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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
For the fiscal year ended | |
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | |
For the transition period from to | |
Commission File No.
Incorporated under the Laws of |
|
(
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
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.
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 ◻
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 for 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
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.
Accelerated filer ◻ | Non-accelerated filer ◻ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
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, 2021 was approximately $
As of February 14, 2022, there were
Documents Incorporated by Reference
Portions of the registrant’s proxy statement to be used in connection with the registrant’s 2022 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, 2021.
SKYWEST, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Unless otherwise indicated in this Report, “SkyWest,” “we,” “us,” “our” and similar terms refer to SkyWest, Inc., including SkyWest’s wholly-owned subsidiary SkyWest Airlines, Inc. “SkyWest Airlines” refers to our wholly-owned subsidiary SkyWest Airlines, Inc., and ExpressJet refers to our former wholly-owned subsidiary ExpressJet Airlines, Inc.
On January 22, 2019, we completed the sale of ExpressJet. Our financial and operating results for the year ended December 31, 2019 contained in this Report, include the financial results of ExpressJet for the period through January 22, 2019, as the sale of ExpressJet did not qualify for presentation of discontinued operations (see Note 3 in the accompanying financial statements).
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 regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition and the impact of any measures, including travel restrictions, taken to mitigate the effect of the pandemic, our future growth and development plans, including our future financial and operating results, our plans, 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 uncertainty of the duration, scope and impact of COVID-19; a further spread or worsening of COVID-19, and other potential future outbreaks of infectious diseases or other health concerns; the consequences of the COVID-19 pandemic to global economic conditions, the travel industry and our major airline partners in general and our financial condition and results of operations in particular; 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, including as a result of the COVID-19 pandemic; 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 our operations; fluctuations in flight schedules, which are determined by the major airline partners for whom SkyWest conducts 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. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports that the Company files with the Securities and Exchange Commission may be further amplified by the global impact of the COVID-19 pandemic. 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, we offer scheduled passenger service to destinations in the United States, Canada, Mexico and the Caribbean. Substantially all of our flights are operated as United Express, Delta Connection, 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 United, Delta, American
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or Alaska, respectively. As of December 31, 2021, we offered approximately 2,080 daily departures, of which approximately 870 were United Express flights, 650 were Delta Connection flights, 410 were American Eagle flights and 150 were Alaska Airlines flights. The number of flights we operated during 2021 was negatively impacted by the COVID-19 pandemic. See the section entitled “Competition and Economic Conditions” below for additional information regarding the COVID-19 impact on our operations.
We generally provide regional flying to our major airline partners under long-term, fixed-fee, code-share agreements. Under these fixed-fee agreements (commonly referred to as “capacity purchase 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 either directly pay for or reimburse us for specified direct operating expenses, including fuel expenses. Our operations are conducted principally at airports that support our major airline partners’ route networks, including Chicago (O’Hare), Dallas, Denver, Detroit, Houston, Los Angeles, Minneapolis, Phoenix, Salt Lake City, San Francisco and Seattle.
SkyWest has been flying since 1972. During our long operating history, we have developed an industry-leading reputation for providing quality regional airline service. As of December 31, 2021, our fleet consisted of aircraft manufactured by Embraer S.A. (“Embraer”) and Bombardier Aerospace (“Bombardier”), including the E175 regional jet aircraft (“E175”), the Canadair CRJ900 regional jet aircraft (“CRJ900”), the Canadair CRJ700 regional jet aircraft (“CRJ700”) and the Canadair CRJ200 regional jet aircraft (“CRJ200”). As of December 31, 2021, we had 629 total aircraft in our fleet, including 509 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:
| E175 |
| CRJ900 |
| CRJ700 |
| CRJ200 |
| Total | |
United |
| 90 | — | 19 | 111 | 220 | ||||
Delta | 71 | 44 | 5 | 29 | 149 | |||||
American |
| 18 | ** | — | 90 | — | 108 | |||
Alaska |
| 32 | — | — | — | 32 | ||||
Aircraft in scheduled service or under contract | 211 | 44 | 114 | 140 | 509 | |||||
Leased to third parties |
| — | 5 | 34 | — | 39 | ||||
Other* |
| — | — | 18 | 63 | 81 | ||||
Total Fleet |
| 211 | 49 | 166 | 203 | 629 |
*As of December 31, 2021, other aircraft included: supplemental spare aircraft supporting our code-share agreements which may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, or aircraft that are scheduled to be disassembled for use as spare parts.
**The Company took delivery of the 18 E175 aircraft under its contract with American as of December 31, 2021. The 18 E175 aircraft are scheduled to begin service in 2022.
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 Bombardier CRJ900 and CRJ700 aircraft and the Embraer E175 aircraft we operate are configured with a first-class seating section. The Bombardier CRJ200 aircraft we operate are configured with single-class seating. 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. As of December 31, 2021, our fleet seat configuration by aircraft type is summarized as follows:
Manufacturer | Aircraft Type | Seat Configuration | ||
Embraer |
| E175s | 70-76 | |
Bombardier |
| CRJ900s | 70-76 | |
Bombardier |
| CRJ700s | 65-70 | |
Bombardier |
| CRJ200s | 50 |
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 and any amendments to those reports filed with or furnished to the Securities and Exchange Commission (“SEC”). We use our investor relations website as a
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means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Investors should monitor our website, in addition to following our press releases, SEC filings and public conferences calls and webcasts. Information relating to our corporate governance is also included on our investor relations website. 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.
We conduct our code-share operations with our major airline partners pursuant to the following agreements:
Major airline partner |
| Agreement |
United | “United Express Agreements” and “United Express Prorate Agreement” | |
Delta | “Delta Connection Agreement” and “Delta Connection Prorate Agreement” | |
American | “American Agreement” | |
Alaska | “Alaska Agreement” |
A summary of the terms for each of our code-share agreements is provided under the heading “Code-Share Agreements” below on page 8.
SkyWest Leasing
SkyWest Leasing is a reportable segment that includes revenue associated with our financing of new aircraft with debt under our capacity purchase agreements, currently consisting of our E175 aircraft, and the depreciation and interest expense of our E175 aircraft. The SkyWest Leasing segment additionally includes the revenue and expense from leasing aircraft and engines to third parties. The SkyWest Leasing segment’s total assets and capital expenditures include the acquired E175 aircraft, and aircraft and engines leased to third parties.
As of December 31, 2021, SkyWest Leasing leased 34 CRJ700 aircraft, five CRJ900 aircraft and regional jet aircraft engines to third parties.
ExpressJet
ExpressJet was a reportable segment prior to our sale of ExpressJet in January 2019. ExpressJet’s operations were conducted principally from airports located in Atlanta, Chicago (O’Hare), Houston, Newark and New York.
Competition and Economic Conditions
The airline industry is highly competitive. SkyWest competes principally with other regional airlines. Our operations extend throughout most major geographic markets in the United States. Our competition includes, therefore, nearly every other domestic regional airline. Our primary competitors 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.); GoJet Airlines, LLC; Mesa Air Group, Inc. (“Mesa”); and Republic Airways Holdings Inc. (“Republic”). 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. Additionally, each major airline may be limited in the number and type of regional aircraft it may use in its network due to agreements the major airline has with its own labor groups, commonly referred to in the industry as “scope limitations.” Given our major airline partners’ scope limitations, we currently do not operate a regional aircraft configured with more than 76 seats.
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 supporting markets and routes served.
Our operations represent the largest regional airline operations in the United States. However, regional carriers owned by major airlines may have access to greater resources than we do through their parent companies.
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
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business combinations among major and regional carriers. The effect of economic downturns may be somewhat mitigated by our predominantly contract-based flying arrangements. 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, 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. Also, major airline scope limitations may restrict growth opportunities for the regional carriers. Additionally, attrition of our pilots or other workgroups may reduce our flying schedules and have a negative impact on our operations and financial condition.
Impact of the COVID-19 Pandemic
COVID-19, which was declared a global health pandemic by the World Health Organization in March 2020, had a significant, negative impact on our business, revenue and financial results in 2020 with moderate improvement in 2021. The ongoing spread of the virus and its variants continues to negatively impact our business, and the domestic and international networks of our major airline partners for whom we conduct flight operations and rely on to set our flight schedules. Various factors outside our control may impact the demand for air travel and our flight schedules, such as the distribution and efficacy of vaccines, government-imposed vaccine mandates, new variants of the virus, and continued or new government travel restrictions. Additionally, indirect factors, such as employee attrition, workforce shortages and third-party labor shortages that may result in delays in outsourced maintenance work and availability of aircraft parts, will likely impede the timing of our recovery from the pandemic and impact operations in 2022 and possibly thereafter, even if passenger demand returns to pre-COVID-19 levels.
In response to the COVID-19 pandemic, we have implemented measures to focus on the personal safety of our passengers and employees, while at the same time seeking to mitigate the impact on our financial position and operations. These measures include, but are not limited to, working with our major airline partners to enhance cleaning procedures for our aircraft and our training and other facilities, provide masks for crewmembers and ensuring that all fleet service personnel have the necessary personal protective equipment for disinfecting the aircraft, and encouraging vaccination for our employees through paid-time off incentives and education.
Capacity and flight schedule impact. We completed the following number of flights and related block hours in 2019, 2020 and 2021, demonstrating our ongoing flight schedule recovery from the COVID-19 pandemic:
For the year ended December 31, | |||||||
| 2021 |
| 2020 | 2019 | |||
Departures | 749,943 | 585,257 | 842,098 | ||||
Block hours | 1,319,628 | 973,338 | 1,464,405 | ||||
Although the number of flights we completed and related block hours incurred in 2021 was 89.1% and 90.1% of 2019 levels, respectively, future passenger demand in 2022 and beyond is uncertain. Additionally, a significant increase in hiring of our pilots by major airlines, low-cost carrier airlines and air freight companies may negatively impact our attrition rates and our ability to operate flight schedules requested by our major airline partners. We may receive requests by our major airline partners, or we may request our major airline partners to defer deliveries of new or used aircraft that were previously scheduled for delivery in 2022 and 2023.
Liquidity
At December 31, 2021, we had $904.0 million in total available liquidity, consisting of $860.4 million in cash and marketable securities, and $43.6 million available under SkyWest Airlines’ line of credit with a bank. Additionally, we have approximately $1.5 billion in unpledged aircraft engines and aircraft parts that we temporarily used as collateral in 2020 and 2021.
Industry Overview
Majors, Low-Cost Carriers 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.
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Low-cost carriers, such as Southwest Airlines Co. (“Southwest”), JetBlue Airways Corporation (“JetBlue”), Spirit Airlines, Inc. (“Spirit”) and Frontier Group Holdings, Inc. (“Frontier”), generally have lower cost structures than major airlines, which permits them to offer flights to and from many of the same markets as the major airlines, but at lower prices. Low-cost carriers typically operate using a point-to-point network strategy, rather than a hub-and-spoke network.
Regional airlines, including SkyWest, typically operate smaller aircraft on shorter 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 and compete with the major airlines. Rather, regional airlines typically enter into agreements 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 fixed fees to operate the flight, termed “capacity purchase agreement,” “capacity purchase contract,” “contract” or “fixed-fee” flights, or the regional airline receives a percentage of applicable passenger ticket revenues on designated flights operated by the regional airline, 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 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 capacity purchase arrangements or prorate arrangements as explained below:
| ● | Capacity Purchase Arrangements. Under a capacity purchase arrangement (also referred to as a “capacity purchase agreement,” “capacity purchase contract,” “flying contract,” “fixed-fee arrangement,” or a “fixed-fee contract,”), 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), and an amount per aircraft in service each month with additional incentives based on completion of flights, on-time performance and other operating metrics. The regional airline typically acquires or finances the aircraft used under the capacity purchase arrangement, which is accounted for as a lease of the aircraft to our major airline partner. In addition, under a capacity purchase arrangement, the major airline bears the risk of fuel price fluctuations and certain other costs. Regional airlines benefit from capacity purchase arrangements because they are protected from some of the elements that typically cause volatility in airline financial performance, including variations in ticket prices, number of passengers onboard each flight and increasing fuel prices. However, regional airlines in capacity purchase 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 decreasing fuel prices, because the major airlines retain passenger fare volatility risk and fuel costs associated with the regional airline flight. |
| ● | Prorate Arrangements. Under a prorate arrangement (also referred to as a “prorate agreement” or “revenue-sharing” 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 prorate arrangement, the regional airline may realize increased profits as ticket prices and passenger loads increase or fuel prices |
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| decrease and, correspondingly, the regional airline may realize decreased profits as ticket prices and passenger loads decrease or fuel prices increase. |
We have code-share agreements with United, Delta, American and Alaska. During the year ended December 31, 2021, approximately 84% of our flying agreements revenue related to capacity purchase agreement flights, where United, Delta, American and Alaska controlled scheduling, ticketing, pricing, and seat inventories. The remainder of our flying agreements revenue during the year ended December 31, 2021, related to prorate flights for United or Delta, where we controlled scheduling, pricing and seat inventories, and shared passenger fares with United or Delta according to prorate formulas. The routes placed under our prorate arrangements typically include flight service between one of our partners’ hub cities and a city not served under our capacity purchase arrangements.
Under our capacity purchase 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. The number of aircraft under our capacity purchase arrangements and our prorate arrangements as of December 31, 2021 is reflected in the summary below. The following summaries of our code-share agreements with our major airline partners do not purport to be complete and are qualified in their entirety by reference to the applicable agreement.
United Express Agreements | |||||||||||
Agreement |
| Aircraft type |
| Number of |
| 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 4.2 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 |
| Term / Termination Dates | |||||
Delta Connection Agreement (capacity purchase agreement) | • E175 • CRJ 900 • CRJ 700 | 71 44 5 | • Individual aircraft have scheduled removal dates from 2022 to 2031 • The average remaining term of the aircraft under contract is 5.5 years | ||||||||
Delta Connection Prorate Agreement (prorate agreement) | • CRJ 200 | 29 | • Terminable with 30-day notice | ||||||||
Total under Delta Connection Agreements | 149 | ||||||||||
American Capacity Purchase Agreement | |||||||||||
Agreement |
| Aircraft type |
| Number of |
| Term / Termination Dates | |||||
American Agreement (capacity purchase agreement) | • E175 • CRJ 700 | 18 90 | • Individual aircraft have scheduled removal dates from 2024 to 2032 • The average remaining term of the aircraft under contract is 4.8 years | ||||||||
Total under American Agreements | 108 | ||||||||||
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Alaska Capacity Purchase Agreement | |||||||||||
Agreement |
| Aircraft type |
| Number of |
| Term / Termination Dates | |||||
Alaska Agreement (capacity purchase agreement) | • E175 | 32 | • Individual aircraft have scheduled removal dates in 2030 • The average remaining term of the aircraft under contract is 8.6 years | ||||||||
In addition to the aircraft operating under the respective arrangements outlined above, SkyWest Airlines has agreed with its major airline partners to place additional aircraft under a capacity purchase arrangement as summarized below. We are coordinating with our major airline partners to optimize the timing of upcoming fleet deliveries and the delivery timing referenced below is subject to change.
| ● | Capacity purchase agreement with American for two new E175 aircraft. Aircraft deliveries are scheduled for early 2022, and the aircraft are expected to be placed into service in 2022. We anticipate financing the aircraft through debt. |
| ● | Capacity purchase agreement with Delta for 16 new E175 aircraft. The delivery dates for the 16 new E175 aircraft are currently scheduled for 2022, and the aircraft are expected to be placed into service in 2022. We anticipate financing the aircraft through debt. The 16 E175 aircraft are expected to replace 16 CRJ900 aircraft that are scheduled to be removed from the capacity purchase agreement with Delta. We are evaluating alternative uses for our CRJ900s that will be displaced by the 16 E175 aircraft. |
| ● | Capacity purchase agreement with Alaska for eleven new E175 aircraft. The delivery dates for the eleven new E175 aircraft are currently scheduled for 2022 and 2023, and the aircraft are expected to be placed into service in 2022 and 2023. |
| ● | Capacity purchase agreement with American for eleven used CRJ700 aircraft. The aircraft are anticipated to be placed into service by the end of 2023. We anticipate using CRJ700s we already possess that are not currently under contract with a major airline partner to fulfill this agreement. |
| ● | In January 2022, we extended the term for 19 CRJ700 aircraft under contract with United for three years with new expiration dates scheduled between 2025 and 2026. |
United Express Agreements
We and United are parties to two United Express agreements: a United Express agreement to operate certain CRJ200 aircraft and CRJ700 aircraft, and a United Express agreement to operate E175 aircraft (collectively, the “United Express Agreements”).
The United Express Agreements have a latest scheduled termination date in 2029. The United Express Agreements are subject to early termination in various circumstances including:
| ● | if we or United fail to fulfill an obligation under the United Express Agreements for a period of 60 days after written notice to cure; |
| ● | if our 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. |
Delta Connection Agreements
We and Delta are parties to a Delta Connection Agreement (the Delta Connection Agreement), pursuant to which we provide contract flight services for Delta.
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The Delta Connection Agreement has a latest scheduled termination date of 2031. The Delta Connection Agreement is subject to early termination in various circumstances, including:
| ● | if we or Delta commit a material breach of the Delta Connection Agreement, subject to 30-day notice and cure rights; |
| ● | if we fail to conduct all flight operations and maintain all aircraft under the Delta Connection Agreement in compliance in all material respects with applicable government regulations; |
| ● | if we fail to satisfy certain performance and safety requirements; or |
| ● | 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. |
American Agreement
We and American are parties to an agreement (the “American Agreement”) for the operation of E175 and CRJ700 aircraft. The American Agreement has a latest scheduled termination date of 2032 and is subject to early termination in various circumstances including:
| ● | if we or American fail to fulfill any obligation under the American Agreement for a period of 30 days after written notice to cure; |
| ● | if our 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 |
Alaska Agreement
We and Alaska are parties to a Capacity Purchase Agreement (the “Alaska Agreement”) for the operation of E175 aircraft. Each aircraft placed under the agreement has a 12-year term and the last aircraft placed into service with Alaska is scheduled to terminate in 2030. The Alaska Agreement is subject to early termination in various circumstances including:
| ● | if we or Alaska fail to fulfill an obligation under the Alaska Capacity Purchase Agreement for a period of 30 days after written notice to cure; |
| ● | if our 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. |
Training and Aircraft Maintenance
SkyWest provides substantially all training to our crew members and maintenance personnel at our training facilities. Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at our maintenance facilities. We also use third-party vendors for certain airframe and engine maintenance work.
Fuel
Our capacity purchase agreements with United, Delta, American and Alaska require the respective major airline partner to pay for fuel costs, either directly to the fuel vendor or 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 United and Delta, we are responsible for the costs to operate the flights, 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, 2021, our major airlines partners purchased the majority of the fuel for our aircraft flying under their respective capacity purchase agreements directly from their fuel vendors or reimbursed us for the fuel costs we incurred under the capacity purchase agreements. Historically, we have not experienced sustained material 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
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competitive prices. 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.
Human Capital Resources
Employee Profile
As of December 31, 2021, we employed 15,205 total employees, consisting of 5,705 pilots, 4,790 flight attendants, 1,784 airport operations personnel, 1,408 maintenance technicians, 821 other maintenance personnel, 168 dispatchers and 529 operational support and administrative personnel. Our total employees at December 31, 2021, included 1,647 part-time employees. All our employees are employed by SkyWest Airlines. Certain SkyWest Airlines employees also provide administrative support to the SkyWest Leasing segment. Approximately 91.1% of these employees were represented by in-house labor associations that have entered into collective bargaining agreements regarding employee compensation and work rules. None of these employees are currently represented by an outside union. Outside union organizing efforts among our employees do occur from time to time and may continue in the future. If unionization efforts are successful, we may be subjected to increased risks of work interruption or stoppage and/or incur additional expenses associated with a change in labor representation of our employees. SkyWest Airlines has never experienced a work stoppage due to a strike or other labor dispute, and we consider our relationships with our employees to be good.
