SkyWest Airlines 2012 Annual Report Download

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2012
ANNUAL REPORTANNUAL REPORTANNUAL REPORTANNUAL REPORT
NOTICE OF 2013 ANNUAL MEETING AND PROXY STATEMENT

Table of contents

  • Page 1
    2012 ANNUAL REPORT N O T I C E O F 2 0 1 3 A N N U A L M E E T I N G A N D P R O X Y S TAT E M E N T

  • Page 2
    ... Muskegon Saginaw Rochester Syracuse North Bend Jackson Hole Rochester Manchester Grand Rapids Flint London Albany Madison Buffalo Twin Falls Pocatello Casper Medford Milwaukee Boston Lansing Klamath Falls Elmira Windsor Locks Detroit Cedar Rapids Providence Crescent City Des Moines Moline Chicago...

  • Page 3
    ... jet aircraft operating as American Eagle. We inducted 12 of these aircraft into operations at Los Angeles, CA in November 2012. The remaining 11 aircraft were inducted into operations on February 14, 2013, at Dallas, TX. The aircraft operating from Los Angeles are flown by SkyWest Airlines while...

  • Page 4
    ...our major partners. Forward Thinking We believe our overall strategic positioning has value based on our size and breadth of operations, our experienced and talented people and financial resources that are unmatched in our regional market. We are very pleased to report the progress made during 2012...

  • Page 5
    ... File No. 0-14719 SKYWEST, INC. Incorporated under the Laws of Utah 444 South River Road St. George, Utah 84790 (435) 634-3000 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check...

  • Page 6
    ...and Financial Disclosure ...Item 9A. Controls and Procedures ...Item 9B. Other Information ...PART III Item 10. Directors, Executive Officers and Corporate Governance ...Item 11. Executive Compensation ...Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 7
    ... SkyWest Airlines and ExpressJet, we offer scheduled passenger service with approximately 4,000 daily departures to destinations in the United States, Canada, Mexico and the Caribbean. Substantially all of our flights are operated as Delta Connection, United Express, US Airways Express, American...

  • Page 8
    ...Airways Express flights, 85 were American Eagle flights and 25 were Alaska-coded flights. SkyWest Airlines' operations are conducted principally from airports located in Chicago (O'Hare), Denver, Los Angeles, Houston, Minneapolis, Portland, Seattle, Phoenix, San Francisco and Salt Lake City. SkyWest...

  • Page 9
    ...by US Airways). Major airlines award contract flying to these regional airlines based primarily upon, the following criteria: low cost, financial resources, overall customer service levels relating to on-time arrival and departure statistics, cancellation of flights, baggage handling performance and...

  • Page 10
    ... for code-share partner regional airlines are code-share agreement terms, customer service, aircraft types, fare pricing, flight schedules and markets and routes served. The combined operations of SkyWest Airlines and ExpressJet represent the largest regional airline operation in the United States...

  • Page 11
    ...for the code-share partner. For example, SkyWest Airlines flies out of Chicago (O'Hare), Washington Dulles, Denver, Houston, Los Angeles and San Francisco as United Express, out of Salt Lake City and Minneapolis as Delta Connection, out of Seattle and Portland as an Alaska carrier, out of Phoenix as...

  • Page 12
    ... Airlines was operating more than 500 Delta Connection flights per day between Salt Lake City, Detroit or Minneapolis and outlying destinations. Additionally, as of December 31, 2012, SkyWest Airlines operated eight Brasilia turboprops and nine CRJ200 under the Delta code under a revenue-sharing...

  • Page 13
    ... the Delta Connection flights. Costs directly reimbursed by Delta under the ExpressJet Delta Connection Agreement include costs related to fuel, ground handling, and aircraft engine maintenance and aircraft ownership. The ExpressJet Delta Connection Agreement also provides for incentive compensation...

  • Page 14
    ... 1,050 United Express flights per day between Chicago (O'Hare), Denver, Houston, Los Angeles, San Francisco or Washington Dulles and designated outlying destinations. Generally, under the SkyWest Airlines United Express Agreement, United retains all air fares, cargo rates, mail charges and...

  • Page 15
    ... • if SkyWest Airlines operates, subject to certain exceptions, any additional regional jets or turboprop aircraft pursuant to a marketing or code-share relationship with any party other than United to provide hub service at United's hubs in Chicago (O'Hare), Denver, San Francisco, Seattle/Tacoma...

  • Page 16
    ... Airlines operated 12 CRJ200s under the SkyWest Airlines American Agreement, flying approximately 85 American Eagle flights per day between Los Angeles and designated outlying destinations. Generally, under the SkyWest Airlines American Agreement, American retains all air fares, cargo rates, mail...

  • Page 17
    ... the SkyWest Airlines Alaska Capacity Purchase Agreement, flying approximately 25 Alaska flights per day between Seattle or Portland and designated outlying destinations. Generally, under the SkyWest Airlines Alaska Capacity Purchase Agreement, Alaska retains all air fares, cargo rates, mail charges...

  • Page 18
    ..., as of December 31, 2012, SkyWest Airlines operated one CRJ200s under a revenue-sharing arrangement. Generally, under the SkyWest Airlines US Airways Express Agreement, US Airways retains all air fares, cargo rates, mail charges and other revenues associated with each flight. In exchange for...

  • Page 19
    ...2012, SkyWest Airlines scheduled 90 daily flights as a US Airways Express carrier to or from Phoenix International Airport. As of December 31, 2012, SkyWest Airlines scheduled 85 daily flights as an American Eagle carrier to or from Los Angeles International Airport. As of December 31, 2012, SkyWest...

