Nature of Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2015

Nature of Operations and Summary of Significant Accounting Policies

The Company’s consolidated financial statements include the accounts of SkyWest, Inc. and its subsidiaries, including SkyWest Airlines and ExpressJet, with all inter‑company transactions and balances having been eliminated.

In preparing the accompanying consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after December 31, 2015, through the filing date of the Company’s annual report with the U.S. Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The Company classified $8.2 million and $11.6 million of cash as restricted cash collateralizing letters of credit under the Company’s workers’ compensation insurance policy and classified it accordingly in the consolidated balance sheets as of December 31, 2015 and 2014, respectively.

Marketable Securities

The Company’s investments in marketable debt and equity securities are deemed by management to be available-for-sale and are reported at fair market value with the net unrealized appreciation (depreciation) reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. At the time of sale, any realized appreciation or depreciation, calculated by the specific identification method, is recognized in other income and expense. The Company’s position in marketable securities as of December 31, 2015 and 2014 was as follows (in thousands):


			Gross unrealized		Gross unrealized
At December 31, 2015	Amortized Cost		holding gains		holding losses		Fair market value
Total cash and cash equivalents	$	203,035	$	—	$	—	$	203,035
Available-for-sale securities:
Bond and bond funds	$	286,857	$	—	$	(220)	$	286,637
Asset backed securities		30		1		—		31
Total available-for-sale securities	$	286,887	$	1	$	(220)	$	286,668
Total cash and cash equivalents and available for sale securities	$	489,922	$	1	$	(220)	$	489,703


			Gross unrealized			Gross unrealized
At December 31, 2014	Amortized Cost		holding gains		holding losses		Fair market value
Total cash and cash equivalents	$	132,275	$	—	$	—	$	132,275
Available-for-sale securities:
Bond and bond funds	$	410,618	$	9	$	(464)	$	410,163
Asset backed securities		5,108		3		(1)		5,110
Total available-for-sale securities	$	415,726	$	12	$	(465)	$	415,273
Total cash and cash equivalents and available for sale securities	$	548,001	$	12	$	(465)	$	547,548

Marketable securities had the following maturities as of December 31, 2015 (in thousands):


Maturities	Amount
Year 2016	$	231,298
Years 2017 through 2020		55,370

As of December 31, 2015 and 2014, the Company had classified $286.7 million and $415.3 million of marketable securities, respectively, as short‑term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. The Company has classified approximately $2.3 million and $2.3 million of investments as non‑current and has identified them as “Other assets” in the Company’s consolidated balance sheet as of December 31, 2015 and 2014, respectively (see Note 6).

Inventories

Inventories include expendable parts, fuel and supplies and are valued at cost (FIFO basis) less an allowance for obsolescence based on historical results and management’s expectations of future operations. Expendable inventory parts are charged to expense as used. An obsolescence allowance for flight equipment expendable parts is accrued based on estimated lives of the corresponding fleet types and salvage values. The inventory allowance as of December 31, 2015 and 2014 was $13.9 million and $11.6 million, respectively. These allowances are based on management estimates, which can be modified based on future changes in circumstances.

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:


Assets	Depreciable Life	Residual Value
New Aircraft	18 years	30	%
Used Aircraft and rotable spares	3 – 10 years	0 - 30	%
Ground equipment	5 – 10 years	0	%
Office equipment	5 – 7 years	0	%
Leasehold improvements	Shorter of 15 years or lease term	0	%
Buildings	20 – 39.5 years	0	%

Impairment of Long-Lived Assets

As of December 31, 2015, the Company had approximately $5.6 billion of property and equipment and related assets. Additionally, as of December 31, 2015, the Company had approximately $10.5 million in intangible assets. In accounting for these long‑lived and intangible assets, the Company makes estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. On September 7, 2005, the Company acquired all of the issued and outstanding capital stock of Atlantic Southeast and recorded an intangible asset for specifically identifiable contracts of approximately $33.7 million relating to the acquisition. The intangible asset is being amortized over fifteen years under the straight‑line method. As of December 31, 2015 and 2014, the Company had $23.3 million and $21.0 million in accumulated amortization expense, attributable to the acquisition, respectively. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long‑lived assets, a significant change in the condition of the long‑lived assets and operating cash flow losses associated with the use of the long‑lived assets. On a periodic basis, the Company evaluates whether impairment indicators are present. When considering whether or not impairment of long‑lived assets exists, the Company groups similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet or contract level.

The Company did not recognize any impairment charges of long lived assets during 2015 or 2013.