Our relations with labor are governed by the Railway Labor Act (the “RLA”), the federal law governing labor relations between air carriers and their employees. Under the RLA, a collective bargaining agreement between an airline and a labor representative does not expire, but instead becomes amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in “self-help.” “Self-help” includes, among other things, a strike by the representative 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. SkyWest Airlines respects all employees’ legal rights, including the rights to free association and collective bargaining. This includes the right to decide whether to be represented by a union. Our employees are covered by the RLA. Under the RLA, employees have the right to decide whether they wish to be represented by a union. They also have the right to reject union representation.
Culture
At SkyWest our people are our most valued assets, and the success of our business is dependent on having an engaged and effective workforce. We respect every individual's quality of life and are committed to promoting dignity and trust in all we do. We strive to be the partner of choice and employer of choice.
Health Safety
Safety is the primary focus and foundation of our culture with our first guiding principle being Health and Safety First. We expect our employees to think, plan, communicate and act appropriately to prevent injury, illness or harm to themselves, fellow employees, passengers and aircraft. SkyWest’s Safety Management System (SMS) integrates an intentional safety culture into every work group and every employee process from new hire through retirement, focusing on industry-best practices in safety competencies and behaviors. Training is required for every SkyWest employee, regardless of position.
SkyWest’s SMS is designed to identify, track, and help mitigate potential safety risks before an incident or accident occurs. Employees are encouraged to participate in our voluntary programs to report potential safety concerns or violations to reduce safety risk, including, but not limited to our Aviation Safety Action Program and Safety Concern Report.
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| ● | Aviation Safety Action Program is a non-punitive program that allows employees in participating work groups to self-disclose violations of policies and procedures. Each report is reviewed by an Event Review Committee who helps identify any potential trends and whether corrective actions have been put into place to prevent the problem from occurring in the future. |
| ● | Safety Concern Reporting is a confidential program that allows all employees to identify potential safety risks within the operation. Each report is reviewed and investigated, as needed, by the Safety Department. Employees may also report safety concerns to their direct manager, the facility manager, a facility safety committee member or confidentially through our safety hotline. |
Attracting, Developing and Retaining Talent
Recruitment Strategies. We strive to be the employer of choice for aviation professionals pursuing a career in the regional airline industry and we continually update our recruiting strategies to attract quality aviation professionals. We adapt our recruitment efforts based on the supply of eligible aviation professionals and our outlook for anticipated future flight schedules. Our recruiting focus generally targets key aviation technical roles, especially pilots and mechanics. We seek qualified individuals through publishing positions on both internal and external career websites, supporting professional development leads, investment in targeted advertising, social media outreach, employee referrals and relationships with community-based organizations and educational institutions.
School Partnerships and Development. We maintain relationships with numerous flight schools and educational institutions across the country that are focused on developing the next generation of aviation professionals. We typically recruit pilots and maintenance technicians that have completed required coursework from an accredited flight or maintenance school, respectively, and have obtained other applicable certifications. We also provide other programs to enhance our recruiting efforts towards individuals who are in process of completing their training, including a Pilot Pathway Program and an Aviation Maintenance Technician (AMT) Pathway Program.
| ● | The SkyWest Pilot Pathway Program provides a direct path for qualified pilots seeking to begin their aviation career in the regional airline industry. Participants benefit from the SkyWest Pilot Pathway Program through accelerated starting seniority at SkyWest, final interview privileges and access to pilot mentors. The Pilot Pathway Program allows students to remain at their campus to complete their flight training until they meet SkyWest's Airline Transport Pilot standards and achieve their required minimum hours of flight time. Each participant may also participate in SkyWest recruiting events and outreach programs on their way to fulfilling commercial pilot jobs. |
| ● | The SkyWest AMT Pathway Program provides a career path for maintenance technicians seeking employment with SkyWest. Participants benefit from the SkyWest AMT Pathway Program through accelerated starting seniority at SkyWest, guaranteed final interview and access to mechanic advisors. |
Ongoing Training and Retention. SkyWest invests in retaining its professionals by providing a range of talent development opportunities, including mandatory compliance training, new hire training and general professional development, as well as engaging in the training of leaders through leadership development courses. Our training programs include full-motion flight simulators for pilots, on-the-job training for technicians, and cabin trainers for flight attendants. We also reinforce our guiding principles, including but not limited to, health and safety, excellent service and quality, and respect and teamwork through our training and development programs, as well as through our employee appreciation and recognition programs.
As the larger airlines recover from the COVID-19 pandemic and look to hire pilots, we anticipate seeing a significant turnover of our pilots, specifically our captains. As we work to train and promote our first officers to captains, we will likely have higher training costs. Additionally, if our captain attrition levels exceed our upgrade replacement levels, we will likely need to reduce future flight schedules with our major airline partners, negatively impacting our revenue.
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Diversity Inclusion
Our approach is to hire the best qualified individuals, regardless of race, religion, gender, national origin, disability, sexual orientation or similar classifications. As of December 31, 2021, approximately 40% and 28% of our workforce were women and people of color, respectively. We believe every employee brings unique education, skills and life experiences to SkyWest that supplement our ability to achieve our commitment to excellence and to our customers and passengers. As part of SkyWest’s commitment to diversity, we have:
| ● | Organized an Inclusion Council made up of frontline employees who work directly with the C-Suite to continue enhancing SkyWest’s culture of respect and inclusion. |
| ● | Developed required training for all employees, which reviews our company policies, provides opportunities to apply policy to real-world examples, and reaffirms our commitment to diversity and inclusion. |
| ● | Created ongoing opportunities to highlight employees from different cultures throughout the year on internal and external websites. |
Total Rewards
SkyWest Airlines operates in a customer-focused, team-based environment and provides opportunities for dedicated individuals develop their career while receiving competitive compensation, benefits, and rewards. Our employees receive several compensation benefits, including but not limited to:
| ● | Competitive wages and incentives based on our operating performance goals, |
| ● | Multiple insurance options including health care, disability coverage, and life insurance coverage, |
| ● | Access to a 401(k) plan with matching contributions and an employee stock purchase plan, |
| ● | Employee assistance programs that provide confidential counseling or psychiatric care, |
| ● | A variety of resources that promote scheduling flexibility with paid time away from work, and |
| ● | Space-available travel privilege programs for employees and eligible family members through our major airline partner programs. |
Employee Reporting
Our Code of Conduct contains general guidelines for conducting business in an ethical manner. We are committed to a working environment that is safe and supports open and honest communication. We have established a reporting system for any SkyWest employee to report a violation of company policy including harassment, discrimination, drug and alcohol use, questionable financial practice, or a breach involving safety or security. A general grievance may also be filed even if an employee has already utilized their chain of command or chooses to remain anonymous. Reports can be filed using a toll-free ethics and grievance hotline or by using on online reporting system on SkyWest’s intranet.
Government Regulation
All interstate air carriers, including SkyWest, 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, airworthiness 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, 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 aircraft, inspection of aircraft, installation of new safety-related items and the mandatory removal and replacement of aircraft parts.
We believe SkyWest complies, in all material respects, with FAA regulations and holds all operating and airworthiness certificates and licenses which are necessary to conduct our operations. We maintain current certifications and otherwise comply with the laws, rules and regulations to which we are subject. Our flight operations, maintenance programs, recordkeeping 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
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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 is also subject to certain federal and state laws relating to protection of the environment, labor relations and equal employment opportunity. We believe SkyWest complies, in all material respects, with these laws and regulations.
Environmental Matters
We 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.
As the largest regional airline in the United States, we remain committed to lowering our environmental footprint while continuing to offer the best service to our customers and the communities we serve. Our largest source of emissions and environmental impact comes from utilizing jet fuel on flights operated under our code-share agreements with our major airline partners. Under our capacity purchase agreements, our major airline partners purchase the aircraft fuel we consume, select the aircraft type we operate, and set flight schedules, all of which are variables which impact fuel consumption efficiencies. During 2021, we produced approximately 5.7 million metric tons of CO2e from fuel burned, using industry emissions factors, on flights we operated under our code-share agreements. We are largely dependent on direction from our major airline partners regarding long-term fuel saving initiatives such as engine innovations reducing fuel consumption, use of sustainable alternative fuels, carbon sequestration programs, air traffic flow routing efficiencies, and similar initiatives. Each of our major airline partners may pursue alternative strategies and goals to reduce carbon emissions on flights we operate under our code-share agreements that may impact the rate at which we are able to reduce our carbon emissions, if at all. We anticipate our major airline partners will take responsibility for carbon emissions incurred on our contract flights. Alternatively, we may purchase carbon offsets as an alternative strategy to reduce our carbon emissions.
Our board of directors has oversight of our environment-related performance. Through software and training, we heavily monitor and manage our fuel trends and fuel consumption which leads to better fuel management and reductions in emissions. When possible, we conserve fuel burned by utilizing single engine taxi procedures, improving the efficiency of aircraft routing, using performance-based navigation procedures to reduce track miles, and using ground power when parked at the gate. Additionally, we collaborate with aircraft and engine manufacturers and our major airline partners regarding innovations and emerging technologies that could improve fuel efficiencies and minimize environmental impact. We participate with our major airline partners in recycling programs, and we have implemented recycling initiatives in our facilities to reduce the amount of paper, plastic and other recyclables going to landfills. We have worked aggressively to reduce our reliance on paper manuals, further eliminating unnecessary waste while increasing efficiencies.
We have entered into a strategic partnership with Eve UAM, LLC (“Eve”), an Embraer company, to develop a network of deployment for Eve’s electric vertical takeoff and landing (“eVTOL”) aircraft. This partnership includes the option for SkyWest to purchase up to 100 eVTOL aircraft. Eve anticipates its four-passenger eVTOL aircraft will be certified and available for service after 2025.
Safety and Security
We are committed to the safety and security of our passengers and employees. We have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of our operations. Some of the safety and security measures we have taken with our major airline partners include: aircraft security and surveillance, aircraft cleaning procedures, 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
We 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
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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 capacity purchase 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.
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 That May Disrupt Our Operations
The demand for air travel has not fully recovered from the COVID-19 pandemic, which has adversely impacted our and our major airline partners’ business, operating results, financial condition and liquidity. The duration and severity of the COVID-19 pandemic, and similar public health threats that we may face in the future, could result in additional adverse effects on our and our major airline partners’ business, operating results, financial condition and liquidity.
In March 2020, the World Health Organization declared COVID-19 a global health pandemic. COVID-19 and its variants has resulted in travel restrictions and business slowdowns or shutdowns in affected areas. As a result, the United States government implemented various domestic and international travel advisories and has also implemented enhanced screenings, mandatory quarantine requirements and other travel restrictions in connection with the COVID-19 pandemic.
The COVID-19 outbreak, along with the measures governments and private organizations worldwide have implemented to contain the spread of this pandemic, has resulted in a severe decline in demand for air travel, which has adversely affected our and our major airline partners’ business, operations and financial condition to an unprecedented extent. In response to this material decrease in demand, our major airline partners, upon whom we depend to contract with us and to set our flight schedules, drastically reduced our flights in 2020 compared to 2019. Although our flight schedules significantly increased in 2021 compared to 2020, we have not returned to pre-pandemic flight levels, and we cannot predict whether such levels will return in 2022 and thereafter. We will continue to work with our major airline partners regarding future schedules and make further demand-driven adjustments to our capacity as needed. We may experience significant fluctuations in in our future monthly flight schedules from our major airline partners in response to anticipated demand and the ongoing recovery from the COVID-19 pandemic.
During 2020 and 2021, the COVID-19 pandemic had a negative impact on our revenues. Our total revenue decreased from $2,972.0 million for the year ended December 31, 2019, to $2,127.1 million for the year ended December 31, 2020, or 28.4% and to $2,713.5 million for the year ended December 31, 2021, a decrease of 8.7% compared to the year ended December 31, 2019. Total block hours on flights we operated decreased from 1.46 million for the year ended December 31, 2019, to 0.97 million for the year ended December 31, 2020, or 33.5% and to 1.32 million for the year ended December 31, 2021, a decrease of 9.9% compared to the year ended December 31, 2019. The negative impact to our revenues due to the COVID-19 pandemic and its associated effects on the travel industry may continue into 2022 and potentially thereafter.
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During 2020 and 2021, SkyWest Airlines entered into three payroll support program agreements (the “Payroll Support Program Agreements”) with the U.S. Department of the Treasury (“Treasury”) that provided certain payroll support relief payments. During 2020, we received $345.5 million in the form of a payroll grant that was reflected as a reduction to operating expenses and we received $105.2 million in the form of a ten-year unsecured loan, which remained outstanding as of December 31, 2021. During 2021, we received $422.7 million in the form of a payroll grant that was reflected as a reduction to operating expenses and we received $95.4 million in the form of a ten-year unsecured loan, which remained outstanding as of December 31, 2021. The payroll support programs include certain restrictions, including requirements to maintain certain levels of scheduled service, restrictions on the payment of dividends and the repurchase of our common stock through September 30, 2022, and certain limitations on executive compensation. There is no assurance that we will receive additional payroll support from Treasury.
Additionally, during 2020 SkyWest Airlines entered into a secured loan and guarantee agreement with Treasury (the “Treasury Loan Agreement”), which permitted us to borrow up to $725 million under a five-year term. Upon execution, we borrowed $60 million under the Treasury Loan Agreement. The Treasury Loan Agreement includes certain restrictions, including on the payment of dividends, repurchase of our common stock and executive compensation for a twelve-month period following repayment of the loan in full. During 2021, we repaid amounts outstanding under the Treasury Loan and terminated the Treasury Loan Agreement. There is no assurance Treasury will provide similar financing arrangements in the future.
We may also take additional actions to improve our financial position, including measures to improve liquidity, such as drawing down on SkyWest Airlines’ line of credit, the issuance of secured debt securities, and/or the entry into other debt facilities. There can be no assurance as to the timing of any such drawdown or issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all. Any such actions could be conducted in the near term, may be material in nature and could result in significant additional borrowing. Measures to improve liquidity or other strategic actions that we may take in the future in response to COVID-19 may not be effective in offsetting decreased demand, and we will not be permitted to take certain strategic actions as a result of the Payroll Support Program Agreements, which could result in a material adverse effect on our business, operating results and financial condition.
The full extent of the ongoing impact of COVID-19 on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, including the effectiveness of the mitigation strategies discussed above, the duration and spread of COVID-19 and its variants and related travel advisories and restrictions, the impact of COVID-19 on overall long-term demand for air travel, the impact of COVID-19 on our financial health and operations and that of our major airline partners, recovery plans initiated by major airlines and others in the airline industry, the impact of potential vaccine mandates on employee attrition and future governmental actions, all of which are highly uncertain and cannot be predicted. The COVID-19 pandemic has had a material impact, and the continuation of reduced demand could have a material adverse effect, on our business, operating results, financial condition and liquidity.
In addition, a further outbreak of COVID-19 and its variants, an outbreak of another disease or similar public health threat, or fear of such an event, that affects travel demand, travel behavior or travel restrictions could have a material adverse impact on our business, financial condition and operating results and those of our major airline partners. Outbreaks of other diseases could also result in increased government restrictions and regulation, such as those actions described above or otherwise, which could adversely affect our operations.
We may experience difficulty upgrading and retaining qualified pilots.
Our operations rely on retaining qualified pilots, including captains and first officers. Our pilots may seek employment at major airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines. In response to the COVID-19 pandemic, several major airlines offered their employees early retirement programs in 2020 and have publicly announced their intention to hire significant levels of pilots in the near term. As a result, we are experiencing elevated levels of pilot attrition, particularly attrition of our captains. As we work to upgrade our first officers to captain, if attrition levels exceed our upgrade and replacement levels, we likely will experience a shortage of captains, due to training time and other factors, resulting in a reduction of our flight schedules with our major airline partners. If we request our major airline partners to reduce our flight schedules due to pilot or other labor shortages, our major airline partners may seek to enforce financial penalties or reduce the compensation otherwise
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payable to us under our capacity purchase, which would likely have a negative impact on our revenues and adversely impact our financial condition.
We may experience difficulty recruiting qualified pilots.
Our operations rely on recruiting and training qualified pilots. FAA regulations regarding personnel certification and qualifications, and potential future changes in FAA regulations, could limit the number of qualified new entrants that we could hire. In the event we are unable to hire qualified pilots, we may be unable to operate requested flight schedules under our capacity purchase agreements, which could result in a reduction in revenue and operating inefficiencies, such as incremental new-hire training costs, and our business and financial condition could be adversely affected.
We may experience difficulty recruiting and retaining other operational personnel.
In addition to pilots, our operations rely on recruiting and retaining other qualified personnel, including, but not limited to, flight attendants, maintenance technicians, dispatch personnel, crew support and other operational personnel. Our operational personnel may seek employment at major airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines. Should the turnover of our employees sharply increase, we may not be able to hire sufficient personnel to replace those leaving. In the event we are unable to hire and retain qualified personnel, including flight attendants and maintenance technicians, we may be unable to operate requested flight schedules under our capacity purchase agreements, which could result in a reduction in revenue and operating inefficiencies, such as incremental new-hire training costs, and our business and financial condition could be adversely affected.
Various 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, public health emergencies (including the COVID-19 pandemic and related variants), wars, terrorist attacks or political instability; |
| ● | changes in consumer preferences, perceptions, spending patterns or demographic trends; |
| ● | changes in the competitive environment due to industry consolidation, new airlines entering the market, our major airline partners operating smaller sized aircraft that may reduce the demand for regional aircraft and other factors; |
| ● | actual or potential disruptions to U.S. air traffic control systems; |
| ● | interference on aviation equipment from the deployment of 5G wireless telecommunications systems; |
| ● | price of jet fuel and oil that may negatively impact the number of flights we are scheduled to operate by our major airline partners under our capacity purchase agreements and may negatively impact the profitability of our prorate agreements; |
| ● | outbreaks of diseases and other illnesses 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.
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 U.S. air traffic control systems, power, telecommunications or the internet, may disrupt our internal network. Any individual failure or repeated failure of technology could impact our ability to conduct our business and result in
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increased costs. Our technological systems and related data may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, cybersecurity threats pose a potential risk to the security of our information technology systems, networks and services, as well as the confidentiality and integrity of our data. Cybersecurity risks may include security breaches, computer viruses, malicious or destructive code, ransomware and other attacks. 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. During 2021, we identified malware on our system resulting from a cyberattack. We successfully quarantined the malware without disruption to our operations. However, this quarantine breach required a rebuild of a triple-redundant server. While moving one of our critical systems to a newly rebuilt server, we experienced a server outage that resulted in approximately 1,700 flight cancellations. We estimate the impact of the outage negatively impacted our 2021 financial results by approximately $18 million (pre-tax). Although we have changed our procedures related to migrating critical systems to new servers, we cannot assure a similar outage will not reoccur. 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.
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 supporting our major airline partners’ route networks 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 Chicago, Denver, Salt Lake City and San Francisco. A significant interruption or disruption in service at one of our hubs, due to adverse weather, system malfunctions, airport construction, 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.
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 and could affect our relationships with our major airline partners.
We may experience disruption in service with key third-party service providers.
We rely on third party 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 experiences labor shortages, aircraft part shortages, 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.
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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.
We are subject to significant governmental regulation and potential regulatory changes.
