SKYWEST INC - Quarter Report: 2012 March (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to

 

Commission file number 0-14719

 

SKYWEST, INC.

 

 

444 South River Road

St. George, Utah 84790

(435) 634-3000

 

Indicate by a 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.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was to required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

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SKYWEST, INC.

 

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION:		3
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	3
		Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three months ended March 31, 2012 and 2011	5
		Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	22
PART II	OTHER INFORMATION:		22
	Item 1.	Legal Proceedings	22
	Item 1A.	Risk Factors	23
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 6.	Exhibits	24
		Signature	25
Exhibit 31.1	Certification of Chief Executive Officer
Exhibit 31.2	Certification of Chief Accounting Officer
Exhibit 32.1	Certification of Chief Executive Officer
Exhibit 32.2	Certification of Chief Accounting Officer

 

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PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

ASSETS

 

		March 31, 2012			December 31, 2011
		(unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	98,946		$	129,526
Marketable securities		464,918			497,552
Restricted cash		19,440			19,434
Income tax receivable		2,095			1,568
Receivables, net		146,233			130,510
Inventories, net		118,620			115,211
Prepaid aircraft rents		337,559			285,737
Deferred tax assets		74,781			69,519
Other current assets		37,418			31,407
Total current assets		1,300,010			1,280,464
PROPERTY AND EQUIPMENT:
Aircraft and rotable spares		3,986,196			3,973,027
Buildings and ground equipment		291,329			291,294
		4,277,525			4,264,321
Less-accumulated depreciation and amortization		(1,435,405		)	(1,380,846		)
Total property and equipment, net		2,842,120			2,883,475
OTHER ASSETS
Intangible assets, net		18,935			19,497
Other assets		104,592			98,472
Total other assets		123,527			117,969
Total assets		$	4,265,657		$	4,281,908

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

		March 31,			December 31,
		2012			2011
		(unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt		$	203,943		$	208,398
Accounts payable		240,098			220,784
Accrued salaries, wages and benefits		110,455			112,987
Accrued aircraft rents		18,400			22,285
Taxes other than income taxes		17,507			21,186
Other current liabilities		43,838			38,508
Total current liabilities		634,241			624,148
OTHER LONG-TERM LIABILITIES		48,820			50,194
LONG-TERM DEBT, net of current maturities		1,577,773			1,606,993
DEFERRED INCOME TAXES PAYABLE		573,499			567,874
DEFERRED AIRCRAFT CREDITS		96,916			98,438
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, 5,000,000 shares authorized; none issued		—			—
Common stock, no par value, 120,000,000 shares authorized; 76,224,131 and 75,833,696 shares issued, respectively		602,366			598,985
Retained earnings		1,101,425			1,104,144
Treasury stock, at cost, 25,279,790 and 25,221,481 shares, respectively		(371,206		)	(370,309		)
Accumulated other comprehensive income		1,823			1,441
Total stockholders’ equity		1,334,408			1,334,261
Total liabilities and stockholders’ equity		$	4,265,657		$	4,281,908

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Dollars and Shares in Thousands, Except per Share Amounts)

(Unaudited)

 

		Three Months Ended March 31,
		2012			2011
OPERATING REVENUES:
Passenger		$	902,356		$	844,476
Ground handling and other		18,817			21,475
Total operating revenues		921,173			865,951
OPERATING EXPENSES:
Salaries, wages and benefits		290,814			286,148
Aircraft maintenance, materials and repairs		179,636			163,174
Aircraft fuel		147,450			126,740
Aircraft rentals		84,903			86,422
Depreciation and amortization		64,315			63,193
Station rentals and landing fees		43,933			42,626
Ground handling services		35,315			36,853
Acquisition related costs		—			1,031
Other, net		54,350			59,537
Total operating expenses		900,716			865,724
OPERATING INCOME		20,457			227
OTHER INCOME (EXPENSE):
Interest income		1,954			1,966
Interest expense		(19,780		)	(20,220		)
Other, net		(3,853		)	(506		)
Total other expense, net		(21,679		)	(18,760		)
LOSS BEFORE INCOME TAXES		(1,222		)	(18,533		)
BENEFIT FOR INCOME TAXES		(540		)	(7,470		)
NET LOSS		(682		)	$	(11,063	)
BASIC LOSS PER SHARE		(0.01		)	$	(0.21	)
DILUTED LOSS PER SHARE		(0.01		)	$	(0.21	)
Weighted average common shares:
Basic		50,881			53,844
Diluted		50,881			53,844
Dividends declared per share		$	0.04		$	0.04
COMPREHENSIVE LOSS:
Net loss		(682		)	(11,063		)
Proportionate share of other companies foreign currency translation adjustment, net of tax $20 and $102, respectively		(30		)	160
Net unrealized appreciation on marketable securities, net of tax of $263 and $198, respectively		412			309
TOTAL COMPREHENSIVE LOSS		$	(300	)	$	(10,594	)

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In Thousands)

 

		Three Months Ended March 31,
		2012			2011
NET CASH USED IN OPERATING ACTIVITIES		$	(1,917	)	$	(8,394	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities		(87,218		)	(120,245		)
Sales of marketable securities		120,220			234,872
Proceeds from the sale of equipment		630			110
Acquisition of property and equipment:
Aircraft and rotable spare parts		(14,860		)	(16,320		)
Deposits on aircraft		—			(13,200		)
Buildings and ground equipment		(35		)	(2,303		)
Increase in other assets		(13,032		)	(8,603		)
NET CASH PROVIDED BY INVESTING ACTIVITIES		5,705			74,311
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(33,675		)	(30,897		)
Net proceeds from issuance of common stock		2,236			2,201
Purchase of treasury stock		(897		)	(19,581		)
Payment of cash dividends		(2,032		)	(2,238		)
NET CASH USED IN FINANCING ACTIVITIES		(34,368		)	(50,515		)
Increase (decrease) in cash and cash equivalents		(30,580		)	15,402
Cash and cash equivalents at beginning of period		129,526			112,338
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	98,946		$	127,740
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, net of capitalized amounts		$	15,294		$	16,312
Income taxes		$	(54	)	$	467

 

See accompanying notes to condensed consolidated financial statements.