  • Page 20
    ...their union affiliations prior to the ExpressJet Combination. Approximate Number of Active Employees Represented Employee Group Representatives Status of Agreement Atlantic Southeast Pilots ...Atlantic Southeast Flight Attendants ... 1,620 Air Line Pilots Association International International...

  • Page 21
    ... and affect our financial performance. As of December 31, 2012, SkyWest and SkyWest Airlines collectively employed 9,300 full-time equivalent employees, consisting of 5,377 pilots and flight attendants, 2,441 customer service personnel, 1,281 mechanics and other maintenance personnel, and 201...

  • Page 22
    ... 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 Related to Our Operations We are highly dependent on Delta and United. If any of our code-share agreements with Delta or United are terminated...

  • Page 23
    ...including airport and terminal facilities and operations, information technology support, ticketing and reservations, scheduling, dispatching, fuel purchasing and ground handling services. If Delta or United were to cease any of these systems, close any of these facilities or no longer provide these...

  • Page 24
    ... our business. 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. For example, during the year ended December 31, 2012, our salary, wage and benefit costs...

  • Page 25
    ...accomplished in a ''fair and equitable'' manner consistent with the process set forth in the Allegheny-Mohawk Labor Protective Provisions or internal union merger policies, if applicable. Employee dissatisfaction with the results of the seniority integration may lead to litigation that in some cases...

  • Page 26
    .... The financial condition of Delta and United will continue to pose risks for our operations. Serial bankruptcies are not unprecedented in the commercial airline industry, and Delta and/or United could file for bankruptcy, in which case our code-share agreements could be subject to termination under...

  • Page 27
    ... our major partners could have an adverse effect on our operating results and financial condition. SkyWest, SkyWest Airlines and ExpressJet are parties to code-share agreements with Delta and United. For the year ended December 31, 2012, approximately 97% of our ASMs were attributable to flights we...

  • Page 28
    ... fleet, or to make required debt service payments related to our existing 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, results of operations, and the price of our common stock...

  • Page 29
    ... International Airport), Orlando and Salt Lake City. Under the SkyWest Airlines United Express Agreement, growth is restricted in Chicago (O'Hare International Airport), Denver, San Francisco, Seattle/Tacoma and Washington D.C. (Dulles International Airport). Due to the fluctuations in our schedules...

  • Page 30
    ... fuel prices to our pro-rate customers by increasing fares our financial performance would be adversely impacted. The Airline Safety and Pilot Training Improvement Act of 2009 could negatively affect our operations and our financial condition. Prompted by the crash of a Colgan aircraft in 2009, near...

  • Page 31
    ...our aircraft under our code-share agreements would adversely impact our financial results. The majority of our code-share agreements set forth minimum levels of flight operations which our major partners are required to schedule for our operations and we are required to provide. These minimum flight...

  • Page 32
    ... impact on our operations. We currently operate primarily through hubs in Atlanta, Los Angeles, Houston, Minneapolis, Detroit, San Francisco, Salt Lake City, Chicago, Denver, Houston, Washington, D.C., Newark, Cleveland and the Pacific Northwest. Nearly all of our flights either originate from...

  • Page 33
    ... to air travel in the affected areas and adversely affected airlines operating in the region, including ExpressJet. We operate a significant number of flights to and from airports with particular weather difficulties, including Atlanta, Salt Lake City, Chicago, San Francisco, Newark and Denver...

  • Page 34
    ... management and operating personnel. 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-man insurance on any of our executive officers...

  • Page 35
    ...between United and Continental in October 2010, Delta and Northwest Airlines, Inc. in November 2008 and America West Airlines and US Airways in September 2005, as well as the merger of Southwest and AirTran Airways, Inc. (''AirTran'') during 2011. We understand that several airlines are currently in...

  • Page 36
    ... 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; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training...

  • Page 37
    ... 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...

  • Page 38
    ... jet impractical. As of December 31, 2012, SkyWest Airlines operated 42 Brasilia turboprops out of Los Angeles, San Francisco, Salt Lake City, Seattle/Tacoma and Portland. SkyWest Airlines' Brasilia turboprops are generally used in its California markets, which are characterized by high frequency...

  • Page 39
    ... in Palm Springs, California. • SkyWest Airlines leases a 131,300 square foot facility at the Salt Lake International Airport. This facility consists of a 58,400 square-foot aircraft maintenance hangar and a 72,900 square-foot training and office facility. In January 2002, SkyWest Airlines entered...

  • Page 40
    ... unrelated aircraft maintenance provider; however ExpressJet remains obligated for payment and other obligations of the lease under the lease agreement which is scheduled to expire on October 2, 2016. • ExpressJet leases a 57,000 square-foot training center and support space in Houston, Texas. The...

  • Page 41
    ... 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. On February 1, 2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton...

  • Page 42
    ... 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 Airlines and Atlantic Southeast filed their...

  • Page 43
    ... our common stock is Zions First National Bank, Salt Lake City, Utah. Dividends During 2012 and 2011, our Board of Directors declared regular quarterly dividends of $0.04 per share. Securities Authorized for Issuance Under Equity Compensation Plans The following table contains information regarding...

  • Page 44
    ... date. Effective September 14, 2012, our Board of Directors adopted the SkyWest, Inc. 2012 Stock Repurchase Plan (the ''Stock Repurchase Plan''), which provides for the repurchase of up to 6,514,266 shares of common stock, from time to time in open market or privately negotiated transactions, as...