All interstate air carriers, including SkyWest, 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; recordkeeping 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.
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.
Risks Related to Our Code-Share Agreements with Our Major Airline Partners
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 or acquiring a regional airline. 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 or regional airline could have a material adverse effect on our financial results. Additionally, our major airline partners may be limited in the number of regional aircraft they can operate in their network due to aircraft scope limitations they have with their labor groups. Scope limitations could limit our ability to increase the number of aircraft operating under our code-share agreements.
As of December 31, 2021, 369 out of our total 509 aircraft in scheduled service were operating under a capacity purchase arrangement or a prorate agreement with either United or Delta. If our code-share relationship with United or Delta 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
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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 and may not be a viable alternative.
Additionally, each of our agreements with our major airline partners is subject to certain early termination provisions, including uncured material performance breaches. We also currently use the systems, facilities and services of our major airline partners 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 our major airline partners 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 personnel working for our major airline partners 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.
Our major airline partners may experience events that negatively impact their financial strength or operations, which may also negatively impact our operations.
Our business model relies significantly on our major airline partners, and we may be negatively affected by their financial and operating strength. Events impacting airline travel, including pandemics such as COVID-19, that negatively impact the financial strength of our major airline partners or have a long-term effect on the use of our major airline partners by airline travelers would likely have a material adverse effect on our business, financial condition, and results of operations. If our major airline partners experience adverse effects to their operational or financial condition, they may be unable to make payments due to us under their capacity purchase agreements or may need to reduce utilization of our aircraft. Additionally, if one of our major airline partners undergoes bankruptcy, our agreement with such partner may not be assumed in bankruptcy and could be terminated. This and other events, which are outside of our control, could have a material adverse effect on our business, financial condition, and results of operations.
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 major airline partner can operate in its regional network due to its own labor agreements or scope limitations. 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 we 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.
There are long-term risks related to supply and demand of regional aircraft associated with our regional airline services strategy.
Various factors could change our major airline partners’ long-term strategy in using regional aircraft to support their network objectives. Such changes could result in a reduction in the number of regional aircraft our major airline partners operate in the future. If our major airline partners’ future strategies include a material reduction in regional aircraft generally or for specific aircraft types, such as 50-seat regional aircraft, the resulting decrease in demand in the aircraft we operate could have a material negative impact on our business and financial condition.
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.
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Our prorate arrangements with our major airline partners may not return to pre-pandemic revenue levels and are terminable upon notice of 120 days or less.
Our prorate revenue, which is derived from passenger fares on flights we operate under our prorate arrangements, decreased from $521.0 million for the year ended December 31, 2019 to $268.9 million for the year ended December 31, 2020, or 48.4% and to $409.7 million for the year ended December 31, 2021, or 21.4% when compared to the year ended December 31, 2019. Our prorate revenue and passenger demand was negatively impacted by the COVID-19 pandemic, and there is no assurance our prorate revenue will return to pre-pandemic levels in 2022 or thereafter. We may reduce the volume of flying under our prorate arrangements in the future based on several factors including, but not limited to, passenger demand on prorate routes and labor availability.
Our prorate flying agreements with our major airline partners permit each 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 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 could 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.
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. 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.
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 compete with other regional airlines on various factors including, but not limited to, labor resources, including pilots and mechanics; low operating costs; financial resources, including the ability to finance aircraft at competitive terms; geographical infrastructure; and overall customer service levels relating to on-time arrival and flight completion percentages. Our major airline partners rely on us to fly passengers from various locations into their hubs under our code-share agreements at competitive terms. 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 indirectly face competition from low-cost carriers, such as Southwest, Allegiant, Spirit, JetBlue and others, who compete with our major airline partners on many routes we operate. Certain of our competitors are larger and have significantly greater 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 inability to remain competitive on the various factors valued by our major airline partners could adversely affect our operating results and financial condition.
The airline industry has undergone substantial consolidation in recent years, including the mergers between Alaska and Virgin America Inc. in 2016, American and US Airways Group Inc. in 2013, 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.
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Risks Related to Our Operating Costs and Personnel
Increases in labor costs, including pilot costs, flight attendant costs, maintenance costs and overhead costs may result in lower operating margins under our capacity purchase contracts.
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. Increases in our labor costs could result in a material reduction in our earnings. For example, during the year ended December 31, 2020 and 2021, our salary, wage and benefit costs constituted approximately 40.9% and 40.5% of our total operating costs, respectively. 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. Labor costs to recruit, incentivize and retain skilled employees may significantly increase in the future due to increased competition for the limited number of qualified industry personnel. Attrition rates that exceed our ability to hire and replace applicable workgroups could negatively impact our ability to generate revenue, negatively impact our operating results, increase our training and labor costs and our business prospects could be harmed.
Additionally, under our capacity purchase contracts with United, Delta, 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, 2021, approximately 91.4% of our code-share operating costs were reimbursable at pre-determined rates and 8.6% of our code-share operating costs were directly reimbursed costs, or often referred to as pass-through costs. Additionally, our aircraft maintenance costs may increase annually as our fleet ages at a higher rate than our pre-determined rates allow. Also, on an individual aircraft basis, various in-depth maintenance procedures are typically scheduled to occur at multi-year intervals, which can result in maintenance expense fluctuations year-to-year. If our operating costs for labor, aircraft maintenance and overhead costs exceed the compensation earned from our pre-determined rates under our capacity purchase arrangements, our financial position and operating results will be negatively affected.
Increased labor costs, pilot and other labor availability, labor disputes and 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, maintenance technicians and other personnel. 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 represented employees may be on terms that are not as attractive as our current agreements or comparable to agreements entered into by our competitors.
SkyWest’s employees are represented by in-house associations; however, organizing efforts to join national unions 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 our employees being represented by one or more national unions. If our employees were to unionize or be deemed to be represented by one or more national unions, negotiations with these unions 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 union-involved collective bargaining may increase our operating expenses and negatively 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 difficult 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,
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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 capacity purchase 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, 2021, we operated 41 CRJ200s under a prorate agreement with United and 29 CRJ200s under a prorate agreement with Delta. 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.
Risks Related to Operating and Leasing Regional Jet Aircraft and Engines
We are reliant on two aircraft manufacturers and one engine manufacturer.
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 as the sole manufacturer of engines used on the aircraft we operate. Our operations could be materially and adversely affected by the failure or inability of Bombardier, Embraer or General Electric to provide sufficient parts or related maintenance and support services to us on a timely manner. Additionally, timing and availability of new aircraft deliveries could be delayed beyond our control.
We have a significant amount of contractual long-term debt obligations.
As of December 31, 2021, we had a total of approximately $3.1 billion in total long-term debt obligations. Our long-term debt obligations include $2.94 billion related to the acquisition of aircraft and $200.6 million related to borrowings under the Payroll Support Program Agreements with Treasury. Excluding aircraft financed by our major airline partners that we operate for them under contract, we had 43 aircraft under long-term lease agreements as of December 31, 2021, with remaining terms up to nine years. Future minimum lease payments due under all long-term operating leases were approximately $294.3 million at December 31, 2021. At a 6.0% discount factor, which is the average rate used to approximate the implicit rates within the applicable leases, the present value of these lease obligations was equal to approximately $237.2 million at December 31, 2021. 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.
Under our capacity purchase agreements, 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. In the event any of our major airline partners defaults under a capacity purchase agreement or we are unable to extend the flying contract terms on aircraft with ongoing financial obligations, our financial position and financial results could be materially adversely affected.
In addition, given the negative effects the COVID-19 pandemic has had and may continue to have on our business, including demand fluctuations, labor shortages or other effects, we may seek material amounts of additional financial liquidity in the short-term, which may include drawing down on SkyWest Airlines’ line of credit, the issuance of secured debt securities and/or the entry into other debt facilities, among other items. There can be no assurance as to the timing of any such drawdown or issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all.
If our liquidity is materially diminished, we might not be able to timely pay our leases and debts or comply with certain covenants under SkyWest Airlines’ line of credit or with other material provisions of our contractual obligations.
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Our anticipated aircraft purchases are expected to require a significant increase in our leverage and the related cash requirements.
As of December 31, 2021, we have firm purchase commitments for 29 E175 aircraft and spare engines totaling $0.8 billion. Over the next several years, if we continue to add new aircraft to our fleet, we anticipate using significant amounts of capital to acquire these aircraft.
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 and results of operations 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.
The residual value of our owned aircraft may be less than estimated in our depreciation policies.
As of December 31, 2021, we had approximately $5.5 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, amendments to our capacity purchase agreements that impact the anticipated cash flows for our aircraft, 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. In 2021, we recorded a non-cash impairment of $84.6 million attributable to certain CRJ900 aircraft operating with a major airline partner as a result of contract expirations and the uncertainty about our ability to redeploy the CRJ900 aircraft with another major airline partner. An impairment on any of our aircraft types we operate or an increased level of depreciation expense resulting from a change to our depreciation policy and assumptions could result in a material negative impact to our financial results.
We lease aircraft and engines to third parties and the lessee may default under the lease terms, which could negatively affect our financial condition, cash flow and results of operations.
We leased five CRJ900 aircraft, 34 CRJ700 aircraft, and engines used on CRJ aircraft to third parties as of December 31, 2021. In the event a lessee defaults under the terms of the lease agreement, we may incur additional costs, including legal and other expenses necessary to repossess the aircraft or engines, particularly if the lessee is contesting the proceedings or is in bankruptcy. We could also incur substantial maintenance, refurbishment or repair costs if a defaulting lessee fails to pay such costs and where such maintenance, refurbishment or repairs are necessary to put the aircraft or engines in suitable condition for remarketing or sale. We may also incur storage costs associated with any aircraft or engine that we repossess and are unable to place immediately with another lessee. Even if we are able to immediately place a repossessed aircraft or engine into service ourselves, or place the aircraft and engines under another lessee, we may not be able to do so at a similar or favorable lease rate. A lessee default under one of our lease agreements could negatively affect our financial condition, cash flow and results of operations.
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We have entered into a strategic engine leasing joint venture that operates under joint control with a third party that involves significant risk.
We have entered into a strategic engine joint venture with a third party to lease engines to other parties. This strategic venture involves significant risks, including:
| ● | we may not realize a satisfactory return on our investment; |
| ● | the joint venture may divert management’s attention from our core business; |
| ● | our joint venture partner could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments; and |
| ● | our joint venture partner might fail to fund their share of required capital contributions or fail to fulfill their other obligations. |
Although we currently participate in the management of our engine joint venture, our joint venture agreement requires unanimous approval over all significant actions. In addition, if we were unable to resolve a dispute with our joint venture partner that retains material managerial veto rights, we might reach an impasse that could require us to dissolve the joint venture at a time and in a manner that could negatively affect our financial results.
We entered into a partnership with a third party to develop demand for electric-powered aircraft that involves significant uncertainty and risk.
We have entered into a strategic partnership with Eve UAM, LLC (“Eve”), an Embraer company, to develop a network of deployment for Eve’s electric vertical takeoff and landing (“eVTOL”) aircraft. To support this effort, SkyWest and Eve plan to dedicate a team to focus on vehicle design, vertiport specifications, and the certification roadmap for eVTOL operations. This strategic partnership involves significant risks, including:
| ● | development and certification of the aircraft is uncertain or may take longer than expected; |
| ● | future customer demand for eVTOL aircraft is uncertain; |
| ● | other parties are developing electric-powered aircraft and the level of competition may increase; |
| ● | the extent government regulation of eVTOL aircraft and its related infrastructure is uncertain, and the cost of compliance with any such regulations may be significant; |
| ● | we may not realize a satisfactory return on our investment; and |
| ● | our partner might fail to fulfill its obligations. |
The effect of any, or some combination, of the foregoing risks could affect our partnership with Eve and future benefits may not materialize.
We are subject to various environmental requirements, including laws and regulations related to climate change and emissions. Compliance with new or existing environmental requirements could materially and adversely affect the Company's business plans, strategies, and results of operations.
We are subject to federal, state, and local laws and regulations relating to the protection of the environment, including those relating to aircraft and ground-based emissions, discharges into water systems, safe drinking water, and the management of hazardous substances and waste materials. Certain legislative bodies and regulatory authorities are increasingly focused on climate change and have taken actions to implement additional laws, regulations, and programs intended to protect the environment. For example, the federal government, as well as several state and local governments, have implemented legislative and regulatory proposals and voluntary measures intended to reduce greenhouse gas emissions. Compliance with laws, regulations, and other programs intended to reduce emissions or otherwise protect the environment may require us to reduce our emissions, secure carbon offset credits or otherwise pay for emissions, or make capital investments to modify certain aspects of our operations to reduce emissions. Future policy, legal, and regulatory developments relating to the protection of the environment could increase our costs and have a material adverse effect on our operations.
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We support our major airline partners’ goals and strategies to reduce carbon emissions on flights we operate under our code-share agreements and, as we work to support each of our major airline partners’ goals and strategies, initiatives to reduce emissions may not materialize and could materially and adversely affect the Company's business plans, strategies, and results of operations.
During 2021, we produced approximately 5.7 million metric tons of CO2e from fuel burned, using industry emissions factors, on flights we operated under our code-share agreements. Under our flying contracts, our major airline partners are responsible for fuel procurement and selection of the type of aircraft we operate and have significant control over our flight schedules. Accordingly, we anticipate our major airline partners will take responsibility for carbon emissions incurred on our contract flights. Each of our major airline partners may have different goals, strategies and timelines to reduce carbon emissions on our flights. We are largely dependent on the direction from our major airline partners regarding long-term fuel saving initiatives such as engine innovations reducing fuel consumption, use of sustainable alternative fuels, carbon sequestration programs, air traffic flow routing efficiencies, among other initiatives. Each of our major airline partners may pursue alternative strategies and goals to reduce carbon emissions on flights we operate under our code-share agreements that may impact the rate at which we are able to reduce our carbon emissions, if at all. There is no assurance our major airline partners will take responsibility for carbon emissions incurred under our contract flights and no assurance future long-term fuel saving initiatives will materialize. In the event we pursue purchasing carbon offsets as an alternative strategy to reduce our carbon emissions, the cost could materially and adversely affect our business plans and results of operations.
Risks Related to Dividends, Share Repurchases and Our Common Stock
We are currently restricted from paying dividends or repurchasing our stock under our agreements with Treasury.
Historically, we have paid dividends and repurchased shares of our common stock in varying amounts. During 2020 and 2021, we entered into several agreements with Treasury, the Payroll Support Program Agreement and the Treasury Loan Agreement under the CARES Act, the Payroll Support Program Extension Agreement under the 2021 Appropriations Act and the Payroll Support Program 3 Agreement under the American Rescue Plan Act. Under the terms of these agreements, we are restricted from the payment of dividends and the repurchase of our common stock through September 30, 2022.
Following the dividend and share repurchase restriction lapse under our agreements with Treasury, there can be no assurance that we will resume our past practice of paying dividends on our common stock or that we will have the financial resources to pay such dividends. Similarly, 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. The future payment of dividends and the number of shares of common stock we may repurchase will depend upon our financial condition and results of operations and other factors deemed relevant by our board of directors.
If we resume paying cash dividends or resume a share repurchase program in the future, such dividends and repurchases 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, resuming 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.
We issued warrants to purchase shares of our common stock to Treasury for relief we received under the CARES Act, the 2021 Appropriations Act, and the American Rescue Plan Act.
In 2020, we issued warrants to purchase 370,720 shares of our common stock with an exercise price of $28.38 per share to Treasury as consideration for payroll support payments we received under the CARES Act payroll support program. Also, during 2020 we issued warrants to purchase 211,416 shares of our common stock with an exercise price of $28.38 per share to Treasury as consideration for borrowing $60.0 million under the Treasury Loan Agreement. In 2021, we issued warrants to purchase 124,773 shares of our common stock with an exercise price of $40.41 per share to Treasury as consideration for payroll support payments we received under the 2021 Appropriations Act. Additionally, in 2021 we issued warrants to purchase 78,317 shares of our common stock with an exercise price of $57.47 per share to Treasury as consideration for payroll support payments we received under the American Rescue Plan Act.
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If Treasury exercises its option to purchase shares of our common stock under warrants previously issued to Treasury, such exercise will be dilutive to our shareholders. As of December 31, 2021, Treasury has not exercised any of the warrants issued.
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.
General Risk Factors
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. Under the terms of the Payroll Support Program 3 Agreement, we are subject to certain limitations on executive compensation through April 1, 2023. 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 be a party to litigation in the normal course of business or otherwise, which could affect our financial condition and results of operations.
We may become party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, arising in the ordinary course of our business or otherwise, including, but not limited to those related to injury or tort, environmental, employment and commercial legal issues. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Litigation is subject to significant uncertainty and may be expensive, time-consuming, and disruptive to our operations. Although we will vigorously defend ourselves in such legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain. If a legal proceeding is resolved against us, it could result in significant compensatory damages or injunctive relief that could materially adversely affect our financial condition, results of operations and cash flows.
The adoption of new tax legislation or changes to existing tax laws and regulations could adversely affect our financial condition or results of operations.
We are subject to tax laws and regulations of the U.S. federal, state and local governments as well as various non-U.S. jurisdictions. Potential changes in existing tax laws, including future regulatory guidance, may impact our effective tax rate and tax payments. There can be no assurance that changes in tax laws or regulations, both within the United States and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our major airline partners, customers or the economy generally may also impact our financial condition and results of operations.
In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. Any changes in enacted tax laws, rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our effective tax rate, tax payments, financial condition and results of operations.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Flight Equipment
As of December 31, 2021, our fleet under our code-share agreements 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) | ||||||
E175s |
| 180 | 31 |
| 70-76 |
| 2,100 |
| 530 |
| 4.5 | |
CRJ900s |
| 19 | 25 |
| 70-76 |
| 1,500 |
| 530 |
| 11.0 | |
CRJ700s |
| 87 | 27 |
| 65-70 |
| 1,600 |
| 530 |
| 16.3 | |
CRJ200s |
| 135 | 5 |
| 50 |
| 1,500 |
| 530 |
| 19.5 |
Several factors may impact our fleet size throughout 2022 and thereafter, including, but not limited to, contract expirations that are not renewed, labor shortages, reductions in our prorate fleet, lease expirations that are not extended and growth opportunities. Below is our 2022 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 due to demand uncertainty resulting from COVID-19 and other factors.
| ● | E175s – We anticipate taking delivery of two new E175 aircraft under a capacity purchase agreement with American, 16 new E175 aircraft under a capacity purchase agreement with Delta and eleven new E175 aircraft under a capacity purchase agreement with Alaska. We anticipate financing these aircraft with debt and deliveries are anticipated to begin in 2022 and 2023. We anticipate placing the aircraft into service in 2022 and 2023. |
| ● | CRJ900s – We anticipate taking delivery of 16 new E175 aircraft under a capacity purchase agreement with Delta in 2022. The 16 E175 aircraft will replace 16 CRJ900 aircraft that will be removed from the capacity purchase agreement with Delta. We are evaluating alternative uses for our CRJ900s that will be displaced in 2022. |
| ● | CRJ700s – We anticipate placing eleven used CRJ700s into service under a capacity purchase agreement with American by the end of 2023. We will use aircraft we own and were not operating under a code-share agreement with any of our major airline partners as of December 31, 2021. In January 2022, we extended the term for 19 CRJ700 aircraft under contract with United for three years with new expiration dates scheduled between 2025 and 2026. |
| ● | CRJ200s – As a result of the COVID-19 demand disruption and partial recovery, we reduced the number of CRJ200s operating under code-share agreements from 190 as of December 31, 2019 to 130 as of December 31, 2020 and increased the number of CRJ200s in scheduled service to 140 aircraft as of December 31, 2021. Various factors could result in higher or lower demand for our CRJ200 fleet in 2022 and subsequent periods including, but not limited to, changes in passenger demand on routes typically serviced by CRJ200 aircraft, including our prorate routes, and anticipated costs to maintain our older CRJ200 fleet. |
Ground Facilities
We lease many of the buildings and associated land that we occupy. Most of these leases are for facilities at airports with various government agencies that control the use of the airport. We lease maintenance, training and office facilities in Salt Lake City, Utah, and we lease additional maintenance facilities in Boise, Idaho; Fresno, California; Tucson, Arizona; Chicago, Illinois; Detroit, Michigan; Nashville, Tennessee; South Bend, Indiana; Fort Wayne, Indiana;
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and San Luis Obispo, California. We also lease ticket counters, passenger hold rooms, operating areas and other terminal space in many of the airports that we serve.
