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, 2020 and 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, 2020 and 2019 was as follows (in thousands):


			Gross unrealized		Gross unrealized
At December 31, 2020	Amortized Cost		holding gains		holding losses		Fair market value
Total cash and cash equivalents	$	215,723	$	—	$	—	$	215,723
Marketable securities:
Bond and bond funds	$	117,928	$	—	$	—	$	117,928
Commercial Paper		492,257		—		—		492,257
Total marketable securities	$	610,185	$	—	$	—	$	610,185
Total assets measured at fair value	$	825,908	$	—	$	—	$	825,908


			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

As of December 31, 2020 and 2019, the Company had classified $610.2 million and $433.0 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, 2020, 2019 and 2018, the Company capitalized interest costs of approximately $1.7 million, $1.6 million, and $1.5 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 “capacity purchase agreements”, “fixed-fee arrangements,” or “fixed-fee contracts”) with Delta, United, 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 arrangement, such as fuel, airport landing fees and airport rents. Under the capacity purchase arrangements, the Company’s performance obligation is met and revenue is recognized 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 year ended December 31, 2020, capacity purchase arrangements represented approximately 87.0% of the Company’s flying agreements revenue.

Under the Company’s prorate arrangements (referred to as a “prorate” or “revenue-sharing” 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, 2020, prorate flying arrangements represented approximately 13.0% of the Company’s flying agreements revenue.

Lease, airport services 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, 2020, $271.1 million of regional jet aircraft and spare engines were 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 flying agreements revenue by type for the years ended December 31, 2020, 2019 and 2018 (in thousands):


	For the year ended December 31,
	2020		2019		2018
Capacity purchase agreements revenue: flight operations	$	945,008	$	1,538,062	$	1,856,253
Capacity purchase agreements revenue: aircraft lease		846,933		830,247		814,518
Prorate agreements revenue		268,860		520,956		498,749
Flying agreements revenue	$	2,060,801	$	2,889,265	$	3,169,520

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 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 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. 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.

Under the Company’s capacity purchase agreements, the Company is paid a fixed amount per month per aircraft over the contract term. The Company recognizes revenue attributed to the Fixed Monthly Payments proportionate to the number of block hours complete during each reporting period, relative to the estimated number of block hours we anticipate completing over the remaining contract term. Due to the material decrease in completed block hours in 2020 from historical levels and from anticipated future levels over the remaining contract terms, the Company determined the amount of Fixed Monthly Payments received in 2020 was disproportionately high relative to the number of block hours completed during 2020. The Company anticipates the future number of block hours it will complete over the remaining capacity purchase agreements will significantly increase from 2020 levels. Accordingly, the Company deferred recognizing revenue of $110.7 million of fixed monthly cash payments the Company received under its capacity purchase agreements during 2020. The Company’s deferred revenue related to the fixed payments will adjust over the remaining contract term for each capacity purchase agreement based on the number of block hours it completes each reporting period relative to the number of block hours it anticipates completing over the remaining contract term of each capacity purchase agreement.

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:

Delta Connection Agreements

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

Delta Connection Agreement

(capacity purchase arrangement)

●

E175

●

CRJ 900

●

CRJ 700

71

39

6

●

Individual aircraft have scheduled removal dates from 2021 to 2030

● The average remaining term of the aircraft under contract is 5.7 years

Delta Connection Prorate Agreement (prorate arrangement)

●

CRJ 200

26

●

Terminable with 30-day notice

United Express Agreements

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

United Express Agreements

(capacity purchase arrangement)

●

E175

●

CRJ 700

●

CRJ 200

90

19

70

●

Individual aircraft have scheduled removal dates under the agreement between 2022 and 2029

● The average remaining term of the aircraft under contract is 4.9 years

United Express Prorate Agreement (prorate arrangement)

●

CRJ 200

34

●

Terminable with 120-day notice

American Capacity Purchase Agreement

Agreement

Aircraft type

Number of Aircraft

Term / Termination Dates

American Agreement

(capacity purchase arrangement)

● CRJ 700

65

● Individual aircraft have scheduled removal dates from 2022 to 2026

● The average remaining term of the aircraft under contract is 3.3 years

Alaska Capacity Purchase Agreement



Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
Alaska Agreement (capacity purchase arrangement)	● E175	32	● Individual aircraft have scheduled removal dates from 2027 to 2030 ● The average remaining term of the aircraft under contract is 8.2 years

In addition to the contractual arrangements described above, as of December 31, 2020, SkyWest Airlines entered into a capacity purchase agreement with American to place 20 E175 aircraft into service. The delivery dates for the 20 new E175 aircraft are currently scheduled for 2021 and 2022 and the aircraft are expected to be placed into service in 2022. SkyWest Airlines also entered into an agreement with American to place 25 used CRJ700s under a multi-year capacity purchase agreement beginning in 2021. Final delivery dates may be adjusted based on various factors.

SkyWest Airlines also entered into an agreement with Delta to place one CRJ900 aircraft under a capacity purchase agreement in 2021. The Company anticipates Delta will acquire the aircraft and SkyWest operate the aircraft.

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 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.

The following table represents the Company’s lease, airport services and other revenues for the years ended December 31, 2020, 2019 and 2018 (in thousands):


	For the year ended December 31,
	2020		2019		2018
Airport customer service and other revenue	$	25,804	$	45,538	$	48,236
Operating lease income relating to lease payments		34,791		27,552		3,923
Operating lease income relating to variable lease payments		5,710		9,608		—
Lease, airport services and other	$	66,305	$	82,698	$	52,159

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, 2020 (in thousands):



2021	$	43,573
2022		43,390
2023		42,837
2024		42,530
2025		39,082
Thereafter		155,089
	$	366,501

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.

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, 2020, the Company had $34.5 million in accounts receivable of which $27.5 million related to flying agreements. As of December 31, 2019, the Company had $83.0 million in accounts receivable of which $58.8 million related to flying agreements.

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.

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 on marketable debt securities.

Segment Reporting

Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company’s chief operating decision maker when deciding how to allocate resources and in assessing performance. The Company’s three operating segments (prior to the sale of ExpressJet in January 2019) consist of the operations conducted by SkyWest Airlines, ExpressJet (for the periods owned by the Company) and SkyWest Leasing. Following the sale of ExpressJet, 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.