  • Page 45
    ....: Allegiant Travel Co.; AMR Corp/DE; Delta Air Lines, Inc.; Great Lakes Aviation, LTD.; Gulfstream Intl. Group Inc.; Hawaiian Holdings, Inc.; JetBlue Airways, Corp.; Pinnacle Airlines, Corp.; Republic Airways, Holdings Inc.; SkyWest, Inc. Southwest Airlines, Spirit Airlines Inc.; United Continental...

  • Page 46
    ... and Analysis of Financial Condition and Results of Operations,'' and our consolidated financial statements and related notes included elsewhere in this Report. Selected Consolidated Financial Data (amounts in thousands, except per share data): 2012 2011 Year Ended December 31, 2010(2) 2009...

  • Page 47
    ... 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 December 31, 2012, we operated a combined fleet of 744 aircraft consisting of...

  • Page 48
    ...-fee arrangements. Under our United, American, US Airways and Alaska flying contracts, a portion of our compensation is based upon fixed hourly rates, which is intended to compensate us for engine maintenance costs (''Fixed-Rate Engine Contracts''). Under the compensation structure for our Delta...

  • Page 49
    .... 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, flight departures and other operating measures. Financial Highlights We had revenues of...

  • Page 50
    ... the American Agreements on November 14, 2012, with 12 aircraft that are being flown out of Los Angeles International Airport by SkyWest Airlines. The other 11 aircraft were placed into service by ExpressJet on February 14, 2013 and are operated out of Dallas/Fort Worth International Airport. Total...

  • Page 51
    ... Passenger and ground handling revenues are recognized when service is provided. Under our contract and pro-rate flying agreements with our code-share partners, revenue is considered earned when the flight is completed. Our agreements with our code-share partners contain certain provisions...

  • Page 52
    ... as of December 31, 2012. Stock-Based Compensation Expense We estimate the fair value of stock options as of the grant date using the Black-Scholes option pricing model. We use historical data to estimate option exercises and employee termination in the option pricing model. The expected term of...

  • Page 53
    ... utilizing a discounted cash flow model. Results of Operations Our Business Segments For the year ended December 31, 2012, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet. 2012 Amount 2011 Amount $ Change Amount % Change...

  • Page 54
    ... compensation negotiations with our major partners. • ExpressJet salaries, wages and employee benefits decreased $7.8 million primarily due to integration benefits and aircraft scheduling inefficiencies experienced in 2011 that were not replicated during 2012. • Aircraft maintenance expense...

  • Page 55
    ...Change Amount % Change Percent 2012 Cents Per ASM 2011 Cents Per ASM Aircraft fuel ...Salaries, wages and benefits ...Aircraft maintenance, materials and repairs ...Aircraft rentals ...Depreciation and amortization . Station rentals and landing fees . Ground handling services ...Acquisition-related...

  • Page 56
    ...) For the year ended December, 2012 2011 % Change Fuel gallons purchased ...Average price per gallon ...Fuel expense ... 118,765 $ 3.59 $426,387 170,332 $ 3.48 $592,871 (30.3)% 3.2% (28.1)% Salaries Wages and Employee Benefits. Salaries, wages and employee benefits increased $16.6 million, or...

  • Page 57
    ...from the termination of SkyWest Airlines' AirTran code share agreement during the year ended December 31, 2011. Acquisition-related costs. During the year ended December 31, 2011, we incurred $5.8 million of direct severance, legal and advisor fees associated with Atlantic Southeast's acquisition of...

  • Page 58
    ... diluted share, for the year ended December 31, 2011. Our Business Segments For the year ended December 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...

  • Page 59
    ..., the 2010 amounts represent Atlantic Southeast's operating results and 50 days of ExpressJet Delaware's operating results. 2011 Amount 2010 Amount $ Change Amount % Change Percent Operating Revenues: SkyWest Airlines operating revenue ...ExpressJet operating revenues ...Other operating revenues...

  • Page 60
    ... Express Agreement, United pays for more costs directly (such as station rents and aircraft ownership) and as such, there are no associated reimbursements recognized as revenue on costs paid directly by United. Under our other code-share agreements, the majority of those costs are paid by SkyWest...

  • Page 61
    ... fourth quarter of 2010, SkyWest Airlines and Atlantic Southeast reached an agreement with Delta on contractual rates satisfying the second-lowest rate provision and agreed on rates through December 31, 2015. Delta additionally waived its right to require that the contractual rates payable under the...

  • Page 62
    ... % Change Percent 2011 Cents Per ASM 2010 Cents Per ASM Aircraft fuel ...Salaries, wages and benefits ...Aircraft maintenance, materials and repairs ...Aircraft rentals ...Depreciation and amortization ...Station rentals and landing fees ...Ground handling services ...Acquisition related costs...

  • Page 63
    ... ExpressJet Merger. Without the expansion of the ExpressJet Delaware operations, station rentals and landing fees would have decreased, primarily due to our major partners paying for certain station rents and landing fees directly to the applicable airports. Ground handling service. Ground handling...

  • Page 64
    ... Merger and integration related costs, including advisory fees to assist Atlantic Southeast and ExpressJet in their efforts to operate under a single operating certificate. Other expenses. Other expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training...

  • Page 65
    ...2010. Liquidity and Capital Resources 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, 2012 and 2011, and our total cash and marketable...