We own our corporate headquarters facilities located in St. George, Utah and a maintenance accessory shop facility in Salt Lake City, Utah. We also own maintenance facilities on land leases with airport authorities in Milwaukee, Wisconsin; Oklahoma City, Oklahoma; Colorado Springs, Colorado; and Palm Springs, California.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2021, 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. However, the ultimate resolution of these matters is inherently uncertain.
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 Information
Our common stock is traded on The Nasdaq Global Select Market under the symbol “SKYW.” As of February 14, 2022, there were approximately 3,951 stockholders of record of our common stock. Securities held of record do not include shares held in securities position listings. The transfer agent for our common stock is Zions First National Bank, Salt Lake City, Utah.
Dividends
Pursuant to the terms of our agreements with Treasury, we are restricted from paying dividends through September 30, 2022. As such, no dividends were declared during the 2021 calendar year, and there can be no assurance that we will pay dividends in the future. In February 2020, our Board of Directors declared a regular dividend of $0.14 per share. No subsequent dividends were declared during the 2020 calendar year.
Issuer Purchases of Equity Securities
Our Board of Directors has adopted a stock repurchase program which authorizes the Company 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 was authorized in 2019 for the repurchase of up to $250.0 million of our common stock. Pursuant to the terms of our Payroll Support Program Agreements and Treasury Loan Agreement with Treasury, we are restricted from repurchasing shares of our common stock through September 30, 2022. No shares of common stock were repurchased under our repurchase program during the twelve months ended December 31, 2021.
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, 2021, 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.
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INDEXED RETURNS |
| ||||||||||||
Base |
| ||||||||||||
Period | Years Ending |
| |||||||||||
Company Name / Index | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| ||||||
SkyWest, Inc. |
| 100 |
| 146.56 | 123.84 | 181.32 |
| 113.48 |
| 110.64 | |||
NASDAQ Composite |
| 100 |
| 129.64 | 125.96 | 172.17 |
| 249.51 |
| 304.85 | |||
NASDAQ Transportation Index | 100 | 127.55 | 116.02 | 146.11 | 191.19 | 241.77 | |||||||
ITEM 6. [Reserved]
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, 2021 and 2020. Also discussed is our financial position as of December 31, 2021 and 2020. 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.
This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Annual Report on Form 10-K can be found in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Overview
We have the largest regional airline operation in the United States. As of December 31, 2021, we offered scheduled passenger and air freight service with approximately 2,080 total daily departures to destinations in the United
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States, Canada, Mexico and the Caribbean. As of December 31, 2021, we had 629 total aircraft in our fleet, including 509 aircraft in scheduled service or under contract under our code-share agreements, summarized as follows:
| E175 |
| CRJ900 |
| CRJ700 |
| CRJ200 |
| Total | |
United |
| 90 | — | 19 | 111 | 220 | ||||
Delta | 71 | 44 | 5 | 29 | 149 | |||||
American |
| 18 | ** | — | 90 | — | 108 | |||
Alaska |
| 32 | — | — | — | 32 | ||||
Aircraft in scheduled service or under contract | 211 | 44 | 114 | 140 | 509 | |||||
Leased to third parties |
| — | 5 | 34 | — | 39 | ||||
Other* |
| — | — | 18 | 63 | 81 | ||||
Total Fleet |
| 211 | 49 | 166 | 203 | 629 |
*As of December 31, 2021, other aircraft included: supplemental spare aircraft supporting our code-share agreements which may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, or aircraft that are scheduled to be disassembled for use as spare parts.
**The Company took delivery of the 18 E175 aircraft under its contract with American as of December 31, 2021. The 18 E175 aircraft are scheduled to begin service in 2022.
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. The COVID-19 pandemic had a significant impact to our operations including a reduction in the number of flights we were scheduled to operate during 2020 and 2021 and changes we made to enhance the safety of our passengers and employees, including aircraft cleaning procedures and use of personal protective equipment.
During the 2021 calendar year, we made several changes to our fleet count under our flying agreements, including the addition of 18 new E175 aircraft, 24 used CRJ700 aircraft, one new and four used CRJ900 aircraft, and 10 used CRJ200 aircraft. Leases on two CRJ200 aircraft with third parties terminated during 2021.
We anticipate our fleet will continue to evolve, as we are scheduled to add two new E175 aircraft with American in 2022, 16 new E175 aircraft with Delta by the first half of 2023, and eleven new E175 aircraft with Alaska by the first half of 2023. The 16 E175 aircraft with Delta will replace 16 older SkyWest-owned or financed CRJ900 aircraft currently operating under contract with Delta. Under the terms of the contract with Delta, Delta has the right to purchase the 16 E175 aircraft at the end of the contract term at a price estimated to be the fair value at the end of the contract. Timing of these anticipated deliveries may be subject to change as we are coordinating with our major airline partners in response to the COVID-19 recovery, labor availability or other factors. Our primary objective in the fleet changes is to improve our profitability by adding new E175 aircraft and used CRJ aircraft to capacity purchase agreements, and potentially removing older aircraft from service that typically require higher maintenance costs.
For the year ended December 31, 2021, approximately 43.2% of our aircraft in scheduled service or under contract were operated for United, approximately 29.3% were operated for Delta, approximately 21.2% were operated for American and approximately 6.3% 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 capacity purchase arrangements and our prorate flying arrangements. For the year ended December 31, 2021, contract flying revenue and prorate revenue represented approximately 84.3% and 15.7%, respectively, of our total flying agreements revenue. On contract routes, the major 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, the number of aircraft under contract and other operating measures. On prorate routes, we have more control over scheduling, pricing and seat inventories, we share passenger fares with our major airline partners according to prorate formulas and we are responsible for the operating costs of the prorate flights, including fuel and airport costs.
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Financial Highlights
We had total operating revenues of $2.7 billion for the year ended December 31, 2021, a 27.6% increase compared to total operating revenues of $2.1 billion for the year ended December 31, 2020. We had net income of $111.9 million, or $2.20 per diluted share, for the year ended December 31, 2021, compared to a net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020. The significant items affecting our revenue and operating expenses during the year ended December 31, 2021, 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 flying agreements revenue under our capacity purchase arrangements. The number of flights we operate and the corresponding number of passengers we carry are the primary drivers to our revenue under our prorate flying agreements. As a result of higher passenger demand compared to the onset of the COVID-19 pandemic, the number of aircraft we operated increased from 452 as of December 31, 2020, to 509 as of December 31, 2021; the number of block hours increased from 1.0 million in 2020 to 1.3 in 2021, or by 35.6%; and the number of passengers we carried increased from 21.3 million in 2020 to 36.6 million in 2021, or by 72.2%.
As a result of increased flight schedules and additional aircraft operating under our capacity purchase agreements in 2021 compared to 2020, our capacity purchase revenue increased $413.5 million, or 23.1% in 2021. Additionally, we recognized $6.8 million of previously deferred revenue and $8.4 million of unbilled revenue for the year ended December 31, 2021, compared to deferring revenue of $110.7 million of fixed monthly payments received under our capacity purchase agreements for the year ended December 31, 2020, as further described in the section of this report entitled “Results of Operations.” As a result of increased flight schedules and passengers carried on our prorate routes, our prorate revenue increased $140.8 million, or 52.4% in 2021, as compared to 2020. Despite the ongoing COVID-19 demand recovery, the negative impact to our revenues due to the COVID-19 pandemic and its associated effects on the travel industry, including potential labor shortages that may negatively impact our future flight schedules, may continue in 2022.
Operating Expenses
Our total operating expenses increased $419.3 million, or 20.8% for the year ended December 31, 2021, compared to the year ended December 31, 2020. This increase was primarily due to an increase in the number of flights we operated and a non-cash impairment charge of $84.6 million for the year ended December 31, 2021. Departures increased from 585,257 in 2020 to 749,943 in 2021, or by 28.1%. Additionally, we recorded $422.7 million in payroll support grants received from Treasury as an offset to our operating expenses for the year ended December 31, 2021, compared to $345.5 million recorded for the year ended December 31, 2020. Additional details regarding the increase in our operating expenses are described in the section of this Report entitled “Results of Operations.”
Fleet Activity
The following table summarizes our fleet activity for 2021:
Aircraft in Service or Under Contract |
| December 31, 2020 |
| Additions |
| Removals | December 31, 2021 | |
E175s |
| 193 |
| 18 |
| — | 211 | |
CRJ900s |
| 39 |
| 5 |
| — | 44 | |
CRJ700s |
| 90 |
| 25 |
| (1) | 114 | |
CRJ200s |
| 130 |
| 10 |
| — | 140 | |
Total |
| 452 |
| 58 |
| (1) | 509 |
During 2021, we took delivery of 18 new E175 aircraft and one new CRJ900 aircraft and placed the aircraft into service or under contract under capacity purchase agreements. We placed 24 (net) used CRJ700 aircraft, four used CRJ900 aircraft into service under capacity purchase agreements, and ten used CRJ200 aircraft into prorate service.
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Results of Operations
2021 Compared to 2020
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages of change for the periods identified below. The increase in block hours, departures and passengers carried during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to demand recovery from reduced flight schedules in response to the COVID-19 pandemic.
For the year ended December 31, | |||||||
Block hours by aircraft type: |
| 2021 |
| 2020 |
| % Change | |
E175s |
| 613,465 | 435,557 | 40.8 | % | ||
CRJ900s | 116,576 | 66,640 | 74.9 | % | |||
CRJ700s | 289,902 | 200,860 | 44.3 | % | |||
CRJ200s |
| 299,685 | 270,281 | 10.9 | % | ||
Total block hours | 1,319,628 | 973,338 | 35.6 | % | |||
| |||||||
| |||||||
Departures |
| 749,943 | 585,257 | 28.1 | % | ||
Passengers carried |
| 36,608,918 | 21,255,931 | 72.2 | % | ||
Passenger load factor |
| 74.6 | % | 56.4 | % | 18.2 | pts |
Average passenger trip length (miles) |
| 532 | 500 | 6.4 | % | ||
Operating Revenues
The following table summarizes our operating revenue for the periods indicated (dollar amounts in thousands):
For the year ended December 31, | ||||||||||||
| 2021 |
| 2020 |
| $ Change |
| % Change | |||||
Flying agreements | $ | 2,615,076 | $ | 2,060,801 | $ | 554,275 | 26.9 | % | ||||
Lease, airport services and other |
| 98,415 |
| 66,305 |
| 32,110 | 48.4 | % | ||||
Total operating revenues | $ | 2,713,491 | $ | 2,127,106 | $ | 586,385 |
| 27.6 | % | |||
Flying agreements revenue primarily consists of revenue earned on flights we operate under our capacity purchase agreements and prorate agreements with our major airline partners. Lease, airport services and other revenues consist of revenue earned from leasing aircraft and spare engines to third parties separate from our capacity purchase agreements and providing airport counter, gate and ramp services.
We disaggregate our flying agreements revenue into the following categories (dollar amounts in thousands):
For the year ended December 31, | ||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||
Capacity purchase agreements revenue: flight operations |
| $ | 1,146,375 |
| $ | 945,008 |
| $ | 201,367 |
| 21.3 | % |
Capacity purchase agreements revenue: aircraft lease and fixed revenue |
| 1,059,017 |
| 846,933 |
| 212,084 |
| 25.0 | % | |||
Prorate agreements revenue |
| 409,684 | 268,860 | 140,824 |
| 52.4 | % | |||||
Flying agreements revenue | $ | 2,615,076 | $ | 2,060,801 | $ | 554,275 |
| 26.9 | % | |||
The increase in “Capacity purchase agreements revenue: flight operations” of $201.4 million was primarily due to an increase in scheduled flights we operated under our contracts with our major airline partners as a result of the ongoing COVID-19 demand recovery. Our completed departures increased 28.1% and completed block hours increased 35.6% for the year ended December 31, 2021, compared to year ended December 31, 2020.
The increase in “Capacity purchase agreements revenue: aircraft lease and fixed revenue” of $212.1 million was primarily due to recognizing previously deferred revenue and unbilled revenue during the year ended December 31, 2021, compared to the year ended December 31, 2020, combined with aircraft lease and fixed rate revenue generated from 18 E175 aircraft added to our fleet since December 31, 2020. Under our capacity purchase agreements, we are paid a fixed amount per month per aircraft over the contract term. We recognize the fixed amount per aircraft as revenue
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proportionately to the number of block hours we complete, our performance obligation, for each reporting period. During the year ended December 31, 2021, the increase in our flight schedules resulted in recognizing $6.8 million of previously deferred revenue and $8.4 million in unbilled revenue on our capacity purchase agreements. For the year ended December 31, 2020, we deferred recognizing revenue on $110.7 million of fixed monthly cash payments we received under our capacity purchase agreements. Our deferred revenue and unbilled 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 we complete each reporting period relative to the number of block hours we anticipate completing over the remaining contract term of each capacity purchase agreement. The deferred revenue balance applicable to each contract will be recorded as revenue by the end of each respective contract term. Our total deferred revenue and unbilled revenue balances were $103.9 million and $8.4 million as of December 31, 2021, respectively.
The increase in prorate agreements revenue of $140.8 million was primarily due to the increase in prorate passengers and passenger revenue we received on routes we operated under our prorate agreements during 2021, compared to 2020, due to the ongoing COVID-19 demand recovery.
The increase in lease, airport services and other revenues of $32.1 million was primarily due an increase in the number of flights operated at locations where we were contracted to provide airport customer service during 2021 compared to 2020 and we leased 34 CRJ700s to a third party for all of 2021, whereas we leased 34 to a third party for only a portion of 2020.
Operating Expenses
Individual expense components attributable to our operations are set forth in the following table (dollar amounts in thousands).
For the year ended December 31, | ||||||||||||
2021 | 2020 | $ Change | % Change | |||||||||
Salaries, wages and benefits | $ | 986,664 | $ | 826,109 | $ | 160,555 | 19.4 | % | ||||
Aircraft maintenance, materials and repairs |
| 817,803 |
| 618,989 |
| 198,814 |
| 32.1 | % | |||
Depreciation and amortization |
| 440,198 |
| 474,959 |
| (34,761) |
| (7.3) | % | |||
Airport-related expenses |
| 104,690 |
| 93,886 |
| 10,804 |
| 11.5 | % | |||
Aircraft fuel |
| 107,057 |
| 61,739 |
| 45,318 |
| 73.4 | % | |||
Aircraft rentals |
| 63,357 |
| 65,316 |
| (1,959) |
| (3.0) | % | |||
Special items |
| 84,592 |
| — |
| 84,592 |
| NM | ||||
Payroll support grant | (422,669) | (345,491) | (77,178) | 22.3 | % | |||||||
Other operating expenses |
| 255,932 |
| 222,797 |
| 33,135 |
| 14.9 | % | |||
Total operating expenses | $ | 2,437,624 | $ | 2,018,304 | $ | 419,320 |
| 20.8 | % | |||
Interest expense |
| 123,122 |
| 123,173 |
| (51) |
| (0.0) | % | |||
Total airline expenses | $ | 2,560,746 | $ | 2,141,477 | $ | 419,269 |
| 19.6 | % | |||
NM = Not Meaningful
Salaries, wages and benefits. The $160.6 million, or 19.4%, increase in salaries, wages and benefits was due to the increase in direct labor costs that resulted from a higher number of flights we operated during 2021 in response to demand recovery from the COVID-19 pandemic.
Aircraft maintenance, materials and repairs. The $198.8 million, or 32.1%, increase in aircraft maintenance expense was primarily due to an increase in direct maintenance costs, including the replacement of time-limited engine components, incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleet intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during 2021 compared to 2020.
Depreciation and amortization. The $34.8 million, or 7.3%, decrease in depreciation and amortization expense was primarily due to certain CRJ200 aircraft that became fully depreciated during 2020. This reduction in depreciation on our CRJ200 fleet was partially offset by an increase in depreciation expense due to the acquisition of 18 new E175 aircraft and spare engines in 2021, as well as the acquisition of eleven used CRJ700 aircraft in 2021.
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Airport-related expenses. Airport-related expenses include airport-related customer service costs such as outsourced airport gate and ramp agent services, airport security fees, passenger interruption costs, deicing, landing fees and station rents. For clarity, our employee airport customer service labor costs are reflected in salaries, wages and benefits and customer service labor costs we outsource to third parties are included in airport-related expenses. The $10.8 million, or 11.5%, increase in airport-related expenses was primarily due to an increase in airport service activities in response to an increase in our prorate passengers.
Aircraft fuel. The $45.3 million, or 73.4%, increase in fuel cost was primarily due to an increase in the number of flights we operated under our prorate agreements and corresponding increase in gallons of fuel we purchased, and an increase in our average fuel cost per gallon from $1.89 in 2020 to $2.49 in 2021. We purchase and incur expense for all fuel on flights operated under our prorate agreements. All fuel costs incurred under our capacity purchase contracts are either purchased directly by our major airline partner, or if purchased by us, we record the direct reimbursement as a reduction to our fuel expense. The following table summarizes the gallons of fuel we purchased under our prorate agreements, for the periods indicated:
For the year ended December 31, | |||||||||
(in thousands) |
| 2021 |
| 2020 |
| % Change | |||
Fuel gallons purchased | 43,059 | 32,590 | 32.1 | % | |||||
Fuel expense | $ | 107,057 | $ | 61,739 |
| 73.4 | % | ||
Aircraft rentals. The $2.0 million, or 3.0%, decrease in aircraft rentals was primarily related to a reduction of our fleet size that was financed through leases from third parties as a result of scheduled lease expirations during 2020.
Special items. Special items for 2021 consisted of a non-cash impairment charge on SkyWest Airlines’ CRJ900 aircraft of $84.6 million. During 2021, SkyWest reached an agreement with Delta to place 16 new E175 aircraft under contract beginning in 2022. These E175 aircraft will replace 16 older SkyWest-owned or financed CRJ900 aircraft currently operating under contract with Delta. We do not anticipate extending the contract term with Delta on these 16 CRJ900 aircraft. These factors, combined with the market value of SkyWest’s CRJ900 fleet, resulted in a non-cash impairment charge of $84.6 million.
Payroll support grant. During 2020 and 2021, we entered into three Payroll Support Program Agreements with U.S. Treasury that provided certain payroll support relief payments that were recognized as a reduction in labor expense over the periods the grants intended to compensate. We recognized $422.7 million in payroll support grant proceeds we received as a reduction to our operating expenses for the year ended December 31, 2021, a 22.3% increase compared to $345.5 million in payroll support grant proceeds we received as a reduction to our operating expenses for year ended December 31, 2020.