 

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SKYWEST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note A — Condensed Consolidated Financial Statements

 

The condensed consolidated financial statements of SkyWest, Inc. (“SkyWest” or the “Company”) and its operating subsidiaries, SkyWest Airlines, Inc. (“SkyWest Airlines”) and U.S. ExpressJet Airlines Inc. (“ExpressJet”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the following disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature, unless otherwise disclosed. The Company suggests that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results will differ and may differ materially from those estimates and assumptions.

 

Note B — Passenger and Ground Handling Revenue

 

Passenger and Ground Handling Revenues

 

The Company recognizes passenger and ground handling revenues when the service is provided. Under the Company’s contract and pro-rate flying agreements with Delta Airlines, Inc. (“Delta”), United Air Lines, Inc. (“United”), Continental Airlines, Inc. (“Continental”), US Airways Group, Inc. (“US Airways”) and Alaska Airlines (“Alaska”), revenue is considered earned when the flight is completed. Revenue is recognized under the Company’s pro-rate flying agreements based upon the portion of the pro-rate passenger fare the Company anticipates that it will receive.

 

Delta Connection Agreements

 

SkyWest Airlines and ExpressJet are each parties to a Delta Connection Agreement with Delta, pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The Delta Connection Agreements provide for fifteen-year terms, subject to early termination by Delta, SkyWest Airlines or ExpressJet, as applicable, upon the occurrence of certain events. Delta’s termination rights include (i) cross- termination rights between the two Delta Connection Agreements, (ii) the right to terminate each of the Delta Connection Agreements upon the occurrence of certain force majeure events, including certain labor-related events, that prevent SkyWest Airlines or ExpressJet from performance for certain periods, and (iii) the right to terminate each of the Delta Connection Agreements if SkyWest Airlines or ExpressJet fails to maintain competitive base rate costs, subject to certain adjustment rights. The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi-year rate reset provisions beginning in 2010 and each 5th year thereafter. In addition to the termination rights, Delta has the right to extend the term of the Delta Connection Agreements upon the occurrence of certain events or at the expiration of the initial term. SkyWest Airlines and ExpressJet have the right to terminate their respective Delta Connection Agreement upon the occurrence of certain breaches by Delta, including the failure to cure payment defaults. SkyWest Airlines and ExpressJet also have cross-termination rights between the two Delta Connection Agreements.

 

Under the terms of the SkyWest Airlines Delta Connection Agreement, Delta has agreed to compensate SkyWest Airlines for the direct costs associated with operating the Delta Connection flights, plus a payment based on block hours flown. Under the terms of the ExpressJet Delta Connection Agreement, Delta has agreed to compensate ExpressJet for its direct costs associated with operating the Delta Connection flights, plus, if ExpressJet completes a certain minimum percentage of its Delta Connection flights, an additional percentage of such costs. Additionally, ExpressJet’s Delta Connection Agreement provides for the payment of incentive compensation upon satisfaction of certain performance goals. The incentives are defined in the ExpressJet Delta Connection Agreement as being measured and determined on a monthly and quarterly basis. At the end of each quarter, the Company calculates the incentives achieved during the quarter and recognizes revenue accordingly. The parties to the Delta Connection Agreements made customary representations, warranties and covenants, including with respect to various operational, marketing and administrative matters.

 

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In the event that the contractual rates under the Delta Connection Agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of prior period’s approved rates, as adjusted to reflect any contract negotiations and the Company’s estimate of rates that will be implemented in accordance with revenue recognition guidelines.

 

The Delta Connection Agreements also provide that, beginning with the fifth anniversary of the execution of the agreements (September 8, 2010), Delta has the right to require that certain contractual rates under those agreements shall not exceed the second lowest of all carriers within the Delta Connection program. During the fourth quarter of 2010, SkyWest Airlines and Atlantic Southeast Airlines, Inc., ExpressJet’s predecessor (“Atlantic Southeast”) reached an agreement with Delta on contractual rates satisfying the 2010 rate reset provision and the second-lowest rate provision and agreed to rates through December 31, 2015. Delta additionally waived its right to require that the contractual rates payable under the Delta Connection Agreements shall not exceed the second-lowest rates of all carriers within the Delta Connection program through December 31, 2015.

 

In the event the Company has a reimbursement dispute with a major partner, the Company evaluates the dispute under its established revenue recognition criteria and, provided the revenue recognition criteria have been met, the Company recognizes revenue based on management’s estimate of the resolution of the dispute. During the quarter ended December 31, 2007, Delta notified the Company, SkyWest Airlines and Atlantic Southeast of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to allocation of liability for certain irregular operations (“IROP”) expenses that are paid by SkyWest Airlines and ExpressJet to their passengers under certain situations. As a result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Delta continues to withhold a portion of the funds the Company believes are payable as weekly scheduled wire payments to SkyWest Airlines and ExpressJet (See Note I for additional details).

