10-K 1 skyw-20171231x10k.htm 10-K skyw_Current folio_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

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:

(Title of Each Class)                                                                                                                   (Name of Exchange on which Registered)

Common Stock, No Par Value                                                                                                          The Nasdaq Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒  No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all 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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 229.405)is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer ☒

Accelerated filer ☐

Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐  No ☒

The aggregate market value of the registrant’s common stock held by non‑affiliates (based upon the closing sale price of the registrant’s common stock on The Nasdaq Global Select Market) on June 30, 2017 was approximately $1,816,989,866.

As of February 16, 2018, there were 51,784,012 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s proxy statement to be used in connection with the registrant’s 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report as specified. Such proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2017.

 

 

 

 


 

SKYWEST, INC.

ANNUAL REPORT ON FORM 10‑K

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

Cautionary Statement Concerning Forward Looking Statements 

3

Item 1. 

Business

3

Item 1A. 

Risk Factors

15

Item 1B. 

Unresolved Staff Comments

25

Item 2. 

Properties

25

Item 3. 

Legal Proceedings

27

Item 4. 

Mine Safety Disclosures

28

PART II

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

28

Item 6. 

Selected Financial Data

29

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

52

Item 8. 

Financial Statements and Supplementary Data

52

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

82

Item 9A. 

Controls and Procedures

82

Item 9B. 

Other Information

84

PART III

Item 10. 

Directors, Executive Officers and Corporate Governance

84

Item 11. 

Executive Compensation

84

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

84

Item 13. 

Certain Relationships and Related Transactions

84

Item 14. 

Principal Accountant Fees and Services

84

PART IV

Item 15. 

Exhibits and Financial Statement Schedules

84

Signatures 

89

 

 

2


 

PART I

Unless otherwise indicated in this Report, “SkyWest,” “we,” “us,” “our” and similar terms refer to SkyWest, Inc., “SkyWest Airlines” refers to our wholly‑owned subsidiary, SkyWest Airlines, Inc., and "ExpressJet" refers to our wholly-owned subsidiary, ExpressJet Airlines, Inc.

Cautionary Statement Concerning Forward‑Looking Statements

Certain of the statements contained in this Report should be considered “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward‑looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “hope,” “likely,” and “continue” and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements about our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines and ExpressJet, our objectives, expectations and intentions and other statements that are not historical facts. Readers should keep in mind that all forward‑looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended for a number of reasons, including but not limited to: the challenges of competing successfully in a highly competitive and rapidly changing industry; developments associated with fluctuations in the economy and the demand for air travel; the financial stability of United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”) and any potential impact of their financial condition on the operations of SkyWest, SkyWest Airlines or ExpressJet; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest’s operating airlines conduct flight operations; variations in market and economic conditions; significant aircraft lease and debt commitments; realization of manufacturer residual value guarantees on applicable SkyWest aircraft; residual aircraft values and related impairment charges; the impact of global instability; labor relations and costs; potential fluctuations in fuel costs, and potential fuel shortages; the impact of weather-related or other natural disasters on air travel and airline costs; new aircraft deliveries; and the ability to attract and retain qualified pilots, as well as the other factors described below in Item 1A. Risk Factors.

There may be other factors that may affect matters discussed in forward‑looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward‑looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.

ITEM 1.  BUSINESS

General

Through SkyWest Airlines and ExpressJet, we offer scheduled passenger service with approximately 2,980 daily departures to destinations in the United States, Canada, Mexico and the Caribbean. Substantially all of our flights are operated as Delta Connection, United Express, American Eagle or Alaska Airlines flights under code‑share arrangements (commercial agreements between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with Delta, United, American or Alaska, respectively. SkyWest Airlines and ExpressJet generally provide regional flying to our major airline partners under long‑term, fixed‑fee, code‑share agreements. Under these fixed‑fee agreements, our major airline partners generally pay us fixed rates for operating the aircraft primarily based on the number of completed flights, flight time and the number of aircraft under contract. The major airline partners also reimburse us for specified direct operating expenses (including fuel expense).

3


 

SkyWest Airlines and ExpressJet have developed industry‑leading reputations for providing quality regional airline service during their long operating histories. SkyWest Airlines has been flying since 1972 and ExpressJet (and its predecessors) since 1979. As of December 31, 2017, we had 595 aircraft in scheduled service consisting of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

CRJ200

    

CRJ700

    

CRJ900

    

ERJ135

    

ERJ145

    

E175

    

Total

 

United

 

81

 

20

 

 —

 

 3

 

109

 

65

 

278

 

Delta

 

94

 

60

 

52

 

 —

 

 —

 

19

 

225

 

American

 

16

 

49

 

 —

 

 —

 

 —

 

 —

 

65

 

Alaska

 

 4

 

 —

 

 —

 

 —

 

 —

 

23

 

27

 

Aircraft in scheduled service

 

195

 

129

 

52

 

 3

 

109

 

107

 

595

 

Subleased to an un-affiliated entity

 

 4

 

 —

 

 —

 

 —

 

 —

 

 —

 

 4

 

Other*

 

 9

 

 7

 

 —

 

 —

 

 8

 

 —

 

24

 

Total Fleet

 

208

 

136

 

52

 

 3

 

117

 

107

 

623

 

*As of December 31, 2017, these aircraft have been removed from service and are in the process of being returned under the applicable leasing arrangement or are aircraft transitioning between code-share agreements with our major airline partners. During the year ended December 31, 2017, we sold eleven owned Embraer Brasilia EMB120 (“EMB120”) 30-seat turboprop aircraft at net book value.

 

As of December 31, 2017, our fleet scheduled for service consisted of aircraft manufactured by Bombardier Aerospace (“Bombardier”) and Embraer S.A. (“Embraer”) summarized as follows:

 

 

 

 

 

Manufacturer

 

Aircraft Type

 

Seat Configuration

Bombardier

 

CRJ900s

 

76

Bombardier

 

CRJ700s

 

65-70

Bombardier

 

CRJ200s

 

50

Embraer

 

E175s 

 

76

Embraer

 

ERJ145s

 

50

Embraer

 

ERJ135s

 

37

 

Bombardier and Embraer are the primary manufacturers of regional jets operated in the United States and offer many of the amenities of larger commercial jet aircraft, including flight attendant service, a stand‑up cabin, overhead and under seat storage, lavatories and in‑flight snack and beverage service. The speed of Bombardier and Embraer regional jets is comparable to larger aircraft operated by major airlines, and they have a range of approximately 1,600 miles and 2,100 miles, respectively.

We were incorporated in Utah in 1972. Our principal executive offices are located at 444 South River Road, St. George, Utah 84790, and our primary telephone number is (435) 634‑3000. We maintain an internet website at inc.skywest.com, which provides links to our annual, quarterly and current reports filed with the Securities and Exchange Commission (“SEC”). The information on our website does not constitute part of this Report. In addition, we provide electronic or paper copies of our SEC filings free of charge upon request.

Our Operating Platforms

SkyWest Airlines

SkyWest Airlines provides regional jet service to airports primarily located in the Midwestern and Western United States, as well as Mexico and Canada. As of December 31, 2017, SkyWest Airlines offered approximately 2,000 daily departures, of which approximately 770 were United Express flights, 810 were Delta Connection flights, 300 were American Eagle flights and 120 were Alaska Airlines flights. SkyWest Airlines’ operations are conducted principally from airports located in Chicago (O’Hare), Denver, Houston, Los Angeles, Minneapolis, Phoenix, Salt Lake City, San Francisco and Seattle. As of December 31, 2017, SkyWest Airlines operated a fleet of 422 aircraft consisting of the following:

4


 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

CRJ200

    

CRJ700

    

CRJ900

    

E175

    

Total

    

United

 

81

 

20

 

 —

 

65

 

166

 

Delta

 

94

 

27

 

36

 

19

 

176

 

American

 

16

 

37

 

 —

 

 —

 

53

 

Alaska

 

 4

 

 —

 

 —

 

23

 

27

 

Total

 

195

 

84

 

36

 

107

 

422

 


SkyWest Airlines conducts its code‑share operations with its major airline partners pursuant to the following agreements:

 

 

 

Major airline partner

    

Agreement

United

 

“SkyWest Airlines United Express Agreements” and “SkyWest Airlines United Express Prorate Agreement”

Delta

 

“SkyWest Airlines Delta Connection Agreement” and “SkyWest Airlines Delta Prorate Agreement”

American

 

“SkyWest Airlines American Agreement” and “SkyWest Airlines American Prorate Agreement”

Alaska

 

“SkyWest Airlines Alaska Agreement”

A summary of the terms for each SkyWest Airlines code‑share agreement with the respective major airline partner is provided under the heading “Code-Share Agreements” below on page 7.

ExpressJet

ExpressJet provides regional jet service to airports primarily located in the Eastern and Midwestern United States, as well as Mexico, Canada and the Caribbean.  ExpressJet’s operations are conducted principally from airports located in Atlanta, Chicago (O’Hare), Houston, Newark and New York. ExpressJet offered approximately 980 daily departures, of which approximately 350 were Delta Connection flights, 550 were United Express flights and 80 were American Eagle flights. As of December 31, 2017, ExpressJet operated a fleet of 173 aircraft consisting of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

CRJ200

    

ERJ145

    

ERJ135

    

CRJ700

    

CRJ900

    

Total

 

United

 

 —

 

109

 

 3

 

 —

 

 —

 

112

 

Delta

 

 —

 

 —

 

 —

 

33

 

16

 

49

 

American

 

 —

 

 —

 

 —

 

12

 

 —

 

12

 

Total

 

 —

 

109

 

 3

 

45

 

16

 

173

 


ExpressJet conducts its code‑share operations with its major airline partners pursuant to the following agreements:

 

 

 

Major airline partner

    

Agreement

United

 

“ExpressJet United Express ERJ Agreement”

Delta

 

“ExpressJet Delta Connection Agreement”

American

 

“ExpressJet American Agreement”

A summary of the terms for each ExpressJet code‑share agreement with the respective major airline partner is provided under the heading “Code-Share Agreements” below on page 7.

SkyWest Leasing

The SkyWest Leasing segment includes revenue attributed to our Embraer E175 dual-class regional jet aircraft (“E175”) ownership cost earned under the applicable fixed-fee contracts, and the depreciation and interest expense of our E175 aircraft.  The SkyWest Leasing segment’s total assets and capital expenditures include the acquired E175 aircraft.  The SkyWest Leasing segment additionally includes the income from Bombardier CRJ200 regional jet (“CRJ200”) aircraft leased to a third-party.

5


 

Competition and Economic Conditions

The airline industry is highly competitive. SkyWest Airlines and ExpressJet compete principally with other regional airlines. The combined operations of SkyWest Airlines and ExpressJet extend throughout most major geographic markets in the United States. Our competition includes, therefore, nearly every other domestic regional airline. The primary competitors of SkyWest Airlines and ExpressJet include Air Wisconsin Airlines Corporation (“Air Wisconsin”); Endeavor Air, Inc. (“Endeavor”) (owned by Delta); Envoy Air Inc. (“Envoy”), PSA Airlines, Inc. (“PSA”) and Piedmont Airlines (“Piedmont”) (Envoy, PSA and Piedmont are owned by American); Horizon Air Industries, Inc. (“Horizon”) (owned by Alaska Air Group, Inc.); Mesa Air Group, Inc. (“Mesa”); Republic Airways Holdings Inc. (“Republic”); and Trans States Airlines, Inc. (“Trans States”). Major airlines typically award code-share flying arrangements to regional airlines based primarily upon the following criteria: ability to fly contracted schedules, availability of labor resources, including pilots, low operating cost, financial resources, geographical infrastructure, overall customer service levels relating to on‑time arrival and flight completion percentages and the overall image of the regional airline.

The principal competitive factors for regional airline code‑share arrangements include labor resources, code‑share agreement terms, reliable flight operations, operating cost structure, ability to finance new aircraft, certification to operate certain aircraft types and geographical infrastructure and markets and routes served.

The combined operations of SkyWest Airlines and ExpressJet represent the largest regional airline operations in the United States. However, regional carriers owned by major airlines may have access to greater resources through their parent companies than SkyWest Airlines and ExpressJet.

