Impact of the COVID-19 Pandemic

9 Months Ended

Sep. 30, 2020

Impact of the COVID-19 Pandemic

Impact of the COVID-19 Pandemic

Note 2 — Impact of the COVID-19 Pandemic

COVID-19, which was declared a global health pandemic by the World Health Organization in March 2020, has surfaced in nearly all regions of the world and driven the implementation and continuation of significant, government-imposed measures to prevent or reduce its spread, including travel restrictions, closing of borders, “shelter in place” orders and business closures. Consequently, the Company and its major airline partners (as defined in Note 3

below), have experienced an unprecedented decline in the demand for air travel, which has materially and adversely affected the Company’s revenues, including its capacity purchase agreements and its prorate agreements (as defined in Note 3 below). The continued spread of the virus and the ongoing global pandemic has affected the majority of the domestic and international networks of the Company’s major airline partners for whom it conducts flight operations and relies on to set its flight schedules. While the length and severity of the reduction in demand due to COVID-19 are uncertain, the Company presently expects a continued significant negative impact on its results of operations at a minimum for the remainder of 2020 and into 2021.
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In response to these developments, the Company has implemented measures to focus on the personal safety of its passengers and employees, while at the same time seeking to mitigate the impact on the Company’s financial position and operations. These measures include, but are not limited to, the following:

Focus on the Personal Safety of Passengers and Employees. The safety and well-being of the Company’s passengers and employees are the Company’s priorities in every decision it makes. As the COVID-19 pandemic has developed, the Company has taken numerous steps to help passengers and employees take appropriate safety measures on the ground and in the air in keeping with current Centers for Disease Control and Prevention recommendations, including:

● Working with the Company’s major airline partners to enhance its aircraft cleaning procedures.

● Working with the Company’s major airline partners to provide masks for crewmembers and ensuring that all fleet service personnel have the necessary personal protective equipment for disinfecting the aircraft.

● Providing a number of options to employees who are diagnosed with COVID-19, including pay protection and extended leave options.

● Implementing workforce social distancing and protection measures, enhanced cleaning of the Company’s facilities, including training facilities, using methods and products similar to what the Company is using on its aircraft.

Capacity Reductions. Beginning in March 2020, the Company and its major airline partners experienced an unprecedented decrease in demand for air travel and expect this decline from pre COVID-19 flight levels to continue at a minimum for the remainder of 2020 and into 2021. The Company depends on its major airline partners to contract with the Company to schedule flights. Therefore, in response to this decreased demand, the Company has significantly reduced its capacity. During the three months ended September 30, 2020, the Company’s number of departures and block hours each decreased 37.3% and 40.8%, respectively, from the three months ended September 30, 2019. The Company also anticipates similar schedule reductions will likely continue at a minimum throughout the remainder of 2020 and into 2021. The number of daily flights operated by the Company may not return to pre-COVID-19 levels for the foreseeable future. The Company will continue to work with its major airline partners regarding future schedules and make further demand-driven adjustments to its capacity as needed. The Company has removed 38 Canadair CRJ200 regional aircraft (“CRJ200”) that were operating under the SkyWest Airlines Delta Connection Agreement with scheduled contract expirations in 2020 that were not extended as a result of decreased demand as of September 30, 2020, and anticipates removing an additional 17 CRJ200 aircraft during the fourth quarter of 2020. The Company additionally terminated its American Prorate Agreement on seven CRJ200 aircraft in the second quarter of 2020 and the Company may have further reductions in the number of CRJ200 aircraft operating under its other prorate agreements. The Company may receive requests by its major airline partners to defer deliveries of new or used aircraft that were previously scheduled for 2020, 2021 and 2022.

Cost Reductions. With the reduction in revenue, the Company has, and will continue to implement, cost saving initiatives, including:

● Reducing employee-related costs including by:

o Offering voluntary unpaid leave to employees.

o Suspending all non-scale pay increases.

o Instituting a company-wide hiring freeze.

