Item 2 : Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

SkyWest, Inc. (the “Company”), through its wholly owned subsidiary, SkyWest Airlines, Inc. (“SkyWest”), operates the largest independent regional airline in the United States.  SkyWest offers scheduled passenger and air freight service with approximately 1,100 daily departures to 104 cities in 27 states and three Canadian provinces.  SkyWest has been a code-sharing partner with Delta Air Lines, Inc. (“Delta”) in Salt Lake City and United Air Lines, Inc. (“United”) in Los Angeles since 1987 and 1997, respectively.  In April 1998, SkyWest expanded its United Express Agreement to provide service as United Express in United’s Portland and Seattle/Tacoma markets and in additional Los Angeles markets, which began in April 1998.  In January 1998, SkyWest expanded its operations to serve as the United Express carrier in San Francisco, which began in June 1998.  In October 2001, SkyWest expanded its operations to serve as the Delta Connection in Dallas/Fort Worth.  In April 2003, SkyWest signed an agreement with Continental Airlines, Inc. (“Continental”) to supply Continental with regional airline feed into Continental’s Houston hub effective on July 1, 2003.  Today, SkyWest operates as the Delta Connection in Salt Lake City and Dallas/Fort Worth, as United Express in Los Angeles, San Francisco, Denver and the Pacific Northwest and as Continental Connection in Houston.  SkyWest believes that its success in attracting multiple code-sharing relationships is attributable to its delivery of high-quality customer service with an all cabin-class fleet.  As of September 30, 2003, 55% of SkyWest’s capacity operated under the Delta code, 44% operated under the United code and 1% operated under the Continental code.  SkyWest offers a convenient and frequent flight schedule designed to maximize connecting and origin-destination traffic for its code-sharing partners.  As of September 30, 2003, SkyWest operated a fleet of 76 Embraer EMB-120 Brasilia turboprops (“Brasilias”) and 101 Canadair Regional Jets (“CRJs”).

Historically, multiple code-sharing relationships have enabled SkyWest to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of SkyWest-controlled or “prorate” flying and contract flying.  On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and SkyWest receives from the major airline partner negotiated payments per block hour or flight departure and incentives related to levels of customer service.  On SkyWest-controlled flights, SkyWest controls scheduling, ticketing, pricing and seat inventories and receives a prorated portion of passenger fares.  The Company transitioned all of its Delta Connection CRJ flights to contract flying October 1, 2001 and transitioned all of its Delta Connection Brasilia flights to contract flying effective January 1, 2002.  Effective August 1, 2003, however, the Company returned all of its Delta Connection Brasilia flights back to SkyWest-controlled flying.

As of September 30, 2003, the Company had agreements to acquire ten additional 50-seat CRJs.  These aircraft will be allocated to SkyWest’s United Express operations.  On September 15, 2003, the Company announced the completion of a firm order for 30, 70-seat CRJs for its United Express operations.  The Company anticipates that it will begin taking delivery of these aircraft in January 2004 and continue through May 2005.  The contract also grants to the Company options to acquire another 80 aircraft that can be delivered in either 70 or 90-seat configurations. The Company anticipates delivery dates for these aircraft could start in June 2005 and continue through September 2008.

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Forward-Looking Statements

The Company may, from time-to-time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements encompass the Company’s beliefs, expectations, hopes or intentions regarding future events.  Words such as “expects,” “intends,” “believes,” “anticipates,” “should”, “likely” and similar expressions identify forward-looking statements.  All forward-looking statements included in this Current Report on Form 10-Q are made as of the date hereof and are based on information available to the Company as of such date.  The Company assumes no obligation to update any forward-looking statement. Actual results will vary, and may vary materially, from those anticipated, estimated, projected or expected for a number of reasons, including, among others: developments associated with the bankruptcy proceedings involving United; ongoing negotiations between the Company and its major partners regarding their code-sharing arrangements; variations in market and economic conditions; and other unanticipated factors.  Risk factors, cautionary statements and other conditions which could cause actual results to differ from the Company’s current expectations are contained in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K.

Factors that May Affect Future Results

The Company will be materially affected by the challenges of the airline industry

The airline industry has experienced tremendous challenges in recent years and will likely remain volatile for the foreseeable future.  Among other factors, the events associated with September 11, 2001, the slowing U.S. economy throughout 2001 and 2002 and the war with Iraq have significantly affected the U.S. airline industry.  These events have resulted in changed government regulation, declines and shifts in passenger demand, increased insurance costs and tightened credit markets, all of which have affected, and will continue to affect, the operations and financial condition of participants in the industry including the Company, major carriers (including the Company’s code-sharing partners), competitors and aircraft manufacturers.  These industry developments raise substantial risks and uncertainties which will affect the Company, major carriers (including the Company’s code-sharing partners), competitors and aircraft manufacturers in ways that the Company is not currently able to predict.