Other operating expenses. Other operating expenses primarily consist of property taxes, hull and liability insurance, simulator costs, crew per diem, crew hotel costs and credit loss reserves. The $33.1 million, or 14.9%, increase in other operating expenses was primarily related to an increase in other operating costs that correspond to the higher number of flights we operated during 2021 compared to 2020, such as crew per diem, crew hotel costs and simulator costs.
Interest Expense. The $0.1 million, decrease in interest expense was primarily related to $3.6 million of deferred loan costs expense attributed to the payoff and termination of the secured loan agreement with U.S. Treasury in 2021, offset by a decrease in interest expense due to a lower average effective interest rate in 2021 as compared to 2020. Our average effective interest rate for 2021 and 2020 was 3.8% and 4.0%, respectively.
Total airline expenses. Our total airline expenses, comprising of our total operating expenses and interest expense, increased $419.3 million, or 19.6%, due to an increase in direct operating costs attributed to the higher number of completed flights in 2021 compared to 2020 and due to the non-cash impairment charge of $84.6 million on SkyWest operated CRJ900 aircraft in 2021, offset by an increase in the payroll support grant benefit we recorded in 2021, compared to the benefit recorded in 2020.
As our interest expense is primarily attributed to debt associated with financing aircraft under our capacity purchase agreements and as revenue earned under our capacity purchase agreements is intended to compensate us for our
35
aircraft ownership costs, including interest expense, we believe our total airline expense is meaningful expense measure for management discussion and analysis purposes.
Summary of interest income, other income (expense) and provision for income taxes:
Interest income. Interest income decreased $4.8 million, or 81.1%, during 2021, compared to 2020. The decrease in interest income was primarily related to a decrease in average interest rates attributed to our marketable securities from 2020 to 2021.
Other income (expense), net. Other income (expense), net decreased $4.4 million, compared to 2020. Other income (expense), net primarily consists of income related to our investment in a joint venture with a third party. In 2021, the joint venture incurred an increase in engine overhaul expenses compared to 2020.
Summary of provision for income taxes:
Provision for income taxes. For the years ended December 31, 2021, and December 31, 2020, our income tax provision rates were 25.7% and 16.2%, respectively, which include the statutory federal income tax rate of 21% and other reconciling income tax items, including state income taxes and the impact of non-deductible expenses. For the year ended December 31, 2020, the lower effective tax rate was primarily due to pre-tax loss of $7.3 million and non-deductible expenses which resulted in a $1.2 million provision for income taxes. Our income tax provision rate may fluctuate each reporting period based on various factors including, but not limited to, the amount of our non-deductible operating expenses, relative to our income before income taxes.
Net Income. Primarily due to the factors described above, we generated net income of $111.9 million, or $2.20 per diluted share, for the year ended December 31, 2021, compared to a net loss of $8.5 million, or $0.17 loss per share, for the year ended December 31, 2020.
Our Business Segments 2021 compared to 2020:
For the years ended December 31, 2021 and 2020, our reporting segments included SkyWest Airlines and SkyWest Leasing.
Our chief operating decision maker analyzes the profitability of operating aircraft under our code-share agreements separately from the profitability of our financing new aircraft acquired through debt and cash placed under our capacity purchase agreements, currently consisting of our E175 fleet, and our return on such aircraft financing. More specifically, the SkyWest Leasing segment includes an allocation of revenue from our capacity purchase agreements attributed to our financing of new aircraft through debt and cash covered under such agreements (aircraft lease revenue), and the respective depreciation and interest expense of such financed aircraft. The SkyWest Leasing segment also includes the activity of acquiring and leasing used regional jet aircraft and regional aircraft engines to other entities. The SkyWest Leasing segment’s total assets and capital expenditures include new E175 aircraft acquired through the issuance of debt and our aircraft and engines leased to other entities.
The SkyWest Airlines segment includes all other revenue and operating expenses attributed to operating aircraft under our capacity purchase agreements and all revenue and operating expenses attributed to our prorate agreements and airport service agreements.
Corporate overhead expenses, primarily consisting of administrative labor costs, were allocated to the operating expenses of SkyWest Airlines and SkyWest Leasing. Overhead expenses allocated to SkyWest Leasing reflect our estimated labor expense incurred to support SkyWest Leasing activities.
The following table sets forth our segment data for the years ended December 31, 2021 and 2020 (in thousands):
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For the year ended December 31, | ||||||||||||
(dollar amounts in thousands) | ||||||||||||
| 2021 |
| 2020 |
| $ Change |
| % Change | |||||
Operating Revenues: | ||||||||||||
SkyWest Airlines operating revenue | $ | 2,192,432 | $ | 1,636,762 | $ | 555,670 |
| 33.9 | % | |||
SkyWest Leasing operating revenues |
| 521,059 |
| 490,344 |
| 30,715 |
| 6.3 | % | |||
Total Operating Revenues | $ | 2,713,491 | $ | 2,127,106 | $ | 586,385 |
| 27.6 | % | |||
Airline Expenses: | ||||||||||||
SkyWest Airlines airline expense | $ | 2,190,884 | $ | 1,729,189 | $ | 461,695 |
| 26.7 | % | |||
SkyWest Leasing airline expense |
| 369,862 |
| 412,288 |
| (42,426) |
| (10.3) | % | |||
Total Airline Expenses (1) | $ | 2,560,746 | $ | 2,141,477 | $ | 419,269 |
| 19.6 | % | |||
Segment profit: | ||||||||||||
SkyWest Airlines segment profit (loss) | $ | 1,548 | $ | (92,427) | $ | 93,975 |
| NM | ||||
SkyWest Leasing profit |
| 151,197 |
| 78,056 |
| 73,141 |
| 93.7 | % | |||
Total Segment Profit | $ | 152,745 | $ | (14,371) | $ | 167,116 |
| NM | ||||
Interest Income |
| 1,114 |
| 5,879 |
| (4,765) |
| (81.1) | % | |||
Other Income (Expense), net |
| (3,249) |
| 1,165 |
| (4,414) |
| NM | ||||
Consolidated Income Before Taxes | $ | 150,610 | $ | (7,327) | $ | 157,937 |
| NM | ||||
NM = Not Meaningful
| (1) | Total Airline Expenses includes operating expense and interest expense |
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $94.0 million during 2021, compared to 2020.
SkyWest Airlines block hour production increased to 1,319,628, or 35.6%, for 2021 from 973,338 for 2020, primarily due to demand recovery from reduced flight schedules in response to the COVID-19 pandemic. Significant items contributing to the SkyWest Airlines segment profit are set forth below.
SkyWest Airlines operating revenues increased $555.7 million, or 33.9%, from 2020 to 2021 due to increased flight schedules, increased passenger demand under our prorate agreements, and more flights we handled under our airport service agreements, collectively as a result of the demand recovery from the COVID-19 pandemic. SkyWest Airlines also provided temporary rate reductions for COVID relief to our major airline partners under our capacity purchase agreements during 2021 and 2020 in the same quarters we recognized payroll support grant proceeds from Treasury.
SkyWest Airlines airline expense increased $461.7 million, or 26.7%, from 2020 to 2021 due to the following primary factors:
| ● | SkyWest Airlines’ salaries, wages and benefits expense increased by $161.2 million, or 19.6%, primarily due to an increase in direct labor costs that resulted from a significantly higher number of flights we operated during 2021. |
| ● | SkyWest Airlines’ aircraft maintenance, materials and repairs expense increased by $191.9 million, or 31.7%, primarily due to an increase in direct maintenance costs, including the replacement of time-limited engine components, incurred on a portion of SkyWest Airlines’ CRJ700 and CRJ200 fleets intended to extend the operational performance and reliability of these older aircraft, including increased engine maintenance expense during 2021 compared to 2020. |
| ● | SkyWest Airlines’ depreciation and amortization expense decreased by $10.9 million, or 4.9%, primarily due to certain CRJ200 aircraft that became fully depreciated during 2020, partially offset by an increase in depreciation expense related to the acquisition of used CRJ700 aircraft in 2021. |
| ● | SkyWest Airlines’ fuel expense increased $45.3 million, or 73.4%, due to an increase in the number of flights we operated under our prorate agreements and a corresponding increase in gallons of fuel we purchased and an increase in our average fuel cost per gallon from $1.89 in 2020 to $2.49 in 2021. |
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| ● | SkyWest Airlines recognized $422.7 million in payroll support grant proceeds as a reduction to our operating expenses in 2021, a 22.3% increase compared to $345.5 million recognized in 2020. |
| ● | SkyWest Airlines recorded a non-cash impairment charge on its CRJ900 aircraft of $84.6 million in 2021. See the Operating Expenses section of “Results of Operations” for further discussion on the impairment charge recorded in 2021. SkyWest Airlines did not have a comparable charge in 2020. |
| ● | SkyWest Airlines’ remaining airline expenses increased $66.8 million, or 18.4%, primarily related to an increase in other operating costs that correspond to the higher number of flights we operated in 2021 compared to 2020, such as crew per diem, crew hotel costs and simulator costs. |
SkyWest Leasing Segment Profit. SkyWest Leasing profit increased $73.1 million, or 93.7%, during 2021, compared to 2020, primarily due to the acquisition of 18 new E175 aircraft added to our fleet in 2021.
Liquidity and Capital Resources
As of December 31, 2021, we had $860.4 million in cash and cash equivalents and marketable securities and $43.6 million available for borrowings under our line of credit. Additionally, we have approximately $1.5 billion in unpledged aircraft engines and aircraft parts that we temporarily used as collateral in 2020 and 2021. Given our available liquidity as of December 31, 2021 and given the measures we have implemented to reduce the impact of the COVID-19 pandemic on our financial position and operations, we believe the working capital currently available to us will be sufficient to meet our present financial requirements, including planned capital expenditures, scheduled lease payments, and debt service obligations for at least the next 12 months.
Our total of cash and marketable securities increased from $825.9 million as December 31, 2020, to $860.4 million as of December 31, 2021, or by $34.5 million. Our total long-term debt, including current maturities decreased from $3,203.7 million as of December 31, 2020, to $3,109.2 million as of December 31, 2021, or by $94.5 million. Thus, our total long-term debt, net of cash and marketable securities, decreased from $2,377.8 million as of December 31, 2020, to $2,248.8 million as of December 31, 2021, or $129.0 million. At December 31, 2021, our total capital mix was 45.5% equity and 54.5% long-term debt, compared to 43.3% equity and 56.7% long-term debt at December 31, 2020.
As of December 31, 2021 and 2020, we had $61.4 million and $61.1 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions. We had no restricted cash as of December 31, 2021 and 2020.
Sources and Uses of Cash
Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the years ended December 31, 2021 and 2020, and our total cash and marketable securities position as of December 31, 2021 and December 31, 2020 (in thousands). See “Liquidity and Capital Resources” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of our sources and used of cash in 2020 compared to 2019.
For the year ended December 31, | ||||||||||||
| 2021 |
| 2020 |
| $ Change |
| % Change | |||||
Net cash provided by operating activities | $ | 831,820 | $ | 633,563 | $ | 198,257 | 31.3 | % | ||||
Net cash used in investing activities |
| (698,522) |
| (683,471) |
| (15,051) |
| 2.2 | % | |||
Net cash provided by (used in) financing activities |
| (90,600) |
| 178,425 |
| (269,025) |
| (150.8) | % | |||
| December 31, |
| December 31, |
|
|
| ||||||
2021 | 2020 | $ Change | % Change | |||||||||
Cash and cash equivalents | $ | 258,421 | $ | 215,723 | $ | 42,698 |
| 19.8 | % | |||
Marketable securities |
| 601,989 |
| 610,185 |
| (8,196) |
| (1.3) | % | |||
Total | $ | 860,410 | $ | 825,908 | $ | 34,502 |
| 4.2 | % | |||
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Cash Flows provided by Operating Activities
Our cash flows provided by operating activities was $831.8 million in 2021, compared to $633.6 million in 2020. Our operating cash flows are typically impacted by various factors including our net income, adjusted for non-cash expenses and gains such as depreciation expense, asset impairment charges, stock-based compensation expense, and gains or losses on the disposal of assets; and timing of cash payments and cash receipts attributed to our various current asset and liability accounts, such as accounts receivable, inventory, accounts payable, accrued liabilities, deferred revenue and deferred payroll support grant proceeds.
The increase in our cash flow from operations in 2021 compared to 2020, was primarily due an increase in net income of $120.4 million, the difference between a net loss of $8.5 million in 2020 and net income of $111.9 million in 2021, and a non-cash impairment charge of $84.6 recorded in 2021. The cash provided by these operating activities were partially offset by a reduction in depreciation expense and deferred revenue, an increase in unbilled revenue, and changes in our current asset and liability accounts, primarily due to the timing of cash payments and cash receipts in 2021 compared to 2020. The operating cash flows for 2021 and 2020 also included the benefit from the payroll support grant of $422.7 million and $345.5 million, respectively, partially offset by temporary COVID relief rate reductions provided to our major airline partners in 2021 and 2020.
Cash Flows used in Investing Activities
Our cash flows used in investing activities was $698.5 million in 2021, compared to $683.5 million in 2020. Our investing cash flows are typically impacted by various factors including our capital expenditures, such as the acquisition of aircraft and spare engines; deposit payments and refunds of previously made deposits on new aircraft; purchase and sales of marketable securities; proceeds from the sale of assets; and timing of cash payments and cash receipts attributed to our various long-term asset and long-term liability accounts.
The increase in our cash flow used in investing activities in 2021 compared 2020, was primarily due to an increase in aircraft deposits and acquisition of aircraft, offset by the change in purchases and sales of marketable securities. Cash used for aircraft deposits increased from $9.6 million in 2020 to $125.7 million in 2021 because of E175 aircraft purchase commitments. We acquired 18 new E175 aircraft and eleven used CRJ700 aircraft in 2021 resulting in $537.6 million in cash used for purchases of aircraft and related parts, compared to 2020 when we acquired six new E175 aircraft and 22 used CRJ700 aircraft that resulted in cash used for purchases of aircraft and spare parts of $425.6 million. Cash provided by sales of marketable securities, net of purchases of marketable securities in 2021 was $8.2 million, compared to cash used in purchases of marketable securities, net of sales of marketable securities of $177.2 million in 2020.
The increase in cash flows used in investing activities was also offset by an increase in our long-term assets resulting from timing of payments received from our major airline partners attributed to our long-term receivables and changes to our non-current deferred revenue. In 2020, we amended certain debt agreements on our aircraft which suspended our obligation to make debt service payments for an approximately six-month period during 2020. Concurrently, we suspended required aircraft ownership payments due to us from our major airline partners under our capacity purchase agreements during the same period. We anticipate collecting the payments on these long-term receivables from our major airline partners over the remaining contract terms.
Cash Flows provided by (used in) Financing Activities
Our cash flows used in financing activities was $90.6 million in 2021, compared to cash provided by financing activities of $178.4 million in 2020. Our financing cash flows are typically impacted by various factors including proceeds from issuance of debt, principal payments on debt obligations, repurchases our common stock and payment of cash dividends.
The $269.0 million increase in cash used by financing activities was primarily due to an increase of $353.1 million in principal payments on long-term debt related to the additional E175 aircraft acquired subsequent to December 31, 2020, repayment of the $60 million U.S. Treasury secured loan, and early repayment of $80.1 million in aircraft debt. The increase was offset by proceeds from the issuance of long-term debt primarily due to the purchase of new E175
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aircraft in 2021 and a reduction in 2021 of cash used to purchase treasury stock and payment of dividends by $20.0 million and $13.1 million, respectively, due to restrictions under our loan agreements with U.S. Treasury.
Significant Commitments and Obligations
General
The following table summarizes our commitments and obligations as noted for each of the next five years and thereafter (in thousands):
| Total |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter | ||||||||
Operating lease payments for aircraft and facility obligations | $ | 294,265 | $ | 81,911 | $ | 75,598 | $ | 31,446 | $ | 17,481 | $ | 15,427 | $ | 72,402 | |||||||
Firm aircraft and spare engine commitments |
| 791,095 | 723,076 | 68,019 | — | — | — | — | |||||||||||||
Interest commitments (1) |
| 491,330 | 113,099 | 96,987 | 80,752 | 65,185 | 49,391 | 85,916 | |||||||||||||
Principal maturities on long-term debt |
| 3,140,938 | 395,371 | 403,091 | 398,084 | 413,846 | 423,227 | 1,107,319 | |||||||||||||
Total commitments and obligations | $ | 4,717,628 | $ | 1,313,457 | $ | 643,695 | $ | 510,282 | $ | 496,512 | $ | 488,045 | $ | 1,265,637 | |||||||
| (1) | At December 31, 2021, all of our total long-term debt associated with aircraft had fixed interest rates. |
Purchase Commitments and Options
We are coordinating with our major airline partners and aircraft manufacturers on the timing of upcoming fleet deliveries under previously announced deals. The anticipated future aircraft delivery dates are subject to change. As of December 31, 2021, we had a firm purchase commitment for 29 E175 aircraft from Embraer with scheduled delivery dates anticipated through 2023.
At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition. In recent years, we have issued long-term debt to finance our new aircraft. At present, we intend to fund our aircraft purchase commitments through cash on hand and debt financing. Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed acquisitions, as well as additional aircraft. We intend to finance the firm purchase commitment for 29 E175 aircraft with approximately 80-85% debt and the remaining balance with cash.
Aircraft Lease and Facility Obligations
We also have significant long-term lease obligations, primarily relating to our aircraft fleet. Excluding aircraft financed by our major airline partners that we operate for them under contract, we had 43 aircraft under lease with remaining terms ranging from two years to nine years as of December 31, 2021. Future minimum lease payments due under all long-term operating leases were approximately $294.3 million at December 31, 2021. Assuming a 6.0% discount rate, which is the average incremental borrowing rate we anticipate we would have incurred on debt obtained over a similar term to acquire these assets, the present value of these lease obligations would have been equal to approximately $237.2 million at December 31, 2021.
Long-term Debt Obligations
As of December 31, 2021, we had $2.94 billion of long-term debt obligations related to the acquisition of aircraft and certain spare engines. The average effective interest rate on those long-term debt obligations was approximately 3.8% at December 31, 2020. We also had $200.6 million of long-term debt obligations under the Payroll Support Program Agreements.
Under our capacity purchase arrangements, the 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
40
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.
Guarantees
We have guaranteed the obligations of SkyWest Airlines under the Delta Connection Agreement and the United Express Agreement for the E175 aircraft. In addition, we have guaranteed certain other obligations under aircraft financing and leasing agreements.
Critical Accounting Policies and Estimates
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, long-lived assets, and income tax 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
Flying agreements and airport customer service and other revenues are recognized when service is provided. Under our capacity purchase and prorate flying agreements with our major airline partners, our performance obligation is determined on a per completed flight basis. Under our capacity purchase agreements, the performance obligation of each completed flight is measured using block hours incurred for each completed flight, which factors the duration of each flight. Under our airport customer service agreements, our performance obligation is measured on per departure basis for each flight we provide customer service.
A portion of our compensation under our capacity purchase agreements is designed to reimburse us for the use of the aircraft we provide under such agreements. This compensation is deemed to be lease revenue, because the agreements identify the “right of use” or a specific type and number of aircraft over the agreement term. The amount of compensation deemed to be lease revenue is determined from the agreed upon rates for the use of the aircraft included in each capacity purchase agreement, which we believe approximates fair value for the aircraft leases.