 

United Express Agreements

 

SkyWest Airlines and United have entered into a United Express Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ United Express operations. Under the terms of the United Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the United Express Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

On February 10, 2010, Atlantic Southeast and United entered into a United Express Agreement, pursuant to which ExpressJet, as successor to Atlantic Southeast, operates 14 CRJ200s as a United Express carrier. The ExpressJet United Express Agreement is a capacity purchase agreement with a five-year term, and other terms which are generally consistent with the SkyWest Airlines United Express Agreement.

 

On December 1, 2009, ExpressJet Airlines, Inc., a Delaware corporation (“ExpressJet Delaware”) which was merged with Atlantic Southeast to form ExpressJet, effective as of December 31, 2011 (the “ExpressJet Combination”), and United also entered into a United Express Agreement, which sets forth the principal terms and conditions governing the United Express operations conducted by ExpressJet. Under the terms of that United Express Agreement, to which ExpressJet became a party through the ExpressJet Combination, ExpressJet is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, ExpressJet is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in that ExpressJet United Express Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

Continental CPA

 

Effective November 12, 2010, ExpressJet Delaware entered into a Capacity Purchase Agreement with Continental (the “Continental CPA”), whereby ExpressJet Delaware agreed to provide regional airline service in the Continental flight system. Under the terms of the Continental CPA, to which ExpressJet became a party through the ExpressJet Combination, ExpressJet operates 206 aircraft in the Continental flight system and Continental has agreed to compensate ExpressJet on a monthly basis based on the block hours flown by ExpressJet and the weighted average number of aircraft operated by ExpressJet under the Continental CPA. Additionally, ExpressJet may earn incentive compensation for good operating performance, but is subject to financial penalties for poor operating performance. At the end of each month, the Company calculates the incentives achieved during the month under the Continental CPA and recognizes revenue accordingly.

 

Alaska Capacity Purchase Agreement

 

SkyWest Airlines and Alaska have entered into a Capacity Purchase Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ operations for Alaska. Under the terms of the Alaska Capacity Purchase Agreement, SkyWest

 

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Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the Alaska Capacity Purchase Agreement as being measured and determined on a monthly basis. At the end of each month, the Company calculates the incentives achieved during the month and recognizes revenue accordingly.

 

US Airways Express Agreement

 

SkyWest Airlines and US Airways have entered into a US Airways Express Agreement, which sets forth the principal terms and conditions governing SkyWest Airlines’ US Airways Express operations. Under the terms of the US Airways Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the US Airways Express Agreement as being measured and determined on a quarterly basis. At the end of each quarter, the Company calculates the incentives achieved during the quarter and recognizes revenue accordingly.

 

Other Revenue Items

 

The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with Delta, United, Continental, Alaska or US Airways, integration of ExpressJet’s operations as contemplated by Atlantic Southeast’s acquisition of ExpressJet Delaware in November 2010 and the ExpressJet Combination, contract modifications resulting from contract re-negotiations, 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 partners.

 

Note C — Share-Based Compensation

 

The fair value of stock options granted by the Company has been estimated as of the grant date using the Black-Scholes option pricing model. During the three months ended March 31, 2012, the Company granted options to purchase 200,115 shares of common stock under the SkyWest, Inc. 2010 Long-Term Incentive Plan (the “2010 Incentive Plan”).  The following table shows the assumptions used and weighted average fair value for stock option grants during the three months ended March 31, 2012.

 

Expected annual dividend rate		1.23		%
Risk-free interest rate		0.81		%
Average expected life (years)		5.6
Expected volatility of common stock		.409
Forfeiture rate		0.0		%
Weighted average fair value of option grants		$	4.43

 

During the three months ended March 31, 2012, the Company granted 289,125 restricted stock units to the Company’s employees under the 2011 Incentive Plan.  The restricted stock units have a three-year vesting period, during which the recipient must remain employed with the Company or one of the Company’s subsidiaries.  Upon vesting, a restricted stock unit will be replaced with a common share of stock. Additionally, during the three months ended March 31, 2012, the Company granted 27,874 fully-vested shares of common stock to the Company’s directors.  The weighted average fair value of the shares of restricted stock on the date of grant was $13.06 per share.

 

The Company records share-based compensation expense only for those options and restricted stock units that are expected to vest.  The estimated fair value of the stock options and restricted stock units is amortized over the applicable vesting periods.  During the three months ended March 31, 2012 and 2011, the Company recorded pre-tax share-based compensation expense of $1.3 million and $1.8 million, respectively.

 

Note D — Net Loss Per Common Share

 

Basic net loss per common share (“Basic EPS”) excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss 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 loss per common share. During the three months ended March 31, 2012 and 2011, options to acquire 3,991,000 and 5,738,000 shares, respectively, were excluded from the computation of Diluted EPS as their impact was anti-dilutive.

 

The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS for the periods indicated (in thousands, except per share data) is as follows:

 

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		Three months ended March 31,
		2012			2011
Numerator
Net Loss		$	(682	)	$	(11,063	)
Denominator
Weighted average number of common shares outstanding		50,881			53,844
Effect of outstanding share-based awards		—			—
Weighted average number of shares for diluted net loss per common share		50,881			53,844
Basic loss per share		$	(0.01	)	$	(0.21	)
Diluted loss per share		$	(0.01	)	$	(0.21	)

 

Note E — 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 (“CODM”) when deciding how to allocate resources and in assessing performance.

