at the bank's base rate less one-quarter percent, which was a net rate of 7.50 percent at March 31, 1999. Certain of the Company's long-term debt arrangements contain limitations on, among other things, sale or lease of assets and ratio of long-term debt to tangible net worth. As of March 31, 1999, the Company was in compliance with all the debt covenants. (3) INCOME TAXES The provision for income taxes includes the following components (in thousands):
Year ended March 31, ----------------------------------- 1999 1998 1997 ------- ------- ------- Current tax provision: Federal $22,297 $ 7,457 $ 3,663 State 4,348 2,104 394 ------- ------- ------- 26,645 9,561 4,057 ------- ------- ------- Deferred tax provision : Federal 528 3,363 2,344 State 100 641 455 ------- ------- ------- 628 4,004 2,799 ------- ------- ------- Provision for income taxes $27,273 $13,565 $ 6,856 ======= ======= =======
The following is a reconciliation between the statutory Federal income tax rates (at 35 percent for fiscal 1999 and 1998 and at a blended rate of 34 percent on taxable income up to $10,000,000 and 35 percent for taxable income in excess of $10,000,000 for fiscal 1997) and the effective rate which is derived by dividing the provision for income taxes by income before provision for income taxes (in thousands).
Year ended March 31, ----------------------------------- 1999 1998 1997 -------- -------- -------- Computed "expected" provision for income taxes at the statutory rates $ 24,465 $ 12,329 $ 5,800 Increase (decrease) in income taxes: resulting from: State income taxes, net of Federal income tax benefit 2,777 1,391 711 Other, net 31 (155) 345 -------- -------- -------- Provision for income taxes $ 27,273 $ 13,565 $ 6,856 ======== ======== ========
18 3. INCOME TAXES (continued) The significant components of the net deferred tax assets and liabilities are as follows (in thousands):
As of March 31, ------------------------ Deferred tax assets: 1999 1998 -------- -------- Accrued benefits $ 1,293 $ 1,038 Engine overhaul accrual 2,867 2,216 AMT credit carry forward -- 216 Accrued expense reserves and other 2,995 1,465 -------- -------- Total deferred tax assets 7,155 4,935 -------- -------- Deferred tax liabilities: Accelerated depreciation (24,879) (22,285) Other (735) (595) -------- -------- Total deferred tax liabilities (25,614) (22,880) -------- -------- Net deferred tax liability $(18,459) $(17,945) ======== ========
(4) COMMITMENTS AND CONTINGENT LIABILITIES LEASE OBLIGATIONS The Company leases 78 aircraft, as well as airport facilities, office space, and various other property and equipment under noncancelable operating leases which are generally on a long-term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The following summarizes future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of March 31, 1999 (in thousands):
Year ending March 31, --------------------- 2000 $ 59,705 2001 56,841 2002 56,045 2003 52,682 2004 48,657 Thereafter 309,056 -------- $582,986 ========
Total rental expense for noncancelable operating leases was approximately $49,232,000, $35,188,000, and $35,058,000 for the years ended March 31, 1999, 1998 and 1997, respectively. The above minimum rental payments do not include landing fees, which amounted to approximately $10,629,000, $6,505,000, and $6,259,000 for the years ended March 31, 1999, 1998 and 1997, respectively. PURCHASE COMMITMENTS AND OPTIONS During fiscal 1998, SkyWest entered into an agreement to purchase 20 new Brasilia aircraft, related spare parts inventory and support equipment. Two of these aircraft were delivered in fiscal 1998 and 13 were delivered in fiscal 1999. At March 31, 1999, SkyWest had agreed to purchase the remaining five Brasilia aircraft, related spare parts inventory and support equipment at an aggregate cost of approximately $40.0 million, including estimated cost escalations. During fiscal 1999, SkyWest entered into an agreement to