The Company has been, and will continue to be, significantly impacted by United’s Bankruptcy Proceedings

On September 10, 2003, the Company announced it had completed negotiations, and signed a long-term, 11-year definitive contract with United (the “United Express Agreement”).  On August 29, 2003 the United Express Agreement was approved by the U.S. Bankruptcy Court.  Subsequently, the United Express Agreement received all necessary approvals from the creditors’ committee operating in behalf of United under bankruptcy protection and United’s pilot union, the Airline Pilot Association (ALPA).  Notwithstanding the execution of the United Express Agreement, United’s bankruptcy filing could still lead to many other unforeseen expenses, risks and uncertainties.  Additionally, United could still file for liquidation under Chapter 7 of the United States Bankruptcy Code, or liquidate some or all of its assets through one or more transactions with third parties.  Such events, individually or singly, could jeopardize the Company’s United Express operations, leave the Company unable to efficiently utilize the additional aircraft which the Company is currently obligated to purchase, or result in other outcomes which could have a material adverse effect on the operations, activities and financial condition of the Company.

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The Company’s operations and financial condition are dependent upon the terms of its relationships with its major partners

Substantially all of the Company’s revenues are derived from flight operations conducted under its code-sharing agreements with Delta, United and Continental.  Any material change in the Company’s code-sharing relationships would impact the Company’s operations and financial condition.  The Company’s major partners currently face significant economic, operational, financial and competitive challenges.  United’s bankruptcy filing and associated reorganization effort represent only one of those challenges.  As the Company’s major partners struggle to address such challenges, they have required, and will likely continue to require, the Company’s participation in efforts to reduce costs and improve the financial position of the Company’s partners.  Management believes these developments will impact many aspects of the Company’s operations and financial performance.  In particular, the Company anticipates that its financial performance, including its margins, will be less consistent than in prior periods and will be negatively impacted as the industry experiences significant restructuring.

Terrorist activities or warnings have dramatically impacted, and will likely continue to impact, the Company

The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general and the Company’s operations in particular. The primary effects experienced by the airline industry included substantial losses of passenger traffic and revenue, increased security and insurance costs, increased concerns about future terrorist attacks, airport delays due to heightened security and significantly reduced yields due to the drop in demand for air travel.

Additional terrorist attacks, the fear of such attacks, the war in Iraq, other hostilities in the Middle East or other regions, as well as other factors, could negatively impact the airline industry, and result in further decreased passenger traffic and yields, increased flight delays or cancellations associated with new government mandates, as well as increased security, fuel and other costs.  The Company cannot provide any assurance that these events will not harm the airline industry generally or the Company’s operations or financial condition.

The Company’s reliance on only two aircraft types exposes the Company to a number of potentially significant risks

As of September 30, 2003 the Company had a fleet of 76 Brasilias and 101 CRJs.  During the nine months ended September 30, 2003, 83% of the Company’s ASMs were flown by CRJs and 17% were flown by Brasilias.  Additionally, as of September 30, 2003, the Company had agreements to acquire ten additional50-seat CRJs and 30, 70-seat CRJs and had obtained options to acquire another 80 CRJs that can be delivered in either 70 or 90 seat configurations.  The Company anticipates delivery dates for the 80 options on either 70 or 90 seat CRJs could start in June 2005 and continue through September 2008.  The Company is subject to various risks related to its current fleet and the ability to operate the additional aircraft that could materially or adversely effect its operations and financial condition, including:

•                   the Company’s ability to obtain necessary financing to fulfill the Company’s contractual obligations related to the acquisition of CRJs,

•                   the breach by Bombardier, Inc. of the Company’s firm order contracts for the delivery of ten 50-seat and 30, 70-seat CRJs or any change in the delivery schedule of such CRJs,

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•                   the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for such aircraft,

•                   the issuance of FAA directives restricting or prohibiting the use of Brasilias or CRJs, or

•                   the adverse public perception of an aircraft type as a result of an accident or other adverse publicity

The possible unionization of the Company’s employees could impact the Company’s business

The employees of the Company are not currently represented by any union.  Management is aware that collective bargaining group organization efforts among its employees occur from time to time and expects that such efforts will continue in the future.  If unionizing efforts are successful, the Company may be subjected to risks of work interruption or stoppage and/or incur additional administrative expenses associated with union representation.  Management recognizes that such efforts will likely continue in the future and may ultimately result in some or all of the Company’s employees being represented by a union.

The Company is subject to significant governmental regulation

All interstate air carriers, including SkyWest, are subject to regulation by the DOT, the FAA and other governmental agencies.  Regulations promulgated by the DOT primarily relate to economic aspects of air service.  The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs.  The Company cannot predict whether it will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on operations.