 

The Company’s two operating segments consist of the operations of its two operating subsidiaries, SkyWest Airlines and ExpressJet. On December 31, 2011, ExpressJet Delaware and Atlantic Southeast merged through the ExpressJet Combination. In conjunction with the ExpressJet Combination, ExpressJet became a reportable segment. Prior year amounts have been revised to conform to the current year segment presentation. Corporate overhead expense incurred by the Company is allocated to the operating expenses of its two operating subsidiaries. The following represents the Company’s segment data for the three months ended March 31, 2012 and 2011 (in thousands).

 

		Three months ended March 31,2012
		SkyWest Airlines		ExpressJet		Other		Consolidated
Operating revenues		494,911		423,629		2,633		921,173
Operating expense		472,906		426,552		1,258		900,716
Depreciation and amortization expense		38,783		25,532		—		64,315
Interest expense		12,562		6,045		1,173		19,780
Segment profit (loss)(1)		9,443		(8,968	)	202		677
Identifiable intangible assets, other than goodwill		—		18,935		—		18,935
Total assets		2,595,738		1,669,919		—		4,265,657
Capital expenditures (including non-cash)		15,253		3,802		—		19,055

 

		Three months ended March 31,2011
		SkyWest Airlines		ExpressJet		Other		Consolidated
Operating revenues		479,618		383,459		2,874		865,951
Operating expense		456,815		407,591		1,318		865,724
Depreciation and amortization expense		36,455		26,738		—		63,193
Interest expense		12,730		6,379		1,111		20,220
Segment profit (loss) (1)		10,073		(30,511	)	445		(19,993	)
Identifiable intangible assets, other than goodwill		—		21,185		—		21,185
Total assets		2,541,923		1,857,393		—		4,399,316
Capital expenditures (including non-cash)		10,299		7,319		—		17,618

 

(1)           Segment profit is operating income less interest expense

 

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Note F — Commitments and Contingencies

 

As of March 31, 2012, the Company leased 551 aircraft, as well as airport facilities, office space, and various other property and equipment under non-cancelable operating leases which are generally on a long-term net rent basis where 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.  The following table summarizes future minimum rental payments required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2012 (in thousands):

 

April through December 2012		$	244,152
2013		380,369
2014		358,473
2015		309,142
2016		239,731
Thereafter		907,298
		$	2,439,165

 

Note G — 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 March 31, 2012, 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 March 31, 2012
		Total			Level 1			Level 2			Level 3
Marketable Securities
Bonds and bond funds		$	450,842		$	—		$	450,842		$	—
Commercial paper		13,643						13,643
Asset backed securities		433			—			433			—
		464,918						464,918			—
Cash, Cash Equivalents and Restricted Cash		118,386			118,386			—			—
Other Assets (a)		3,807			—			—			3,807
Total Assets Measured at Fair Value		$	587,111		$	118,386		$	464,918		$	3,807

 

(a)          Auction rate securities included in “Other assets” in the Company’s unaudited condensed consolidated balance sheet

 

Based on market conditions, the Company uses a discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing condensed consolidated financial statements, these securities were categorized as Level 3 securities. 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 not make any significant transfers of securities between Level 1, Level 2 and Level 3 during the three months ended March 31, 2012.  The Company’s policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.

 

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The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2012 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs

 

(Level 3)

 

		Auction Rate Securities
Balance at January 1, 2012		$	3,793
Total realized and unrealized gains or (losses)
Included in earnings		—
Included in other comprehensive income		14
Transferred out		—
Settlements		—
Balance at March 31, 2012		$	3,807

 

The fair value of the Company’s long-term debt classified as Level 2 was estimated using discounted cash flow analyses, based on the Company’s current estimated incremental borrowing rates for similar types of borrowing arrangements. 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 estimated to be $1,889.6 million as of March 31, 2012, as compared to the carrying amount of $1,781.7 million as of March 31, 2012.

 

Note H — Income Taxes

 

As a result of decreases in the Company’s estimated pre-tax income, the Company’s estimated annual effective tax rate for the three months ended March 31, 2012 varied from the federal statutory rate of 35% primarily due to the proportionate increase in expenses with limited tax deductibility relative to the Company’s estimated pre-tax income for the year ending December 31, 2012.

 

Note I — Legal Matters

 

The Company is subject to certain legal actions which it considers routine to its business activities. As of March 31, 2012, management believes, after consultation with legal counsel, that the ultimate outcome of such legal matters is not likely to have a material adverse effect on the Company’s financial position, liquidity or results of operations. However, the following is a significant outstanding legal matter.