acquire 25 Canadair regional jets and related spares parts inventory and support equipment together with options on 25 additional aircraft. Subsequent, to year-end, SkyWest entered into an agreement to acquire an additional 10 Canadair regional jets and secured options for an additional 20 aircraft. This brings the total firm order to 35 jet aircraft and 35 options at an aggregate cost of approximately $787.5 million. The options to acquire 35 additional 19 4. COMMITMENTS AND CONTINGENT LIABILITIES (continued) Canadair regional jets are at fixed prices (subject to cost escalations) and delivery schedules and are exercisable through July 2003. LEGAL MATTERS The Company is the subject of certain legal actions, which it considers routine to its business activities. As of March 31, 1999, management believes that any potential liability to the Company under such actions will not materially effect the accompanying consolidated financial statements. STANDBY LETTERS OF CREDIT As of March 31, 1999, the Company has outstanding letters of credit totaling approximately $2,909,000 related to requirements of certain airports, port authorities and workers compensation agreements. CASH AND CASH EQUIVALENTS As of March 31, 1999, the Company has demand deposits and money market accounts totaling $658,000 with Wells Fargo Bank, $900,000 with Bank of America, $232,000 with Edward D. Jones, $2,458,000 with Citibank, $120,000 with Bank One, and $25,291,000 with Zions First National Bank. These balances exceed the $100,000 limit for insurance by the Federal Deposit Insurance Corporation. (5) CAPITAL TRANSACTIONS PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of preferred stock from time to time in one or more series without stockholder approval. No shares of preferred stock are presently outstanding. The Board of Directors is authorized, without any further action by the stockholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges. STOCK OFFERING On February 20, 1998, the Company completed a public offering of 3,220,000 shares of common stock which generated net proceeds of $61,557,000 after deducting underwriting commissions and other expenses. STOCK DIVIDEND On May 5, 1998, the Company's Board of Directors declared a 100 percent stock dividend (one share for each share outstanding) payable to stockholders of record on May 20, 1998. The dividend was distributed on June 8, 1998. The Company paid cash in lieu of issuing fractional shares. All common shares and per share information in the accompanying consolidated financial statements have been retroactively adjusted to reflect this stock dividend. SUBSEQUENT CASH DIVIDEND On May 4, 1999, the Company's Board of Directors declared a regular quarterly cash dividend of $.03 per share payable to stockholders of record on June 30, 1999, distributable July 14, 1999. STOCK OPTIONS The Company's Board of Directors and Stockholders have approved the SkyWest, Inc. Amended and Combined Incentive and Non-statutory Stock Option Plan ("the Option Plan"). The Option Plan provides for the issuance of 20 5. CAPITAL TRANSACTIONS (continued) a maximum of 3,000,000 shares of common stock to officers, directors and other key employees. The Option Plan is administered by the Board of Directors who designate option grants as either incentive or non-statutory. Incentive stock options are granted at not less than 100 percent of the market value of the underlying common stock on the date of grant. Non-statutory stock options are granted at a price as determined by the Board of Directors. Both types of options are exercisable for the period as defined by the Board of Directors at the date granted; however, no stock option will be exercisable before six months have elapsed from the date it is granted and no incentive stock option shall be exercisable after ten years from the date of grant. The following table summarizes the stock option activity for fiscal years 1997, 1998 and 1999.