In 2014, the Company had impairments on several long-lived assets relating to Embraer Brasilia EMB 120 (“EMB120”) turboprop aircraft, ERJ145 aircraft type specific assets and an aircraft paint facility located in Saltillo, Mexico. See Note 8, Special items, for the impairment charges recorded during the year ended December 31, 2014 related to the EMB120 long-lived assets, ERJ145 long-lived assets, Saltillo, Mexico paint facility and related assets.

Capitalized Interest

Interest is capitalized on aircraft purchase deposits as a portion of the cost of the asset and is depreciated over the estimated useful life of the asset. During the years ended December 31, 2015, 2014 and 2013, the Company capitalized interest costs of approximately $2.2 million, $1.8 million, and $1.2 million, respectively.

Maintenance

The Company operates under a FAA approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its regional jet engine overhauls wherein the expense is recorded when the overhaul event occurs. The Company has engine services agreements with third-party vendors to provide long-term engine services covering the scheduled and unscheduled repairs for certain of its Bombardier CRJ700 Regional Jets (“CRJ700s”), Embraer ERJ145 regional jet aircraft and Embraer E-175 jet (“E175”) aircraft. Under the terms of the agreements, the Company pays a fixed dollar amount per engine hour flown on a monthly basis and the third-party vendors will assume the responsibility to repair the engines at no additional cost to the Company, subject to certain specified exclusions. Maintenance costs under these contracts are recognized when the engine hour is flown pursuant to the terms of each contract.

The Company used the “deferral method” of accounting for its EMB120 turboprop aircraft engine overhauls, wherein the overhaul costs were capitalized and depreciated to the next estimated overhaul event, or remaining lease term for leased aircraft, whichever was shorter. In 2015, the Company removed all of its EMB120 aircraft from service.

The costs of maintenance for airframe and avionics components, landing gear and normal recurring maintenance are expensed as incurred.

Passenger and Ground Handling Revenues

The Company recognizes passenger and ground handling revenues when the service is provided under its code-share agreements. Under the Company’s fixed fee arrangements (referred to as “fixed-fee arrangements, “contract flying” or “capacity purchase agreements”) with Delta, United, American and Alaska, the major airline generally pays the Company a fixed fee for each departure, flight or block time incurred, and an amount per aircraft in service each month with additional incentives based on completion of flights and on time performance. The major airline partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee arrangement such as fuel expense and landing fee expenses. Under the fixed-fee arrangements, revenue is earned when each flight is completed.

Under a Revenue Sharing Arrangement (referred to as a “revenue-sharing” or “pro rate” arrangement), the major airline and regional airline negotiate a passenger fare proration formula, pursuant to which the regional airline receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on the regional airline and the other portion of their trip on the major airline. Revenue is recognized under the Company’s pro rate flying agreements when each flight is completed based upon the portion of the pro rate passenger fare the Company anticipates that it will receive for each completed flight.

Other ancillary revenues commonly associated with airlines such as baggage fee revenue, ticket change fee revenue and the marketing component of the sale of mileage credits are retained by the Company’s major airline partners on flights that the Company operates under its code-share agreements.

In the event that the contractual rates under the agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of prior period’s approved rates, as adjusted to reflect any contract negotiations and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines. In the event the Company has a reimbursement dispute with a major partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute.

In several of the Company’s agreements, the Company is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are being measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period, the Company calculates the incentives achieved during that period and recognizes revenue accordingly.

The following summarizes the significant provisions of each code share agreement the Company has with each major partner:

Delta Connection Agreements


	Number of		Pass through costs
	aircraft under	Term / Termination	or costs paid directly
Agreement	agreements	Dates	by major partner
SkyWest Airlines	• CRJ 200 - 48	• The contract is scheduled to expire on an individual aircraft basis commencing in 2016	• Fuel
Delta Connection	• CRJ 700 - 19	• The final aircraft is scheduled to expire in 2022	• Engine Maintenance
Agreement (fixed-fee arrangement)	• CRJ 900 - 36	• The average remaining term of the aircraft under contract is 3.8 years	• Landing fees
		• Upon expiration, aircraft may be renewed or extended	• Station Rents, Deice
			• Insurance
ExpressJet Delta	• CRJ 200 - 42	• The contract is scheduled to expire on an individual aircraft basis commencing in 2016	• Fuel
Connection	• CRJ 700 - 41	• The final aircraft is scheduled to expire in 2022	• Engine Maintenance
Agreement (fixed-fee arrangement)	• CRJ 900 - 28	• The average remaining term of the aircraft under contract is 3.7 years	• Landing fees
		• Upon expiration, aircraft may be renewed or extended	• Station Rents, Deice
			• Insurance
SkyWest Airlines	• CRJ 200 - 21	• Terminable with 30 days' notice	• None
Pro-rate Agreement (revenue-sharing agreement)