 

SkyWest Airlines and ExpressJet v. Delta

 

During the quarter ended December 31, 2007, Delta notified the Company, SkyWest Airlines and Atlantic Southeast, of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to the allocation of liability for certain irregular operation (“IROP”) expenses paid by SkyWest Airlines and Atlantic Southeast (now ExpressJet) to their passengers and vendors under certain situations. During the period between the execution of the Delta Connection Agreements in September 2005 and December 2007, SkyWest Airlines and Atlantic Southeast passed through to Delta IROP expenses that were paid pursuant to Delta’s policies, and Delta accepted and reimbursed those expenses. Delta now claims it is obligated to reimburse only a fraction of those IROP expenses. As a result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Since December 2007, Delta has continued to withhold payments from the weekly scheduled wire payments to SkyWest Airlines and Atlantic Southeast (now ExpressJet), and has disputed subsequent billings for IROP expenses. As of December 31, 2011, the Company had recognized a cumulative total of $31.7 million of revenue associated with the funds withheld by Delta. Since July 1, 2008, the Company has not recognized revenue related to IROP expense reimbursements withheld by Delta because collection of those reimbursements is the subject of litigation and is not reasonably assured. On February 1, 2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton County, Georgia (“Superior Court”) challenging Delta’s treatment of the matter and seeking recovery of the payments withheld by Delta and any future withholdings related to this issue. Delta filed an Answer to the SkyWest Airlines and Atlantic Southeast Complaint and a Counterclaim against SkyWest Airlines and Atlantic Southeast on March 24, 2008. Delta’s Counterclaim alleged that SkyWest Airlines and Atlantic Southeast breached the Delta Connection Agreements by invoicing Delta for IROP expenses that were paid pursuant to Delta’s policies, and claims only a portion of those expenses may be invoiced to Delta.

 

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After proceedings that included contested motions, document discovery, and depositions, Delta voluntarily dismissed its Counterclaim. Discovery in that action was not complete at the time of dismissal. On February 14, 2011, SkyWest Airlines and Atlantic Southeast exercised their statutory rights to voluntarily dismiss their claims in the Superior Court, and filed a new complaint (the “State Court Complaint”) in the Georgia State Court of Fulton County (the “State Court”). The claims continue to include breach of contract, breach of contract based on mutual departure, breach of contract based on voluntary payment, and breach of the duty of good faith and fair dealing. Delta moved for partial dismissal of the State Court Complaint, which motion was denied in its entirety. Delta also filed a separate action in the Superior Court containing claims for declaratory judgment and breach of the confidentiality provisions of the Delta Connection Agreements. SkyWest Airlines and Atlantic Southeast moved for dismissal of Delta’s claims in the Superior Court. The Superior Court dismissed Delta’s complaint in its entirety. Discovery in the lawsuit is ongoing.

 

On October 18, 2011, Delta filed a counterclaim (the “Counterclaim”) against SkyWest Airlines and Atlantic Southeast. The Counterclaim contains claims for unjust enrichment and breach of contract related to alleged non-revenue positive space flying by SkyWest and Atlantic Southeast employees for non-Delta related business. Delta’s Counterclaim does not specify an amount of damages, but the Counterclaim alleges, on information and belief, that Delta’s damages exceed $4.5 million. SkyWest and Atlantic Southeast filed their reply to the Counterclaim on November 21, 2011, stating the allegations contained in the Counterclaim stand denied by operation of law and asserting SkyWest’s and Atlantic Southeast’s affirmative defenses. An estimated loss is accrued if the loss is probable and reasonably estimable. Because these conditions have not been satisfied, the Company has not recorded a loss in its consolidated financial statements with respect to the dispute. As of March 31, 2012, a range of reasonably possible loss is not determinable related to this Counterclaim.

 

During 2010, the Company and Delta began preliminary settlement discussions related to the dispute. Notwithstanding the legal merits of the case, the Company offered to settle the claim for approximately $5.9 million less than the cumulative total of revenue recognized related to this matter. Those settlement discussions were not successful; however, as a result of the settlement offer, the Company wrote off $5.9 million of related receivables as of December 31, 2010. As of March 31, 2012, the Company’s estimated range of reasonably possible loss related to the dispute was $0 to $25.8 million.

 

SkyWest Airlines and ExpressJet continue to vigorously pursue their claims set forth in the State Court Complaint and their defenses against Delta’s Counterclaim.

 

ITEM 2:      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 the results of operations of SkyWest, Inc. (“SkyWest” “we” or “us”) during the three months ended March 31, 2012 and 2011. Also discussed is our financial position as of March 31, 2012 and December 31, 2011. You should read this discussion in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2012, including the notes thereto, appearing elsewhere in this Report.  This discussion and analysis contains forward-looking statements. Please refer to the section of this Report entitled “Cautionary Statement Concerning Forward-Looking Statements” for discussion of the uncertainties, risks and assumptions associated with these statements.

 

Effective December 31, 2011, our subsidiary, ExpressJet Airlines, Inc. was merged into our subsidiary, Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the “ExpressJet Combination”).  In this Report, “Atlantic Southeast” refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, “ExpressJet Delaware” refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and “ExpressJet” refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the consummation of the ExpressJet Combination.

 

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 SkyWest’s outlook, the revenue environment, SkyWest’s contract relationships, and SkyWest’s expected financial performance.  These statements include, but are not limited to, statements about SkyWest’s future growth and development plans, including SkyWest’s future financial and operating results, SkyWest’s plans for SkyWest Airlines and ExpressJet, SkyWest’s objectives, expectations and intentions, and other statements that are not historical facts.  You should also keep in mind that all forward-looking statements are based on SkyWest’s existing beliefs about present and future events outside of SkyWest’s 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, SkyWest’s actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended.

 

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There may be other factors not identified above of which SkyWest is not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed.  SkyWest assumes 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 law.