The occurrence of an aviation accident would negatively impact the Company’s operations and financial condition

An accident or incident involving one of the Company’s aircraft could involve repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service, as well as significant potential claims of injured passengers and others.  The Company is required by the DOT to carry liability insurance.  In the event of an accident, the Company’s liability insurance may not be adequate and the Company may be forced to bear substantial losses from the accident.  Substantial claims resulting from an accident in excess of the Company’s related insurance coverage would harm operational and financial results.  Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that the Company is less safe or reliable than other airlines.

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Significant Accounting Policies

Revenue Recognition

Passenger and freight revenues are recognized when service is provided.  Under the Company’s contract and prorate flying agreements with Delta Airlines, Inc. (“Delta”) and United Airlines, Inc. (“United”) revenue is considered earned when the flight is completed.  Passenger tickets sold but not used and the liability to other airlines are recorded as air traffic liability.

The Company’s flight and related operations conducted under the Delta code-sharing relationship are governed by a ten-year agreement signed with Delta in 2000.  During 2003, the Company is compensated on a fee-per-completed-block hour basis plus true-ups for fuel costs as this is a pass through cost.  Effective August 1, 2003, all Embraer EMB-120 Brasilia turbo-prop (“Brasilia”) flights conducted by the Company under the Delta code were switched from contract flying to “prorate flying”.  Under the prorate flying arrangement, the Company controls scheduling, ticketing, pricing and seat inventories and receives a prorated portion of passenger fares.

On September 10, 2003, the Company announced it had completed negotiations, and signed a long-term 11-year definitive contract with United(the “United Express Agreement”).  On August 29, 2003 the United Express Agreement was approved by the U.S. Bankruptcy Court.  Subsequently, the United Express Agreement received all the necessary approvals from the creditors’ committee operating in behalf of United under bankruptcy protection and United’s pilot union, the Airline Pilot Association.  Under the terms of the United Express Agreement, the Company will be reimbursed primarily on a fee-per-completed-block hour and departure basis plus a margin base on performance-based incentives, similar in structure to the previous agreement between the parties.

On April 3, 2003, the Company signed a new code-sharing agreement with Continental Airlines, Inc. (“Continental”) to supply Continental with regional airline feed into its Houston hub beginning on July 1, 2003.  The Company’s Continental Connection operations are currently conducted using the Company’s Brasilias and Brasilias leased from Continental.  The Continental agreement provides for payment to the Company of a prorated portion of passenger fares.

The agreements with Delta, United and Continental contain certain provisions pursuant to which the parties could terminate the respective agreements, subject to certain rights of the other party, if certain performance criteria are not maintained.  The Company’s revenues could be impacted by a number of factors, including changes to the agreements, the annual negotiations and the Company’s ability to earn incentive payments contemplated under the agreements.

The Company’s results of operations included a positive pretax amount of $5.9 million, or $0.06 per diluted share, resulting from adjustments made to reflect the Company’s actual operating results from flights under the United Express Agreement, which were more favorable to the Company than the rates and expenses estimated by the Company prior to the execution of the United Express Agreement.

Maintenance

Due to the change in the Company’s contractual arrangement with one of its major partners and based on the provisions of a letter agreement executed by the Company and GE Engine Services, Inc. (“GE”) in April 2002 (the “Letter Agreement”), the Company elected to change from the accrual method to the direct-expense

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method of accounting for Canadair Regional Jet (“CRJ”) engine overhaul costs effective January 1, 2002.  The Company believes the direct-expense method is preferable because the maintenance expense is not recorded until the maintenance services are performed, the direct-expense method eliminates significant estimates and judgments inherent under the accrual method and it is the predominant method used in the airline industry.  Accordingly, during the quarter ended March 31, 2002, the Company reversed its engine overhaul accrual that totaled $14.1 million as of January 1, 2002 by recording a cumulative effect of change in accounting principle of $8.6 million (net of income taxes of $5.5 million).  The cumulative effect of change in accounting principle has been reflected in the accompanying September 30, 2002 condensed consolidated statements of income.  Additionally, the Company determined that the Letter Agreement did not relieve the Company from the fixed rate per-engine-hour obligation under a sixteen-year engine services agreement executed by and between the Company and GE effective August 1, 2001 (the “Services Agreement”), and therefore a maintenance contract liability to GE, of $22.8 million, based on the fixed rate per-engine-hour, has been recorded in the December 31, 2002 condensed consolidated balance sheet with a corresponding maintenance contract asset of $22.8 million.  Until the Services Agreement was terminated, the maintenance contract asset was recorded because under the direct-expense method the Company does not record maintenance costs until the actual maintenance event occurs.