United Express Agreements


			Pass through costs
	Number of		or costs paid
	aircraft under	Term / Termination	directly by major
Agreement	agreements	Dates	partner
SkyWest Airlines	• CRJ 200 - 57	• The contract is scheduled to expire on an individual aircraft basis commencing in 2016	• Fuel
United Express	• CRJ 700 - 70	• The final aircraft is scheduled to expire in 2027	• Landing fees
Agreements (fixed-fee	• E175 - 40	• The average remaining term of the aircraft under contract is 4.3 years	• Station Rents, Deice
arrangement)		• Upon expiration, aircraft may be renewed or extended	• Insurance
ExpressJet United ERJ	• ERJ 135 - 5	• The contract is scheduled to expire on an individual aircraft basis commencing in 2016	• Fuel
Agreement (fixed-fee arrangement)	• ERJ 145 - 166	• The final aircraft is scheduled to expire in 2017	• Engine Maintenance
		• The average remaining term of the aircraft under contract is 1.9 years	• Landing fees
		• Upon expiration, aircraft may be renewed or extended	• Station Rents, Deice
			• Insurance
SkyWest Airlines United	• CRJ 200 - 26	• Terminable with 120 days' notice	• None
Express Pro-rate Agreement (revenue-sharing arrangement)

Alaska Capacity Purchase Agreement


			Pass through costs
	Number of		or costs paid
	aircraft under	Term / Termination	directly by major
Agreement	agreements	Dates	partner
SkyWest Airlines	• CRJ 700 - 9	• The contract is scheduled to expire on an individual aircraft basis commencing in 2016	• Fuel
Alaska Agreement	• E175 - 5	• The final aircraft is scheduled to expire in 2028	• Landing fees
(fixed-fee arrangement)		• Upon expiration, aircraft may be renewed or extended	• Station Rents, Deice
			• Insurance

American Agreement


			Pass through costs
	Number of		or costs paid
	aircraft under	Term / Termination	directly by major
Agreement	agreements	Dates	partner
SkyWest Airlines	• CRJ 200 - 12	• Scheduled to expire in 2016	• Fuel
American Agreement		• Upon expiration, aircraft may be renewed or extended	• Landing fees
(fixed-fee agreement)			• Station Rents, Deice
			• Insurance
SkyWest Airlines	• CRJ 200 - 5	• Terminable with 120 days' notice	• None
American Pro-rate
Agreement (revenue-
sharing agreement)
ExpressJet American	• CRJ 200 - 11	• Scheduled to expire in 2017	• Fuel
Agreement (fixed-fee	• ERJ 145 - 16	• Upon expiration, aircraft may be renewed or extended	• Landing fees
agreement)			• Station Rents, Deice
			• Insurance
ExpressJet American Pro-rate	• CRJ 200 - 3	• Terminable with 120 days' notice	• None
Agreement (revenue-sharing agreement)

Other Revenue Items

As of December 31, 2015, the Company anticipated placing an additional 25 E175 aircraft with United, ten additional E175 aircraft with Alaska and 19 E175 aircraft with Delta. The delivery dates for the new aircraft are expected to take place from January 2016 to June 2017.

Under the Company’s fixed-fee arrangements, the major airline partners compensate the Company for its costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement, but is intended to cover either the Company’s aircraft principal and interest debt service costs, its aircraft depreciation and interest expense or its aircraft lease expense costs while the aircraft is under contract. Under the Company’s ExpressJet United ERJ Agreement and ExpressJet American ERJ145 Agreement, the major partner provides the aircraft to the Company for a nominal amount.

The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code‑share agreements with Delta, United, Alaska or American, contract modifications resulting from contract re‑negotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code‑share agreements and settlement of reimbursement disputes with the Company’s major partners.

Under the Company’s fixed-fee agreements with Delta, United, Alaska, and American, the compensation structure generally consists of a combination of agreed‑upon rates for operating flights and direct reimbursement for other certain costs associated with operating the aircraft. A portion of the Company’s contract flying compensation is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is rental income, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The amounts deemed to be rental income under the agreements for the years ended December 31, 2015, 2014 and 2013 were $504.9 million, $497.0 million and $500.2 million, respectively. These amounts are reflected as passenger revenues on the Company’s consolidated statements of comprehensive income (loss). The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income (loss) since the use of the aircraft is not a separate activity of the total service provided.

