Nature of Operations and Summary of Significant Accounting Policies

Use of Estimates

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

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 appreciation 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. At December 31, 2019, the fair market value of the available-for-sale securities was the amortized cost. The Company’s position in marketable securities as of December 31, 2019 and 2018 was as follows (in thousands):


			Gross unrealized		Gross unrealized
At December 31, 2019	Amortized Cost		holding gains		holding losses		Fair market value
Total cash and cash equivalents	$	87,206	$	—	$	—	$	87,206
Marketable securities:
Bond and bond funds	$	267,243	$	—	$	—	$	267,243
Commercial Paper		165,723		—		—		165,723
Total marketable securities	$	432,966	$	—	$	—	$	432,966
Total assets measured at fair value	$	520,172	$	—	$	—	$	520,172



			Gross unrealized		Gross unrealized
At December 31, 2018	Amortized Cost		holding gains		holding losses		Fair market value
Total cash and cash equivalents	$	328,384	$	—	$	—	$	328,384
Marketable securities:
Bond and bond funds	$	229,825	$	—	$	(42)	$	229,783
Commercial Paper		131,163		—		(1)		131,162
Total marketable securities	$	360,988	$	—	$	(43)	$	360,945
Total assets measured at fair value	$	689,372	$	—	$	(43)	$	689,329

As of December 31, 2019 and 2018, the Company had classified $433.0 million and $360.9 million of marketable securities, respectively, as short-term since it had the ability to redeem the securities within one year.

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	%

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, 2019, 2018 and 2017, the Company capitalized interest costs of approximately $1.6 million, $1.5 million, and $1.4 million, respectively.

Flying Agreements and Airport Customer Service and Other Revenues

The Company recognizes flying agreements revenue and airport customer service and other revenues when the service is provided under its code-share agreements. Under the Company’s fixed-fee arrangements (referred to as “fixed-fee arrangements,” “fixed-fee contracts” or “capacity purchase agreements”) with Delta Air Lines, Inc. (“Delta”), United Airlines, Inc. (“United”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“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 fixed-fee arrangement, such as fuel, airport landing fees and airport rents. Under the fixed-fee arrangements, the Company’s performance obligation is met and revenue is recognized when each flight is completed and is reflected in flying agreements revenue. The transaction price for the fixed-fee 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 year ended December 31, 2019, fixed-fee arrangements represented approximately 82.0% of the Company’s flying agreements revenue.

Under the Company’s revenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), 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 anticipates 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 year ended December 31, 2019, prorate flying arrangements represented approximately 18.0% of the Company’s flying agreements revenue.

Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. 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. Additionally, airport customer service and other revenues includes revenue generated from aircraft and spare engines leased to third parties. Of the Company’s $5.4 billion of property and equipment, net as of December 31, 2019, $97.0 million of regional jet aircraft and spare engines was leased to third parties under operating leases. The Company mitigates the residual asset risks of these assets by leasing aircraft and engine types that can be operated by the Company in the event of a default. A portion of the Company’s leases to third parties contain variable payments from lessees based on departures where the Company pays for maintenance. 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 following table represents the Company’s airport customer service and other revenue for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	For the year ended December 31,
	2019		2018		2017
Airport customer service revenue	$	45,538	$	48,236	$	41,002
Operating lease income relating to lease payments		27,552		3,923		3,293
Operating lease income relating to variable lease payments		9,608		—		—
Airport customer service and other	$	82,698	$	52,159	$	44,295

The following table summarizes future minimum rental income under operating leases primarily related to leased aircraft that had remaining non-cancelable lease terms as of December 31, 2019 (in thousands):



2020	$	32,724
2021		31,344
2022		24,786
2023		18,530
2024		18,222
Thereafter		54,932
	$	180,538

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.

The following table represents the Company’s flying agreements revenue by type for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	For the year ended December 31,
	2019		2018		2017
Capacity purchase agreements revenue: flight operations	$	1,538,062	$	1,856,253	$	1,805,510
Capacity purchase agreements revenue: aircraft lease		830,247		814,518		834,366
Prorate agreements revenue		520,956		498,749		438,421
Flying agreements revenue	$	2,889,265	$	3,169,520	$	3,078,297

A portion of the Company’s compensation under its fixed-fee 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 fixed-fee agreements is reflected 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 fixed-fee agreements is accounted for as an operating lease and is reflected as flying agreements revenue on the Company’s consolidated statements of comprehensive income. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income since the use of the aircraft is not a separate activity of the total service provided.

The Company’s fixed-fee 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:

Delta Connection Agreements

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

Delta Connection Agreement

(fixed-fee arrangement)

●

CRJ 200

●

CRJ 700

●

CRJ 900

●

E175

55

13

43

59

●

Individual aircraft have scheduled removal dates from 2020 to 2029

● The average remaining term of the aircraft under contract is 4.1 years

Delta Connection Prorate Agreement (revenue-sharing arrangement)

●

CRJ 200

29

●

Terminable with 30-day notice

United Express Agreements

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

United Express Agreements

(fixed-fee arrangement)

●

CRJ 200

●

CRJ 700

●

E175

68

19

65

●

Individual aircraft have scheduled removal dates under the agreement between 2020 and 2029

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

United Express Prorate Agreement (revenue-sharing arrangement)