1997 1998 1999 ---------------------- --------------------- ---------------------- Weighted Weighted Weighted Number of Average Number of Average Number of Average Options Price Options Price Options Price --------- -------- --------- ----- --------- ------ Outstanding at beginning of year 1,062,498 $8.81 1,132,350 $9.19 990,716 $ 8.34 Granted 238,000 7.48 346,000 6.65 660,000 21.93 Exercised (102,500) 2.75 (383,420) 9.04 (399,606) 9.77 Canceled (65,648) 6.90 (104,214) 9.33 (24,637) 17.73 --------- ----- ------- ----- --------- ------ Outstanding at end of year 1,132,350 $9.19 990,716 $8.34 1,226,473 $14.90 ========= ===== ========== ===== ========= ====== Options exerciseable at year-end 316,000 289,716 79,112 Weighted average fair value of options granted during the year $ 6.43 $ 4.97 $ 8.99
The following table summarizes information about stock options outstanding at March 31, 1999:
Options Outstanding Options Exercisable ----------------------------------------------------------- ------------------------------------- Range of Number Weighted Average Weighted Average Number Weighted Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at March 31,1999 Contractual Life Price at March 31,1999 Price - -------- ---------------- ---------------- ---------------- ---------------- ---------------- $5 to $15 591,112 6.4 years $ 7.30 79,112 $9.77 $16 to $25 635,361 7.9 years 21.96 -- -- --------- ------ $5 to $25 1,226,473 7.2 years 14.90 79,112 9.77 ========= ======
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans, which include the Option Plan and the Stock Purchase Plan (see Note 6). SFAS No. 123, ?Accounting for Stock-Based Compensation,? requires pro forma information regarding net income and net income per share as if the Company had accounted for its stock options and employee stock purchases granted or sold subsequent to April 1, 1996, under the fair value method of the statement. The fair value of these stock options and employee stock purchases was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions used for grants in fiscal 1999, 1998 and 1997: a risk-free interest rate of 4.8 percent for fiscal 1999, 5.6 percent for fiscal 1998 and 6.5 percent for fiscal 1997, a dividend yield of .5 percent for fiscal 1999 and 1998 and 1.5 percent for fiscal 1997, a volatility factor of the expected common stock price of .465 for fiscal 1999, .390 for fiscal 1998 and .508 for fiscal 1997 and a weighted average expected life of four years for the stock options and six months for employee stock purchases for all the years presented. For purposes of the pro forma disclosures, the estimated fair value of the stock options and employee stock purchases is amortized over the vesting period of the respective stock options and employee stock purchases. 21 5. CAPITAL TRANSACTIONS (continued) Following are the pro forma disclosures and the related impact on net income and net income per share (in thousands, except per share information):
Year Ended March 31, --------------------------------- 1999 1998 1997 ------- ------- ------- Net income: As reported $41,835 $21,944 $10,111 Pro forma $40,194 $21,213 $ 9,838 Net income per common share: Diluted as reported $ 1.69 $ 1.04 $ .50 Diluted pro forma $ 1.62 $ 1.00 $ .49
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1996, and due to the nature and timing of option grants, the resulting pro forma compensation cost may not be indicative of future years. (6) RETIREMENT PLAN AND EMPLOYEE STOCK PURCHASE PLAN RETIREMENT PLAN The Company sponsors the SkyWest Airlines Employee's Retirement Plan (the "Plan"). Employees who have completed one year of service and are 21 years of age are eligible for participation in the Plan. Employees may elect to make contributions to the Plan. The Company matches 100 percent of such contributions up to 2 percent, 4 percent or 6 percent of the individual participant's compensation, based upon length of service. Additionally, a discretionary contribution may be made by the Company. The Company?s combined contribution was $3,800,000, $2,729,000 and $1,960,000 to the Plan for the years ended March 31, 1999, 1998 and 1997, respectively. EMPLOYEE STOCK PURCHASE PLAN On February 7, 1996, the Company?s Board of Directors approved the SkyWest, Inc. 1996 Employee Stock Purchase Plan (?the Stock Purchase Plan?). All employees who have completed 90 days of employment are eligible to participate, except officers who are highly compensated employees under section 414 (q) of the Internal Revenue Code. The Stock Purchase Plan enables employees to purchase shares of the Company?s common stock at a 15 percent discount, through payroll deductions. Employees can contribute two to 15 percent of their base pay, not to exceed $21,250 each calendar year, for the purchase of