  • Page 66
    ... of credit. As of December 31, 2012 and 2011, SkyWest Airlines had no amount outstanding under the facility. The facility is scheduled to expire on March 31, 2013 and has a fixed interest rate of 4.0%. As of December 31, 2012, we had $75.1 million in letters of credit and surety bonds outstanding...

  • Page 67
    ... relating to our aircraft fleet. At December 31, 2012, we had 568 aircraft under lease with remaining terms ranging from one to 13 years. Future minimum lease payments due under all long-term operating leases were approximately $2.2 billion at December 31, 2012. Assuming a 4.7% discount rate...

  • Page 68
    ... flying arrangements, United, Delta, Alaska, American and US Airways 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 pro-rate operations. For the year ended December 31, 2012, approximately...

  • Page 69
    ...December 31, 2012, we had investments in auction rate securities valued at...financial statements appearing in Item 8 of this Report. 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...

  • Page 70
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), SkyWest, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of...

  • Page 71
    SKYWEST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS December 31, 2012 December 31, 2011 CURRENT ASSETS: Cash and cash equivalents Marketable securities ...Restricted cash ...Income tax receivable ...Receivables, net ...Inventories, net ...Prepaid aircraft rents ...

  • Page 72
    ...) (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY December 31, 2012 December 31, 2011 CURRENT LIABILITIES: Current maturities of long-term debt . Accounts payable ...Accrued salaries, wages and benefits . Accrued aircraft rents ...Taxes other than income taxes ...Income tax payable...

  • Page 73
    ... per share amounts) Year Ended December 31, 2011 2010 2012 OPERATING REVENUES: Passenger ...Ground handling and other ...Total operating revenues ...OPERATING EXPENSES: Salaries, wages and benefits ...Aircraft maintenance, materials and repairs Aircraft fuel ...Aircraft rentals ...Depreciation...

  • Page 74
    ......Sale of common stock under employee stock purchase plan ...Stock based compensation expense related to the issuance of stock options and restricted stock ...Tax benefit from exercise of common stock options . . Treasury stock purchases ...Cash dividends declared ($0.16 per share) ...- - - 392 487...

  • Page 75
    ... (In thousands) Year Ended December 31, 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ...Stock based compensation expense ...Loss (gain) on sale of property...

  • Page 76
    ...American''). As of December 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, a US Airways...

  • Page 77
    ... 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 December 31, 2012, ExpressJet operated as a Delta Connection carrier in Atlanta and Detroit and a United Express...

  • Page 78
    ... CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (1) Nature of Operations and Summary of Significant Accounting Policies (Continued) identification method, is recognized in other income and expense. The Company's position in marketable securities as of December 31, 2012 and 2011 was...

  • Page 79
    ...the issued and outstanding capital stock of Atlantic Southeast and recorded an intangible asset of approximately $33.7 million relating to the acquisition. The intangible asset is being amortized over fifteen years under the straight-line method. As of December 31, 2012 and 2011, the Company had $16...

  • Page 80
    ... 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. Delta Connection Agreements SkyWest Airlines and...

  • Page 81
    ...DECEMBER 31, 2012 (1) Nature of Operations and Summary of Significant Accounting Policies (Continued) 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...

  • Page 82
    ... FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (1) Nature of Operations and Summary of Significant Accounting Policies (Continued) Company, SkyWest Airlines and Atlantic Southeast of a dispute under the Delta Connection Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast...

  • Page 83
    ... aircraft flown under the American Agreement have been removed from flying contracts SkyWest Airlines and ExpressJet had with another major partner. The term of each agreement is four years. The American Agreements provide for SkyWest Airlines and ExpressJet to be compensated primarily on a fee-per...

  • Page 84
    ... partners. Under the Company's code-share agreements with Delta, United, Alaska, US Airways and American, the compensation structure generally consists of a combination of agreed-upon rates for operating flights and direct reimbursement for other certain costs associated with operating the aircraft...

  • Page 85
    SKYWEST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (1) Nature of Operations and Summary of Significant Accounting Policies (Continued) Net Income (Loss) Per Common Share Basic net income (loss) per common share (''Basic EPS'') excludes dilution ...

  • Page 86
    ... of Operations and Summary of Significant Accounting Policies (Continued) Joint Stock Company, an airline operating in Vietnam (''Air Mekong'') (see note 8), net of tax, for the periods indicated (in thousands): Year Ended December 31, 2012 2011 2010 Net Income (Loss) ...Proportionate share of...

  • Page 87
    ... segment. 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 years ended December 31, 2012, 2011 and 2010 (in thousands). Year ended December 31,2012 SkyWest Airlines...

  • Page 88
    ..., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (2) Segment Reporting (Continued) Year ended December 31,2010 SkyWest Airlines ExpressJet Other Consolidated Operating revenues ...Operating expense (income) ...Depreciation and amortization expense...

  • Page 89
    ... amounts otherwise payable to SkyWest Airlines under the existing United Express Agreement for a maximum period of 30 days. The maximum deferral amount is $49 million and any amounts deferred accrue a deferral fee of 8%, payable weekly. As of December 31, 2012 and 2011, $49 million was deferred...

  • Page 90
    SKYWEST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (5) Income Taxes The provision for income taxes includes the following components (in thousands): Year ended December 31, 2012 2011 2010 Current tax provision (benefit): Federal ...State ......

  • Page 91
    ... As of December 31, 2012 2011 Deferred tax assets: Intangible Asset ...Accrued benefits ...Net operating loss carryforward AMT credit carryforward ...Deferred aircraft credits ...Accrued reserves and other ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... $ 37,031...