● Delaying non-essential projects and reducing or suspending other discretionary spending.

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Liquidity. At September 30, 2020, the Company had $1,374.8 million in total available liquidity, consisting of $822.0 million in cash and marketable securities and $39.8 million available under SkyWest Airlines’ line of credit and

an additional $513.0 million available to draw under the Company’s secured loan with the U.S. Department of the Treasury (“Treasury”) related to the Coronavirus Aid Relief, and Economic Security Act (the “CARES Act”).

CARES Act. On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act is a relief package intended to assist many aspects of the U.S. economy, including providing the airline industry with up to $25 billion in grants to be used for employee wages, salaries and benefits.
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In April 2020, SkyWest Airlines entered into an agreement with Treasury to receive $438.0 million in emergency relief through the CARES Act payroll support program to be paid in installments from April to September 2020. In conjunction with an additional payment received in September 2020, SkyWest Airlines has received $450.7 million in the aggregate under the payroll support program as of September 30, 2020. The relief payments are conditioned on the Company’s agreement to, among other things, refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020. Other conditions include bans on share repurchases and dividends through September 30, 2021, continuing essential air service as directed by the U.S. Department of Transportation and certain limitations on executive compensation. The relief payments received through September 30, 2020 include $345.5 million in a grant and $105.2 million in an unsecured 10-year loan. The loan bears interest at an annual rate of 1.00% for the first five years (through April 2025) and the Secured Overnight Financing Rate plus 2.00% in the final five years. In return, the Company agreed to issue to Treasury warrants to purchase 370,720 shares of the Company’s common stock. These warrants have an exercise price of $28.38 per share and a five-year term from the date of issuance.

The relative fair value of the warrants is recorded within stockholder's equity and as a discount reducing the carrying value of the loan, which will be amortized as interest expense in the Company’s income statement over the term of the loan. The proceeds of the grant are recorded in cash and cash equivalents when received and will be recognized as a reduction in expense in CARES Act payroll support grant in our income statement over the periods that the funds are intended to compensate.

During the nine months ended September 30, 2020, the Company recognized $342.1 million of grant proceeds received under the CARES Act payroll support program, as a reduction in payroll expense with the remaining $3.4 million recorded as a deferred reduction in expense in other current liabilities on our balance sheet. We expect to recognize the remainder of the grant proceeds from the CARES Act payroll support program as a reduction in payroll expense by the end of 2020. See Note 9, "Long-Term Debt," for further discussion of the unsecured loans and warrants to acquire the Company’s shares issued under the CARES Act payroll support program.

The CARES Act also provides for up to $25 billion in secured loans to the airline industry. In September 2020 the Company entered into a secured loan and guarantee agreement with Treasury and the Bank of New York Mellon (the “Loan Agreement”), which permits the Company to borrow up to $573 million. Subsequently, on October 28, 2020, the Company entered into an amendment to the Loan Agreement that permits the Company to borrow up to $725 million in the aggregate. As of September 30, 2020, the Company has borrowed $60 million and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 26, 2021. The proceeds are to be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the Loan Agreement and the applicable provisions of the CARES Act. The loan will bear interest at a variable rate per annum equal to the London interbank offer rate divided by one minus the Eurodollar Reserve Percentage (as defined in the Loan Agreement) plus 3.00%. The applicable interest rate for the $60 million loan will be 3.22% per annum through September 15, 2021 at which time the interest rate will reset in accordance with the foregoing formula. In return, the Company agreed to issue to Treasury warrants to purchase shares of the Company’s common stock based on a debt coverage ratio and amounts drawn under the facility. The Company issued warrants to purchase 211,416 shares of the Company’s common stock to Treasury in conjunction with the Company’s $60 million borrowing under the facility. These warrants have an exercise price of $28.38 per share and a five-year term from the date of issuance.