Generally, the airline industry is sensitive to changes in general economic conditions. Economic downturns, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional carriers. The effect of economic downturns may be somewhat mitigated by the predominantly contract-based flying arrangements of SkyWest Airlines and ExpressJet. If, however, any of our major airline partners experience a prolonged decline in the number of passengers or are negatively affected by low ticket prices or high fuel prices, they may seek rate reductions in future code-share agreements with SkyWest Airlines or ExpressJet, or materially reduce scheduled flights in order to reduce their costs. In addition, adverse weather conditions can impact our ability to complete scheduled flights and can have a negative impact on our operations and financial condition.  

Industry Overview

Major and Regional Airlines

The airline industry in the United States has traditionally been comprised of several major airlines, including Alaska, American, Delta and United. The major airlines offer scheduled flights to most major U.S. cities, numerous smaller U.S. cities, and cities throughout the world through a hub and spoke network.

Regional airlines, including ExpressJet and SkyWest Airlines, typically operate smaller aircraft on shorter distance routes than major and low‑cost carriers. Several regional airlines, including Endeavor, Envoy, Horizon, Piedmont and PSA, are wholly‑owned subsidiaries of major airlines.

Regional airlines generally do not try to establish an independent route system to compete with the major airlines. Rather, regional airlines typically enter into relationships with one or more major airlines, pursuant to which the regional airline agrees to use its smaller, lower‑cost aircraft to carry passengers booked and ticketed by the major airline between a hub of the major airline and a smaller outlying city. In exchange for such services, the major airline pays the regional airline either a fixed flight fee, termed “contract” or “fixed‑fee” flights, or the regional airline receives a percentage of applicable passenger ticket revenues, termed “prorate” or “revenue‑sharing” flights, as described in more detail below.

Code‑Share Agreements

Regional airlines generally enter into code‑share agreements with major airlines, pursuant to which the regional airline is authorized to use the major airline’s two‑letter flight designator codes to identify the regional airline’s flights and fares in the central reservation systems, to paint its aircraft with the colors and/or logos of the major airline and to

6


 

market and advertise its status as a carrier for the major airline. Code‑share agreements also generally obligate the major airline to provide services such as reservations, ticketing, ground support and gate access to the regional airline, and the major airline often coordinates marketing, advertising and other promotional efforts. In exchange, the regional airline provides a designated number of low‑capacity (usually between 50 and 76 seats) flights between larger airports served by the major airline and surrounding cities, usually in lower‑volume markets. The financial arrangements between the regional airlines and their code‑share partners usually involve either fixed‑fee arrangements or revenue‑sharing arrangements as explained below:

·

Fixed‑Fee Arrangements.  Under a fixed‑fee arrangement (referred to as a “fixed‑fee arrangement,” “fixed-fee contract,” “contract flying” or a “capacity purchase agreement”), the major airline generally pays the regional airline a fixed‑fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) and block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on completion of flights, on‑time performance and other operating metrics. In addition, under a fixed fee arrangement, the major airline bears the risk of fuel price fluctuations and certain other costs. Regional airlines benefit from fixed‑fee arrangements because they are protected from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, number of passengers and fuel prices. However, regional airlines in fixed‑fee arrangements generally do not benefit from positive trends in ticket prices, ancillary revenue, such as baggage and food and beverage fees, the number of passengers enplaned or fuel prices, because the major airlines retain passenger fare volatility risk and fuel costs associated with the regional airline flight.

·

Revenue‑Sharing Arrangements.  Under a revenue‑sharing arrangement (referred to as a “revenue‑sharing” arrangement or “prorate” arrangement), the major airline and regional airline negotiate a passenger fare proration formula for specifically identified routes, 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. On the other hand, the regional airline receives all of the passenger fare when a passenger purchases a ticket on a route solely operated by the regional airline. Substantially all costs associated with the regional airline flight are borne by the regional airline. In a revenue‑sharing arrangement, the regional airline may realize increased profits as ticket prices and passenger loads increase or fuel prices decrease and, correspondingly, the regional airline may realize decreased profits as ticket prices and passenger loads decrease or fuel prices increase.

SkyWest Airlines has code‑share agreements with United, Delta, American and Alaska. ExpressJet has code‑share agreements with United, Delta and American.

During the year ended December 31, 2017, approximately 87.8% of our passenger revenues related to fixed‑fee contract flights, where Delta, United, American and Alaska controlled scheduling, ticketing, pricing and seat inventories. The remainder of our passenger revenues during the year ended December 31, 2017 related to prorate flights for Delta, United or American, where we controlled scheduling, pricing and seat inventories, and shared passenger fares with Delta, United or American according to prorate formulas.

Under our fixed-fee arrangements, our major airline partners compensate us for our costs of owning or leasing the aircraft on a monthly basis. The aircraft compensation structure varies by agreement, but is intended to cover either our aircraft principal and interest debt service costs, our aircraft depreciation and interest expense or our aircraft lease expense costs while the aircraft is under contract. Under our ExpressJet United Express ERJ Agreement, a portion of the aircraft operating under our SkyWest Airlines Delta Connection Agreement and a portion of our aircraft operating under our ExpressJet Delta Connection Agreement, the major airline partner provides the aircraft to us for a nominal amount. The number of aircraft under our fixed‑fee arrangements and our prorate arrangements as of December 31, 2017 is reflected in the summary below. The following summaries of our code-share agreements do not purport to be complete and are qualified in their entirety by reference to the applicable agreement.

7


 

Delta Connection Agreements

 

 

 

 

 

 

 

 

Agreement

    

Aircraft type

 

Number of Aircraft

    

Term / Termination
Dates

 

SkyWest Airlines

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 200 

CRJ 700

CRJ 900

E175

70

27

36

19

 

Individual aircraft have scheduled removal dates under the agreement between 2018 and 2027

The average remaining term of the aircraft under contract is 2.9 years

 

ExpressJet

Delta Connection Agreement

(fixed-fee arrangement)

 

CRJ 700

CRJ 900

33

16

 

Individual aircraft have scheduled removal dates under the agreement during 2018

 

SkyWest Airlines 

Delta Connection Prorate Agreement (revenue-sharing arrangement)

 

CRJ 200

 

24

 

Terminable with 30-day notice

 

 

United Express Agreements

 

 

 

 

 

 

 

 

Agreement

    

Aircraft type

 

Number of Aircraft

    

Term / Termination
Dates

 

SkyWest Airlines

United Express Agreements

(fixed-fee arrangement)

 

CRJ 200

CRJ 700

E175

 

57

20

65

 

 

Individual aircraft have scheduled removal dates under the agreement between 2018 and 2029

The average remaining term of the aircraft under contract is 5.1 years

 

ExpressJet

United Express ERJ Agreement

(fixed-fee arrangement)

 

ERJ145

ERJ135

 

 

109

3

 

Agreement expires in 2022

The average remaining term of the aircraft under contract is 4.8 years

 

SkyWest Airlines

United Express Prorate Agreement (revenue-sharing arrangement)

 

CRJ 200

 

 

24

 

Terminable with 120-day notice

 

 

American Agreements

 

 

 

 

 

 

 

 

Agreement

    

Aircraft type

 

Number of Aircraft

    

Term / Termination Dates

 

SkyWest Airlines

American Agreement

(fixed-fee arrangement)

 

CRJ 200

  CRJ 700

 

 

10

37

 

 CRJ200 aircraft are scheduled to expire in 2018 and the CRJ700 aircraft are scheduled to expire in 2019

 

SkyWest Airlines

American Prorate Agreement

(revenue-sharing arrangement)

 

CRJ 200

 

6

 

 Terminable with 120-day notice

 

ExpressJet

American Agreement 

(fixed-fee arrangement)

 

CRJ 700

 

 12

 

 

 CRJ700 aircraft are scheduled to expire in 2019

 

 

Alaska Capacity Purchase Agreement

 

 

 

 

 

 

 

 

Agreement

    

Aircraft type

 

Number of Aircraft

    

Term / Termination
Dates

 

SkyWest Airlines

Alaska Agreement

(fixed-fee arrangement)

 

CRJ 200

E175

 

 

4

23

 

 CRJ200 aircraft are scheduled to expire in 2018

E175 aircraft have scheduled removal dates under the agreement between 2027 and 2029

 

 

8


 

In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska and Delta to place additional E175 aircraft (which are typically configured with 76 seats) or E175 SC dual-class regional jet aircraft (which are typically configured with 70 seats) (“E175 SC”) into service for those major airline partners.  As of December 31, 2017, we anticipate placing an additional 12  E175 aircraft with Alaska and 30 E175 SC aircraft with Delta. The delivery dates for the new E175/E175 SC aircraft are expected to take place by the end of 2018 or early 2019.

SkyWest Airlines and ExpressJet Delta Connection Agreements

ExpressJet and Delta are parties to a Delta Connection Agreement (the “ExpressJet Delta Connection Agreement”). During 2017, ExpressJet and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. As of December 31, 2017, ExpressJet operated 33 Canadair CRJ700 regional jet aircraft (“CRJ700”) and 16 Canadair CRJ900 regional jet aircraft (“CRJ900”) under the ExpressJet Delta Connection Agreement. Of the 49 aircraft, ExpressJet anticipates returning the 19 leased aircraft financed by Delta to Delta, including all CRJ900s, and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta.  ExpressJet expects to transition all 30 CRJ700 aircraft to other major airline partners throughout 2018.

SkyWest Airlines and Delta are parties to a Delta Connection Agreement (the "SkyWest Airlines Delta Connection Agreement"), pursuant to which SkyWest Airlines provides contract flight services for Delta. The SkyWest Airlines Delta Connection Agreement contains multi‑year rate reset provisions applicable to the CRJ aircraft that became operative in 2010. The SkyWest Airlines Delta Connection Agreement multi-year rate reset provision does not include the E175/E175 SC aircraft. SkyWest Airlines agreed with Delta on contractual rates that are effective through December 31, 2018. 

The SkyWest Airlines Delta Connection Agreement is subject to early termination in various circumstances, including:

·

if SkyWest Airlines or Delta commits a material breach of the SkyWest Airlines Delta Connection Agreement, subject to 30‑day notice and cure rights;

·

if SkyWest Airlines fails to conduct all flight operations and maintain all aircraft under the SkyWest Airlines Delta Connection Agreement in compliance in all material respects with applicable government regulations;

·

if SkyWest Airlines fails to satisfy certain performance and safety requirements;

·

if either party files for bankruptcy, reorganization or similar action (subject to limitations imposed by the U.S. Bankruptcy Code) or makes an assignment for the benefit of creditors; or

·

if SkyWest Airlines fails to maintain competitive base rate costs (provided, however, that SkyWest Airlines has the right to adjust its rates prior to any such termination).

SkyWest Airlines United Express Agreements

SkyWest Airlines and United are parties to two United Express agreements: a United Express agreement to operate certain CRJ200s and CRJ700s, and a United Express agreement to operate E175 aircraft (collectively, the “SkyWest Airlines United Express Agreements”).

9


 

The SkyWest Airlines United Express Agreements have a latest scheduled termination date in 2027. The SkyWest Airlines United Express Agreements are subject to early termination in various circumstances including:

·

if SkyWest Airlines or United fails to fulfill an obligation under the SkyWest Airlines United Express Agreements for a period of 60 days after written notice to cure;

·

if SkyWest Airlines’ operations fall below certain performance levels for a period of three consecutive months;

·

subject to limitations imposed by the U.S. Bankruptcy Code, if either party becomes insolvent, fails to pay its debts when due, takes action leading to its cessation as a going concern, makes an assignment of substantially all of its assets, or ceases or suspends operations; or

·

subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party and certain specified conditions are not satisfied.

ExpressJet United Express ERJ Agreement

ExpressJet and United are parties to an Amended and Restated Capacity Purchase Agreement (the "ExpressJet United Express ERJ Agreement") to operate Embraer ERJ145 regional jets (“ERJ145s”) and Embraer ERJ135 regional jets (“ERJ135s”).  During 2017, ExpressJet secured a five-year extension of the ExpressJet United Express ERJ Agreement, effective January 1, 2018.