Deferred Aircraft Credits

The Company accounts for incentives provided by aircraft manufacturers as deferred credits. The deferred credits related to leased aircraft are amortized on a straight‑line basis as a reduction to rent expense over the lease term. Credits related to owned aircraft reduce the purchase price of the aircraft, which has the effect of amortizing the credits on a straight‑line basis as a reduction in depreciation expense over the life of the related aircraft. The incentives are credits that may be used to purchase spare parts and pay for training and other expenses.

Income Taxes

The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that are expected to result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 anti‑dilutive effect on net income (loss) per common share. During the years ended December 31, 2015, 2014 and 2013, 505,000, 3,191,000 and 3,072,000 shares reserved for issuance upon the exercise of outstanding options were excluded from the computation of Diluted EPS respectively, as their inclusion would be anti‑dilutive.

The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS are as follows for the years ended December 31, 2015, 2014 and 2013 (in thousands):



	Year Ended December 31,
	2015		2014		2013
Numerator:
Net Income (Loss)	$	117,817	$	(24,154)	$	58,956
Denominator:
Denominator for basic earnings per-share weighted average shares		51,077		51,237		51,688
Dilution due to stock options and restricted stock		748		—		734
Denominator for diluted earnings per-share weighted average shares		51,825		51,237		52,422
Basic earnings (loss) per-share	$	2.31	$	(0.47)	$	1.14
Diluted earnings (loss) per-share	$	2.27	$	(0.47)	$	1.12

Comprehensive Income (Loss)

Comprehensive income (loss) includes charges and credits to stockholders’ equity that are not the result of transactions with the Company’s shareholders. Also, comprehensive income (loss) consisted of net income (loss) plus changes in unrealized appreciation (depreciation) on marketable securities and unrealized gain (loss) on foreign currency translation adjustment related to the Company’s equity investment in Trip Linhas Aereas, a regional airline operating in Brazil (“TRIP”) and Mekong Aviation Joint Stock Company, an airline operating in Vietnam (“Air Mekong”).

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for receivables and accounts payable approximate fair values because of the immediate or short‑term maturity of these financial instruments. Marketable securities are reported at fair value based on market quoted prices in the consolidated balance sheets. If quoted prices in active markets are no longer available, the Company has estimated the fair values of these securities utilizing a discounted cash flow analysis as of December 31, 2015. These analyses consider, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. The fair value of the Company’s long‑term debt is estimated based on current rates offered to the Company for similar debt and was approximately $1,939.8 million as of December 31, 2015, as compared to the carrying amount of $1,948.8 million as of December 31, 2015. The Company’s fair value of long‑term debt as of December 31, 2014 was $1,813.1 million as compared to the carrying amount of $1,745.8 million as of December 31, 2014.

Segment Reporting

Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company’s chief operating decision maker when deciding how to allocate resources and in assessing performance. The Company’s three operating segments consist of the operations conducted by SkyWest Airlines and ExpressJet, as well as other activities. Information pertaining to the Company’s reportable segments is presented in Note 2, Segment Reporting.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”). Under ASU No. 2014-09, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. In July 2015, the FASB deferred the effective date of ASU No. 2014-09 to January 1, 2018. The FASB also proposed permitting early adoption of the standard, but not before January 1, 2017. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The Company’s management is currently evaluating the impact the adoption of ASU No. 2014-09 is anticipated to have on the Company’s consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU No. 2015-03”). In August 2015, ASU No. 2015-03 was amended to modify existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company anticipates reclassifying the unamortized debt issuance costs and present debt net of those unamortized costs on its balance sheet upon adoption of ASU No. 2015-03. As of December 31, 2015, the Company had $20.9 million in unamortized debt issuance costs.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”). The standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by ASU No. 2015-17. ASU No. 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company’s management is currently evaluating the impact the adoption of ASU No. 2015-17 is anticipated to have on the Company’s consolidated financial statements.

Immaterial error correction to consolidated balance sheet

In connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2015, the Company determined that certain non-current prepaid aircraft rents previously reported were improperly presented as current on the Company’s consolidated balance sheet at December 31, 2014. As a result, current prepaid aircraft rents, as previously reported, were overstated by $201.5 million and non-current prepaid aircraft rents were understated by $201.5 million. The Company concluded that the error was not material to the consolidated balance sheet, but has elected to correct the error in the accompanying 2014 consolidated financial statements for consistency of presentation. The classification error had no effect on the consolidated statements of comprehensive income (loss), stockholders’ equity, or cash flows for the year ended December 31, 2014.