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

12 Months Ended

Dec. 31, 2022

Condensed Consolidated Financial Statements

The Company’s consolidated financial statements include the accounts of the Company and the SkyWest Airlines and SkyWest Leasing segments, with all inter-company transactions and balances having been eliminated.

In preparing the accompanying consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after December 31, 2022, through the filing date of the Company’s annual report with the U.S. Securities and Exchange Commission.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no restricted cash as of December 31, 2022 and 2021.

Marketable securities

Marketable Securities

The Company’s investments in debt securities are classified as available-for-sale and are reported at fair market value with the net unrealized depreciation reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. At the time of sale, any realized appreciation or depreciation, calculated by the specific identification method, is recognized in other income and expense. The Company’s position in marketable securities as of December 31, 2022 and 2021 was as follows (in thousands):


			Gross unrealized		Gross unrealized
At December 31, 2022	Amortized Cost		holding gains		holding losses		Fair market value
Marketable securities:
Bond and bond funds	$	629,280	$	—	$	(5,026)	$	624,254
Commercial Paper		319,977		—		—		319,977
Total marketable securities	$	949,257	$	—	$	(5,026)	$	944,231


			Gross unrealized			Gross unrealized
At December 31, 2021	Amortized Cost		holding gains		holding losses		Fair market value
Marketable securities:
Bond and bond funds	$	54,673	$	—	$	—	$	54,673
Commercial Paper		547,316		—		—		547,316
Total marketable securities	$	601,989	$	—	$	—	$	601,989

As of December 31, 2022 and 2021, the Company had classified $944.2 million and $602.0 million of marketable securities, respectively, as short-term because it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year.

Inventories

Inventories include expendable parts, fuel and supplies and are valued at cost (FIFO basis) less an allowance for obsolescence based on historical results, excess parts and management’s expectations of future operations. Expendable inventory parts are charged to expense as used. An obsolescence allowance for flight equipment expendable parts is accrued based on estimated lives of the corresponding fleet types and salvage values. The inventory allowance as of December 31, 2022 and 2021, was $24.2 million and $23.0 million, respectively.

Property and Equipment

Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:


Assets	Depreciable Life	Current Residual Value
Aircraft, rotable spares, and spare engines	up to 22 years	up to 20	%
Ground equipment	up to 10 years	0	%
Office equipment	up to 7 years	0	%
Leasehold improvements	Shorter of 15 years or lease term	0	%
Buildings	20 - 39.5 years	0	%

Impairment of Long-Lived Assets

As of December 31, 2022, the Company had approximately $5.5 billion of property and equipment, net. In accounting for these long-lived assets, the Company makes estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. On a periodic basis, the Company evaluates whether impairment indicators are present. When considering whether or not impairment of long-lived assets exists, the Company groups similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the aircraft type level.

During 2022, the Company committed to a plan to sell 14 CRJ700 aircraft, resulting in an impairment on the assets held for sale of $51.4 million. See Note 9, “Assets Held for Sale” for more information on the assets held for sale.

During 2021, the Company recorded an impairment charge of $84.6 million to write-down certain CRJ900 aircraft to their estimated fair value. See Note 10, “Special Items” for more information on the CRJ900 impairment.

Capitalized Interest

Interest is capitalized on aircraft purchase deposits as a portion of the cost of the asset and is depreciated over the estimated useful life of the asset. During the years ended December 31, 2022 and 2021, the Company capitalized interest costs of approximately $1.9 million, and during the year ended December 31, 2020, the Company capitalized interest costs of approximately $1.7 million.

Maintenance

The Company operates under a U.S. Federal Aviation Administration approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its regional jet engine overhauls. The Company has engine services agreements with third-party vendors to provide long-term engine services covering the scheduled and unscheduled repairs for most of its aircraft. Under the terms of the agreements, the Company pays a fixed dollar amount per engine hour flown on a monthly basis and the third-party vendors will assume the responsibility to repair the engines at no additional cost to the Company, subject to certain specified exclusions. Maintenance costs under these contracts are recognized when the engine hour is flown pursuant to the terms of each contract.