The ExpressJet United Express ERJ Agreement is scheduled to terminate in December 2022 and is subject to early termination in various circumstances including:

·

if ExpressJet’s performance falls below identified standards and such failure is not cured within 60 days following receipt of notice;

·

upon the occurrence of a labor strike lasting 15 days or longer;

·

upon the occurrence of a material default by ExpressJet under certain lease agreements relating to aircraft operated by ExpressJet under the ExpressJet United Express ERJ Agreement, provided that such material default is not cured within 60 days following receipt of notice; and

·

if United fails to make payment of $500,000 or more due to ExpressJet under the ExpressJet United Express ERJ Agreement and such failure is not cured within five business days following receipt of notice.

Under the terms of the ExpressJet United Express ERJ Agreement, ExpressJet operates 109 ERJ145s and three ERJ135s in the United flight system. All of such ERJ145s and ERJ135s are leased to ExpressJet by United pursuant to sublease or lease agreements. Upon the expiration of the ExpressJet United Express ERJ Agreement, ExpressJet is obligated to return the subleased or leased aircraft to United.

SkyWest Airlines American Agreement

SkyWest Airlines and American are parties to an agreement (the "SkyWest Airlines American Agreement") for the operation of CRJ200 and CRJ700 aircraft. The SkyWest Airlines American Agreement for CRJ200 aircraft and CRJ700 aircraft is scheduled to terminate in 2018 and 2020, respectively, and is subject to early termination in various circumstances including:

·

if SkyWest Airlines or American fail to fulfill any obligation under the SkyWest Airlines American Agreement for a period of 30 days after written notice to cure;

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·

if SkyWest Airlines’ operations fall below certain performance levels;

·

subject to limitations imposed by the U.S. Bankruptcy Code, if either party makes a general assignment for the benefit of creditors or becomes insolvent; or

·

subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party  and certain specified conditions are not satisfied

ExpressJet American Agreement

ExpressJet and American are parties to an agreement (the "ExpressJet American Agreement") for the operation of CRJ700 aircraft. The ExpressJet American Agreement for CRJ700 is scheduled to terminate in 2019 and is subject to early termination in various circumstances including:

·

if ExpressJet or American fail to fulfill any obligation under the ExpressJet American Agreement for a period of 30 days after written notice to cure;

·

if ExpressJet’s operations fall below certain performance levels;

·

subject to limitations imposed by the U.S. Bankruptcy Code, if either party makes a general assignment for the benefit of creditors or becomes insolvent; or

·

subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party  and certain specified conditions are not satisfied.

SkyWest Airlines Alaska Agreement

SkyWest Airlines and Alaska are parties to a Capacity Purchase Agreement (the "SkyWest Airlines Alaska Agreement") for the operation of E175 aircraft. The agreement has a 12‑year term for each of the aircraft subject to the agreement. The SkyWest Airlines Alaska Agreement is subject to early termination in various circumstances including:

·

if SkyWest Airlines or Alaska fail to fulfill an obligation under the SkyWest Airlines Alaska Capacity Purchase Agreement for a period of 30 days after written notice to cure;

·

if SkyWest Airlines’ operational performance falls below certain performance levels;

·

subject to limitations imposed by the U.S. Bankruptcy Code, if either party makes a general assignment for the benefit of creditors or becomes insolvent; or

·

subject to limitations imposed by the U.S. Bankruptcy Code, if bankruptcy proceedings are commenced against either party  and certain specified conditions are not satisfied.

Segment Financial Information

See Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Item 7 of this Report, and Note 2 to our Consolidated Financial Statements included in Item 8 of this Report, for financial information regarding our business segments.

Training and Aircraft Maintenance

SkyWest Airlines and ExpressJet provide substantially all training to their crew members and maintenance personnel at their respective training facilities. SkyWest Airlines and ExpressJet employees perform routine airframe and

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engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. SkyWest Airlines and ExpressJet also use third‑party vendors for certain airframe and engine maintenance work.

Fuel

Our fixed‑fee agreements with Delta, United, American and Alaska require the respective major airline partner to reimburse us for the fuel costs we incur under those agreements, thereby reducing our exposure to fuel price fluctuations. Under our prorate agreements with Delta, United and American, we are responsible for the costs to operate the flight, including fuel costs, and therefore we are exposed to fuel price fluctuations for flights operated under our prorate agreements. During the year ended December 31, 2017, United and Delta purchased the majority of the fuel for our aircraft flying under their respective fixed-fee agreements directly from their fuel vendors. Historically, we have not experienced problems with the availability of fuel, and believe we will be able to obtain fuel in quantities sufficient to meet our existing and anticipated future requirements at competitive prices. Standard industry fuel purchase contracts generally do not provide protection against fuel price increases, nor do they ensure availability of supply. We typically purchase fuel from third-party suppliers for our prorate agreements. A substantial increase in the price of jet fuel for flights we operate under our prorate agreements, or the lack of adequate fuel supplies in the future, could have a material adverse effect on our business, financial condition, results of operations or liquidity.

Employee Matters

Railway Labor Act

Our relations with labor unions in the United States are governed by the Railway Labor Act (the “RLA”). Under the RLA, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (the “NMB”) an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMB’s usual rules, a labor union will be certified as the representative of the employees in a craft or class only if more than 50% of those employees vote for union representation. A certified labor union then enters into negotiations toward a collective bargaining agreement with the employer.

Under the RLA, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request that the NMB appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30‑day “cooling off” period begins. At the end of this 30‑day period, the parties may engage in “self help,” unless the U.S. President appoints a Presidential Emergency Board (“PEB”) to investigate and report on the dispute. The appointment of a PEB maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self help.” “Self help” includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. The U.S. Congress and the President have the authority to prevent “self help” by enacting legislation that, among other things, imposes a settlement on the parties.

Collective Bargaining

As of December 31, 2017, we had approximately 16,300 full‑time equivalent employees. Approximately 22.0% of these employees were represented by unions, as set forth in the table below. Effective December 31, 2011, our subsidiary ExpressJet Airlines, Inc. was merged into our subsidiary Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the “ExpressJet Combination”). Notwithstanding the completion of the ExpressJet Combination, ExpressJet’s employee groups primarily continue to be represented by those unions who provided representation prior to the ExpressJet Combination. Accordingly, the following table refers to ExpressJet’s employee groups based upon their union affiliations prior to the ExpressJet Combination.

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Approximate

    

 

    

 

 

 

 

Number of

 

 

 

 

 

 

 

Active Employees

 

 

 

Status of

 

Employee Group

 

Represented

 

Representatives

 

Agreement

 

Atlantic Southeast Pilots

 

669

 

Air Line Pilots Association International

 

Amendable February 2018

 

Atlantic Southeast Flight Attendants

 

552

 

International Association of Machinists and Aerospace Workers

 

Currently Amendable

 

Atlantic Southeast Flight Controllers

 

25

 

Transport Workers Union of America

 

Currently Amendable

 

Atlantic Southeast Mechanics

 

102

 

International Brotherhood of Teamsters

 

Currently Amendable

 

Atlantic Southeast Stock Clerks

 

29

 

International Brotherhood of Teamsters

 

Currently Amendable

 

ExpressJet Delaware Pilots

 

1111

 

Air Line Pilots Association International

 

Amendable February 2018

 

ExpressJet Delaware Flight Attendants

 

618

 

International Association of Machinists and Aerospace Workers

 

Currently Amendable

 

ExpressJet Delaware Mechanics

 

418

 

International Brotherhood of Teamsters

 

Amendable January 2019

 

ExpressJet Delaware Dispatchers

 

22

 

Transport Workers Union of America

 

Currently Amendable

 

ExpressJet Delaware Stock Clerks

 

42

 

International Brotherhood of Teamsters

 

Currently Amendable

 

 

In January 2018, the ExpressJet Delaware Mechanics ratified a one-year contract extension to their labor agreement. Delays or expenses or other challenges associated with executing an acceptable agreement with each labor workgroup with a currently amendable contract could impact our financial performance.

 

As of December 31, 2017, SkyWest and SkyWest Airlines collectively employed 11,965 full‑time equivalent employees, consisting of 4,495 pilots, 3,380 flight attendants, 1,541 customer service personnel, 1,099 mechanics, 825 other maintenance personnel, 166 dispatchers and 459 operational support and administrative personnel. None of these employees are currently represented by a union. Collective bargaining group organization efforts among SkyWest Airlines’ employees do occur from time to time and may continue in the future. If unionization efforts are successful, we may be subjected to risks of work interruption or stoppage and/or incur additional expenses associated with increased union representation of our employees. Neither SkyWest nor SkyWest Airlines has ever experienced a work stoppage due to a strike or other labor dispute, and we consider SkyWest Airlines’ relationships with its employees to be good.

Government Regulation

All interstate air carriers, including SkyWest Airlines and ExpressJet, are subject to regulation by the U.S. Department of Transportation (the “DOT”), the U.S. Federal Aviation Administration (the “FAA”) and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operating activities; record‑keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. Generally, governmental agencies enforce their regulations through, among other methods, certifications, which are necessary for the continued operations of SkyWest Airlines and ExpressJet, and proceedings, which can result in civil or criminal penalties or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, grounding of

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aircraft, inspection of aircraft, installation of new safety‑related items and the mandatory removal and replacement of aircraft parts.

We believe SkyWest Airlines and ExpressJet are in compliance in all material respects with FAA regulations and hold all operating and airworthiness certificates and licenses which are necessary to conduct their respective operations. We incur substantial costs in maintaining current certifications and otherwise complying with the laws, rules and regulations to which SkyWest Airlines and ExpressJet are subject. SkyWest Airlines’ and ExpressJet’s flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. All air carriers operating in the United States are required to comply with federal laws and regulations pertaining to noise abatement and engine emissions. All such 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. SkyWest Airlines and ExpressJet are also subject to certain federal and state laws relating to protection of the environment, labor relations and equal employment opportunity. We believe SkyWest Airlines and ExpressJet are in compliance in all material respects with these laws and regulations.

Environmental Matters

SkyWest, SkyWest Airlines and ExpressJet are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.

Safety and Security

We are committed to the safety and security of our passengers and employees. SkyWest Airlines and ExpressJet have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of their operations. Some of the safety and security measures we have taken with our major airline partners include: aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security requirements.

Insurance

SkyWest, SkyWest Airlines and ExpressJet maintain insurance policies we believe are of types customary in the industry and in amounts we believe are adequate to protect against material loss. These policies principally provide coverage for public liability, passenger liability, baggage and cargo liability, property damage, including coverage for loss or damage to our flight equipment, and workers’ compensation insurance.

Seasonality

Our results of operations for any interim period are not necessarily indicative of those for the entire year, in part because the airline industry is subject to seasonal fluctuations and changes in general economic conditions. Our operations are somewhat favorably affected by pleasure travel on our prorate routes, historically contributing to increased travel in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which can result in cancelled flights, principally during the winter months. Additionally, a significant portion of our fixed‑fee arrangements is based on completing flights and we typically have more scheduled flights during the summer months. We generally experience a significantly higher number of weather cancellations during the winter months, which negatively impacts our revenue during such months.

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ITEM 1A.  RISK FACTORS

In addition to factors discussed elsewhere in this Report, the following are important risks which could adversely affect our future results. Additional risks and uncertainties not presently known to us or that we currently do not deem material may also impair our business operations. If any of the risks we describe below occur, or if any unforeseen risk develops, our operating results may suffer, our financial condition may deteriorate, the trading price of our common stock may decline and investors could lose all or part of their investment in us.

Risks Related to Our Operations

We may experience a shortage of pilots which may negatively affect our operations and financial condition.

On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increase the required training time for new commercial pilots. With these changes, the supply of qualified pilot candidates eligible for hiring by the airline industry has been dramatically reduced. Additionally, major airlines may significantly increase the number of pilots hired from regional carriers due to the number of pilots at the major airlines reaching the statutory mandatory retirement age of 65 years.  These factors may cause our pilot attrition rates to be higher than our ability to hire and retain replacement pilots.  If we are unable to maintain a sufficient number of eligible pilots to operate our scheduled flights, we may need to request a reduced flight schedule with our major airline partners, which may result in operational performance penalties under the code-share agreements with those partners and our operations and financial results could be materially and adversely affected.

Additionally, our projected number of available pilots and attrition rates may impact our fleet planning decisions.  If actual pilot availability or our actual pilot attrition rates are materially different than our projections, our operations and financial results could be materially and adversely affected. A shortage of qualified pilots to conduct our operations may cause us to underutilize our aircraft and would negatively impact our operations and financial condition.