  • Page 92
    ... payments. Total rental expense for non-cancelable aircraft operating leases was approximately $333.6 million, $346.5 million and $311.9 million for the years ended December 31, 2012, 2011 and 2010, respectively. The minimum rental expense for airport station rents was approximately $43.5 million...

  • Page 93
    ... 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. On February 1, 2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton...

  • Page 94
    ... 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...

  • Page 95
    ... Number of Active Employees Represented Employee Group Representatives Status of Agreement Atlantic Southeast Pilots ... 1,620 Atlantic Southeast Flight Attendants ... 940 Atlantic Southeast Flight Controllers ...Atlantic Southeast Mechanics ... 70 420 Atlantic Southeast Stock Clerks...

  • Page 96
    SKYWEST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (7) Fair Value Measurements The Company holds certain assets that are required to be measured at fair value in accordance with United States GAAP. The Company determined fair value of these ...

  • Page 97
    ...discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing consolidated financial statements, these securities were categorized as Level 3 securities. The Company's ''Marketable Securities'' classified as Level 2 primarily utilize broker quotes...

  • Page 98
    SKYWEST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (8) Investment in Other Companies (Continued) On July 12, 2012, the Company sold its interest in TRIP for a price of $42 million. The purchase price is scheduled to be paid in three installments ...

  • Page 99
    ... approved the adoption of the SkyWest Inc. 2010 Long-Term Incentive Plan, which provides for the issuance of up to 5,150,000 shares of common stock to the Company's directors, employees, consultants and advisors (the ''2010 Incentive Plan''). The 2010 Incentive Plan provides for awards in the form...

  • Page 100
    ... to the Company's directors with a weighted average grant-date fair value of $13.06. The following table summarizes the restricted stock activity as of December 31, 2012, 2011 and 2010: Number of Shares Weighted-Average Grant-Date Fair Value Non-vested Granted . . Vested ...Cancelled . Non-vested...

  • Page 101
    ... 31, 2012, 2011 and 2010 was $191,000, $31,000 and $19,000, respectively. The following table summarizes the status of the Company's non-vested stock options as of December 31, 2012: Number of Shares Weighted-Average Grant-Date Fair Value Non-vested Granted . . Vested ...Cancelled . shares ... at...

  • Page 102
    ... the years ended December 31, 2012, 2011 and 2010, respectively. ExpressJet and Atlantic Southeast Retirement Plan ExpressJet (formerly Atlantic Southeast) sponsors the Atlantic Southeast Airlines, Inc. Investment Savings Plan (the ''Atlantic Southeast Plan''). Employees who have completed 90 days...

  • Page 103
    ... terminate their participation in the 2009 Stock Purchase Plan at anytime upon written notice. The following table summarizes purchases made under the 2009 Employee Stock Purchase Plans during the years ended December 31, 2012, 2011 and 2010: Year Ended December 31, 2012 2011 2010 Number of shares...

  • Page 104
    .... Effective September 14, 2012, the Company's Board of Directors adopted the SkyWest, Inc. 2012 Stock Repurchase Plan (the ''Stock Repurchase Plan''), which provides for the repurchase of up to 6,514,266 shares of common stock, from time to time in open market or privately negotiated transactions...

  • Page 105
    SKYWEST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) DECEMBER 31, 2012 (13) Quarterly Financial Data (Unaudited) (Continued) Year Ended December 31, 2011 Second Third Fourth Quarter Quarter Quarter First Quarter Year Operating revenues ...Operating income ...Net ...

  • Page 106
    ... our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control During the three months ended December 31, 2012, we did not make any changes in our internal control over financial...

  • Page 107
    ... of Independent Registered Public Accounting Firm The Board of Directors and Stockholders SkyWest, Inc. We have audited SkyWest, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued...

  • Page 108
    ... Annual Meeting of Shareholders scheduled for May 7, 2013. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2012, pursuant to Regulation 14A of the Exchange Act. Headings in Proxy Statement ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE...

  • Page 109
    ... Delta Air Lines, Inc. United Express Agreement dated September 9, 2003, between United Air Lines, Inc., and SkyWest Airlines, Inc. Stock Option Agreement dated January 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc. Lease Agreement dated December 1,1989 between Salt Lake City Corporation...

  • Page 110
    ... 12, 2010, by and among ExpressJet Airlines, Inc. and Continental Airlines, Inc. Aircraft Purchase Agreement between Mitsubishi Aircraft Corporation and SkyWest Inc. Subsidiaries of the Registrant Consent of Independent Registered Public Accounting Firm Certification of Chief Executive Officer...

  • Page 111
    ... to Registrant's Form 10-K filed on February 25, 2010 (12) Incorporated by reference to the exhibits to Registrant's Form 8-K filed on November 18, 2010, as amended (13) Incorporated by reference to the exhibits to Registrant's Form 8-K filed on December 13, 2012, as amended (14) Incorporated...

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    ... audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Salt Lake City, Utah February 15, 2013 108

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    SKYWEST, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2012, 2011 and 2010 (Dollars in thousands) Balance at Beginning of Year Additions Charged to Costs and Expenses Description Deductions Balance at End of Year Year Ended December 31, 2012...

  • Page 114
    ...duly authorized, on February 15, 2013. SKYWEST, INC. By: /s/ ERIC J. WOODWARD Eric J. Woodward Chief Accounting Officer (Principal Accounting Officer) 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...