Additionally, under our capacity purchase agreements, we typically receive a fixed monthly payment for each aircraft under contract over the agreement term (“Fixed Monthly Payments”). We recognize 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, we determined the amount of Fixed Monthly Payments we received in 2020 was disproportionately high relative to the number of block hours we completed during 2020. In 2020, we generated 973,338 block hours and we deferred recognizing revenue of $110.7 million in Fixed Monthly Payments we received during the 2020 calendar year. In 2021, we generated 1,319,628 block hours and we recognized $6.8 million of previously deferred revenue and $8.4 million of unbilled revenue. The amount of deferred revenue and unbilled revenue from Fixed Monthly Payments we recognize will increase or decrease in future reporting periods depending on the number of block hours we complete during such reporting period and our then-current forecast of block hours we anticipate completing over the remaining contract term based on information available to us as that time. We currently anticipate we will recognize previously deferred revenue in 2022, depending upon future block hour production and flight schedules each reporting period in 2022.
Our revenues could be impacted by several factors, such as our flight schedules, passenger fares we receive under our prorate agreements, terminations, extensions or other amendments to our code-share agreements, our estimates used to determine the amount of revenue we defer under our capacity purchase agreements, 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
41
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. Our rates were finalized under our code-share agreements as of December 31, 2021.
Long-Lived Assets
As of December 31, 2021, we had approximately $5.5 billion of property and equipment and related assets net of accumulated depreciation. In accounting for these long-lived, 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.
In 2021, we entered into an agreement with Delta to purchase and operate 16 new E175 aircraft under a multi-year capacity purchase agreement. The 16 new E175 aircraft will replace 16 SkyWest-owned or financed CRJ900 aircraft currently under its Delta contract with expirations ranging from the second half of 2022 to early 2023. As of December 31, 2021, we only operated the CRJ900 aircraft under a flying agreement with our major airline partner Delta. As a result of this fleet transition beginning in 2022 and the uncertainty about our ability to redeploy the CRJ900 aircraft with another major airline partner, we concluded that indicators of impairment existed and therefore, we evaluated our CRJ900 fleet and related CRJ900 assets for impairment. In 2021, the Company recorded a non-cash impairment charge of $84.6 million to write-down the CRJ900 aircraft operating under the Delta contracts to their estimated fair value. The impairment analysis required us to identify applicable asset groups, perform a recoverability test using undiscounted cash flows and estimate the fair value of the asset group through the use of third-party valuations. Judgment was required to determine the impairment loss. The amounts we ultimately realize from the disposal of our CRJ900 long-lived assets may vary from our 2021 fair value assessment.
Factors that may impact our estimates used for depreciation include anticipated useful lives of each aircraft type and estimated residual values of each aircraft. As we operate all of our aircraft under code-share agreements with our major airline partners, changes in anticipated demand by our major airline partners for regional aircraft may impact our estimated useful lives and residual values for our aircraft, spare engines and other long-lived assets. At December 31, 2021, we had 81 aircraft that were not in scheduled service with our partners, including 63 CRJ200 aircraft and 18 CRJ700 aircraft. The CRJ200 aircraft not in scheduled service are nearly fully depreciated as of December 31, 2021. The remaining aircraft are scheduled to be placed under contract by 2023 or will be used as supplemental spare aircraft.
Income Tax
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Estimating our tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. We make certain estimates and judgments to determine tax expense for financial statement purposes as we evaluate the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to our tax provision in future periods. Each fiscal quarter we re-evaluate our tax provision and reconsider our estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aircraft Fuel
In the past, we have not experienced sustained material difficulties with fuel availability, and we currently expect to be able to obtain fuel at prevailing prices in quantities sufficient to meet our future needs. Pursuant to our contract flying arrangements, United, Delta, American and Alaska have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. We bear the economic risk of fuel price fluctuations on our prorate operations. For each of the years ended December 31, 2021, 2020 and 2019, approximately 16%, 13% and 18% of our total flying agreements revenue was derived from prorate arrangements. For the years ended December 31, 2021, 2020 and 2019, the average price per gallon of aircraft fuel was $2.49, $1.89 and $2.51, respectively. For illustrative purposes only, we have estimated the impact of the market risk of fuel on our prorate operations using a hypothetical increase of 25% in the price per gallon we purchase. Based on this hypothetical assumption, we would have incurred an additional $26.8 million, $15.4 million and $29.8 million in fuel expense for the years ended December 31, 2021, 2020 and 2019, respectively.
Interest Rates
As of December 31, 2021, our long-term debt had fixed interest rates. We currently intend to finance the acquisition of aircraft through manufacturer financing or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire future aircraft. To the extent we place new aircraft in service under our capacity purchase agreements with United, Delta, American, Alaska or other carriers, our capacity purchase agreements currently provide that reimbursement rates will be adjusted to reflect the interest rates effective at the closing of the respective aircraft financing. A hypothetical 10 basis point change in market interest rates would not have a material effect on our financial results.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and operating results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere herein.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of SkyWest, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SkyWest, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of fixed overhead deferred revenue | |
Description of the Matter | At December 31, 2021, the Company’s deferred revenue balance totaled $103.9 million, of which $24.5 million was presented as a component of other current liabilities and $79.4 million was included in other long-term liabilities on the balance sheet. As discussed in Note 1 to the consolidated financial statements, under the Company’s capacity purchase agreements, the Company is paid a fixed amount per aircraft each month over the contract term. The Company recognizes revenue related to the fixed amount per aircraft per month based upon completed block hours proportionate to total forecasted block hours over the contract term. To perform the |
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allocation over the contract, the Company estimates revenue per block hour using historical data and forecasted flight activity and utilizing trends within the industry.
Auditing the forecasted block hours over the term of the contract, which is the primary input used in the deferred revenue calculation, required extensive audit effort due to the estimation uncertainty of the forecasted block hours over the contract term resulting from the COVID-19 pandemic. | |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls over recognition and deferral of revenue related to block hours flown. This included controls over the forecasting process used to develop the estimated future block hours used in the calculation. We also tested controls over management’s review of the data used in the deferred revenue calculation.
To test the Company’s estimated deferred revenue liability, we performed audit procedures that included, among others, assessing the methodology and assumptions used by the Company in the deferred revenue calculation, including testing of the forecasted block hours and validating completeness and accuracy of the underlying data used by the Company. Specifically, we compared management’s forecasted block hours to historical flight activity, existing flight schedules with partner airlines, and industry trends and publications. We evaluated management’s ability to accurately forecast flight activity by performing hindsight analyses comparing actual historical results to past forecasts, including forecasts developed during the COVID-19 pandemic. We also performed sensitivity analyses to understand the impact of fluctuations in forecasted block hours to the deferred revenue liability. |
/s/
We have served as the Company’s auditor since 2003.
February 17, 2022
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SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31, |
| December 31, | ||||
| 2021 |
| 2020 | |||
CURRENT ASSETS: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Marketable securities |
| |
| | ||
Receivables, net |
| |
| | ||
Inventories, net |
| |
| | ||
Other current assets |
| |
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Total current assets |
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PROPERTY AND EQUIPMENT: | ||||||
Aircraft and rotable spares |
| |
| | ||
Deposits on aircraft |
| |
| | ||
Buildings and ground equipment |
| |
| | ||
Total property and equipment, gross |
| |
| | ||
Less-accumulated depreciation and amortization |
| ( |
| ( | ||
Total property and equipment, net |
| |
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OTHER ASSETS: | ||||||
Operating lease right-of-use assets | | | ||||
Long-term receivables and other assets |
| |
| | ||
Total other assets |
| |
| | ||
Total assets | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
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SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31, |
| December 31, | |||
2021 |
| 2020 | |||
CURRENT LIABILITIES: | |||||
Current maturities of long-term debt | $ | | $ | | |
Accounts payable |
| |
| | |
Accrued salaries, wages and benefits |
| |
| | |
Current maturities of operating lease liabilities |
| |
| | |
Taxes other than income taxes |
| |
| | |
Other current liabilities |
| |
| | |
Total current liabilities |
| |
| | |
LONG-TERM DEBT, net of current maturities |
| |
| | |
DEFERRED INCOME TAXES PAYABLE |
| |
| | |
NONCURRENT OPERATING LEASE LIABILITIES |
| |
| | |
OTHER LONG-TERM LIABILITIES |
| |
| | |
COMMITMENTS AND CONTINGENCIES (Note 6) | |||||
STOCKHOLDERS’ EQUITY: | |||||
Preferred stock, |
|
| |||
Common stock, |
| |
| | |
Retained earnings |
| |
| | |
Treasury stock, at cost, |
| ( |
| ( | |
Total stockholders’ equity |
| |
| | |
Total liabilities and stockholders’ equity | $ | | $ | | |
See accompanying notes to consolidated financial statements.
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SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Year Ended December 31, | |||||||||||
|
| 2021 | 2020 | 2019 |
| ||||||
OPERATING REVENUES: |
|
|
|
|
| ||||||
Flying agreements | $ | | $ | | $ | | |||||
Lease, airport services and other |
| |
| |
| | |||||
Total operating revenues |
| |
| |
| | |||||
OPERATING EXPENSES: | |||||||||||
Salaries, wages and benefits |
| |
| |
| | |||||
Aircraft maintenance, materials and repairs |
| |
| |
| | |||||
Depreciation and amortization |
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Airport-related expenses |
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Aircraft fuel |
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| |
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Aircraft rentals |
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| | |||||
Special items | | — | | ||||||||
Payroll support grant | ( | ( | — | ||||||||
Other operating expenses |
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| |
| | |||||
Total operating expenses |
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| |
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OPERATING INCOME |
| |
| |
| | |||||
OTHER INCOME (EXPENSE): | |||||||||||
Interest income |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( | |||||
Other income (expense), net |
| ( |
| |
| | |||||
Total other expense, net |
| ( |
| ( |
| ( | |||||
INCOME (LOSS) BEFORE INCOME TAXES |
| |
| ( |
| | |||||
PROVISION FOR INCOME TAXES |
| |
| |
| | |||||
NET INCOME (LOSS) | $ | | $ | ( | $ | | |||||
BASIC EARNINGS (LOSS) PER SHARE | $ | | $ | ( | $ | | |||||
DILUTED EARNINGS (LOSS) PER SHARE | $ | | $ | ( | $ | | |||||
Weighted average common shares: | |||||||||||
Basic |
| |
| |
| | |||||
Diluted |
| |
| |
| | |||||
COMPREHENSIVE INCOME (LOSS): | |||||||||||
Net income (loss) | $ | | $ | ( | $ | | |||||
Net unrealized appreciation on marketable securities, net of taxes |
| — |
| — |
| | |||||
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | | $ | ( | $ | | |||||
See accompanying notes to consolidated financial statements.
48
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Accumulated | |||||||||||||||||||
Other | |||||||||||||||||||
Common Stock | Retained | Treasury Stock | Comprehensive | ||||||||||||||||
Shares | Amount | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||
Balance at December 31, 2018 |
| | $ | | $ | |
| ( | $ | ( | $ | ( | $ | | |||||
Change in accounting principle and other (see Note 7) | — | — | ( | — | — | — | ( | ||||||||||||
Balance at December 31, 2018, as adjusted | | $ | | $ | | ( | $ | ( | $ | ( | $ | | |||||||
Net income |
| — | — |
| |
| — |
| — |
| — |
| | ||||||
Net unrealized appreciation on marketable securities, net of tax of $ |
| — | — |
| — |
| — |
| — |
| |
| | ||||||
Exercise of common stock options and vested employee stock awards |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Employee income tax paid on vested equity awards | — | — | — | ( | ( | — | ( | ||||||||||||
Sale of common stock under employee stock purchase plan |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Stock based compensation expense |
| — | |
| — |
| — |
| — |
| — |
| | ||||||
Common stock purchased and cancelled |
| ( | ( |
|
| — |
| — |
| — |
| ( | |||||||
Treasury stock purchases |
| — | — |
| — |
| ( |
| ( |
| — |
| ( | ||||||
Cash dividends declared ($ |
| — | — |
| ( |
| — |
| — |
| — |
| ( | ||||||
Balance at December 31, 2019 |
| | $ | | $ | |
| ( | $ | ( | $ | — | $ | | |||||
Change in accounting principle and other (see Note 1) | — | — | ( | — | — | — | ( | ||||||||||||
Balance at December 31, 2019, as adjusted | | $ | | $ | | ( | $ | ( | $ | — | $ | | |||||||
Net income (loss) |
| — |
| — |
| ( |
| — |
| — |
| — |
| ( | |||||
Exercise of common stock options and vested employee stock awards |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Employee income tax paid on vested equity awards | — | — | — | ( | ( | — | ( | ||||||||||||
Sale of common stock under employee stock purchase plan |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Stock based compensation expense |
| — |
| |
| — |
| — |
| — |
| — |
| | |||||
Treasury stock purchases |
| — |
| — |
| — |
| ( | ( |
| — |
| ( | ||||||
Cash dividends declared ($ | — |
| — |
| ( |
| — |
| — |
| — | ( | |||||||
Warrants issued to U.S. Treasury |
| — | | — | — | — | — |
| | ||||||||||
Balance at December 31, 2020 |
| | $ | | $ | |
| ( | $ | ( | $ | — | $ | | |||||
Net income |
| — |
| — |
| |
| — |
| — |
| — |
| | |||||
Exercise of common stock options and vested employee stock awards |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Employee income tax paid on vested equity awards | — | — | — | ( | ( | — | ( | ||||||||||||
Sale of common stock under employee stock purchase plan |
| | |
| — |
| — |
| — |
| — |
| | ||||||
Stock based compensation expense |
| — |
| |
| — |
| — |
| — |
| — |
| | |||||
Warrants issued to U.S. Treasury | — | | — | — | — | — | | ||||||||||||
Balance at December 31, 2021 |
| | $ | | $ | |
| ( | $ | ( | $ | — | $ | | |||||
See accompanying notes to consolidated financial statements.
49
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, | ||||||||||
| 2021 | 2020 | 2019 |
| ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| |||||
Net income (loss) | $ | | $ | ( | $ | | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||
Depreciation and amortization |
| |
| |
| | ||||
Stock based compensation expense |
| |
| |
| | ||||
Write-off of maintenance assets | — | | — | |||||||
Increase (decrease) in credit loss reserves | ( | | — | |||||||
Loss (gain) on disposal of fixed assets | ( | | — | |||||||
Net increase in deferred income taxes |
| |
| |
| | ||||
Gain on sale of ExpressJet subsidiary | — | — | ( | |||||||
Special items |
| |
| — |
| | ||||
Changes in operating assets and liabilities: | ||||||||||
Decrease (increase) in receivables |
| ( |
| |
| ( | ||||
Decrease (increase) in income tax receivable |
| ( |
| |
| | ||||
Decrease (increase) in inventories |
| ( |
| |
| ( | ||||
Decrease (increase) in other current assets |
| ( |
| |
| | ||||
Decrease in operating lease right-of-use assets | | | — | |||||||
Decrease in operating lease liabilities | ( | ( | ( | |||||||
Increase (decrease) in deferred revenue | ( | | — | |||||||
Increase in unbilled revenue | ( | — | — | |||||||
Increase (decrease) in accounts payable and other current liabilities |
| |
| ( |
| ( | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
| |
| |
| | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Purchases of marketable securities |
| ( |
| ( |
| ( | ||||
Sales of marketable securities |
| |
| |
| | ||||
Net cash received from sale of ExpressJet subsidiary | — | — | | |||||||
Acquisition of property and equipment: | ||||||||||
Aircraft and rotable spare parts |
| ( |
| ( |
| ( | ||||
Buildings and ground equipment |
| ( |
| ( |
| ( | ||||
Proceeds from the sale of property and equipment |
| |
| |
| | ||||
Deposits on aircraft | ( | ( | ( | |||||||
Aircraft deposits applied towards acquired aircraft | | | | |||||||
Decrease (increase) in other assets |
| ( |
| ( |
| | ||||
NET CASH USED IN INVESTING ACTIVITIES |
| ( |
| ( |
| ( | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Proceeds from issuance of long-term debt |
| |
| |
| | ||||
Principal payments on long-term debt |
| ( |
| ( |
| ( | ||||
Net proceeds from issuance of common stock |
| |
| |
| | ||||
Purchase of treasury stock |
| — |
| ( |
| ( | ||||
Purchase of common stock | — | — | ( | |||||||
Employee income tax paid on vested equity awards | ( | ( | ( | |||||||
Payment of debt issuance cost | ( | ( | ( | |||||||
Payment of cash dividends |
| — |
| ( |
| ( | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
| ( |
| |
| ( | ||||
Increase (decrease) in cash and cash equivalents |
| |
| |
| ( | ||||
Cash and cash equivalents at beginning of period |
| |
| |
| | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | | $ | | $ | | ||||
See accompanying notes to consolidated financial statements.
50
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Year Ended December 31, | ||||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | 2021 | 2020 | 2019 |
| ||||||
Non-cash investing and financing activities: | ||||||||||
Acquisition of property and equipment | $ | | $ | | $ | | ||||
Debt assumed on aircraft acquired under operating leases | $ | — | $ | — | $ | | ||||
Engines contributed to joint venture | $ | — | $ | — | $ | | ||||
Non-cash assets used to acquire aircraft under operating leases | $ | — | $ | — | $ | | ||||
Lease liability arising from the recognition of right-of-use asset | $ | — | $ | — | $ | | ||||
Warrants issued to U.S. Treasury | $ | | $ | | $ | — | ||||
Cash paid during the period for: | ||||||||||
Interest, net of capitalized amounts | $ | | $ | | $ | | ||||
Income taxes | $ | | $ | | $ | | ||||
SUPPLEMENTAL DISCLOSURE OF SALE OF SUBSIDIARY: | ||||||||||
Decrease in carrying amount of assets | $ | — | $ | — | $ | ( | ||||
Decrease in carrying amount of liabilities | — | — | | |||||||
Cash received from buyers | — | — | | |||||||
Gain on sale of subsidiary | $ | — | $ | — | $ | | ||||
See accompanying notes to consolidated financial statements.
51
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(1) Nature of Operations and Summary of Significant Accounting Policies
SkyWest, Inc. (the “Company”), through its subsidiary, SkyWest Airlines, Inc. (“SkyWest Airlines”) operates the largest regional airline in the United States. On January 22, 2019, the Company completed the sale of its former wholly owned subsidiary, ExpressJet Airlines, Inc. (“ExpressJet”). As of December 31, 2021, SkyWest Airlines offered scheduled passenger service under code-share agreements with United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) with approximately
| E175 |
| CRJ900 |
| CRJ700 |
| CRJ200 |
| Total | |
United |
| | — | | | | ||||
Delta | | | | | | |||||
American |
| | ** | — | | — | | |||
Alaska |
| | — | — | — | | ||||
Aircraft in scheduled service or under contract | | | | | | |||||
Leased to third parties |
| — | | | — | | ||||
Other* |
| — | — | | | | ||||
Total Fleet |
| | | | | |
*As of December 31, 2021, other aircraft included: supplemental spare aircraft supporting our code-share agreements which may be used in future code-share or leasing arrangements, aircraft transitioning between code-share agreements with our major airline partners, or aircraft that are scheduled to be disassembled for use as spare parts.
**The Company took delivery of the
For the year ended December 31, 2021, approximately
SkyWest Airlines has been a code-share partner with Delta since 1987, United since 1997, Alaska since 2011 and American since 2012. As of December 31, 2021, SkyWest Airlines operated as a Delta Connection carrier primarily in Salt Lake City, Detroit and Minneapolis, a United Express carrier primarily in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an American carrier primarily in Chicago, Dallas, Los Angeles and Phoenix and an Alaska carrier primarily in the Pacific Northwest.
SkyWest Airlines operates the following aircraft manufactured by Bombardier Aerospace (“Bombardier”): CRJ900s, CRJ700s and CRJ200s, and E175s manufactured by Embraer S.A. (“Embraer”). The CRJ700, and aircraft a dual-class configuration typically configured with
Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company and the SkyWest Airlines, ExpressJet (for the periods owned by the Company) and SkyWest Leasing segments, with all inter-company transactions and balances having been eliminated.