Our labor costs, including pilot compensation, may continue to increase.

Labor costs are a significant component of our total expenses. Currently, we believe our labor costs are competitive relative to other regional airlines. However, we cannot provide assurance that our labor costs going forward will remain competitive because of changes in supply and demand for labor in the regional industry. We compete against other airlines and businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, sustain employee engagement in our strategic vision, or if we are unsuccessful at implementing succession plans for our key staff, we may be unable to grow or sustain our business. Attrition beyond normal levels could negatively impact our operating results, increase our training and labor costs and our business prospects could be harmed.

 

The Airline Safety and Pilot Training Improvement Act of 2009 may continue to negatively affect our operations and financial condition.

The Airline Safety and Pilot Training Improvement Act of 2009 (the “Improvement Act”) became effective in August 2013. The Improvement Act added new certification requirements for entry‑level commercial pilots, requires additional emergency training for airline personnel, improves availability of pilot records and mandates stricter rules to minimize pilot fatigue.

 

The Improvement Act also:

 

·

Requires that all airline pilots obtain an Airline Transport Pilot license, which was previously only required for captains.

·

Obligates the FAA to maintain a database of pilot records, including records to be provided by airlines and other sources, so that airlines will have access to more information before they hire pilots.

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·

Requires the FAA to issue new regulations governing the airlines’ obligations to submit pilot records and the requirements for airlines to obtain access for information in the database before the database portion of the Improvement Act becomes effective.

·

Directs the FAA to rewrite the rules for how long pilots are allowed to work and how much rest they must have before working.

The Improvement Act (and associated regulations) has increased our compliance and FAA reporting obligations, has had a negative effect on pilot scheduling, work hours and the number of pilots required to be employed for our operations or other aspects of our operations, and may continue to negatively impact our operations and financial condition.

 

We have aircraft lease and debt commitments that extend beyond our existing fixed‑fee contractual term on certain aircraft.

Under our fixed‑fee arrangements with multiple major airline partners we have a total of 36 CRJ700/CRJ900s with flying contract expirations in 2018 and 2019. Our underlying lease or debt financing obligations associated with each of these aircraft are scheduled to terminate in 2023 and 2024 on an aircraft‑by‑aircraft basis. We may not be successful in extending the flying contract term on these aircraft with our major airline partner at acceptable economic terms. In the event we are unsuccessful in extending the flying contract terms on these aircraft, we intend to pursue alternative uses for the aircraft over the remaining aircraft financing term including, but not limited to, operating the aircraft with another major carrier under a negotiated code‑share agreement, subleasing the aircraft to another operator, and/or marketing the debt financed aircraft for sale. Additionally, we may negotiate an early lease return agreement with the aircraft lessor.  In the event we are unable to extend the flying contract terms for these aircraft at each respective contract’s expiration, we may incur cash and non-cash early lease termination costs that would negatively impact our operations and financial condition.  Additionally, in the event we are unable to extend a flying contract with an existing major airline partner, but reach an agreement to place the aircraft into service with a different major airline partner, we likely will incur inefficiencies and incremental costs, such as changing the aircraft livery, which would negatively impact our financial results.

Our business model is dependent on code-share agreements with four major airline partners.

Our business model depends on major airlines electing to contract with us instead of operating their own regional jets. Some regional airlines are owned by a major airline. We have no guarantee that in the future our major airline partners will choose to enter into contracts with us instead of operating their own regional jets. Our major airline partners are not prohibited from doing so under our code‑share agreements. A decision by any of our major airline partners to phase out code‑share relationships and instead acquire and operate their own regional jets could have a material adverse effect on our financial results.

As of December 31, 2017, 541 out of our total 595 aircraft available for scheduled service were operating under a fixed‑fee arrangement or a revenue‑sharing agreement with either Delta or United. If our code‑share relationship with Delta or United were terminated, we would be significantly impacted and likely would not have an immediate source of revenue or earnings to offset such loss. A termination of either of these relationships would likely have a material adverse effect on our financial condition, operating revenues and net income unless we are able to enter into satisfactory substitute arrangements for the utilization of the affected aircraft by other code‑share partners, or, alternatively, obtain the airport facilities and gates and make the other arrangements necessary to fly as an independent airline. We may not be able to enter into substitute code‑share arrangements, and any such arrangements we might secure may not be as favorable to us as our current agreements. Operating an airline independent from major airline partners would be a significant departure from our business plan and would likely require significant time and resources, which may not be a  viable alternative.

Additionally, each of our agreements with our major airline partners is subject to certain early termination provisions. For example, Delta’s termination rights include the right to terminate the agreements upon the occurrence of certain force majeure events (including certain labor‑related events) that prevent SkyWest Airlines from performance

16


 

for certain periods and the right to terminate the agreements if SkyWest Airlines fails to maintain competitive base rate costs, subject to certain rights of SkyWest Airlines to take corrective action to reimburse Delta for lost revenues. United may terminate the SkyWest Airlines and ExpressJet United Express Agreements due to an uncured breach by SkyWest Airlines or ExpressJet of certain operational or performance provisions, including measures and standards related to flight completions, baggage handling and on‑time arrivals.  We currently use the systems, facilities and services of Delta and United to support a significant portion of our operations, including airport and terminal facilities and operations, information technology support, ticketing and reservations, scheduling, dispatching, fuel purchasing and ground handling services. If Delta or United were to cease to maintain any of these systems, close any of these facilities or no longer provide these services to us, due to termination of one of our code‑share agreements, a strike or other labor interruption by Delta or United personnel or for any other reason, we may not be able to obtain alternative systems, facilities or services on terms and conditions as favorable as those we currently receive, or at all. Since our revenues and operating profits are dependent on our level of flight operations, we could then be forced to significantly reduce our operations. Furthermore, upon certain terminations of our code‑share agreements, Delta and United could require us to sell or assign to them facilities and assets, including maintenance facilities, we use in connection with the code‑share services we provide. As a result, in order to offer airline service after termination of any of our code‑share agreements, we may have to replace these facilities, assets and services. We may be unable to arrange such replacements on satisfactory terms, or at all.

There are long‑term risks related to supply and demand of regional aircraft associated with our regional airline services strategy.

Our major airline partners have indicated that their committed supply of regional airline capacity is larger than they desire given current market conditions. Specifically, they have identified a general oversupply of 50‑seat regional jets under contractual commitments with regional airlines. Delta in particular has reduced both the number of 50‑seat regional jets within its network and the number of regional airlines with which it contracts. In addition to reducing the number of 50‑seat jets under contract, major airlines have reduced the utilization of regional aircraft, thereby reducing the revenue paid to regional airlines under capacity purchase agreements. This decrease has had, and may continue to have, a negative impact on our regional airline services revenue and financial results.

Our growth may be limited with our major airline partners' flight systems.

Additional growth opportunities within our major airline partners’ flight systems are limited by various factors, including a limited number of regional aircraft each such major airline partner can operate in its regional network due to its own labor agreements. Except as contemplated by our existing code‑share agreements, we cannot be sure that our major airline partners will contract with us to fly any additional aircraft. We may not receive additional growth opportunities, or may agree to modifications to our code‑share agreements that reduce certain benefits to us in order to obtain additional aircraft, or for other reasons. Given the competitive nature of the airline industry, we believe limited growth opportunities may result in competitors accepting reduced margins and less favorable contract terms in order to secure new or additional code‑share operations. Even if we are offered growth opportunities by our major airline partners, those opportunities may involve economic terms or financing commitments that are unacceptable to us. Additionally, our major airline partners may reduce the number of regional jets in their system by not renewing or extending existing flying arrangements with regional operators. Any one or more of these factors may reduce or eliminate our ability to expand our flight operations with our existing major airline partners.

Increases in labor costs, maintenance costs and overhead costs may result in lower operating margins under our fixed-fee contracts.

Under our fixed-fee contracts with Delta, United, American and Alaska, a portion of our compensation is based upon pre‑determined rates typically applied to production statistics (such as departures, block hours, flight hours and number of aircraft in service each month). The primary operating costs intended to be compensated by the pre-determined rates include labor costs, including crew training costs, certain aircraft maintenance expenses, and overhead costs.  During the year ended December 31, 2017, approximately 85.9% of our code‑share operating costs were reimbursable at pre‑determined rates and 14.1% of our code‑share operating costs were pass‑through costs.  Additionally, our aircraft maintenance costs may increase annually as our fleet ages at a higher rate than our pre-

17


 

determined rates allow.  If our operating costs for labor, aircraft maintenance and overhead costs exceed the compensation earned from our pre‑determined rates under our fixed‑fee arrangements, our financial position and operating results will be negatively affected.

Anticipated fleet reductions with Delta at ExpressJet may result in operating inefficiencies in 2018.

 

As of December 31, 2017, ExpressJet operated 49 aircraft under the ExpressJet Delta Connection Agreement out of a total of 173 aircraft operated under all of ExpressJet’s code-share agreements. During 2017, ExpressJet and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. Of the 49 aircraft, ExpressJet anticipates returning 19 leased aircraft to Delta and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta. We may not be successful in placing the remaining 22 aircraft with other major airline partners on acceptable economic terms, or at all. In the event we are unsuccessful in negotiating flying contracts for these aircraft, we intend to pursue alternative uses for the aircraft over their remaining financing terms including, but not limited to, subleasing the aircraft to another operator, and/or marketing the debt financed aircraft for sale. Although ExpressJet’s anticipated fleet reduction in 2018 is consistent with our long-term fleet plans to improve our long-term profitability and reduce fleet risk, we may experience operating inefficiencies and cash and/or non-cash expenses in 2018 in connection with the aircraft reductions. These inefficiencies and expenses may include, but are not limited to, under-utilized facilities and other assets, infrastructure reductions, employee relocation costs or other operational disruptions.  We may also experience inefficiencies while aircraft are temporarily removed from service during a transition period.  Fleet transition expenses and potential operating inefficiencies may negatively impact our financial results.

 

We are reliant on two aircraft manufacturers and two engine manufacturers.

We operate aircraft manufactured by Bombardier and Embraer.  The issuance of FAA or manufacturer directives restricting or prohibiting the use of any Bombardier or Embraer aircraft types we operate could negatively impact our business and financial results.  We are also dependent upon General Electric and Rolls Royce as the sole manufacturers of engines used on the aircraft we operate.  Our operations could be materially and adversely affected by the failure or inability of Bombardier, Embraer, General Electric or Rolls Royce to provide sufficient parts or related maintenance and support services to us on a timely manner. Additionally, timing of aircraft deliveries could be delayed.

We may experience disruption in service with key third-party service providers.

We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting, telecommunication systems and information technology infrastructure and services.

 

Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.

 

Information technology security breaches, hardware or software failures, or other information technology disruptions may negatively impact our operations or reputation.

The performance and reliability of our technology are critical to our ability to compete effectively. Any internal technological error or failure or large‑scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our internal network. Any individual, sustained or repeated failure of technology could impact our ability to conduct our business and result in increased costs. Our technological systems and related data may be vulnerable to a variety of sources of interruption due to events beyond our control,

18


 

including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.

In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our passengers and employees and information of our business partners. Our information systems are subject to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving, and may be difficult to anticipate or to detect for long periods of time. We may not be able to prevent all data security breaches or misuse of data. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers’, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business and financial condition.

The residual value of our owned aircraft may be less than estimated in our depreciation policies.

 

As of December 31, 2017, we had approximately $4.2 billion of property and equipment and related assets, net of accumulated depreciation.  In accounting for these long‑lived assets, we make 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.  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.  In the event the estimated residual value of any of our aircraft types is determined to be lower than the residual value assumptions used in our depreciation policies, the applicable aircraft type in our fleet may be impaired and may result in a material reduction in the book value of applicable aircraft types we operate or we may need to prospectively modify our depreciation policies. For example, during 2016 we recorded an impairment of $465.6 million attributable to certain long-lived assets associated with our 50-seat aircraft primarily resulting from changes to our short-term and long-term fleet plans with our 50-seat aircraft. An impairment on any of our aircraft types we operate or an increased level of depreciation expense resulting from a change to our depreciation policies could result in a material negative impact to our financial results.

Interruptions or disruptions in service at one of our hub airports, due to weather, system malfunctions or for any other reason, could have a material adverse impact on our operations.