 

Overview

 

Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of March 31, 2012, SkyWest Airlines and ExpressJet offered scheduled passenger and air freight service with approximately 4,000 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of March 31, 2012, we operated a combined fleet of 727 aircraft consisting of the following:

 

		CRJ 200		ERJ 145		CRJ700		CRJ 900		EMB 120		Total
Delta		158		—		61		31		9		259
United Continental		92		244		70		—		35		441
US Airways		15		—		—		—		—		15
Alaska		—		—		5		—		—		5
Maintenance spare		1		—		—		—		—		1
Subleased to an un-affiliated entity		2		—		—		—		—		2
Subleased to an affiliated entity		—		—		—		4		—		4
Total		268		244		136		35		44		727

 

For the three months ended March 31, 2012, approximately 64.5% of our aggregate capacity was operated under the United Express Agreements executed between United Airlines, Inc. (“United”) and each of SkyWest Airlines and ExpressJet, approximately 33.1%  of our aggregate capacity was operated under Delta Connection Agreements executed between Delta Airlines, Inc. (“Delta”) and each of SkyWest Airlines and ExpressJet (as successor to Atlantic Southeast), approximately 1.3% of our aggregate capacity was operated under the Alaska capacity purchase agreement and approximately 1.1% of our aggregate capacity was operated under the US Airways code-share agreement.

 

SkyWest Airlines has been a code-share partner with Delta in Salt Lake City and United in Los Angeles since 1987 and 1997, respectively. In 1998, SkyWest Airlines expanded its relationship with United to provide service in Portland, Seattle/Tacoma, San Francisco and additional Los Angeles markets. In 2004, SkyWest Airlines expanded its United Express operations to provide service in Chicago. In May 2011, SkyWest Airlines entered into a capacity purchase agreement with Alaska. In addition, during November 2011 SkyWest Airlines entered into a code share agreement with US Airways. As of March 31, 2012, SkyWest Airlines operated as a Delta Connection carrier in Salt Lake City and Minneapolis, a United Express carrier in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an Alaska carrier in Seattle/ Tacoma and Portland and a US Airways carrier in Phoenix.

 

On November 17, 2011, Atlantic Southeast and ExpressJet Delaware consolidated their operations under a single operating certificate, and on December 31, 2011, Atlantic Southeast and ExpressJet Delaware completed the ExpressJet Combination. At the time of the ExpressJet Combination, Atlantic Southeast had been a code-share partner with Delta in Atlanta since 1984 and a code-share partner with United since February 2010. As of March 31, 2012, ExpressJet operated as a Delta Connection carrier in Atlanta and Cincinnati and a United Express carrier in Chicago (O’Hare), Washington, D.C. (Dulles International Airport), Cleveland, Newark and Houston.

 

Historically, multiple contractual relationships have enabled us to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of contract flying and our controlled or “pro-rate” flying. For the three months ended March 31, 2012, contract flying revenue and pro-rate revenue represented approximately 93% and 7%, respectively, of our total passenger revenues. 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 the completed block hours, flight departures and other operating measures.

 

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First Quarter Summary

 

We had revenues of $921.2 million for the three months ended March 31, 2012, a 6.4% increase, compared to revenues of $866.0 million for the three months ended March 31, 2011. We had a net loss of $0.7 million, or $0.01 per diluted share, for the three months ended March 31, 2012, a decrease of 93.8%, compared to $11.1 million of net loss, or $0.21 per diluted share, for the three months ended March 31, 2011.

 

The significant items affecting our financial performance during the three months ended March 31, 2012 are outlined below:

 

Total operating revenues increased $55.2 million for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  The significant reason for the increase was due to increased utilization of the fleet. For the same comparable quarters, the total operating expenses increased $35.0 million. The improved utilization of the fleet significantly impacted the profitability for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  The improved utilization was more prevalent in the ExpressJet fleet.

 

Salaries, wages and employee benefits increased $4.7 million, or 1.6%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The increase in salaries, wages and employee benefits for the quarter ended March 31, 2012 was less than the increase in block hours for the same period, due primarily to significant weather-related cancellations in our Atlanta, Chicago and Houston hubs during the three months ended March 31, 2011 and improved utilization of the fleet during the three months ended March 31, 2012.

 

Aircraft maintenance expense excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rates, increased $2.2 million, or 2.0%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The increase in maintenance excluding engine overhaul costs was due primarily to the increase in aircraft departures and block hours. We experienced during the three months ended March 31, 2012.  The increase in aircraft maintenance expense was less than the increase in block hours, due primarily to cost reduction efforts at ExpressJet.

 

Our passenger revenues for the three months ended March 31, 2012 were $3.8 million higher than our passenger revenues for the three months ended March 31, 2011, due to our receipt of higher incentive payments.

 

Total available seat miles (“ASMs”) for the three months ended March 31, 2012 increased 4.6%, compared to the three months ended March 31, 2011, primarily due to the addition of 14 additional aircraft since April 1, 2011. During the three months ended March 31, 2012, we generated 9.0 billion ASMs, compared to 8.6 billion ASMs during the three months ended March 31, 2011.

 

Outlook

 

Critical Accounting Policies

 

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2011, which are presented in our Annual Report on Form 10-K for the year ended December 31, 2011.  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, maintenance, aircraft leases, impairment of long-lived assets and intangibles, stock-based compensation expense and fair value. 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 differ, and could differ materially, from such estimates.

 

Results of Operations

 

Our Business Segments

 

For the three months ended March 31, 2012, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet (which reflects the combined operations of Atlantic Southeast and ExpressJet Delaware). On December 31, 2011, we completed the ExpressJet Combination, which ended ExpressJet Delaware’s existence as a separate entity.