52
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, 2021, 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 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.
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
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, 2021 and 2020, 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, 2021 and 2020 was as follows (in thousands):
Gross unrealized | Gross unrealized | ||||||||||||
At December 31, 2021 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| ||||
Total cash and cash equivalents | $ | | $ | — | $ | — | $ | | |||||
Marketable securities: | |||||||||||||
Bond and bond funds | $ | | $ | — | $ | — | $ | | |||||
Commercial Paper |
| |
| — |
| — |
| | |||||
Total marketable securities | $ | | $ | — | $ | — | $ | | |||||
Total assets measured at fair value | $ | | $ | — | $ | — | $ | | |||||
Gross unrealized | Gross unrealized | ||||||||||||
At December 31, 2020 |
| Amortized Cost |
| holding gains |
| holding losses |
| Fair market value |
| ||||
Total cash and cash equivalents | $ | | $ | — | $ | — | $ | | |||||
Marketable securities: | |||||||||||||
Bond and bond funds | $ | | $ | — | $ | — | $ | | |||||
Commercial Paper |
| |
| — |
| — |
| | |||||
Total marketable securities | $ | | $ | — | $ | — | $ | | |||||
Total assets measured at fair value | $ | | $ | — | $ | — | $ | | |||||
As of December 31, 2021 and 2020, the Company had classified $
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, 2021 and 2020, was $
53
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 |
| up to | % | |
Ground equipment | up to |
| | % | |
Office equipment | up to | % | |||
Leasehold improvements | Shorter of |
| % | ||
Buildings |
| % | |||
Impairment of Long-Lived Assets
As of December 31, 2021, the Company had approximately $
In 2021, the Company entered into an agreement with Delta to purchase and operate
The Company did
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, 2021, 2020 and 2019, the Company capitalized interest costs of approximately $
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
54
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 $
Flying Agreements and Airport Customer Service and Other Revenues
The Company recognizes flying agreements revenue and lease, airport services and other revenues when the service is provided under the applicable agreement. Under the Company’s fixed-fee arrangements (referred to as “capacity purchase agreements”) with United Airlines, Inc. (“United”), Delta Air Lines, Inc. (“Delta”), 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 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, 2021 and 2020, capacity purchase arrangements represented approximately
Under the Company’s prorate arrangements (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 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 years ended December 31, 2021 and 2020, prorate flying arrangements represented approximately
The following table represents the Company’s flying agreements revenue by type for the years ended December 31, 2021, 2020 and 2019 (in thousands):
For the year ended December 31, | |||||||||
| 2021 |
| 2020 | 2019 | |||||
Capacity purchase agreements revenue: flight operations | $ | | $ | | $ | | |||
Capacity purchase agreements revenue: aircraft lease and fixed revenue |
| |
| |
| | |||
Prorate agreements revenue |
| |
| |
| | |||
Flying agreements revenue | $ | |
| $ | | $ | | ||
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
55
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 lower number of block hours completed during the COVID-19 pandemic compared to historical levels, the amount of cash collected for the fixed amount per aircraft exceeded the revenue recognized based on block hours completed. Accordingly, the Company deferred recognizing revenue on fixed monthly cash payments the Company received under its capacity purchase agreements beginning in 2020. In 2021, the Company recognized $
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 |
| Term / Termination Dates |
United Express Agreements (capacity purchase agreement) | · E175 · CRJ 700 · CRJ 200 | · Individual aircraft have scheduled removal dates under the agreement between 2024 and 2029 · The average remaining term of the aircraft under contract is | ||||
United Express Prorate Agreement (prorate agreement) | · CRJ 200 | 41 | · Terminable with -day notice | |||
Total under United Express Agreements | 220 |
Delta Connection Agreements
Agreement |
| Aircraft type |
| Number of |
| Term / Termination Dates |
Delta Connection Agreement (capacity purchase agreement) | · E175 · CRJ 900 · CRJ 700 | · Individual aircraft have scheduled removal dates from 2022 to 2031 · The average remaining term of the aircraft under contract is | ||||
Delta Connection Prorate Agreement (prorate agreement) | · CRJ 200 | · Terminable with -day notice | ||||
Total under Delta Connection Agreements |
56
American Capacity Purchase Agreement
Agreement |
| Aircraft type |
| Number of |
| Term / Termination Dates |
American Agreement (capacity purchase agreement) | · E175 · CRJ 700 | · Individual aircraft have scheduled removal dates from 2024 to 2032 · The average remaining term of the aircraft under contract is | ||||
Total under American Agreements |
Alaska Capacity Purchase Agreement
Agreement |
| Aircraft type |
| Number of |
| Term / Termination Dates |
Alaska Agreement (capacity purchase agreement) | · E175 | 32 | · Individual aircraft have scheduled removal dates in 2030 · The average remaining term of the aircraft under contract is |
In addition to the contractual arrangements described above, as of December 31, 2021, SkyWest Airlines has a capacity purchase agreement with American to place
SkyWest Airlines has a capacity purchase agreement with Alaska to place
In 2021, SkyWest Airlines reached an agreement with Delta to place
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, 2021, 2020 and 2019 (in thousands):
For the year ended December 31, | |||||||||
| 2021 |
| 2020 | 2019 | |||||
Operating lease revenue relating to lease payments | $ | | $ | | $ | | |||
Operating lease revenue relating to variable lease payments | | | | ||||||
Airport customer service and other revenue | | | | ||||||
Lease, airport services and other | $ | | $ | | $ | | |||
57
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, 2021 (in thousands):
2022 |
| $ | |
2023 |
| ||
2024 |
| ||
2025 |
| ||
2026 |
| ||
Thereafter |
| ||
$ | |
Of the Company’s $
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, 2021, the Company had $
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 $
The Company monitors publicly available credit ratings for entities for which the Company has a significant receivable balance. As of December 31, 2021, the Company had gross receivables of $
58
The following table summarizes the changes in allowance for credit losses:
| Allowance for Credit Losses | ||
Balance at January 1, 2020 | $ | | |
Adjustments to credit loss reserves | | ||
Write-offs charged against allowance | — | ||
Balance at December 31, 2020 | $ | | |
Adjustments to credit loss reserves |
| ( | |
Write-offs charged against allowance |
| — | |
Balance at December 31, 2021 | $ | | |
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.
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. For the year ended December 31, 2021,
Year Ended December 31, | |||||||||
2021 | 2020 | 2019 | |||||||
Numerator: |
|
|
|
|
| ||||
Net income (loss) | $ | | $ | ( | $ | | |||
Denominator: | |||||||||
Basic earnings per share weighted average shares |
| |
| |
| | |||
Dilution due to stock options and restricted stock units |
| |
| — |
| | |||
Diluted earnings per share weighted average shares |
| |
| |
| | |||
Basic earnings (loss) per share | $ | | $ | ( | $ | | |||
Diluted earnings (loss) per share | $ | | $ | ( | $ | | |||
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.
59
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 $
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
Recent Accounting Pronouncements
In November 2021, the FASB issued ASU No.2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance (ASU No. 2021-10”), which increases the transparency of government assistance received by business entities, including disclosure of the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. ASU No. 2021-10 is effective for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact that adopting ASU No. 2021-10 but does not currently expect a material impact on the Company’s consolidated financial statements.
(2) Impact of the COVID-19 Pandemic
COVID-19, which was declared a global health pandemic by the World Health Organization in March 2020, had a significant, negative impact on the Company’s business and financial results in 2020 with moderate improvement in 2021. The ongoing spread of the virus and its variants continues to negatively impact our business, and the domestic and international networks of our major airline partners for whom we conduct flight operations and rely on to set our flight schedules. Various factors outside our control may impact the demand for air travel and our flight schedules, such as the distribution and efficacy of vaccines, government-imposed vaccine mandates, new variants of the virus, and continued or new government travel restrictions. Additionally, indirect factors may impede the timing of our recovery from the virus even if passenger demand returns to pre-COVID-19 levels, such as employee attrition and workforce shortages and third-party labor shortages that may result in delays in outsourced maintenance work and availability of aircraft parts.
Liquidity. At December 31, 2021, the Company had $
Payroll Support Programs. In 2020 and 2021, the Company entered into
60
and Payroll Support Program 3 Agreement (“PSP3”) under the American Rescue Plan Act of 2021 (“American Rescue Plan Act”). The relief payments were conditioned on the Company’s agreement to, among other things, refrain from conducting involuntary employee layoffs or furloughs through September 30, 2021. Other conditions include restrictions on share repurchases and dividends through September 30, 2022, continuing essential air service as directed by the U.S. Department of Transportation and certain limitations on executive compensation. The payments received under the payroll support programs included an amount in the form of a payroll grant and an amount in the form of an unsecured
In 2020, in connection with the CARES Act, the Company entered into the Treasury Loan Agreement with Treasury (“Secured Loan”) and borrowed $
The following table summarizes the amounts received and warrants issued under the payroll support programs and secured loan facility (in thousands except warrant amounts):
Total | Grant |
| Loan | Number of Warrants | |||||||
PSP1 | $ | | $ | | $ | | | ||||
Secured Loan | | — | | | |||||||
PSP2 | | | | | |||||||
PSP3 |
| |
| |
| | | ||||
Total | $ | | $ | | $ | | | ||||
See Note 4, Long-Term Debt, for further discussion on the loans with Treasury and Note 10 “Capital Transactions” for further discussion on the warrants issued to acquire the Company’s shares issued to Treasury.
(3) 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.
Prior to the Company’s sale of ExpressJet on January 22, 2019, the Company’s
The Company’s chief operating decision maker analyzes the profitability of operating new aircraft financed through the issuance of debt, including the Company’s E175 fleet, separately from the profitability of the Company’s capital deployed for ownership and financing of such aircraft. The SkyWest Airlines segment includes revenue earned under the applicable capacity purchase contracts attributed to operating such aircraft and the respective operating costs. The SkyWest Leasing segment includes applicable revenue earned under the applicable capacity purchase contracts attributed to the ownership of new aircraft acquired through the issuance of debt and the respective depreciation and interest expense of such aircraft. The SkyWest Leasing segment also includes the activity of leasing regional jet aircraft and spare engines to third parties. The SkyWest Leasing segment’s total assets and capital expenditures include new aircraft acquired through the issuance of debt and assets leased to third parties.
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The following represents the Company’s segment data for the years ended December 31, 2021, 2020, and 2019 (in thousands).
Year ended December 31, 2021 | |||||||||
SkyWest | SkyWest | ||||||||
| Airlines |
| Leasing |
| Consolidated | ||||
Operating revenues (1) | $ | | $ | | $ | | |||
Operating expense |
| |
| |
| | |||
Depreciation and amortization expense |
| |
| |
| | |||
Special items | | — | | ||||||
Interest expense |
| |
| |
| | |||
Segment profit (2) |
| |
| |
| | |||
Total assets |
| |
| |
| | |||
Capital expenditures (including non-cash) |
| |
| |
| | |||
Year ended December 31, 2020 | |||||||||
SkyWest | SkyWest | ||||||||
| Airlines |
| Leasing |
| Consolidated | ||||
Operating revenues (1) | $ | | $ | | $ | | |||
Operating expense |
| |
| |
| | |||
Depreciation and amortization expense |
| |
| |
| | |||
Interest expense |
| |
| |
| | |||
Segment profit (loss) (2) |
| ( |
| |
| ( | |||
Total assets |
| | |
| | ||||
Capital expenditures (including non-cash) |
| | |
| | ||||
Year ended December 31, 2019 | ||||||||||||
SkyWest | SkyWest | |||||||||||
| Airlines |
| ExpressJet |
| Leasing |
| Consolidated | |||||
Operating revenues (1) | $ | | $ | | $ | | $ | | ||||
Operating expense |
| |
| |
| |
| | ||||
Depreciation and amortization expense |
| |
| |
| |
| | ||||
Special items | | | — | | ||||||||
Interest expense |
| |
| — |
| |
| | ||||
Segment profit (loss) (2) |
| |
| ( |
| |
| | ||||
Total assets |
| | — | |
| | ||||||
Capital expenditures (including non-cash) |
| | — | |
| | ||||||
| (1) | Prorate revenue and airport customer service revenue are primarily reflected in the SkyWest Airlines segment. |
| (2) | Segment profit (loss) is equal to operating income less interest expense. |
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(4) Long-term Debt
Long-term debt consisted of the following as of December 31, 2021 and 2020 (in thousands):
| December 31, |
| December 31, |
| |||
2021 | 2020 |
| |||||
Notes payable to banks, due in quarterly installments, plus interest at | $ | | $ | | |||
Notes payable to banks, due in monthly or semi-annual installments, plus interest at |
| |
| | |||
Notes payable to US Government, interest due quarterly at |
| |
| | |||
Notes payable to US Government, interest due quarterly based on LIBOR plus interest spread currently at | — | | |||||
Notes payable to bank, due in monthly installments interest based on LIBOR plus interest spread at | — | | |||||
Notes payable to banks, due in semi-annual installments plus interest at | — |
| | ||||
Notes payable to a financing company, due in semi-annual installments, with a fixed interest rate of |
| — |
| | |||
Long-term debt | $ | | $ | | |||
Current portion of long-term debt |
| ( |
| ( | |||
Less long-term portion of unamortized debt issue cost, net | ( | ( | |||||
Long-term debt, net of current maturities and debt issue costs | $ | | $ | | |||
Current portion of long-term debt |
| |
| | |||
Less current portion of unamortized debt issue cost, net | ( | ( | |||||
Current portion of long-term debt, net of debt issue costs | $ | | $ | | |||
During 2021, the Company took delivery of
During 2021, in connection with the payroll support programs, the Company issued to Treasury promissory notes for an aggregate principal amount of $
In 2020, in connection with the CARES Act, the Company entered into the Secured Loan with Treasury and borrowed $
Additionally, in 2021, the Company repaid $
As of December 31, 2021 and 2020, the Company had $
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The aggregate amounts of principal maturities of long-term debt as of December 31, 2021 were as follows (in thousands):
2022 |
| $ |
| |
2023 |
| |||
2024 |
| |||
2025 |
| |||
2026 |
| |||
Thereafter |
| |||
$ |
As of December 31, 2021 and 2020, SkyWest Airlines had a $
As of December 31, 2021 and 2020, the Company had $
(5) Income Taxes
The provision for income taxes includes the following components (in thousands):
Year ended December 31, |
| |||||||||
2021 | 2020 | 2019 |
| |||||||
Current tax provision (benefit): |
|
|
|
|
|
| ||||
Federal | $ | — | $ | ( | $ | ( | ||||
State |
| |
| ( |
| | ||||
| |
| ( |
| ( | |||||
Deferred tax provision (benefit): | ||||||||||
Federal |
| |
| |
| | ||||
State |
| |
| ( |
| | ||||
| |
| |
| | |||||
Provision for income taxes | $ | | $ | | $ | | ||||
The following is a reconciliation between a federal income tax rate of
Year ended December 31, |
| |||||||||
2021 | 2020 | 2019 |
| |||||||
Computed provision (benefit) for income taxes at the statutory rate |
| $ | |
| $ | ( |
| $ | | |
Increase (decrease) in income taxes resulting from: | ||||||||||
State income tax provision, net of federal income tax benefit |
| |
| |
| | ||||
Non-deductible expenses | | | | |||||||
Valuation allowance changes affecting the provision for income taxes |
| — |
| ( |
| ( | ||||
Excess tax benefits from share-based compensation | ( | ( | ( | |||||||
Other, net |
| ( |
| |
| ( | ||||
Provision for income taxes | $ | | $ | | $ | | ||||
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For the year ended December 31, 2020, the Company released $
The Company recorded a $
The significant components of the Company’s net deferred tax assets and liabilities as of December 31, 2021 and 2020, are as follows (in thousands):
As of December 31, |
| ||||||
2021 | 2020 |
| |||||
Deferred tax assets: |
|
|
|
| |||
Accrued benefits | $ | | $ | | |||
Net operating loss carryforward |
| |
| | |||
Aircraft credits |
| |
| | |||
Deferred revenue | | | |||||
Operating lease liabilities | | | |||||
Accrued reserves and other |
| |
| | |||
Total deferred tax assets |
| |
| | |||
Valuation allowance |
| — |
| — | |||
Deferred tax liabilities: | |||||||
Accelerated depreciation |
| ( |
| ( | |||
Operating lease right-of-use assets | ( | ( | |||||
Total deferred tax liabilities |
| ( |
| ( | |||
Net deferred tax liability | $ | ( | $ | ( | |||
The Company’s deferred tax liabilities were primarily generated through accelerated depreciation, combined with shorter depreciable tax lives, allowed under the IRS tax code for purchased aircraft and support equipment compared to the Company’s depreciation policy under GAAP for such assets using the straight-line method (see note 1 Nature of Operations and Summary of Significant Accounting Policies).
At December 31, 2021 and 2020, the Company had federal net operating losses of approximately $
Under ASC Topic 740, the accounting guidance related to uncertainty in tax positions requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position.
65
Year ended December 31, | |||||||||
2021 | 2020 | 2019 | |||||||
Unrecognized tax benefits at the beginning of year |
| $ | |
| $ | |
| $ | |
Gross increases - current year tax positions | — | — | — | ||||||
Gross increases - prior year tax positions |
| |
| |
| | |||
Gross decreases - prior year tax positions | — | — | — | ||||||
Unrecognized tax benefits at end of year | $ | | $ | | $ | | |||
Interest and penalties in year-end balance | $ | | $ | | $ | | |||
For the years ending December 31, 2021, 2020, and 2019, the Company recorded $
(6) Commitments and Contingencies
Self-Insurance
The Company self-insures a portion of its potential losses from claims related to workers’ compensation, environmental issues, property damage, medical insurance for employees and general liability. Losses are accrued based on an estimate of the ultimate aggregate liability for claims incurred, using standard industry practices and the Company’s actual experience. The Company uses judgment and estimates in determining the ultimate aggregate liabilities for claims incurred in its workers’ compensation liability. The Company also used assumptions in determining the workers compensation liability such as an estimation of loss payment and loss reporting development patterns. At December 31, 2021 and 2020, the Company’s accrued workers’ compensation liability totaled $
Legal Matters
The Company is subject to certain legal actions which it considers routine to its business activities. As of December 31, 2021, 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 the Company’s financial position, liquidity or results of operations.
Concentration Risk and Significant Customers
The Company requires no collateral from its major airline partners or customers, but monitors the financial condition of its major airline partners. Under the majority of the Company’s code-share agreements, the Company receives weekly payments from its major code-share partners that approximate a significant percentage of the compensation earned for such period. Additionally, the Company provides certain customer service functions at multiple airports for various airlines and the Company maintains a credit loss reserve based upon expected collectability of all accounts receivable. For the years ended December 31, 2021, 2020, and 2019, the Company’s contractual relationships with Delta and United combined accounted for approximately
Employees Under Collective Bargaining Agreements
As of December 31, 2021, the Company had approximately
Aircraft Purchase Commitments
As of December 31, 2021, the Company had a purchase commitment to purchase
66
(7) Leases
Effective January 1, 2019, the Company adopted Topic 842. The Company leases property and equipment under operating leases. For leases with durations longer than 12 months, the Company recorded the related operating lease right-of-use asset and operating lease liability at the present value of lease payments over the term. The Company used its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Aircraft
As of December 31, 2021, excluding aircraft financed by our major airline partners that we operate for them under contract, the Company had
With the adoption of Topic 842, the Company evaluated whether leased aircraft asset groups within the Company’s fleet were impaired. Under the transition guidance for Topic 842, a company is permitted to recognize a previously unrecognized impairment related to a right-of-use asset in the period prior to the adoption date of Topic 842 if the event giving rise to the impairment occurred before the adoption date. In 2016, the Company recorded an impairment on certain of its long-lived assets, which included the Company’s CRJ200 aircraft. In 2016, the market lease rate was less than the contractual lease rate on the Company’s CRJ200 leased aircraft. The Company recorded an impairment of $
Airport facilities
The Company has operating leases for facility space including airport terminals, office space, cargo warehouses and maintenance facilities. The Company generally leases this space from government agencies that control the use of the various airports. The remaining lease terms for facility space vary from
Leases
As of December 31, 2021, the Company’s right-of-use assets were $
The table below presents lease related terms and discount rates as of December 31, 2021.