We currently operate primarily through hubs across the United States. Nearly all of our flights either originate from or fly into one of these hubs. Our revenues depend primarily on our completion of flights and secondarily on service factors such as timeliness of departure and arrival. Any interruptions or disruptions could, therefore, severely and adversely affect us. Extreme weather such as hurricanes or tornados can cause flight disruptions, and, during periods of storms or adverse weather, our flights may be canceled or significantly delayed. We operate a significant number of flights to and from airports with particular weather difficulties, including Atlanta, Salt Lake City, Chicago, San Francisco, Newark and Denver. A significant interruption or disruption in service at one of our hubs, due to adverse weather, system malfunctions, security closures or otherwise, could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe adverse impact on our operations and financial performance.

Negative economic or industry conditions may result in reductions to our flight schedules, which could materially and adversely affect our operations and financial condition.

Our operations and financial condition are affected by many changing economic and other conditions beyond our control, including, among others:

·

disruptions in the credit markets, which may impact availability of financing;

·

actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation, higher interest rates, wars, terrorist attacks or political instability;

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·

changes in consumer preferences, perceptions, spending patterns or demographic trends;

·

changes in the competitive environment due to industry consolidation and other factors;

·

actual or potential disruptions to U.S. air traffic control systems;

·

price of jet fuel and oil;

·

outbreaks of diseases that affect travel behavior; and

·

weather and natural disasters.

The effect of any, or some combination, of the foregoing economic and industry conditions on our operations or financial condition is virtually impossible to forecast; however, the occurrence of any or all of such conditions in a significant manner could materially and adversely affect our operations and financial condition and could cause our major airline partners to reduce the utilization levels of our aircraft under our code-share agreements.

The majority of our code‑share agreements set forth minimum levels of flight operations which our major airline partners are required to schedule for our operations and we are required to provide. These minimum flight operating levels are intended to provide a baseline level of expected utilization of aircraft, labor, maintenance facilities and related flight operations support. Historically, our major airline partners have utilized our flight operations at levels which exceed the minimum levels set forth in our code‑share agreements, however, the occurrence of any or all of the foregoing economic and industry conditions may cause our major airline partners to reduce our utilization levels. If our major airline partners schedule the utilization of our aircraft below historical levels (including taking into account the route distances and frequency of our scheduled flights), we may not be able to maintain operating efficiencies previously obtained, which would negatively impact our operating results and financial condition. Additionally, our major airline partners may change routes and frequencies of flights, which can negatively impact our operating efficiencies. Changes in schedules may increase our flight costs, which could exceed the reimbursed rates paid by our major airline partners. Continued reduced utilization levels of our aircraft or other changes to our schedules under our code‑share agreements would adversely impact our financial results.

We may experience an increase in fuel prices in our prorate operations.

Dependence on foreign imports of crude oil, limited refining capacity and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel. If there are additional outbreaks of hostilities or other conflicts in oil‑producing areas or elsewhere, or a reduction in refining capacity (due to weather events, for example), or governmental limits on the production or sale of jet fuel, there could be a reduction in the supply of jet fuel and significant increases in the cost of jet fuel. Additionally, our operations may experience disruptions from temporary fuel shortages by our fuel vendors resulting from fuel quality issues, refueling disruption, or other challenges.   Major reductions in the availability of jet fuel or significant increases in its cost, or a continuation of high fuel prices for a significant period of time, would have a material adverse impact on us.

Pursuant to our fixed‑fee arrangements, our major airline partners have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. However, we bear the economic risk of fuel price fluctuations on our prorate operations. As of December 31, 2017, we operated 24 CRJ200s under a prorate agreement with United, 24 CRJ200s under a prorate agreement with Delta, and six CRJ200s under a prorate agreement with American. Our operating and financial results with respect to these prorate arrangements can be negatively affected by the price of jet fuel in the event we are unable to increase our passenger fares. Additionally in the event of prolonged low fuel prices, our competitors may lower their passenger ticket prices on routes that compete with our prorate markets, which could negatively impact our passenger load factors.

Certain flying arrangements with our major airline partners are terminable upon notice of 120 days or less.

Certain of our flying agreements with our major airline partners permit the major airline partner to terminate the agreement in its discretion by giving us notice of 120 days or less.  If one of our major airline partners elects to terminate

20


 

a flying agreement with notice of 120 days or less, our ability to use the aircraft under an alternative agreement with similar economics may be limited, which could negatively impact our financial results.  Additionally, even if we can subsequently place the aircraft into service with a different major airline partner, of which there can be no assurance, we likely would incur inefficiencies and incremental costs, such as changing the aircraft livery, during the transition period, which would negatively impact our financial results.

We have a significant amount of contractual obligations.

As of December 31, 2017, we had a total of approximately $2.7 billion in total long‑term debt obligations. Substantially all of this long‑term debt was incurred in connection with the acquisition of aircraft and engines. We also have significant long‑term lease obligations primarily relating to our aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in our consolidated balance sheets. At December 31, 2017, we had 319 aircraft under lease, with remaining terms ranging up to nine years. Future minimum lease payments due under all long‑term operating leases were approximately $716.8 million at December 31, 2017. At a 5.0% discount factor, which is the average rate used to approximate the implicit rates within the applicable aircraft leases, the present value of these lease obligations was equal to approximately $594.3 million at December 31, 2017. Our high level of fixed obligations could impact our ability to obtain additional financing to support additional expansion plans or divert cash flows from operations and expansion plans to service the fixed obligations.

Our anticipated fleet replacement would require a significant increase in our leverage and the related cash requirements.

We currently have 195  CRJ200s with an average life of 15.2  years and 109 ERJ145s with an average life of 15.3 years. Over the next several years, we may continue to replace the CRJ200s and ERJ145s with larger regional jets. If we continue to add new aircraft to our fleet, we anticipate using significant amounts of capital to acquire these larger regional jets.

There can be no assurance that our operations will generate sufficient cash flow or liquidity to enable us to obtain the necessary aircraft acquisition financing to replace our current fleet, or to make required debt service payments related to our existing or anticipated future obligations. Even if we meet all required debt, lease and purchase obligations, the size of these long‑term obligations could negatively affect our financial condition, results of operations and the price of our common stock in many ways, including:

·

increasing the cost, or limiting the availability of, additional financing for working capital, acquisitions or other purposes;

·

limiting the ways in which we can use our cash flow, much of which may have to be used to satisfy debt and lease obligations; and

·

adversely affecting our ability to respond to changing business or economic conditions or continue our growth strategy.

If we need additional capital and cannot obtain such capital on acceptable terms, or at all, we may be unable to realize our fleet replacement plans or take advantage of unanticipated opportunities.

Our business could be harmed if we lose the services of our key personnel.

Our business depends upon the efforts of our chief executive officer, Russell A. Childs, and our other key management and operating personnel. We may have difficulty replacing management or other key personnel who cease to be employed by us and, therefore, the loss of the services of any of these individuals could harm our business. We do not maintain key‑person insurance on any of our executive officers.

We may decrease our dividends and/or reduce the amount of stock repurchases in the future.

Historically, we have paid dividends and repurchased shares of our common stock in varying amounts. The future payment and amount of cash dividends and our future repurchases of shares of common stock, if any, and the number of shares of common stock we may repurchase will depend upon our financial condition and results of

21


 

operations and other factors deemed relevant by our board of directors. There can be no assurance that we will continue our practice of paying dividends on our common stock or that we will have the financial resources to pay such dividends. There also can be no assurance that we will continue our practice of repurchasing shares of common stock or that we will have the financial resources to repurchase shares of common stock in the future.

In addition, repurchases of our common stock pursuant to our share repurchase program and any future dividends could affect our stock price and increase its volatility. The existence of a share repurchase program and any future dividends could cause our stock price to be higher than it would otherwise be and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program and any future dividends may reduce our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Further, our share repurchase program may fluctuate such that our cash flow may be insufficient to fully cover our share repurchases. Although our share repurchase program is intended to enhance long-term shareholder value, there is no assurance that it will do so because the market price of our common stock may decline below the levels at which we repurchased shares of stock and short-term stock price fluctuations could reduce the program’s effectiveness.

Disagreements regarding the interpretation of our code‑share agreements with our major airline partners could have an adverse effect on our operating results and financial condition.

Long‑term contractual agreements, such as our code‑share agreements, are subject to interpretation and disputes may arise under such agreements if the parties to an agreement apply different interpretations to that agreement. Those disputes may divert management time and resources from the core operation of the business, and may result in litigation, arbitration or other forms of dispute resolution.

In recent years we have experienced disagreements with our major airline partners regarding the interpretation of various provisions of our code‑share agreements. Some of those disagreements have resulted in litigation, and we may be subject to additional disputes and litigation in the future. Those disagreements have also required a significant amount of management time, financial resources and settlement negotiations of disputed matters.

To the extent that we experience disagreements regarding the interpretation of our code‑share or other agreements, we will likely expend valuable management time and financial resources in our efforts to resolve those disagreements. Those disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. Furthermore, there can be no assurance that any or all of those proceedings, if commenced, would be resolved in our favor. An unfavorable result in any such proceeding could have adverse financial consequences or require us to modify our operations. Such disagreements and their consequences could have an adverse effect on our operating results and financial condition.

Provisions of our charter documents and code‑share agreements may limit the ability or desire of others to gain control of our company.

Our ability to issue shares of preferred and common stock without shareholder approval may have the effect of delaying or preventing a change in control and may adversely affect the voting and other rights of the holders of our common stock, even in circumstances where such a change in control would be viewed as desirable by most investors. The provisions of the Utah Control Shares Acquisitions Act may also discourage the acquisition of a significant interest in or control of our company. Additionally, our code‑share agreements contain termination and extension trigger provisions related to change in control type transactions that may have the effect of deterring a change in control of our company.

Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.

Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate, and revising the rules governing net operating losses and foreign tax credits. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue

22


 

Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While our analysis and interpretation of this legislation is ongoing, based on reasonable estimates of our current evaluation, we have included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with this legislation. This amount may be subject to further adjustment in subsequent periods throughout 2018 in accordance with subsequent interpretive guidance issued by the SEC or the IRS. Further, there may be other material adverse effects resulting from the legislation that we have not yet identified. While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact on us of the recent tax legislation. We urge our investors to consult with their legal and tax advisors with respect to such legislation.

Risks Related to the Airline Industry

The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.

An accident or incident involving one of our aircraft could result in significant potential claims of injured passengers and others, as well as repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses from the accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that our operations are less safe or reliable than other airlines.

Various factors may negatively impact demand for air travel in the United States.


As is the case for other airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control. Factors that might negatively impact our operations include:

·

congestion and/or space constraints at airports or air traffic control problems;

·

facility disruptions including power supplies;

·

lack of operational approval (e.g. new routes, aircraft deliveries, etc.);

·

adverse weather conditions; 

·

increased security measures or breaches in security;

·

contagious illness and fear of contagion; 

·

changes in international treaties concerning air rights; 

·

international or domestic conflicts or terrorist activity; and

 

·

other changes in business conditions.

Increased labor costs, strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business and reduce our profitability.

Our business is labor intensive, requiring large numbers of pilots, flight attendants, mechanics and other personnel. Labor costs constitute a significant percentage of our total operating costs. For example, during the year ended December 31, 2017, our salary, wage and benefit costs constituted approximately 42.5% of our total operating costs.

23


 

Increases in our labor costs could result in a material reduction in our earnings. Any new collective bargaining agreements entered into by other regional carriers with their work forces may also result in higher industry wages and increased pressure on us to increase the wages and benefits of our employees. Future agreements with unionized and non‑unionized employees may be on terms that are not as attractive as our current agreements or comparable to agreements entered into by our competitors.

Approximately 22.0% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct business. Relations between air carriers and labor unions in the United States are governed by the RLA, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. The RLA generally prohibits strikes or other types of self‑help action both before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining processes required by the RLA have been exhausted.