 

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		2012			2011			$ Change			% Change
		Amount			Amount			Amount			Percent
Operating Revenues:
SkyWest Airlines Operating Revenue		$	494,911		$	479,618		$	15,293		3.2	%
ExpressJet Operating Revenues		423,629			383,459			40,170			10.5	%
Other Operating Revenues		2,633			2,874			(241		)	(8.4	)%
Total Operating Revenues		$	921,173		$	865,951		$	55,222		6.4	%
Airline Expenses:
SkyWest Airlines Expense		$	485,468		$	469,545		$	15,923		3.4	%
ExpressJet Expense		432,597			413,970			18,627			4.5	%
Other Airline Expense		2,431			2,429			2			0.1	%
Total Airline Expense(1)		$	920,496		$	885,944		$	34,552		3.9	%
Segment profit (loss):
SkyWest Airlines segment profit		$	9,443		$	10,073		$	(630	)	(6.3	)%
ExpressJet segment loss		(8,968		)	(30,511		)	21,543			70.6	%
Other profit		202			445			(243		)	(54.6	)%
Total Segment profit (loss)		$	677		$	(19,993)		$	20,670		103.4	%
Interest Income		1,954			1,966			(12		)	(0.6	)%
Other		(3,853		)	(506		)	(3,347		)	(661.5	)%
Consolidated Loss before taxes		$	(1,222	)	$	(18,533	)	$	17,311		93.4	%

 

(1)                                  Total Airline Expense includes operating expense and interest expense

 

Three Months Ended March 31, 2012 and 2011

 

Operational Statistics.  The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.

 

		For the three months ended March 31,
		2012		2011		% Change
Revenue passenger miles (000)		6,938,913		6,448,156		7.6
Available seat miles (“ASMs”) (000)		9,003,482		8,607,004		4.6
Block hours		556,421		539,910		3.1
Departures		341,140		332,375		2.6
Passengers carried		13,366,246		12,557,060		6.4
Passenger load factor		77.1	%	74.9	%	2.2	Pts
Revenue per available seat mile		10.2	¢	10.1	¢	1.0
Cost per available seat mile		10.2	¢	10.3	¢	(1.0	)
Cost per available seat mile excluding fuel		8.6	¢	8.8	¢	(2.3	)
Fuel cost per available seat mile		1.6	¢	1.5	¢	6.7
Average passenger trip length (miles)		519		514		1.0

 

Revenues. Operating revenues increased $55.2 million, or 6.4%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. For financial reporting purposes, we record these reimbursements as operating revenue. Under the SkyWest Airlines and ExpressJet Delta Connection Agreements and the Continental CPA, we are reimbursed for our engine overhaul expenses as incurred. We also record those engine overhaul reimbursements as operating revenue. The following table summarizes the amount of fuel and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).

 

		For the three months ended March 31,
		2012			2011			$ Change			% Change
Passenger revenues		$	902,356		$	844,476		$	57,880		6.9	%
Less: Fuel reimbursement from major partners		124,292			102,161			22,131			21.7	%
Less: Engine overhaul reimbursement from major partners		49,147			37,933			11,214			29.6	%
Passenger revenue excluding fuel and engine overhauls reimbursements		$	728,917		$	704,382		$	24,535		3.5	%

 

Passenger revenues.  Passenger revenues increased $57.9 million, or 6.9%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. Our passenger revenues, excluding fuel and engine overhaul reimbursements

 

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from major partners, increased $24.5 million, or 3.5%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The increase in passenger revenues, excluding fuel and engine overhaul reimbursements, was primarily due to an increase in block hours of 3.1% during the three months ended March 31, 2012 compared to the three months ended March 31, 2011.  In addition, our passenger revenues for the three months ended March 31, 2012 were $3.8 million higher than our passenger revenues for the three months ended March 31, 2011, due to our receipt of higher incentive payments.

 

Ground handling and other.  Total ground handling and other revenues decreased $2.7 million, or 12.4%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. Revenue attributed to ground handling services for our aircraft is reflected in our consolidated statements of operations and comprehensive loss under the heading “Passenger revenues” and revenue attributed to handling third party aircraft is reflected in our consolidated statements of operations and comprehensive loss under the heading “Ground handling and other.”  The decrease was primarily related to the decrease in our ground handling for other airlines.

 

Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. ASM is a common metric used in the airline industry to measure an airline’s passenger capacity. ASMs reflect both the number of aircraft in an airline’s fleet and the seat capacity for the aircraft in the fleet. As the size of our fleet is the underlying driver of our operating costs, the primary basis for our presentation of the following information on a cost per ASM basis is to discuss significant changes in our costs not proportionate to the relative changes in our fleet size (dollar amounts in thousands).