As of December 31, 2021 | |
Weighted-average remaining lease term for operating leases | |
Weighted-average discount rate for operating leases |
The Company’s lease costs for 2021 and 2020 included the following components (in thousands):
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Operating lease cost | $ | | $ | | ||
Variable and short-term lease cost |
| |
| | ||
Sublease income | ( | ( | ||||
Total lease cost | $ | | $ | | ||
67
As of December 31, 2021, the Company leased aircraft, airport facilities, office space, and other property and equipment under non-cancelable operating leases, which are generally on a long-term, triple-net lease basis pursuant to which the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The Company expects that, in the normal course of business, such operating leases that expire will be renewed or replaced by other leases, or the property may be purchased rather than leased.
2022 |
| $ | |
2023 |
| ||
2024 |
| ||
2025 |
| ||
2026 |
| ||
Thereafter |
| ||
$ | |
Total rental expense for non-cancelable aircraft operating leases was approximately $
(8) Fair Value Measurements
The Company holds certain assets that are required to be measured at fair value in accordance with GAAP. The Company 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 the Company’s marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities. |
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. |
As of December 31, 2021, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements as of December 31, 2021 | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Marketable Securities | ||||||||||||
Bonds and bond funds | $ | | $ | — | $ | | $ | — | ||||
Commercial paper |
| |
| — |
| |
| — | ||||
$ | | $ | — | $ | | $ | — | |||||
Cash and Cash Equivalents | | | — | — | ||||||||
Total Assets Measured at Fair Value | $ | | $ | | $ | | $ | — | ||||
68
Fair Value Measurements as of December 31, 2020 | ||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||
Marketable Securities |
|
|
|
|
|
|
|
| ||||
Bonds and bond funds | $ | $ | — | $ | | $ | — | |||||
Commercial paper |
|
| — |
| |
| — | |||||
$ | $ | — | $ | $ | — | |||||||
Cash and Cash Equivalents | | — | — | |||||||||
Total Assets Measured at Fair Value | $ | $ | $ | $ | — | |||||||
The Company’s “Marketable Securities” classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.
The Company did
(9) Special Items
During 2021, the Company entered into an agreement with Delta to purchase and operate
The following table summarizes the components of the Company's special items, for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Year ended December 31, | |||||||||
| 2021 |
| 2020 |
| 2019 | ||||
Special items: | |||||||||
CRJ900 Impairment Charge 1 | $ | | $ | — | $ | — | |||
Parts Credit 2 | — | — | | ||||||
Employee severance 3 |
| — | — |
| | ||||
Total special items | $ | | $ | — | $ | | |||
| (1) | Consists of the impairment charges to write-down CRJ900 aircraft in 2021 to their estimated fair value as discussed above. |
| (2) | The Company terminated an agreement with an aircraft manufacturer that obligated the Company to future aircraft lease return conditions on aircraft the Company leased. In conjunction with the terminated agreement, the aircraft manufacturer released the Company from the future aircraft lease return obligations and the Company agreed to |
69
| terminate aircraft part credits previously issued by the manufacturer to the Company. As a result of the terminated agreement, the Company recorded a non-cash expense of $ |
| (3) | During 2019, the Company incurred $ |
(10) Capital Transactions
Preferred Stock
The Company is authorized to issue
Stock Compensation
On May 7, 2019, the Company’s shareholders approved the adoption of the SkyWest, Inc. 2019 Long-Term Incentive Plan, which provides for the issuance of up to
Stock Options
The fair value of stock options awarded under the Company’s stock option plans has been estimated as of the grant date using the Black-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company’s traded stock and other factors. During the years ended December 31, 2021, 2020, and 2019, the Company did not grant any options to purchase shares of common stock to its employees.
Options are exercisable for a period as defined by the Compensation Committee on the date granted; however, no stock option will be exercisable before
70
2021 | 2020 | 2019 |
| |||||||||||||||||||
Weighted |
| |||||||||||||||||||||
Weighted | Average | Aggregate | Weighted | Weighted |
| |||||||||||||||||
Average | Remaining | Intrinsic | Average | Average |
| |||||||||||||||||
Number of | Exercise | Contractual | Value | Number of | Exercise | Number of | Exercise |
| ||||||||||||||
Options | Price | Term | ($000) | Options | Price | Options | Price |
| ||||||||||||||
Outstanding at beginning of year |
| |
| |
| years | $ | |
| |
| $ | |
| |
| $ | | ||||
Granted |
| — |
| — |
| — |
| — |
| — |
| — | ||||||||||
Exercised |
| ( |
| |
| ( |
| |
| ( |
| | ||||||||||
Cancelled |
| — |
| — |
| — |
| — |
| ( |
| | ||||||||||
Outstanding at end of year |
| |
| |
| year | $ | |
| |
| |
| |
| | ||||||
Exercisable at December 31, 2021 |
| | | year | $ | | ||||||||||||||||
Exercisable at December 31, 2020 |
| | | years | $ | | ||||||||||||||||
The total intrinsic value of options to acquire shares of the Company’s common stock that were exercised during the years ended December 31, 2021, 2020 and 2019 was $
The following table summarizes information about the Company’s stock options outstanding at December 31, 2021:
Options Outstanding | Options Exercisable |
| ||||||||||||||
Weighted Average |
| |||||||||||||||
Number | Remaining | Weighted Average | Number | Weighted Average |
| |||||||||||
Range of Exercise Prices | Outstanding | Contractual Life | Exercise Price | Exercisable | Exercise Price |
| ||||||||||
$ | to | $ |
|
| years |
| $ |
|
| $ | ||||||
$ | to | $ |
|
| years |
|
|
| ||||||||
$ | to | $ |
|
| years | $ |
| $ | ||||||||
Restricted Stock Units (“RSUs”)
During the year ended December 31, 2021, the Company granted
71
The following table summarizes the activity of restricted stock units granted to certain Company employees for the years ended December 31, 2021, 2020, and 2019:
|
| Weighted-Average |
| |||
Grant-Date Fair |
| |||||
Number of RSUs | Value |
| ||||
Non-vested RSUs outstanding at December 31, 2018 |
| | $ | | ||
Granted |
| |
| | ||
Vested |
| ( |
| | ||
Cancelled |
| ( |
| | ||
Non-vested RSUs outstanding at December 31, 2019 |
| | $ | | ||
Granted |
| |
| | ||
Vested |
| ( |
| | ||
Cancelled |
| ( |
| | ||
Non-vested RSUs outstanding at December 31, 2020 |
| | $ | | ||
Granted |
| |
| | ||
Vested |
| ( |
| | ||
Cancelled |
| ( |
| | ||
Non-vested RSUs outstanding at December 31, 2021 |
| | $ | |
Performance Stock Units (“PSUs”)
During the year ended December 31, 2021, the Compensation Committee granted performance share units, which are performance-based restricted stock units, to certain Company employees. The PSUs have a
72
The following table summarizes the activity of performance share units granted at target as of December 31, 2021:
|
| Weighted-Average | |||
Grant-Date Fair | |||||
Number of PSUs | Value | ||||
Non-vested PSUs outstanding at December 31, 2018 |
| | $ | | |
Granted |
| |
| | |
Additional PSUs awarded from the 2016 grant | | | |||
Vested |
| ( |
| | |
Cancelled |
| ( |
| | |
Non-vested PSUs outstanding at December 31, 2019 |
| | $ | | |
Granted |
| |
| | |
Additional PSUs awarded from the 2017 grant | | | |||
Vested |
| ( |
| | |
Cancelled |
| ( |
| | |
Non-vested PSUs outstanding at December 31, 2020 |
| | $ | | |
Granted |
| |
| | |
PSUs forfeited from the 2018 grant | ( | | |||
Vested |
| ( |
| | |
Cancelled |
| ( |
| | |
Non-vested PSUs outstanding at December 31, 2021 |
| | $ | |
During the years ended December 31, 2021, 2020, and 2019, the Company granted fully-vested shares of common stock to the Company’s directors in the amounts of
During the year ended December 31, 2021, 2020 and 2019, the Company recorded equity-based compensation expense of $
As of December 31, 2021, the Company had $
Taxes
The Company’s treatment of stock option grants of non-qualified options, restricted stock units and performance shares results in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised or the restrictions lapse.
Warrants
During the year ended December 31, 2021, the Company issued to Treasury warrants to purchase
During the year ended December 31, 2020, the Company issued to Treasury warrants to purchase
73
Treasury was estimated as of the grant date using the Black-Scholes option pricing model. The Company estimated a weighted average fair value of the warrants issued to Treasury at $
Additionally, in 2020, the Company issued to Treasury warrants to purchase
(11) Retirement Plans and Employee Stock Purchase Plans
SkyWest Retirement Plan
The Company sponsors the SkyWest, Inc. Employees’ Retirement Plan (the “SkyWest Plan”). Employees who are at least
Employee Stock Purchase Plans
In May 2009, the Company’s Board of Directors approved the SkyWest, Inc. 2009 Employee Stock Purchase Plan (the “2009 Stock Purchase Plan”). All employees who have completed
The following table summarizes purchases made under the 2009 Employee Stock Purchase Plans during the years ended December 31, 2021, 2020 and 2019:
Year ended December 31, |
| |||||||||
2021 | 2020 | 2019 |
| |||||||
Number of shares purchased |
| |
| |
| | ||||
Average price of shares purchased | $ | | $ | | $ | | ||||
The 2009 Stock Purchase Plan is a non-compensatory plan under the accounting guidance. Therefore,
(12) Stock Repurchase
The Company’s Board of Directors has adopted a stock repurchase program which authorizes the Company to repurchase shares of the Company’s common stock in the public market or in private transactions, from time to time, at prevailing prices. The Company’s stock repurchase program authorizes the repurchase of up to $
During the years ended December 31, 2020 and 2019, the Company purchased as treasury shares or purchased and cancelled
74
Additionally, during the year ended December 31, 2021, 2020 and 2019, the Company paid $
(13) Related-Party Transactions
During the year ended December 31, 2021, the Company purchased $
(14) Gain on Sale of ExpressJet
On January 22, 2019, the Company completed the sale of its former wholly owned subsidiary ExpressJet. The Company recorded a gain of $
Asset Sale
On January 11, 2019, pursuant to the terms and conditions of the Asset Purchase Agreement, dated as of December 17, 2018, by and among the Company, ExpressJet and United, United acquired certain specified assets and liabilities of ExpressJet, including, among other things, aircraft engines, auxiliary power units, rotable spare parts, ground support equipment and flight training equipment for $
Stock Sale
Additionally, on January 22, 2019, pursuant to the terms and conditions of the Stock Purchase Agreement, dated as of December 17, 2018, by and among the Company and ManaAir, LLC, a company in which United owns a minority interest (the “Buyer”), the Buyer acquired all of the outstanding shares of capital stock of ExpressJet from the Company for $
(15) Investment in Other Companies
During 2019, the Company created a joint venture with Regional One, Inc. (“Regional One”) by investing $
In 2021, the Company entered into a strategic partnership with Eve UAM, LLC (“Eve”), to develop a network of deployment for Eve’s electric vertical takeoff and landing (“eVTOL”) aircraft. The Company signed a non-binding letter
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of intent to purchase
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported accurately and within the time periods specified in the SEC rules and forms. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2021, those controls and procedures were effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the most recently completed fiscal quarter, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021, using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on that evaluation, management believes that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021, has been audited by Ernst Young LLP (“Ernst Young”), the independent registered public accounting firm who also has audited our Consolidated Financial Statements included in this Report. Ernst Young’s report on our internal control over financial reporting appears on the following page.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of SkyWest, Inc.
Opinion on Internal Control over Financial Reporting
We have audited SkyWest, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, SkyWest, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of SkyWest, Inc. and subsidiaries as of December 31, 2021 and 2020, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 17, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst Young LLP
Salt Lake City, Utah
February 17, 2022
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ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
Items 10, 11, 12, 13 and 14 in Part III of this Report are incorporated herein by reference to our definitive proxy statement for our 2022 Annual Meeting of Shareholders scheduled for May 3, 2022. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2021, pursuant to Regulation 14A of the Exchange Act.
Headings in Proxy Statement | ||
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | “Election of Directors,” “Executive Officers,” “Corporate Governance,” “Meetings and Committees of the Board” and “Delinquent Section 16(a) Reports” |
ITEM 11. | EXECUTIVE COMPENSATION | “Corporate Governance,” “Meetings and Committees of the Board,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Director Compensation” and “Director Summary Compensation Table” |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | “Security Ownership of Certain Beneficial Owners” and “Securities Authorized for Issuance Under Equity Compensation Plans” |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | “Certain Relationships and Related Transactions” |
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | “Fees Paid to Independent Registered Public Accounting Firm” |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Documents Filed: |
1. | Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB ID: |
2. | Financial Statement Schedule. The following consolidated financial statement schedule of our company is included in this Item 15. |
• | Schedule II—Valuation and qualifying accounts |
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All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.
(b) | Exhibits |
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Number | Exhibit | Incorporated |
|---|---|---|
+10.17 | (18) | |
10.18 | (19) | |
10.19 | (23) | |
10.20 | (20) | |
10.21 | (20) | |
**10.22 | (21) | |
10.23 | (23) | |
10.24 | (23) | |
10.25 | (23) | |
10.26 | (24) | |
10.27 | (24) | |
21.1 | (23) | |
23.1 | Filed herewith | |
31.1 | Filed herewith | |
31.2 | Filed herewith | |
32.1 | Filed herewith | |
32.2 | Filed herewith | |
101 | The following financial statements from the SkyWest Inc. Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags | Filed herewith |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
* | Certain portions of this exhibit have been omitted pursuant to Rule 24b-2 and are subject to a confidential treatment request. |
** | Pursuant to Item 601(a)(5) of Regulation S-K promulgated by the Securities and Exchange Commission, certain exhibits and schedules to this agreement have been omitted. Such exhibits and schedules are described in the referenced agreement. The Company hereby agrees to furnish to the Securities and Exchange Commission, upon its request, any or all of such omitted exhibits or schedules. |
+ | Management compensatory plan or arrangement. |
| (1) | Incorporated by reference to the exhibits to a Registration Statement on Form S -3 (File No. 333-129831) filed on November 18, 2005 |
| (2) | Incorporated by reference to a Registration Statement on Form S- 3 (File No. 333-42508) filed on July 28, 2000 |
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| (3) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed on September 13, 2005, as amended by Amendment No. 2 on Form 8-K/A filed on February 21, 2006 |
| (4) | Incorporated by reference to exhibits to Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2003 |
| (5) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended December 31, 1986 |
| (6) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on February 13, 2001 |
| (7) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 23, 2009 |
| (8) | Incorporated by reference to Appendix A to Registrant's Definitive Proxy Statement on Schedule 14A (File No. 000-14719) filed on March 12, 2010 |
| (9) | Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8-K filed on November 18, 2010 |
| (10) | Incorporated by reference to the exhibits to Registrant’s Current Report on Form 8-K filed on December 13, 2012, as amended by Amendment No. 1 to Current Report on Form 8-K/A filed on June 25, 2013 |
| (11) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 24, 2012 |
| (12) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on August 7, 2013, as amended by Amendment No. 1 to Quarterly Report on Form 10-Q/A filed on November 4, 2013 |
| (13) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 14, 2014 |
| (14) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 18, 2015 |
| (15) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 27, 2017 |
| (16) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 26, 2018 |
| (17) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 21, 2019 |
| (18) | Incorporated by reference to Appendix B of the Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 22, 2019 |
| (19) | Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on February 15, 2019 |
| (20) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on August 7, 2020 |
| (21) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on November 5, 2020 |
| (22) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 18, 2020 |
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| (23) | Incorporated by reference to the exhibits to Registrant’s Annual Report on Form 10-K filed on February 22, 2021 |
| (24) | Incorporated by reference to the exhibits to Registrant’s Quarterly Report on Form 10-Q filed on May 6, 2021 |
Item 16. Form 10-K Summary
None.
SKYWEST, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands)
|
| Additions |
|
|
| |||||||
Balance at | Charged to |
| ||||||||||
Beginning | Costs and | Balance at |
| |||||||||
Description | of Year | Expenses | Deductions | End of Year |
| |||||||
Year Ended December 31, 2021 | ||||||||||||
Allowance for inventory obsolescence | $ | |
| |
| — |
| $ | | |||
Allowance for credit losses | |
| — |
| ( |
| | |||||
$ | |
| |
| ( |
| $ | | ||||
Year Ended December 31, 2020 | ||||||||||||
Allowance for inventory obsolescence | $ | |
| |
| — |
| $ | | |||
Allowance for doubtful accounts receivable | |
| — |
| ( |
| — | |||||
Allowance for credit losses (adoption of Topic 326) | |
| |
| — |
| | |||||
$ | |
| |
| ( |
| $ | | ||||
Year Ended December 31, 2019 | ||||||||||||
Allowance for inventory obsolescence | $ | |
| — |
| ( |
| $ | | |||
Allowance for doubtful accounts receivable | |
| — |
| ( |
| | |||||
$ | |
| — |
| ( | $ | | |||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K for the year ended December 31, 2021, to be signed on its behalf by the undersigned, thereunto duly authorized, on February 17, 2022.
SkyWest, Inc. | ||
By: | /s/ ROBERT J. SIMMONS Robert J. Simmons | |
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ADDITIONAL SIGNATURES
Pursuant to the requirement of the Securities Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated.
Name | Capacities | Date | ||||||||
/s/ Jerry C. Atkin Jerry C. Atkin | Chairman of the Board | February 17, 2022 | ||||||||
/s/ Russell A. Childs Russell A. Childs | Chief Executive Officer and President (Principal Executive Officer) and Director | February 17, 2022 | ||||||||
/s/ Robert J. Simmons Robert J. Simmons | Chief Financial Officer (Principal Financial Officer) | February 17, 2022 | ||||||||
/s/ Eric J. Woodward Eric J. Woodward | Chief Accounting Officer (Principal Accounting Officer) | February 17, 2022 | ||||||||
/s/ Steven F. Udvar-Hazy Steven F. Udvar-Hazy | Lead Director | February 17, 2022 | ||||||||
/s/ W. Steve Albrecht Steve Albrecht | Director | February 17, 2022 | ||||||||
/s/ Smita Conjeevaram Smita Conjeevaram | Director | February 17, 2022 | ||||||||
/s/ Meredith S. Madden Meredith S. Madden | Director | February 17, 2022 | ||||||||
/s/ Ronald J. Mittelstaedt Ronald J. Mittelstaedt | Director | February 17, 2022 | ||||||||
/s/ Andrew C. Roberts Andrew C. Roberts | Director | February 17, 2022 | ||||||||
/s/ Keith E. Smith Keith E. Smith | Director | February 17, 2022 | ||||||||
/s/ James L. Welch James L. Welch | Director | February 17, 2022 | ||||||||
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