SkyWest Airlines’ employees are not currently represented by any union; however, unionization efforts among those employees occur from time to time. Such efforts will likely continue in the future and may ultimately result in some or all of SkyWest Airlines’ employees being represented by one or more unions. Moreover, one or more unions representing ExpressJet employees may seek a single carrier determination by the National Mediation Board, which could require SkyWest Airlines to recognize such union or unions as the certified bargaining representative of SkyWest Airlines’ employees. One or more unions representing ExpressJet employees may also assert that SkyWest Airlines’ employees should be subject to ExpressJet’s collective bargaining agreements. If SkyWest Airlines’ employees were to unionize or be deemed to be represented by one or more unions, negotiations with unions representing SkyWest Airlines’ employees could divert management attention and disrupt operations, which may result in increased operating expenses and may negatively impact our financial results. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results.

We are subject to significant governmental regulation and potential regulatory changes.

All interstate air carriers, including SkyWest Airlines and ExpressJet, are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; 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. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on our operations. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. A decision by the FAA to ground, or require time‑consuming inspections of or maintenance on, all or any of our aircraft for any reason may have a material adverse effect on our operations. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations. From time to time, various airports throughout the country have considered limiting the use of smaller aircraft, such as our aircraft, at such airports. The imposition of any limits on the use of our aircraft at any airport at which we operate could have a material adverse effect on our operations.

We cannot predict the impact, of potential regulatory changes that may affect our business or the airline industry as whole including the potential impact of tariffs on aircraft deliveries. However, it is possible that these changes could adversely affect our business. Our business may be subject to additional costs or loss of government subsidies as a result of potential regulatory changes, which could have an adverse effect on our operations and financial results.

The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential code‑share partners.

The airline industry is highly competitive. We not only compete with other regional airlines, some of which are owned by or operated as code‑share partners of major airlines, but we also face competition from low‑cost carriers and major airlines on many of our routes. Low‑cost carriers such as Southwest, Allegiant, Spirit and JetBlue among others, operate at many of our hubs, resulting in significant price competition. Additionally, a large number of other carriers operate at our hubs, creating intense competition. Certain of our competitors are larger and have significantly greater

24


 

financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. Increased fare competition could adversely affect our operations and the price of our common stock. The airline industry has undergone substantial consolidation, including the mergers between Alaska and Virgin America Inc. in 2016, American and US Airways Group Inc. in 2013, Southwest Airlines Co. and AirTran Holdings, Inc. in 2011, United and Continental Airlines, Inc. in 2010 and Delta and Northwest Airlines, Inc. in 2008. Any additional consolidation or significant alliance activity within the airline industry could limit the number of potential partners with whom we could enter into code‑share relationships and could have a material adverse effect on our relationships with our major airline partners.

Due, in part, to the dynamic nature of the airline industry, major airlines may also make other strategic changes such as changing or consolidating hub locations. If our major airline partners were to make changes such as these in their strategy and operations, our operations and financial results could be adversely impacted.

Terrorist activities or warnings have dramatically impacted the airline industry, and will likely continue to do so.

The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general, including our operations. The primary effects experienced by the airline industry include a substantial loss of passenger traffic and revenue. If additional terrorist attacks are launched against the airline industry, there will be lasting consequences of the attacks, which may include loss of life, property damage, increased security and insurance costs, increased concerns about future terrorist attacks, increased government regulation and airport delays due to heightened security. Additional terrorist attacks and the fear of such attacks could negatively impact the airline industry, and result in further decreased passenger traffic and yields, increased flight delays or cancellations associated with new government mandates, as well as increased security, fuel and other costs. We cannot provide any assurance that these events will not harm the airline industry generally or our operations or financial condition in particular.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None

ITEM 2.  PROPERTIES

Flight Equipment

As of December 31, 2017, our fleet available for scheduled service consisted of the following types of owned and leased aircraft:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Number of

    

Number of

    

 

    

Scheduled

    

Average

    

 

 

 

 

Owned

 

Leased

 

Passenger

 

Flight

 

Cruising

 

Average

 

Aircraft Type

 

Aircraft

 

Aircraft

 

Capacity

 

Range (miles)

 

Speed (mph)

 

Age (years)

 

CRJ900s

 

11

 

41

 

76

 

1,500

 

530

 

10.4

 

CRJ700s

 

69

 

60

 

65-70

 

1,600

 

530

 

12.4

 

CRJ200s

 

105

 

90

 

50

 

1,500

 

530

 

15.2

 

E175s

 

107

 

 —

 

70-76

 

2,100

 

530

 

1.9

 

ERJ145s

 

 —

 

109

 

50

 

1,500

 

530

 

15.3

 

ERJ135s

 

 —

 

 3

 

37

 

1,500

 

530

 

16.0

 

Several factors may impact our fleet size throughout 2018 and thereafter, including contract expirations, lease expirations, growth opportunities and opportunities to transition to an alternative major airline partner. Below is our 2018 outlook on our fleet by aircraft type. Our actual future fleet size and/or mix of aircraft types will likely vary, and may vary materially, from our current fleet size.

 

·

CRJ900s/CRJ700s –  As of December 31, 2017, ExpressJet operated 16 CRJ900 aircraft and 33 CRJ 700 aircraft under the ExpressJet Delta Connection Agreement. ExpressJet anticipates returning all 16 leased CRJ900

25


 

aircraft and three leased CRJ700 aircraft to Delta and removing the remaining 30 CRJ700 aircraft from service with Delta during 2018. We are pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta.

·

E175s/E175 SCs – We anticipate the E175/E175 SC fleet count will increase to approximately 149 aircraft by the end of 2018 or early 2019. Growth in this aircraft type in excess of 149  aircraft is expected to be contingent upon additional flying contract awards with one of our major airline partners.

 

·

ERJ145s/135s – Our ERJ145/135 fleet is scheduled to be ratably reduced through lease expirations and related flying contract expirations to approximately 100 aircraft by the end of 2018. These aircraft are leased from the major airline partner with which we have our flying contract.

 

·

CRJ200s – We currently have 26 CRJ200 aircraft with contract expirations scheduled for 2018 with multiple major airline partners. We are pursuing contract extension discussions and alternative placement with other major airline partners.

 

Ground Facilities

SkyWest, SkyWest Airlines and ExpressJet own or lease the following principal properties:

SkyWest Facilities

·

We own the corporate headquarters facilities of SkyWest and SkyWest Airlines, located in St. George, Utah, which consist of two adjacent buildings of 63,000 and 55,000 square-feet, respectively.

SkyWest Airlines Facilities

·

SkyWest Airlines leases a 221,000 square-foot facility at the Salt Lake International Airport. This facility consists of a 98,000 square‑foot aircraft maintenance hangar and a 123,000 square‑foot training and office facility. SkyWest Airlines is leasing the facility from the Salt Lake City Department of Airports under a lease that is scheduled to expire on January 1, 2028.

·

SkyWest Airlines owns a 180,000 square‑foot aircraft maintenance hangar and office facility in Milwaukee, Wisconsin with a land lease that is scheduled to expire on November 1, 2032.

·

SkyWest Airlines leases a 126,000 square‑foot aircraft maintenance hangar and office facility in Boise, Idaho. The lease agreement is scheduled to expire on September 1, 2040.

·

SkyWest Airlines leases a 105,000 square‑foot aircraft maintenance hangar and office facility in Fresno, California. The lease agreement is scheduled to expire on August 31, 2019.

·

SkyWest Airlines owns a 101,000 square‑foot aircraft maintenance hangar and office facility in Colorado Springs, Colorado with a land lease that is scheduled to expire on July 31, 2056.

·

SkyWest Airlines leases an 88,000 square‑foot aircraft maintenance hangar and office facility in Detroit, Michigan. The lease agreement is scheduled to expire on September 1, 2019.

·

SkyWest Airlines leases an 80,000 square‑foot aircraft maintenance hangar and office facility in Nashville, Tennessee. The lease agreement is scheduled to expire on September 1, 2022.

·

SkyWest Airlines owns a 75,000 square‑foot aircraft maintenance hangar and office facility in Chicago, Illinois. The City of Chicago possesses the right to acquire ownership rights of the facility in 2018.

·

SkyWest Airlines leases a 70,000 square‑foot aircraft maintenance hangar in Tucson, Arizona. The lease agreement is scheduled to expire on January 1, 2025.

·

SkyWest Airlines owns a 57,000 square-foot aircraft maintenance facility in Palm Springs, California with a land lease that is scheduled to expire on January 14, 2027.

26


 

·

SkyWest Airlines owns a 55,000 square‑foot maintenance accessory shop and leases a 5,000 square‑foot training facility in Salt Lake City, Utah. The lease agreement is scheduled to expire on May 31, 2019.

·

SkyWest Airlines leases a 42,000 square‑foot aircraft maintenance facility in South Bend, Indiana. The lease agreement is scheduled to expire on September 1, 2018.

ExpressJet Facilities

·

ExpressJet leases an aircraft hangar complex consisting of 203,000 square-feet of building space at the Hartsfield‑Jackson Atlanta International Airport. The complex also contains a 15,000 square‑foot ground service equipment facility. The 203,000 square‑foot building space consists of a 114,000 square-foot aircraft maintenance hangar, an 18,000 square‑foot training facility, and 71,000 square-feet of renovated office space which is utilized to support various operating divisions and ExpressJet’s Operational Control Center. The lease agreement for the aircraft hangar complex has a 25‑year term and is scheduled to expire on April 30, 2033. A portion of the hangar complex has been subleased to another airline.

·

ExpressJet leases an aircraft hangar complex located at the Middle Georgia Regional Airport. The complex includes a 77,000 square‑foot aircraft hangar facility and 41,000 square-feet of training and office space. The lease agreement has a sixteen‑year term and is scheduled to expire on April 1, 2018. ExpressJet has subleased the hangar complex to another party, but ExpressJet remains obligated for payment and other obligations of the lease under the lease agreement.

·

ExpressJet leases an 83,000 square‑foot aircraft maintenance hangar, and a 15,000 square‑foot shop facility in Knoxville, Tennessee. The lease agreement for the aircraft maintenance hangar is scheduled to expire on November 30, 2020, and the lease for the shop facility is scheduled to expire on December 31, 2019.

·

ExpressJet subleases a 91,000 square‑foot aircraft maintenance facility in Cleveland, Ohio. The lease agreement is scheduled to expire on January 30, 2020.

·

ExpressJet leases a 69,000 square‑foot aircraft maintenance hangar and office support facility in Houston, Texas. The lease agreement is scheduled to expire on December 31, 2020.

·

ExpressJet leases a 57,000 square‑foot training center and support space in Houston, Texas. The lease agreement is scheduled to expire on December 31, 2027.

·

ExpressJet leases an aircraft hangar complex located at the Baton Rouge Metropolitan Airport District. The complex includes a 39,000 square‑foot aircraft maintenance hangar and office facility. ExpressJet has the right to occupy the Baton Rouge facility rent‑free until 2023.

·

ExpressJet leases a 32,000 square‑foot aircraft maintenance facility in Richmond, Virginia. The lease agreement is scheduled to expire on October 31, 2018.

·

ExpressJet leases a 29,000 square-foot warehouse for the purpose of parts storage in Atlanta, Georgia.  The lease agreement is scheduled to expire on May 31, 2018.

·

ExpressJet leases a 20,000 square‑foot facility at the Hartsfield‑Jackson Atlanta International Airport which serves as ExpressJet’s corporate headquarters. The lease agreement for this facility has a seven‑year term and is scheduled to expire on July 31, 2018.

Our management deems the current facilities of SkyWest, SkyWest Airlines and ExpressJet as being suitable to support existing operations and believes these facilities will be adequate for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

We are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2017, our management believed, after consultation with legal counsel, that the ultimate outcome of such legal matters was not likely to have a material adverse effect on our financial position, liquidity or results of operations.

27


 

ITEM 4.  MINE SAFETY DISCLOSURES

The disclosure required by this item is not applicable.

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price for Our Common Stock

Our common stock is traded on The Nasdaq Global Select Market under the symbol “SKYW.” As of February 16, 2018, there were approximately 768 stockholders of record of our common stock. 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 our common stock, during the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

Quarter

 

High

 

Low

 

High

 

Low

 

First

    

$

37.45

    

$

32.75

    

$

20.08

    

$

14.19

 

Second

 

 

37.50

 

 

30.40

 

 

26.46

 

 

18.77

 

Third

 

 

44.40

 

 

32.05

 

 

29.78

 

 

25.36

 

Fourth

 

 

54.55

 

 

43.20

 

 

39.30

 

 

27.70

 

The transfer agent for our common stock is Zions First National Bank, Salt Lake City, Utah.