 

		For the three months ended March 31,
													2012		2011
		2012			2011			$ Change			% Change		Cents Per		Cents Per
		Amount			Amount			Amount			Percent		ASM		ASM
Aircraft fuel		$	147,450		$	126,740		$	20,710		16.3	%	1.6		1.5
Salaries, wages and benefits		290,814			286,148			4,666			1.6	%	3.2		3.3
Aircraft maintenance, materials and repairs		179,636			163,174			16,462			10.1	%	2.0		1.9
Aircraft rentals		84,903			86,422			(1,519		)	(1.8	)%	0.9		1.0
Depreciation and amortization		64,315			63,193			1,122			1.8	%	0.7		0.7
Station rentals and landing fees		43,933			42,626			1,307			3.1	%	0.5		0.5
Ground handling services		35,315			36,853			(1,538		)	(4.2	)%	0.4		0.4
Acquisition related costs		—			1,031			(1,031		)	(100.0	)%	—		—
Other		54,350			59,537			(5,187		)	(8.7	)%	0.7		0.8
Total operating expenses		900,716			865,724			34,992			4.0	%	10.0		10.1
Interest		19,780			20,220			(440		)	(2.2	)%	0.2		0.2
Total airline expenses		$	920,496		$	885,944		34,552			3.9	%	10.2		10.3

 

Fuel.  Fuel costs increased $20.7 million, or 16.3%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The average cost per gallon of fuel increased to $3.63 per gallon during the three months ended March 31, 2012, from $3.33 during the three months ended March 31, 2011. The amount of fuel costs incurred under our revenue-sharing arrangements decreased $1.4 million during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. This decrease was primarily due to a 13.4% decrease in revenue sharing block hours. The following table summarizes the gallons of fuel we purchased directly, and the change in fuel price per gallon on our fuel expense, for the periods indicated:

 

		For the three months ended March 31,
(in thousands, except per gallon amounts)		2012			2011			% Change
Fuel gallons purchased		40,668			38,091			6.8	%
Average price per gallon		$	3.63		$	3.33		9.0	%
Fuel expense		$	147,450		$	126,740		16.3	%

 

Salaries Wages and Employee Benefits.  Salaries, wages and employee benefits increased $4.7 million, or 1.6%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The average number of full-time equivalent employees increased 4.7% to 18,832 for the three months ended March 31, 2012, from 17,979 for the three months ended March 31, 2011, due primarily to an increase in block hours. The increase in salaries, wages and employee benefits was less than the increase in block hours, due primarily to significant weather-related cancellations in our Atlanta, Chicago and Houston hubs during the three months ended March 31, 2011 and improved utilization of the fleet during the three months ended March 31, 2012.

 

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Aircraft maintenance, materials and repairs.  Maintenance costs increased $16.5 million, or 10.1%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The following table summarizes the amount of engine overhauls and engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).

 

		For the three months ended March 31,
		2012			2011			$ Change			% Change
Aircraft maintenance, materials and repairs		$	179,636		$	163,174		$	16,462		10.1	%
Less: Engine overhaul reimbursed from major partners		49,147			37,933			11,214			29.6	%
Less: CRJ 200 engine overhauls reimbursed at fixed hourly rate		17,615			14,609			3,006			20.6	%
Aircraft maintenance excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rate		$	112,874		$	110,632		$	2,242		2.0	%

 

Aircraft maintenance expense, excluding reimbursed engine overhauls and CRJ 200 engine overhauls reimbursed at fixed hourly rates, increased $2.2 million, or 2.0%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The increase in aircraft maintenance expense excluding engine overhaul costs, was due primarily to the increase in aircraft departure and block hours for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase in aircraft maintenance expense was less than the increase in block hours, due primarily to cost reduction efforts at ExpressJet.

 

We recognize engine maintenance expense on our CRJ200 regional jet engines on an as-incurred basis as maintenance expense. Under the SkyWest Airlines and ExpressJet United Express Agreements, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the SkyWest Airlines and ExpressJet United Express Agreements can have a significant impact on our financial results. During the three months ended March 31, 2012, our CRJ200 engine expense under our SkyWest Airlines and ExpressJet United Express Agreements increased $3.0 million compared to the three months ended March 31, 2011. The increase in CRJ 200 engine overhauls reimbursed at a fixed hourly rate was principally due to scheduled engine maintenance events. We anticipate the number of scheduled engine maintenance events experienced during the year ended December 31, 2011 will likely continue through the middle of 2012, after which we expect a reduction in the number of scheduled engine maintenance events.

 

Under our Delta Connection Agreements we are reimbursed for engine overhaul costs by Delta at the time the maintenance event occurs. Under our Continental Express Agreement, we are also reimbursed for actual engine overhaul costs by Continental at the time the expense is incurred. Such reimbursements are reflected as passenger revenue in our consolidated statements of operations and comprehensive loss.

 

Aircraft rentals.  Aircraft rentals decreased $1.5 million, or 1.8%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The decrease was primarily due to aircraft lease renewals at lower rates subsequent to April 1, 2011.

 

Depreciation and amortization.  Depreciation and amortization expense increased $1.1 million, or 1.8%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011.  The increase in depreciation expense was primarily due to the acquisition of four CRJ700s since April 1, 2011 that were financed through long-term debt.

 

Ground handling service.  Ground handling service expense decreased $1.5 million, or 4.2%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The decrease in ground handling service expense was primarily due to a reduction in de-icicing expense.  This reduction was due to two principal factors:  the termination of our AirTran code share agreement and generally better weather experienced during the three months ended March 31, 2012.

 

Acquisition-related costs.  During the three months ended March 31, 2011, we incurred $1.0 million of direct severance, legal and advisor fees associated with Atlantic Southeast’s acquisition of ExpressJet Delaware in November 2010. We did not incur comparable expenses during the three months ended March 31, 2012.

 

Other expenses.  Other expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, decreased $5.2 million, or 8.7%, during the three months ended March 31, 2012, compared to the three months ended March 31, 2011. The decrease in other expenses was primarily due to the reduction in property tax expense due to refunds received during the three months ended March 31, 2012.

 

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