●

CRJ 200

31

●

Terminable with 120-day notice

American Agreements


Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
American Agreement (fixed-fee arrangement)	● CRJ 700	62	● Individual aircraft have scheduled removal dates from 2022 to 2025 ● The average remaining term of the aircraft under contract is 4.1 years
American Prorate Agreement (revenue-sharing arrangement)	● CRJ 200	7	● Terminable with 120-day notice

Alaska Capacity Purchase Agreement

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

Alaska Agreement

(fixed-fee arrangement)

●

E175

32

● Individual aircraft have scheduled removal dates from 2027 to 2030

● The average remaining term of the aircraft under contract is 9.2 years

In addition to the contractual arrangements described above, SkyWest Airlines has entered into fixed-fee agreements with Delta and American to place additional E175 aircraft into service. As of December 31, 2019, the Company was scheduled to take delivery of six new E175 aircraft in connection with its agreement with Delta and 20 new E175 aircraft in connection with its agreement with American. The delivery dates for the new E175 aircraft are currently scheduled to be completed by the end of 2021. Final delivery dates may be adjusted based on various factors. Additionally, the Company is scheduled to add an additional six used E175 aircraft under the Delta agreement during 2020.

SkyWest Airlines also entered into an agreement with Delta to place one CRJ900 aircraft under a nine-year fixed-fee agreement in 2020.

SkyWest Airlines also entered into an agreement with American to place ten used CRJ700s under a multi-year contract. As of December 31, 2019, SkyWest Airlines had placed two of these CRJ700 aircraft into service with American.

When an aircraft is scheduled to be removed from a fixed-fee 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 arrangement, 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.

Airport customer service and other revenues primarily consist of ground handling functions, such as gate and ramp agent services at applicable airports where the Company provides such services. The transaction price for airport service agreements is determined from an agreed-upon rate by location applied to the applicable number of flights handled (measured by departures) by the Company over the agreement term.

The Company’s operating revenues could be impacted by a number of 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.

As of December 31, 2019, the Company had $83.0 million in accounts receivable of which $58.8 million related to flying agreements. As of December 31, 2018, the Company had $64.2 million in accounts receivable of which $52.7 million related to flying agreements.

Net Income Per Common Share

Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding during the 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. During the year ended December 31, 2019, 150,000 performance share units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2019. During the year ended December 31, 2018, 207,000 performance share units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2018. During the year ended December 31, 2017, 284,000 performance share units (at target performance) were excluded in the computation of Diluted EPS since the Company had not achieved the minimum target thresholds as of December 31, 2017. 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, 2019, 2018 and 2017 (in thousands):


	Year Ended December 31,
	2019		2018		2017
Numerator:
Net Income	$	340,099	$	280,372	$	428,907
Denominator:
Basic earnings per share weighted average shares		50,932		51,914		51,804
Dilution due to stock options and restricted stock units		443		957		1,296
Diluted earnings per share weighted average shares		51,375		52,871		53,100
Basic earnings per share	$	6.68	$	5.40	$	8.28
Diluted earnings per share	$	6.62	$	5.30	$	8.08

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. The fair value of the Company’s long-term debt is estimated based on current rates offered to the Company for similar debt and was approximately $3,049.1 million as of December 31, 2019, as compared to the carrying amount of $3,017.5 million as of December 31, 2019. The Company’s fair value of long-term debt as of December 31, 2018 was $3,157.3 million as compared to the carrying amount of $3,185.4 million as of December 31, 2018.

Recent Accounting Pronouncements

Standards Effective in Future Years and Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“Topic 326”), which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosure regarding significant estimates and judgments used in estimating credit losses. Topic 326 is effective for the Company beginning January 1, 2020. The Company will adopt Topic 326, on January 1, 2020. The Company’s primary financial assets as of December 31, 2019, include trade receivables from its flying agreements, notes and other receivables from third parties. The Company estimates it will record a credit loss amount between $7.0 million and $12.0 million in conjunction with the adoption. The Company anticipates that the initial credit loss recorded upon adoption of Topic 326 will be reflected as a January 1, 2020 beginning balance sheet entry to retained earnings (after income tax).

Recently Adopted Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“Topic 842”). Topic 842 and subsequently issued amendments require certain leases with durations longer than 12 months to be recognized on the balance sheet. The Company adopted Topic 842 effective January 1, 2019 and elected the package of transition practical expedients for expired or existing contracts, which does not require reassessment of: (1) whether any of the Company’s contracts are or contain leases, (2) lease classification and (3) initial direct costs. In July 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements - Leases (Topic 842).” This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior years presented. If this adoption method is elected, an entity would recognize a cumulative-effect adjustment to the

opening balance of retained earnings in the year of adoption. The Company elected this adoption method and recognized a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019.

Additionally, the Company’s adoption of Topic 842 did not have a significant impact on the recognition, measurement or presentation of lease revenue and lease expenses within the condensed consolidated statements of operations and comprehensive income or the condensed consolidated statements of cash flows. The Company’s adoption of Topic 842 did not have a material impact on the timing or amount of the Company’s lease revenue as a lessor. The Company’s prepaid aircraft rents, accrued aircraft rents and deferred rent credits that were separately stated in the Company’s December 31, 2018 balance sheet have been classified as a component of the Company’s right-of-use assets effective January 1, 2019. The consolidated financial statements for 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.

See Note 6, "Leases" for more information.