The costs of maintenance for airframe and avionics components, landing gear and other recurring maintenance are expensed as incurred. In 2020, the Company wrote-off $3.7 million of long-lived maintenance assets at maintenance locations the Company vacated during the year as a maintenance expense. There was not a similar expense in 2022 and 2021.

Flying Agreements and Airport Customer Service and Other Revenues

The Company recognizes revenue under its flying agreements and under its lease, airport services and other service agreements when the service is provided under the applicable agreement. Under the Company’s capacity purchase agreements with United, Delta, American and Alaska (each, a “major airline partner”), the major airline partner generally pays the Company a fixed-fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or 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 flight completion and on-time performance. The major airline partner also directly pays for or reimburses the Company for certain direct expenses incurred under the capacity purchase agreement, such as fuel, airport landing fees and airport rents. Under the capacity purchase agreements, the Company’s performance obligation is met when each flight is completed, measured in completed block hours, and is reflected in flying agreements revenue. The transaction price for the capacity purchase agreements is determined from the fixed-fee consideration, incentive consideration and directly reimbursed expenses earned as flights are completed over the agreement term. For the years ended December 31, 2022, 2021 and 2020, capacity purchase arrangements represented approximately 88.0%, 84.3% and 87.0% of the Company’s flying agreements revenue, respectively.

Under the Company’s prorate arrangements (also referred to as a “prorate” or “revenue-sharing” agreement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner. Under the Company’s prorate flying agreements, the performance obligation is met and revenue is recognized when each flight is completed based upon the portion of the prorate passenger fare the Company determines that it will receive for each completed flight. The transaction price for the prorate agreements is determined from the proration formula derived from each passenger ticket amount on each completed flight over the agreement term. For the years ended December 31, 2022, 2021 and 2020, prorate flying agreements represented approximately 12.0%, 15.7%, and 13.0% of the Company’s flying agreements revenue, respectively.

The following table represents the Company’s flying agreements revenue by type for the years ended December 31, 2022, 2021 and 2020 (in thousands):


	For the year ended December 31,
	2022		2021		2020
Capacity purchase agreements flight operations revenue (non-lease component)	$	2,028,308		1,678,219		1,265,923
Capacity purchase agreements fixed aircraft lease revenue		504,529		527,173		526,018
Capacity purchase agreements variable aircraft lease revenue		17,664		—		—
Prorate agreements revenue		349,336		409,684		268,860
Flying agreements revenue	$	2,899,837	$	2,615,076	$	2,060,801

The Company allocates the total consideration received under its capacity purchase agreements between the lease and non-lease components based on stand-alone selling prices. A portion of the Company’s compensation under its capacity purchase agreements is designed to reimburse the Company for certain aircraft ownership costs. The consideration for aircraft ownership costs varies by agreement but is intended to cover either the Company’s aircraft principal and interest debt service costs, its aircraft depreciation and interest expense or its aircraft lease expense costs while the aircraft is under contract. The consideration received for the use of the aircraft under the Company’s capacity purchase agreements is accounted for as lease revenue, inasmuch as the agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. The lease revenue associated with the Company’s capacity purchase agreements is accounted for as an operating lease and is reflected as flying agreements revenue on the Company’s consolidated statements of comprehensive income (loss). During the year ended December 31, 2022, the Company amended its capacity purchase agreements with certain major airline partners that reduced certain contractual fixed monthly payments and increased certain contractual variable payments. Accordingly, the Company re-evaluated the allocation of the total consideration between the lease and non-lease components for the amended agreements, including the allocation of the consideration to the fixed and variable lease components. As a result of these amendments, the Company deferred recognizing lease revenue on $22.1 million of the allocated fixed monthly lease payments received during the year ended December 31, 2022, under the straight-line method. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income (loss) because the use of the aircraft is not a separate activity of the total service provided under the capacity purchase agreements.