Dividends

During 2017, our Board of Directors declared regular quarterly dividends of $0.08 per share. Our Board of Directors declared regular quarterly dividends of $0.04 per share for the first quarter of 2016 and $0.05 per share for the second, third and fourth quarters of 2016. We intend to continue to pay quarterly dividends subject to liquidity, capital availability and quarterly determinations that cash dividends are in the best interests of our shareholders.

Issuer Purchases of Equity Securities

Our Board of Directors has adopted a stock repurchase program which authorizes us to repurchase shares of our common stock in the public market or in private transactions, from time to time, at prevailing prices. Our stock repurchase program currently authorizes the repurchase of up to $100.0 million of our common stock. The following table summarizes our purchases under our stock repurchase program during the three months ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total Number of
Shares Purchased

    

Average Price
Paid Per Share

    

Total Number of Shares
Purchased as Part of a
Publicly Announced
Program (1)

    

Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the
Program (in Thousands)

November 1, 2017 - November 31, 2017

 

110,497

 

$

46.90

 

110,497

 

$

84,807

December 1, 2017 - December 31, 2017

 

92,258

 

 

52.18

 

92,258

 

 

79,992

Total

 

202,755

 

$

49.30

 

202,755

 

$

79,992

(1)

On February 9, 2017, we announced that our Board of Directors authorized the repurchase of up to $100.0 million of our common stock over the next three years. Purchases are made at management’s discretion based on market conditions and financial resources. As of December 31, 2017, we had repurchased approximately 484,000 shares of our common stock for $20.0 million under this authorization.  

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Stock Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), except to the extent we specifically incorporate it by reference into such filing. 

The following graph compares the cumulative total shareholder return on our common stock over the five‑year period ended December 31, 2017, with the cumulative total return during such period of the Nasdaq Stock Market (U.S. Companies) and the Nasdaq Stock Market Transportation Index. The following graph assumes an initial investment of $100.00 with dividends reinvested. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance. 

Picture 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INDEXED RETURNS

 

 

 

Base

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Years Ending

 

Company Name / Index

 

2012

 

2013

 

2014

 

2015

 

2016

 

2017

 

SkyWest, Inc.

    

100

    

120.38

 

109.71

 

158.69

 

306.30

 

448.91

 

NASDAQ Composite

 

100

 

140.12

 

160.78

 

171.97

 

187.22

 

242.71

 

NASDAQ Transportation Index

 

100

 

141.60

 

171.91

 

132.47

 

171.17

 

218.34

 

 

 

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this Report.

29


 

Selected Consolidated Financial Data (amounts in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

Operating revenues

    

$

3,204,268

    

$

3,121,206

    

$

3,095,563

    

$

3,237,447

    

$

3,297,725

 

Operating income (loss)(1)

 

 

388,199

 

 

(172,684)

 

 

234,515

 

 

24,848

 

 

153,111

 

Net income (loss)(2)

 

 

428,907

 

 

(161,586)

 

 

117,817

 

 

(24,154)

 

 

58,956

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

8.28

 

$

(3.14)

 

$

2.31

 

$

(0.47)

 

$

1.14

 

Diluted

 

$

8.08

 

$

(3.14)

 

$

2.27

 

$

(0.47)

 

$

1.12

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

51,804

 

 

51,505

 

 

51,077

 

 

51,237

 

 

51,688

 

Diluted

 

 

53,100

 

 

51,505

 

 

51,825

 

 

51,237

 

 

52,422

 

Total assets(3)

 

$

5,458,279

 

$

5,007,966

 

$

4,781,984

 

$

4,388,818

 

$

4,214,582

 

Current assets(3)

 

 

995,133

 

 

917,792

 

 

1,017,570

 

 

1,089,501

 

 

1,287,568

 

Current liabilities

 

 

820,825

 

 

747,265

 

 

748,026

 

 

691,065

 

 

625,910

 

Long-term debt, net of current maturities

 

 

2,377,346

 

 

2,240,051

 

 

1,659,234

 

 

1,548,390

 

 

1,306,370

 

Stockholders’ equity

 

 

1,754,322

 

 

1,350,943

 

 

1,506,435

 

 

1,400,346

 

 

1,434,939

 

Return (loss) on average equity(4)

 

 

27.6

 

(12.0)

 

7.8

 

(1.7)

 

4.2

%

Cash dividends declared per common share

 

$

0.32

 

$

0.19

 

$

0.16

 

$

0.16

 

$

0.16

 


(1)

Our operating loss for 2016 included a special charge of $465.6 million related to an impairment on our 50-seat aircraft and related assets. Our 2014 operating income included a special charge of $74.8 million primarily related to an impairment on our EMB120 aircraft and ERJ145 long-lived assets.

(2)

Our net income for 2017 included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with the Tax Cuts and Jobs Act of 2017 that was enacted into law in December 2017.

(3)

Certain reclassifications were made to 2016 balances to conform to the current period presentation.  See Note 1 to our Consolidated Financial Statements included in Item 8 of this Report.

(4)

Calculated by dividing net income (loss) by the average of beginning and ending stockholders’ equity for the year.

Selected Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

Block hours

    

1,839,779

    

1,938,492

    

2,074,804

    

2,275,562

    

2,380,118

 

Departures

 

1,087,052

 

1,153,480

 

1,226,897

 

1,357,454

 

1,453,601

 

Passengers carried

 

51,483,552

 

53,539,438

 

56,228,593

 

58,962,010

 

60,581,948

 

Average passenger trip length

 

512

 

523

 

528

 

534

 

525

 

Number of operating aircraft at end of year(1)

 

595

 

652

 

660

 

717

 

755

 


(1)

Excludes aircraft leased to un‑affiliated and affiliated entities.

 

30


 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2017, 2016 and 2015. Also discussed is our financial position as of December 31, 2017 and 2016. You should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report or incorporated herein by reference. This discussion and analysis contains forward‑looking statements. Please refer to the sections of this Report entitled “Cautionary Statement Concerning Forward‑looking Statements” and “Item 1A. Risk Factors” for discussion of some of the uncertainties, risks and assumptions associated with these statements.

Overview

Through SkyWest Airlines and ExpressJet, we have the largest regional airline operations in the United States. As of December 31, 2017, SkyWest Airlines and ExpressJet offered scheduled passenger and air freight service with approximately 2,980 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of December 31, 2017, we had 595 aircraft available for scheduled service consisting of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

CRJ200

    

CRJ700

    

CRJ900

    

ERJ135

    

ERJ145

    

E175

    

Total

 

United

 

81

 

20

 

 —

 

 3

 

109

 

65

 

278

 

Delta

 

94

 

60

 

52

 

 —

 

 —

 

19

 

225

 

American

 

16

 

49

 

 —

 

 —

 

 —

 

 —

 

65

 

Alaska

 

 4

 

 —

 

 —

 

 —

 

 —

 

23

 

27

 

Aircraft in scheduled service

 

195

 

129

 

52

 

 3

 

109

 

107

 

595

 

Subleased to an un-affiliated entity

 

 4

 

 —

 

 —

 

 —

 

 —

 

 —

 

 4

 

Other*

 

 9

 

 7

 

 —

 

 —

 

 8

 

 —

 

24

 

Total Fleet

 

208

 

136

 

52

 

 3

 

117

 

107

 

623

 

*As of December 31, 2017, these aircraft have been removed from service and are in the process of being returned under the applicable leasing arrangement or are aircraft transitioning between code-share agreements with our major airline partners. During the year ended December 31, 2017, we sold eleven owned EMB120 30-seat turboprop aircraft at net book value.

Our business model is based on providing scheduled regional airline service under code-share agreements (commercial agreements between airlines that, among other things, allow one airline to use another airline’s flight designator codes on its flights) with our major airline partners.  Our success is principally centered on our ability to meet the needs of our major airline partners through providing a reliable and safe operation at attractive economics.  Over the last several years, our business has evolved as we have added 21 new E175 aircraft to our fleet since December 31, 2016, removed 47 50-seat ERJ145 aircraft and 18 50 seat CRJ200 aircraft that were operating under less profitable or unprofitable flying agreements.

 

We anticipate our fleet will continue to evolve in 2018 as we are scheduled to add 42 new E175 to existing fixed-fee agreements by the end of 2018 or early 2019.  We also anticipate certain fleet reductions, primarily due to the wind down of the ExpressJet Delta Connection Agreement. Our primary objective in the fleet changes is to improve our profitability by adding new aircraft to fixed-fee agreements at improved economics, including the E175 aircraft, while removing aircraft that were operating under less profitable or unprofitable arrangements.

For the year ended December 31, 2017, approximately 46.7% of our aircraft in scheduled service were operated for United, approximately 37.8% were operated for Delta, approximately 10.9% were operated for American and approximately 4.6% were operated for Alaska.

Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed‑fee arrangements and our prorate flying arrangements. For the year ended December 31, 2017, contract flying revenue and prorate revenue represented approximately 88% and 12%, respectively, of our total passenger revenues. On contract routes, the major

31


 

airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours (measured from takeoff to landing, including taxi time), flight departures and other operating measures.

Financial Highlights

We had total operating revenues of $3.2 billion for the year ended December 31, 2017, a 2.5% increase, compared to total operating revenues of $3.1 billion for the year ended December 31, 2016. We had a net income of $428.9 million, or $8.08 per diluted share, for the year ended December 31, 2017, compared to a net loss of $161.6 million, or $(3.14) per diluted share, for the year ended December 31, 2016. Our results for 2017 included a $246.8 million benefit related to the revaluation of our net deferred tax liability and other tax liabilities in accordance with the Tax Cuts and Jobs Act that was enacted into law in December 2017. Our results for 2016 included a non-cash impairment charge of $465.6 million (pre-tax) primarily attributable to assets associated with our 50-seat aircraft. 

 

The significant items affecting our financial performance during the year ended December 31, 2017 are outlined below:

 

Revenue

The number of aircraft we have in scheduled service and the number of block hours we generate on our flights are primary drivers to our passenger revenues under our fixed-fee arrangements.  During 2017, we had a net reduction in the number of aircraft operating under fixed-fee agreements. As summarized under the Fleet Activity section below, from December 31, 2016 to December 31, 2017, we removed 78 aircraft from service that were operating under less profitable flying contracts and added 21 aircraft to new or existing fixed-fee arrangements at improved economics.  The number of aircraft available for scheduled service decreased from 652 aircraft at December 31, 2016 to 595 at December 31, 2017, or by 8.7%.  Our completed block hours decreased 5.1% primarily due to the reduced fleet size during 2017.

 

Despite the net reduction in our fleet size and block hour production since 2016, our total passenger revenue increased 2.5% from 2016 to 2017 primarily due to higher compensation we earned on aircraft, including new aircraft added in 2017, partially offset by a decrease in revenue associated with the aircraft removed from our fleet. Additionally, SkyWest Airlines took delivery of 19 E175 aircraft during the fourth quarter of 2016, which had only a partial quarter impact on 2016 revenue for comparability purposes to the 2017 year.

 

Operating Expenses

The decrease in our operating expense from 2016 to 2017 of $477.8 million, or 14.5%, was related primarily to a non-cash impairment of $465.6 million recorded in 2016 primarily attributable to the write-down of certain long-lived assets associated with our 50-seat aircraft. We did not have an impairment in 2017. The remaining decrease in our direct operating costs was primarily associated with the reduction to our fleet size of 8.7% from 2016 to 2017.

 

Fleet Activity

 The following table summarizes our fleet activity for 2017:

 

 

 

 

 

 

 

 

 

 

 

Aircraft in Service

 

December 31, 2016

 

Additions

 

Removals

 

December 31, 2017

 

CRJ200s

 

213

 

 

(18)

 

195

 

CRJ700s

 

130

 

 

(1)

 

129

 

CRJ900s

 

64

 

 

(12)

 

52

 

ERJ145/135s

 

159

 

 

(47)

 

112

 

E175s

 

86

 

21

 

 

107

 

Total

 

652

 

21

 

(78)

 

595

 

 

32


 

The additional 21 E175 aircraft were new aircraft we acquired and placed into fixed-fee contracts during 2017.  The 18 CRJ200s, 47 ERJ145s, twelve CRJ900s and one CRJ700 were aircraft removed from scheduled service during 2017 and were either leased aircraft that were returned to lessors (or in the process of being returned to lessors) or owned aircraft that were sold to third parties.  