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    Name Capacities Date /s/ ROBERT G. SARVER Robert G. Sarver Director February 15, 2013 /s/ MARGARET S. BILLSON Margaret S. Billson Director February 15, 2013 /s/ HENRY J. EYRING Henry J. Eyring Director February 15, 2013 /s/ JAMES L. WELCH James L. Welch Director February 15, 2013 111

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    SkyWest, Inc. 444 South River Road ɀ St. George, UT 84790 March 19, 2013 Dear Shareholder: You are invited to attend the Annual Meeting of Shareholders of SkyWest, Inc. scheduled to be held at 11:00 a.m., Tuesday, May 7, 2013, at our headquarters located at 444 South River Road, St. George, Utah, ...

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  • Page 119
    ...Inc. 444 South River Road ɀ St. George, UT 84790 NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS OF SKYWEST, INC. Date: Time: Place: Tuesday, May 7, 2013 11:00 a.m., Mountain Daylight Time (MDT) SkyWest, Inc. Headquarters 444 South River Road St. George, Utah 84790 1. 2. 3. To elect eight directors of...

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  • Page 121
    ... of Directors ...Executive Officers ...Corporate Governance ...Meetings and Committees of the Board ...Compensation Discussion and Analysis ...Compensation Committee Report ...Executive Compensation ...Certain Relationships and Related Transactions ...Director Compensation ...Director Summary...

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  • Page 123
    ... Notice of Annual Meeting, proxy card and the Annual Report to Shareholders of SkyWest, Inc. (the ''Company'' or ''SkyWest'') are being mailed on or about March 19, 2013. The Board of Directors of the Company (the ''Board'') is soliciting your proxy to vote your shares at the Annual Meeting of...

  • Page 124
    ... revoke your proxy before the time of voting at the Meeting in any of the following ways: • by mailing a revised proxy card to the Chief Financial Officer and Treasurer of the Company; • by changing your vote on the Internet website; • by using the telephone voting procedures; or • by voting...

  • Page 125
    ..., the 2012 Annual Report to Shareholders and a form of proxy card or voting instruction card. All shareholders who do not receive a Notice will receive a paper copy of the proxy materials by mail. The Company believes this process will allow it to provide its shareholders with the information they...

  • Page 126
    ...Sarver • Steven F. Udvar-Hazy • James L. Welch The Board Recommends That Shareholders Vote FOR All Eight Nominees Listed Below. Nominees for Election as Directors At the Meeting, the Company proposes to elect eight directors to hold office until the 2014 Annual Meeting of Shareholders and until...

  • Page 127
    ...-time equivalent Company employees. Mr. Atkin has a deep knowledge and understanding of the Company, SkyWest Airlines and ExpressJet, as well as the regional airline industry. Mr. Atkin also performs an extremely valuable role as the Chairman of the Board, providing critical leadership and direction...

  • Page 128
    ...: 66 2012 (Also served as a director of the Company from 2003 until 2009) Chairman of the Audit and Finance Committee; Member of the Safety and Compliance Committee; Audit Committee Financial Expert. Andersen Alumni Professor at Brigham Young University Mr. Albrecht, a certified public accountant...

  • Page 129
    ... the Republic of Ghana, and Chief Executive Officer of Euro Sky, a company organized to explore the feasibility of operating a regional airline in Austria. From March 1991 to January 1993, Mr. Atkin was Director of Business and Economic Development for the State of Utah. The Board's nomination of Mr...

  • Page 130
    ... division which is an international provider of aviation flight support and aftermarket services. Previously she was the Chief Operations Officer and later the President, Airplane Division, of Eclipse Aviation Corporation (''Eclipse''), a manufacturer of small business jets, during its development...

  • Page 131
    ...Compensation Committee; Member of the Audit and Finance Committee Advancement Vice President at Brigham Young University Idaho Mr. Eyring has served in various positions of administration at Brigham Young University Idaho...the Company's operations. His thoughtful application of business and legal ...

  • Page 132
    ...Chief Executive Officer of California Bank and Trust from 1995 to 2001. Prior to 1995, he served as the President of National Bank of Arizona. The Board nominated Mr. Sarver, in part, because of his significant knowledge in the areas of financial analysis, business strategy and investment management...

  • Page 133
    ... of the Compensation Committee; Member of Safety and Compliance Committee; Lead Director Chairman and Chief Executive Officer of Air Lease Corporation Mr. Udvar-Hazy has been engaged in aircraft leasing and finance for over 40 years. Prior to his current engagement with Air Lease Corporation, which...

  • Page 134
    ... Nominating and Corporate Governance Committee; Member of the Compensation Committee. Chief Executive Officer of YRC Worldwide Inc. Since July 2011, Mr. Welch has served as the Chief Executive Officer of YRC Worldwide Inc., a provider of global, national and regional ground transportation services...

  • Page 135
    ...'s operations, including aircraft flight operations, maintenance and customer service. He also oversees SkyWest Airline's operational relationships with American, Delta, United, U.S. Airways and Alaska. Mr. Childs was initially employed with the Company in January 2001 as Senior Director/Controller...

  • Page 136
    ... Board will have a majority of directors who meet the criteria for independence as required by The Nasdaq Global Select Market. Director Qualifications Criteria for Membership The Company's Nominating and Corporate Governance Committee is responsible for annually reviewing with the Board the desired...

  • Page 137
    ... Market, including those relating to director independence and to compensation of Audit & Finance Committee members. CEO Evaluation and Management Succession The Nominating and Corporate Governance Committee conducts an annual review to assess the performance of the Company's Chief Executive Officer...