A portion of the Company’s compensation under its capacity purchase agreements relates to operating the aircraft, identified as the non-lease component of the capacity purchase agreement. The Company recognizes revenue attributed to the non-lease component received as fixed-fees for each departure, flight hour or block hour on an as-completed basis for each reporting period. The Company recognizes revenue attributed to the non-lease component received as fixed monthly payments per aircraft proportionate to the number of block hours completed during each reporting period, relative to the estimated number of block hours the Company anticipates completing over the remaining contract term. Due to the lower number of block hours completed during 2020 as a result of the COVID-19 pandemic compared to historical levels, the amount of cash collected for the fixed amount per aircraft for operating the aircraft did not align with revenue recognized based on block hours completed. Accordingly, the Company deferred recognizing revenue on fixed monthly payments the Company received for operating the aircraft under its capacity purchase

agreements beginning in 2020. In 2022, the Company deferred $18.7 million of fixed monthly payments under certain agreements and recognized $11.5 million of unbilled revenue under certain other agreements, compared to recognizing previously deferred revenue of $6.8 million and $8.4 million of unbilled revenue in 2021. The Company’s deferred revenue and unbilled revenue balance is measured on a contract-by-contract basis and will be recognized based on the number of block hours completed during each period relative to the estimated number of block hours the Company anticipates completing over the remaining respective contract terms.

The Company’s total deferred revenue balance, as of December 31, 2022, was $144.7 million, including $5.2 million in other current liabilities and $139.5 million in other long-term liabilities. The Company’s unbilled revenue balance as of December 31, 2022, was $19.9 million, including $9.9 million in other current assets and $10.0 million in other long-term assets. The Company’s deferred revenue balance as of December 31, 2021, was $103.9 million, including $24.5 million in other current liabilities and $79.4 million in other long-term liabilities. The Company’s unbilled revenue balance as of December 31, 2021, of $8.4 million was included in other long-term assets.

The Company’s capacity purchase and prorate agreements include weekly provisional cash payments from the respective major airline partner based on a projected level of flying each month. The Company and each major airline partner subsequently reconcile these payments to the actual completed flight activity on a monthly or quarterly basis.

In the event a flying agreement includes a mid-term rate reset to adjust rates prospectively and the contractual rates under the Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company applies the variable constraint guidance under Topic 606, where the Company records revenue to the extent it believes that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In several of the Company’s agreements, the Company is eligible to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi-annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly, subject to the variable constraint guidance under Topic 606.

The following summarizes the significant provisions of each code-share agreement the Company has with each major airline partner through SkyWest Airlines:

United Express Agreements



Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
United Express Agreements (capacity purchase agreement)	· E175 · CRJ 700 · CRJ 200	90 19 70	· Individual aircraft have scheduled removal dates under the agreement between 2024 and 2029 · The average remaining term of the aircraft under contract is 3.5 years
United Express Prorate Agreement (prorate agreement)	· CRJ 200	41*	· Terminable with 120-day notice
Total under United Express Agreements		220

Delta Connection Agreements

Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
Delta Connection Agreement (capacity purchase agreement)	· E175 · CRJ 900 · CRJ 700	84 41 5	· Individual aircraft have scheduled removal dates from 2023 to 2033 · The average remaining term of the aircraft under contract is 5.6 years
Delta Connection Prorate Agreement (prorate agreement)	· CRJ 200	25*	· Terminable with 30-day notice
Total under Delta Connection Agreements		155

American Capacity Purchase Agreement

Agreement

Aircraft type

Number of
Aircraft

Term / Termination Dates

American Agreement

(capacity purchase agreement)

E175

CRJ 700

Individual aircraft have scheduled removal dates from 2023 to 2032

The average remaining term of the aircraft under contract is 4.3 years

Total under American Agreement

100

Alaska Capacity Purchase Agreement

* The Company’s prorate agreements are based on specific routes, not a specific aircraft count. The number of aircraft listed above for each prorate agreement approximates the number of aircraft the Company uses to serve the prorate routes.

In addition to the contractual arrangements described above, as of December 31, 2022, SkyWest Airlines has a capacity purchase agreement with Delta to place a total of three additional E175 aircraft into service, with delivery dates currently scheduled in 2023 and 2024. SkyWest Airlines has a capacity purchase agreement with Alaska to place one additional E175 aircraft into service with a delivery date currently scheduled for 2025. Final delivery and in-service dates for aircraft to be placed under contract may be adjusted based on various factors.