 

Fleet Developments

As of December 31, 2017, we had 107 E175 aircraft in service.  We have agreements with multiple major airline partners to place 42 new E175/E175 SC aircraft into fixed-fee contracts by the end of 2018 or early 2019.

 

During 2017, ExpressJet and Delta mutually agreed to initiate the wind down of the ExpressJet Delta Connection Agreement by the end of 2018. As of December 31, 2017, ExpressJet operated 49 CRJ700s/900s under the ExpressJet Delta Connection Agreement. Of the 49 aircraft, ExpressJet anticipates returning 19 leased aircraft to Delta and removing 30 CRJ700 aircraft from service with Delta during 2018. ExpressJet is pursuing placement of the 30 CRJ700 aircraft with other major airline partners, of which eight aircraft are scheduled to be placed under an agreement with American following the removal from service with Delta.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 to our Consolidated Financial Statements included in Item 8 of this Report. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management’s subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, aircraft maintenance, aircraft leases, impairment of long‑lived assets, stock‑based compensation expense and fair value as discussed below. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results will likely differ, and could differ materially, from such estimates.

Revenue Recognition

Passenger and ground handling revenues are recognized when service is provided. Under our fixed-fee and prorate flying agreements with our major airline partners, revenue is considered earned when each flight is completed. Our agreements with our major airline partners contain certain provisions pursuant to which the parties could terminate the respective agreement, subject to certain rights of the other party, if certain performance criteria are not maintained. Our revenues could be impacted by a number of factors, including changes to the applicable code‑share agreements, contract modifications resulting from contract renegotiations and our ability to earn incentive payments contemplated under applicable agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement date, we record that period’s revenues based on the lower of the prior period’s approved rates or our estimate of rates that will be implemented upon completion of negotiations. Also, in the event we have a reimbursement dispute with a major airline partner at a quarterly or annual financial statement date, we evaluate the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are required to exercise judgment and use assumptions in the application of our revenue recognition policy. See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that we anticipate is likely to have an impact on our revenue accounting beginning in 2018.

Maintenance

We use the direct‑expense method of accounting for our regional jet aircraft engine overhaul costs. Under this method, the maintenance liability is not recorded until the maintenance services are performed. With respect to engines on a portion of our fleet, a third‑party vendor provides our long‑term engine services covering the scheduled and unscheduled repairs for engines under our Fixed‑Rate Engine Contracts. Under the terms of the vendor agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third‑party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the third‑party vendor agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement.

33


 

Aircraft Leases

Our fleet of aircraft in scheduled service includes 319 aircraft under lease. All of ExpressJet’s ERJ145 aircraft flying for United are leased from United for nominal amounts. In order to determine the proper classification of our leased aircraft as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Under the majority of our operating leases, we are required to meet half-time lease return conditions with the aircraft, which presumes at least 50 percent of the eligible flight time for certain components since the last overhaul remains when the aircraft is returned to the lessor. A liability for probable lease return costs is recorded after the aircraft has completed its last maintenance cycle prior to being returned. Additionally, operating leases are not reflected in our consolidated balance sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that is likely to have an impact on our aircraft lease accounting beginning in 2019.

Impairment of Long‑Lived Assets

As of December 31, 2017, we had approximately $4.2 billion of property and equipment and related assets net of accumulated depreciation. Additionally, as of December 31, 2017, we had approximately $4.9 million in intangible assets. In accounting for these long‑lived and intangible assets, we make 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. 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. When considering whether or not impairment of long‑lived assets exists, we group 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 type or contract level. We did not have any impairment charges during the year ended December 31, 2017.

Stock‑Based Compensation Expense

Restricted stock units (“RSUs”) are awarded to eligible employees and entitle the grantee to receive shares of common stock at the end of the vest period.  Performance Share Units (“PSUs”) are awarded to certain employees to receive shares of common stock if specific performance targets are achieved. At the end of each performance period, the number of shares awarded can range from 0% to 200% of the original 2017 grant amount for performance share units and can range from 0% to 150% of the original 2015 and 2016 grant amounts for performance shares, depending on the performance against the pre-established targets. The fair value of the RSUs and PSUs are based on the trailing 20-day average stock price as of the date of grant and “cliff vest” after three years. Expense is recognized over the three year vesting period. 

 

Fair value

We hold certain assets that are required to be measured at fair value in accordance with U.S. Generally Accepted Accounting Principles. We determined fair value of these assets based on the following three levels of inputs:

 

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of our marketable securities primarily utilize broker quotes in a non‑active market for valuation of these securities.

34


 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions.

 

We utilize several valuation techniques in order to assess the fair value of our financial assets and liabilities. Our cash and cash equivalents primarily utilize quoted prices in active markets for identical assets or liabilities.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements included in Item 8 of this Report for a description of recent accounting pronouncements.

 

Other Accounting Items

Under our fixed‑fee arrangements, three components may have a significant impact on comparability of revenue and operating expense for the periods presented in this Report. The first item is the reimbursement of fuel expense, which is a directly‑reimbursed expense under all of our fixed‑fee arrangements. If we purchase fuel directly from vendors, our major airline partners reimburse us for fuel expense incurred under each respective fixed‑fee contract, and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed‑fee arrangements during a particular period will impact our fuel expense and our passenger revenue during the period equally, with no impact on our operating income. Over the past few years, some of our major airline partners have purchased an increased volume of fuel directly from vendors on flights we operated under our fixed‑fee contracts, which has decreased both revenue and operating expenses compared to previous periods presented in this Report.

The second item is the reimbursement of landing fees and station rents, which is a directly‑reimbursed expense under all of our fixed‑fee arrangements. Our major airline partners reimburse us for landing fees and station rent expense incurred under each respective fixed‑fee contract, and we record such reimbursement as passenger revenue. Over the past few years, some of our major airline partners have paid an increased volume of landing fees and station rents directly to our vendors on flights we operated under our flying contracts, which has also decreased both revenue and operating expenses compared to previous periods presented in this Report.

The third item is the compensation we receive for engine maintenance under our fixed‑fee arrangements. Under certain of our fixed-fee contracts, a portion of our compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to cover our engine maintenance costs (“Fixed‑Rate Engine Contracts”). Under the remainder of our fixed-fee contracts, our major airline partner directly reimburses us for engine maintenance expense when the expense is incurred as a pass‑through cost (“Directly‑Reimbursed Engine Contracts”).

Because we recognize revenue using the applicable fixed hourly rates under our Fixed‑Rate Engine Contracts, the number of engine maintenance events and related expense we incur may vary between reporting periods under such contracts, which may impact the comparability of our operating income for the presented reporting periods.

Because we recognize revenue and engine overhaul expense in the same amount and in the same period when we incur engine maintenance expense on engines operating under our Directly‑Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on our operating income for the presented reporting periods.

We use the direct‑expense method of accounting for our regional jet aircraft engine overhaul costs and, accordingly, we recognize engine maintenance expense on our engines on an as‑incurred basis. Under the direct‑expense method, the maintenance liability is recorded when the maintenance services are performed (“Engine Overhaul Expense”).

We have an agreement with a third‑party vendor to provide long‑term engine maintenance covering scheduled and unscheduled repairs for engines on certain of our CRJs and E175s operating under our Fixed‑Rate Engine Contracts (a “Power-by-the-Hour Agreement”). Under the terms of the Power-by-the-Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power-by-the-Hour Agreement, we

35


 

expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. The table below summarizes how we are compensated by our major airline partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.

 

 

 

 

 

Flying Contract

    

Compensation of Engine Expense

    

Expense Recognition

SkyWest Delta Connection (CRJs)

 

Directly-Reimbursed Engine Contracts

 

Direct Expense

SkyWest Delta Connection (E175)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

ExpressJet Delta Connection (CRJs)

 

Directly-Reimbursed Engine Contracts

 

Direct Expense

SkyWest United Express (CRJ200, CRJ700, E175)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

ExpressJet United (ERJ145)

 

Directly-Reimbursed Engine Contracts

 

Power-by-the-Hour Agreement

Alaska Agreement (CRJ200, CRJ700)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

Alaska Agreement (E175)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

SkyWest American Agreement (CRJ200, CRJ700)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

ExpressJet American Agreement (CRJ700)

 

Fixed-Rate Engine Contracts

 

Power-by-the-Hour Agreement

 

Results of Operations

2017 Compared to 2016

Operational Statistics. The following table sets forth our major operational statistics and the associated percentages of change for the periods identified below. The decrease in block hours, departures and passengers carried during the year ended December 31, 2017, compared to the year ended December 31, 2016, was primarily due to a net reduction in our operating fleet from 652 aircraft to 595 aircraft.

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2017

    

2016

    

% Change

 

Block hours

 

1,839,779

 

1,938,492

 

(5.1)

%

Departures

 

1,087,052

 

1,153,480

 

(5.8)

%

Passengers carried

 

51,483,552

 

53,539,438

 

(3.8)

%

Passenger load factor

 

80.4

%  

82.1

%  

(1.7)

pts

Average passenger trip length (miles)

 

512

 

523

 

(2.1)

%

Revenues.  Total operating revenues increased $83.1 million, or 2.7%, during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to higher compensation earned on aircraft added to our fleet and improved economics on flying contract renewals, partially offset by a reduction in revenue from aircraft removed from unprofitable or less profitable flying contracts since 2016, as further explained in the “Passenger revenues” section below. Under certain of our fixed-fee contracts, certain expenses are subject to direct reimbursement from our major airline partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. The following table summarizes our passenger revenues and the amount of fuel, landing fees, station rents, and engine maintenance incurred under our fixed-fee agreements. The direct reimbursement was included in our passenger revenues for the periods indicated (dollar amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2017

    

2016

    

$ Change

    

% Change

 

Passenger revenues

 

$

3,126,708

 

$

3,051,414

 

$

75,294

 

2.5

%

Less: directly-reimbursed fuel from airline partners

 

 

77,517

 

 

51,583

 

 

25,934

 

50.3

%

Less: directly-reimbursed landing fee and station rent from airline partners

 

 

13,002

 

 

18,739

 

 

(5,737)

 

(30.6)

%

Less: directly-reimbursed engine maintenance from airline partners

 

 

68,531

 

 

62,782

 

 

5,749

 

9.2

%

Passenger revenue excluding directly-reimbursed fuel, landing fee, station rent and engine maintenance

 

$

2,967,658

 

$

2,918,310

 

$

49,348

 

1.7

%

 

36


 

Passenger revenues.    The $75.3 million, or 2.5%, increase in passenger revenues during the year ended December 31, 2017, compared to the year ended December 31, 2016, was partially attributed to an increase in the amount of directly-reimbursed fuel expenses incurred under our fixed-fee contracts of $25.9 million in the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in directly-reimbursed fuel expense was primarily due to higher average fuel cost per gallon in 2017 compared to 2016 and an increase in the volume of gallons that we purchased.  Our fuel expense, landing fees, station rents and directly‑reimbursed engine expense increased by $25.9 million during the year ended December 31, 2017, compared to the year ended December 31, 2016.

 

Passenger revenue excluding directly-reimbursed fuel, landing fees, station rents and engine maintenance increased $49.3 million, or 1.7%, in the year ended December 31, 2017, compared to the year ended December 31, 2016, due to higher compensation we earned on aircraft, including new aircraft added in 2017, partially offset by a decrease in revenue associated with the aircraft removed from our fleet. Additionally, SkyWest Airlines took delivery of 19 E175 aircraft during the fourth quarter of 2016, which had only a partial quarter impact on 2016 revenue for comparability purposes to the 2017 year. 

 

Ground handling and other.  Total ground handling and other revenues increased $7.8 million, or 11.1%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. Ground handling and other revenue primarily consists of ground handling services we provide to third‑party airlines and government subsidies we receive for operating certain routes under our prorate agreements. Revenues associated with ground handling services we provide for our aircraft are recorded as passenger revenues. The increase was primarily related to an increase in ground handling operations provided to third-party airlines on a short-term contract basis.

Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

 

 

    

Amount

    

Amount

    

Amount

    

Percent

    

 

Salaries, wages and benefits

 

$

1,196,227

 

$

1,211,380

 

$

(15,153)

 

(1.3)

%  

 

Aircraft maintenance, materials and repairs