shares. For the fiscal year ended March 31, 1999, 59,878 shares were purchased by employees at prices of $12.38 and $ 25.18. For the fiscal year ended March 31, 1998, 106,068 shares were purchased by employees at prices of $5.90 and $6.64. For the fiscal year ended March 31, 1997, 103,506 shares were purchased by employees at prices of $5.47 and $5.90. In addition, as of March 31, 1999, $488,000 had been withheld for the future purchase of shares. Shares are purchased semi-annually at the lower of the beginning or the end of the period price. Employees can terminate from the Stock Purchase Plan at anytime upon written notice. (7) DISCONTINUED OPERATIONS On August 26, 1998, the Company entered into an Asset Purchase Agreement ("Agreement") with Eagle Canyon Airlines, Inc., ("Eagle") to sell a majority of the assets of Scenic Airlines, Inc., ("Scenic"). Included under the Agreement were all of the assets, properties, rights and business of Scenic related to its Las Vegas based tour and scheduled flight operations. The agreement was consummated on December 23, 1998 with the Company receiving cash proceeds of $16.2 million. Additionally, the Company recorded a pretax loss of approximately $0.3 million on the sale. On January 11, 1999, the Company entered into an agreement ("Page Agreement") with JCMI, LLC, to sell the remainder of the assets and business of Scenic. The Page Agreement includes all of the assets, properties, rights and business of Scenic related to its Page, Arizona tour operations. The agreement was consummated on March 2, 1999 with the Company receiving total proceeds of $5.0 million consisting of cash and a secured promissory note of $1.9 million. The Company recorded a pretax loss of approximately $0.7 million on the sale. 22 7. DISCONTINUED OPERATIONS (continued) The accompanying condensed consolidated financial statements reflect the operations of Scenic as Discontinued Operations. Accordingly, the revenues, costs and expenses, assets and liabilities of Scenic have been excluded from the respective captions in the financial statements and have been reported through the date of disposition as income (loss) from discontinued operations, net of income taxes and net assets of discontinued operations. The revenues of Scenic amounted to $28.0 million, $31.0 million and $32.0 million for the years ended March 31, 1999, 1998 and 1997, respectively. (8) RELATED-PARTY TRANSACTIONS The Company and Delta Air Lines, Inc. ("Delta") operate under a joint marketing and code-sharing agreement under which the Company uses the Delta two letter designator code (DL) in displaying its schedules on certain flights in the automated airline reservation systems used throughout the industry. During fiscal 1998, the Company entered into a code-sharing agreement with United Airlines, Inc. ("United"). The Company uses the United two letter designator code (UA) in displaying schedules on certain flights in the automated airline reservation systems used throughout the industry. As of March 31, 1999, Delta owned 3,107,798 shares of common stock which represents approximately 13 percent of the outstanding common stock of the Company. The Company leases various terminal facilities from Delta and Delta provides certain services to the Company, including advertising, reservation and ground handling services. Expenses paid to Delta under these agreements were approximately $8,409,000, $8,893,000 and $11,218,000 during the years ended March 31, 1999, 1998 and 1997, respectively. United provides services to the Company consisting of passenger and ground handling-services. The Company paid $5,294,000 and $742,000 to United for their services for the year ended March 31, 1999 and 1998, respectively. The Company had a net receivable from Delta of $761,000 as of March 31, 1999 and a net payable to Delta of $65,000 as of March 31, 1998. The Company had net receivables from United of $1,553,000 and $1,687,000 as of March 31, 1999 and 1998, respectively. EX-24.1 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 24.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated May 19,1999 included in SkyWest, Inc.'s Annual Report to Shareholders for the fiscal year ended March 31, 1999. We further consent to the incorporation of our report dated May 19, 1999, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements No. 33-41285 and No. 33-60173. /s/ Arthur Andersen LLP - ----------------------------------- Arthur Andersen LLP Salt Lake City, Utah June 23, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 1 52,237 109,580 13,476 203 13,863 216,801 310,717 111,793 417,660 74,326 61,830 0 0 141,831 256,256 417,660 388,626 388,626 0 324,321 0 0 2,376 69,901 27,273 42,628 (793) 0 0 41,835 1.73 1.69
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