  • Page 138
    ... mail: Board of Directors or Name of Individual Director(s) c/o Chief Financial Officer and Treasurer SkyWest, Inc. 444 South River Road St. George, UT 84790 Code of Ethics The Company has adopted a Code of Ethics for Directors and Senior Executive Officers, which is available on the Company's Web...

  • Page 139
    ...CEO succession and the Company's compensation policies and related risks by regular reviews with management and the Compensation Committee's outside advisors. The Board and the Safety and Compliance Committee monitor management's administration of airline flight operations safety and compliance with...

  • Page 140
    ... execution of its responsibilities: (1) Audit and Finance, (2) Compensation, (3) Nominating and Corporate Governance and (4) Safety and Compliance. All the committees are comprised solely of non-employee, independent directors as defined by The Nasdaq Global Select Market listing standards. Charters...

  • Page 141
    ... the duties imposed on the Compensation Committee by the terms of those plans; • Review and approve any severance or termination payments proposed to be made to any current or former officer of the Company; • Prepare and issue the report of the Compensation Committee required by the rules of the...

  • Page 142
    ... information and provide confirmation of the candidate's consent to serve as a director. This information should be addressed to Jerry C. Atkin, Chairman of the Board and Chief Executive Officer of the Company, 444 South River Road, St. George, Utah 84790. As contemplated by the Company's Corporate...

  • Page 143
    ... during the year ended December 31, 2012, was an officer or employee of the Company in 2012 or any time prior thereto. None of the members of the Compensation Committee during the year ended December 31, 2012, had any relationship with the Company requiring disclosure under Item 404 of Regulation...

  • Page 144
    ... Financial Officer and Treasurer of the Company, SkyWest Airlines and ExpressJet (the ''CFO''); • Russell A. Childs, President and Chief Operating Officer of SkyWest Airlines; and • Bradford R. Holt, President and Chief Operating Officer of ExpressJet. The compensation discussion and analysis...

  • Page 145
    ... compensation consultants. No Employment and Severance Agreements. The Executives do not have employment, severance or change-in-control agreements, although the vesting of stock options, restricted stock, restricted stock units and performance units generally is accelerated upon a change in control...

  • Page 146
    ... at other airlines. Salary adjustments are considered annually and influenced by growth of the Company's operations, individual performance, changes in responsibility, changes in cost of living, and other factors. The salaries of the Executives are set forth in the Summary Compensation Table set...

  • Page 147
    ... of Messrs. Atkin, Rich and Kraupp, the applicable net income and other financial targets, with the exception of a designated amount of net income at the Company level, were based on the designated amounts of both operating subsidiaries SkyWest Airlines (weighted two thirds) and ExpressJet (weighted...

  • Page 148
    ... price. Accordingly, stock options provide compensation only if the underlying share price increases over the option term and the Executive's employment continues through the vesting date. The size of the grant for each Executive is calculated by determining the number of shares with a theoretical...

  • Page 149
    ...stock unit component is to support continued employment through volatile economic and stock market conditions, to manage dilution overhang, and to align officers' interests with maintaining shareholder value already created. The Committee believes this approach mitigates the incentive for Executives...

  • Page 150
    ...,600 $ 98,280 (1) Number of performance units if 100% of target achieved. See table above for performance units actually earned for 2012. Retirement Benefits. The Company and SkyWest Airlines sponsor a 401(k) retirement plan for their eligible employees, including the Executives other than Mr. Holt...

  • Page 151
    ... to the Summary Compensation Table applicable to the heading ''All Other Compensation'' below, are reasonable, competitive and consistent with overall executive compensation objectives. Those benefits consist primarily of employer-paid premiums on health, dental and eye insurance, a personal...

  • Page 152
    ... executive officers. Stock options and 2012 long-term performance units awarded to the Executives during 2012 were intended to constitute ''qualified performance-based compensation'' under Section 162(m) of the Code. The Company's 2012 restricted stock unit grants and 2012 performance-based annual...

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    COMPENSATION COMMITTEE REPORT The Compensation Committee has reviewed the foregoing compensation discussion and analysis and discussed with the Company's management the information set forth herein. Based on such review and discussions with management, the Compensation Committee recommended to the ...

  • Page 154
    ... $254,000 President and Chief 2011 $254,000 Operating Officer- 2010 $247,200 SkyWest Airlines, Inc. Bradford R. Holt ...2012 $254,000 President and Chief 2011 $254,000 Operating Officer- 2010 $231,800 ExpressJet Michael J. Kraupp ...2012 $175,500 Chief Financial Officer 2011 $172,000 And Treasurer...

  • Page 155
    ...for 2012; $5,103 in employer-paid health insurance premiums; $5,309 for personal use of the Company's recreational equipment; and $1,108 in discretionary matching contributions under the SkyWest 401(k) Plan. (17) All other compensation for Mr. Kraupp for 2011 consists of: $39,543 of employer credits...

  • Page 156
    ... to the 2010 Long-Term Incentive Plan. Each Executive's target level of performance unit grant is listed in column (c). The shares underlying each Executive's stock option grant are listed in column (f). The number of shares of Company common stock underlying each restricted stock unit award earned...

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    Outstanding Equity Awards at Year-End This table provides information on the year-end 2012 holdings of stock options and other stock awards (restricted stock and restricted stock units) by the Executives. (b) Number of Securities Underlying Unexercised Options Exercisable (#) 104,000 188,000 61,100 ...