When an aircraft is scheduled to be removed from a capacity purchase arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the aircraft with another major airline partner, return the aircraft to the lessor if the aircraft is leased and the lease is expiring, place owned aircraft for sale, or pursue other uses for the aircraft. Other uses for the aircraft may include placing the aircraft in a prorate agreement, leasing the aircraft to a third party or parting out the aircraft to use the engines and parts as spare inventory or to lease the engines to a third party.

Lease, airport services and other revenues primarily consists of revenue generated from aircraft and spare engines leased to third parties and airport customer services, such as gate and ramp agent services at applicable airports where the Company has agreements with third parties. The following table represents the Company’s lease, airport services and other revenues for the years ended December 31, 2022, 2021 and 2020 (in thousands):


	For the year ended December 31,
	2022		2021		2020
Operating lease revenue relating to lease payments	$	48,714	$	46,532	$	34,791
Operating lease revenue relating to variable lease payments		17,050		19,998		5,710
Airport customer service and other revenue		39,324		31,885		25,804
Lease, airport services and other	$	105,088	$	98,415	$	66,305

The following table summarizes future minimum rental income under operating leases primarily related to leased aircraft and engines that had remaining non-cancelable lease terms as of December 31, 2022 (in thousands):


2023	$	45,900
2024		45,177
2025		40,207
2026		34,640
2027		34,619
Thereafter		86,182
	$	286,725

Of the Company’s $5.5 billion of property and equipment, net as of December 31, 2022, $221.0 million of regional jet aircraft and spare engines were leased to third parties under operating leases. The Company’s mitigation strategy for the residual asset risks of these assets includes leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases typically have specified lease return condition requirements paid by the lessee to the Company and the Company typically maintains inspection rights under the leases.

The transaction price for airport customer service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled by the Company over the agreement term.

The Company’s operating revenues could be impacted by several factors, including changes to the Company’s code-share agreements with its major airline partners, changes in flight schedules, contract modifications resulting from contract renegotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major airline partners.

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

As of December 31, 2022, the Company had $100.5 million in accounts receivable of which $73.7 million related to flying agreements. As of December 31, 2021, the Company had $65.3 million in accounts receivable of which $50.8 million related to flying agreements.

Allowance for Credit Losses

The Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”) on January 1, 2020. At adoption, the Company’s primary financial assets included trade receivables from its flying agreements, a note receivable from the sale of the Company’s subsidiary, ExpressJet Airlines, Inc., in 2019, and receivables from aircraft manufacturers and other third parties in the airline industry. The Company recorded a credit loss of $11.6 million net of income tax in conjunction with the adoption of Topic 326. The Company recorded this credit loss as a January 1, 2020, beginning balance sheet entry to retained earnings (net of income tax).

The Company monitors publicly available credit ratings for entities for which the Company has a significant receivable balance. As of December 31, 2022, the Company had gross receivables of $122.5 million in current assets and gross receivables of $210.5 million in other long-term assets. The Company has established credit loss reserves based on publicly available historic default rates issued by a third party for companies with similar credit ratings, factoring in the term of the respective accounts receivable or note receivable. During the year ended December 31, 2022, there were no significant changes in the outstanding accounts receivable or notes receivable or the credit ratings of the entities.

The following table summarizes the changes in allowance for credit losses:


	Allowance for Credit Losses
Balance at January 1, 2020		15,388
Adjustments to credit loss reserves		30,837
Write-offs charged against allowance		—
Balance at December 31, 2020	$	46,225
Adjustments to credit loss reserves		(4,249)
Write-offs charged against allowance		—
Balance at December 31, 2021	$	41,976
Adjustments to credit loss reserves		(4,591)
Write-offs charged against allowance		—
Balance at December 31, 2022	$	37,385

Income Taxes

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

Income Taxes


	Allowance for Credit Losses
Balance at January 1, 2020		15,388
Adjustments to credit loss reserves		30,837
Write-offs charged against allowance		—
Balance at December 31, 2020	$	46,225
Adjustments to credit loss reserves		(4,249)
Write-offs charged against allowance		—
Balance at December 31, 2021	$	41,976
Adjustments to credit loss reserves		(4,591)
Write-offs charged against allowance		—
Balance at December 31, 2022	$	37,385

Net Income (Loss) Per Common Share

Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income (loss) per common share. Securities that could potentially dilute Basic EPS in the future, and which were excluded from the calculation of Diluted EPS because inclusion of such share would be anti-dilutive, are as follows (in thousands):


	Year Ended December 31,
	2022		2021		2020
PSP1 and Treasury Loan Warrants ⁽¹⁾		437		—		582
PSP2 Warrants ⁽²⁾		125		—		—
PSP3 Warrants ⁽³⁾		78		78		—
Employee Stock Awards		219		—		314
Total antidilutive securities		859		78		896

(1)	Pursuant to the payroll support program established under the CARES Act (“PSP1”) and Loan and Guarantee Agreement with the U.S. Department of the Treasury (“U.S. Treasury”), SkyWest issued to Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $28.38 per share.

(2)	Pursuant to the payroll support program established under the 2021 Consolidated Appropriations Act (“PSP2”), SkyWest issued to U.S. Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $40.41 per share.

(3)	Pursuant to the payroll support program established under the American Rescue Plan (“PSP3”), SkyWest issued to U.S. Treasury warrants to purchase shares of SkyWest common stock for an exercise price of $57.47 per share.

Additionally, for the years ended December 31, 2022, 2021 and 2020, 146,000, 140,000 and 178,000 performance share units (at target performance) were excluded from the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2022, 2021 and 2020, respectively.

The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS are as follows for the years ended December 31, 2022, 2021 and 2020 (in thousands):


	Year Ended December 31,
	2022		2021		2020
Numerator:
Net income (loss)	$	72,953	$	111,910	$	(8,515)
Denominator:
Basic earnings per share weighted average shares		50,548		50,348		50,195
Dilution due to employee equity awards and warrants		96		405		—
Diluted earnings per share weighted average shares		50,644		50,753		50,195

Basic earnings (loss) per share	$	1.44	$	2.22	$	(0.17)
Diluted earnings (loss) per share	$	1.44	$	2.20	$	(0.17)

Comprehensive Income (Loss)

Comprehensive income (loss) includes charges and credits to stockholders’ equity that are not the result of transactions with the Company’s shareholders, including changes in unrealized appreciation (or depreciation) on marketable debt securities.

Comprehensive Income (Loss)


	Year Ended December 31,
	2022		2021		2020
Numerator:
Net income (loss)	$	72,953	$	111,910	$	(8,515)
Denominator:
Basic earnings per share weighted average shares		50,548		50,348		50,195
Dilution due to employee equity awards and warrants		96		405		—
Diluted earnings per share weighted average shares		50,644		50,753		50,195

Basic earnings (loss) per share	$	1.44	$	2.22	$	(0.17)
Diluted earnings (loss) per share	$	1.44	$	2.20	$	(0.17)

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for receivables and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. Marketable securities are reported at fair value based on market quoted prices in the consolidated balance sheets. If quoted prices in active markets are no longer available, the Company has estimated the fair values of these securities utilizing a discounted cash flow analysis. These analyses consider, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. Certain investments in other companies are reported at fair value based on market quoted prices or using the Black Scholes Option Pricing model in the consolidated balance sheets. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt.

Segment Reporting

GAAP requires disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company’s chief operating decision maker when deciding how to allocate resources and in assessing performance. The Company has two reportable segments: SkyWest Airlines and SkyWest Leasing. Information pertaining to the Company’s reportable segments is presented in Note 3, Segment Reporting.

Agreement

Aircraft type

Number of
Aircraft

Term / Termination Dates

Alaska Agreement
(capacity purchase agreement)

·
Individual aircraft have scheduled removal dates from 2030 to 2034
·
The average remaining term of the aircraft under contract is 8.8 years