  • Page 158
    ...and earns a rate of return based upon certain notational, self-directed investment options offered under the applicable plan. Each Executive's account under the SkyWest Deferred Compensation Plan and ExpressJet Deferred Compensation Plan, as applicable, is also credited with a discretionary employer...

  • Page 159
    ...the SkyWest Deferred Compensation Plan, and the annual rate of return for the calendar year ended December 31, 2012: Name of Fund Rate of Return NVIT Money Market Fund Class I ...PIMCO VIT Total Return Admin ...PIMCO VIT Real Return Admin ...Invesco Van Kampen V.I. Growth & Income I . Dreyfus Stock...

  • Page 160
    ... ExpressJet Deferred Compensation Plan, and the annual rate of return for the calendar year ended December 31, 2012: Name of Fund Rate of Return American Century Equity Income-Inst ...American Century International Growth-Inst ...American Century Premium Money Market-Inv ...American Century Short...

  • Page 161
    ... stock options, unvested restricted stock, unvested restricted stock units or performance unit awards, and if the value of such acceleration equals or exceeds three times the Executive's average W-2 compensation with the Company for the five taxable years preceding the year of the change in control...

  • Page 162
    ... Related Party Jerry C. Atkin, the Company's Chairman of the Board and Chief Executive Officer, serves on the Board of Directors of Zions. The Company maintains a line of credit and certain bank accounts with Zions. Zions is an equity participant in leveraged leases on ten aircraft operated...

  • Page 163
    ...of its directors. Each director is encouraged to own at least 8,000 shares of Common Stock. Cash Compensation Paid to Directors For the year ended December 31, 2012, all directors who were not employees of the Company received an annual cash retainer of $33,000 and attendance fees of $1,800 for each...

  • Page 164
    ... SUMMARY COMPENSATION TABLE The table below summarizes the compensation paid by the Company to its non-employee directors for the year ended December 31, 2012. (a) (b) (c) (d) (e) Change in Pension Value and Deferred Compensation Earnings ($) (f) (g) Name(1) Fees Earned or Paid in Cash ($) Stock...

  • Page 165
    ... OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Security Ownership of Directors and Executive Officers The following table sets forth the beneficial ownership of the Common Stock as of March 4, 2013, for each director and nominee for director, each Executive, and by all directors (including nominees) and...

  • Page 166
    ... Common Stock Percent of Shares Class Name Tradewinds Global Investors, LLC ...2049 Century Park East Los Angeles, CA 90067 Dimensional Fund Advisors LP ...6300 Bee Cave Road Austin, TX 78746 Black Rock, Inc...40 East 52nd Street New York, NY 10022 Franklin Resources Inc...One Franklin Parkway San...

  • Page 167
    ... goals, while at the same time avoiding the encouragement of unnecessary or excessive risk-taking. The Board encourages you to review in detail the Compensation Discussion and Analysis beginning on page 22 of this Proxy Statement and the executive compensation tables beginning on page 31 of...

  • Page 168
    ... public accounting firm (independent auditors) to examine the consolidated financial ...statements of the Company for the year ending December 31, 2013. The Company is seeking shareholder ratification of such action. It is expected that representatives of Ernst & Young LLP will attend...

  • Page 169
    ... Audit and Finance Committee charter should be submitted to Michael J. Kraupp, Chief Financial Officer and Treasurer of the Company, at 444 South River Road, St. George, Utah 84790. How does the Audit and Finance Committee conduct its meetings? During the year ended December 31, 2012, the Audit and...

  • Page 170
    ... on an anonymous basis) of complaints about financial and control matters. The Audit and Finance Committee also has implemented a policy that addresses when the Company may recruit personnel who formerly were employed by the Company's independent registered public accounting firm. In other cases...

  • Page 171
    ... statements for the year ended December 31, 2012? The Audit and Finance Committee has: • Reviewed and discussed the Company's audited financial statements with the Company's management; and • Discussed with E&Y the matters required to be discussed by Statement on Auditing Standards No. 61...

  • Page 172
    ..., 2012? Based upon its review and the discussions with management and the Company's independent registered public accounting firm, the Audit and Finance Committee recommended to the Board that the audited consolidated financial statements for the Company be included in the Company's Annual Report on...

  • Page 173
    ...'s financial statements included in its Quarterly Reports on Form 10-Q, audits of the closing balance sheets of certain businesses acquired, and the review of the Company's registration statements. Audit-Related Fees During the years ended December 31, 2012 and 2011, the Company did not pay any fees...

  • Page 174
    ... for the year ended December 31, 2012, the Audit and Finance Committee has: (1) reviewed and discussed the audited financial statements with management; (2) discussed with E&Y, the Company's independent registered public accounting firm, the matters required to be discussed by the Statement on...

  • Page 175
    ...Company's executive officers, directors and 10% shareholders are required under Section 16 of the Exchange Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Copies of these reports must also be furnished to the Company. Based solely on a review of...

  • Page 176
    ... Proxy Statement and the Company's 2012 Annual Report to Shareholders should submit a request in writing to Michael J. Kraupp, Chief Financial Officer and Treasurer of the Company, 444 South River Road, St. George, Utah 84790. Beneficial owners sharing an address who are receiving multiple copies of...

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    ... Zions First National Bank Stock Transfer Department PO Box 9088 Salt Lake City, UT 84130 Independent Public Accountants Ernst & Young LLP 178 South Rio Grande Street, Suite 400 Salt Lake City, UT 84101 Corporate Headquarters SkyWest, Inc. 444 South River Road St. George, UT 84790 Tel: (435) 634...

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    inc.skywest.com