On March 14, 2003, the Company and GE amended the Services Agreement to provide that the Company will pay for services performed by GE on a time and materials basis as opposed to the fixed rate per-engine-hour as stipulated in the Services Agreement and as modified for 2002 in the Letter Agreement.  Further, the amendment provides that payments made by the Company for services completed since the effective date of the Services Agreement (August 1, 2001) will be considered to be in satisfaction of all amounts owed by the Company for work performed under the Services Agreement as of December 31, 2002.  As a result of the amendment, a $22.8 million maintenance contract liability and corresponding $22.8 million deferred maintenance asset were reversed in March 2003.

Under the Company’s United Express agreement, specific amounts are included in the rates and charges for mature maintenance on regional jet aircraft engines that the Company records as revenue.  However, consistent with the change to a time and material maintenance policy, as more fully described in the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002, the Company records maintenance expense on its regional jet aircraft engines as it is incurred.  As a result, during the third quarter of 2003, the Company has collected and recorded as revenue $4.2 million (pretax) under its new United Express agreement with no corresponding offset for regional jet engine maintenance overhauls since there were none incurred.

The Company currently has a relatively new CRJ fleet.  Accordingly, management anticipates that maintenance costs will incur in the future as the fleet ages.

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Passenger load factor increased to 73.8% for the three months ended September 30, 2003, compared to 69.4% for the three months ended September 30, 2002.  The increase in load factor was due primarily to the further development of code-sharing relationships with United and Delta whereby SkyWest is experiencing higher than average load factors as the Company transitions to CRJs in its new markets.

Total available seat miles (“ASM”) generated by the Company during the three months ended September 30, 2003 increased 39.7% from the three months ended September 30, 2002.  The increase in ASMs was primarily a result of the Company increasing its fleet size to 177 aircraft as of September 30, 2003, from 138 aircraft as of September 30, 2002.  During the three months ended September 30, 2003 the Company took delivery of eight new CRJs and placed two additional Brasilias into service under the Continental code.

Results of Operations:

The Company anticipates that its ongoing revenues will be generated pursuant to a mix of contract and prorate flying arrangements with Delta, United and Continental.  The Company’s revenues could be impacted by a number of unanticipated factors, including changes to contracts with the Company’s major partners, the annual rate negotiations with the Company’s major partners and the Company’s ability to earn incentive payments contemplated under its contracts with its major partners.

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Three Months Ended September 30, 2003 and 2002

The following tables set forth information regarding the Company’s operating expense components for the three months ended September 30, 2003 and 2002.  Operating expenses are expressed as a percentage of operating revenues. Individual expense components are also expressed as cents per ASM.

Net income decreased to $21.1million, or $0.36 per diluted share, for the three months ended September 30, 2003, compared to $22.9 million, or $0.40 per diluted share, for the three months ended September 30, 2002.  Factors relating to the change in net income are discussed below.

Passenger revenues, which represented 99.3% of consolidated operating revenues for the three months ended September 30, 2003, increased 13.7% to $229.0 million for the three months ended September 30, 2003, from $201.5 million or 99.4% of consolidated operating revenues for the three months ended September 30, 2002.  The increase was primarily due to a 39.7% increase in ASMs, principally as a result of the delivery of 40 additional CRJs over the past twelve months.  Passenger revenues were also positively affected by the Company’s achievement of a 99.5% controllable completion factor and an actual completion factor of 99.2% of scheduled flights.

The Company continued to increase its services with its code-sharing partners and placed eight CRJs in service and returned three that were previously operated under short-term lease arrangements during the three months ended September 30, 2003.  Three of the eight aircraft were placed in service under the Delta Connection operations and five were placed in service under the United Express operations.  Revenue per ASM decreased 18.7% to 14.8¢ for the three months ended September 30, 2003, from 18.2¢ for the three months ended September 30, 2002, primarily due to an increase in ASMs produced by CRJs (resulting in lower revenue per ASM pursuant to the terms of the Company’s code-sharing agreements with Delta and United).  However, the Company continues to realize economic efficiencies on an ASM basis as total airline expenses decreased 15.9% to 12.7¢ per ASM for the three months ended September 30, 2003, from 15.1¢ per ASM for the three months ended September 30, 2002.

Passenger load factor increased to 73.8% for the three months ended September 30, 2003, from 69.4% for the three months ended September 30, 2002.  The increase in load factor was due primarily to the further development of code-sharing relationships with United and Delta whereby SkyWest is experiencing higher than

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average load factors as the Company adds CRJs in its new markets.  The increase was also due, in part, to refinements in flight schedules made by the Company’s major partners.

Total airline expenses for the three months ended September 30, 2003, excluding fuel charges (which are reimbursable by the Company’s major partners), increased approximately 13.5% from the same period of 2002.  The increase was primarily a result of a 39.7% increase in ASMs (which resulted principally from the expansion of SkyWest’s CRJ fleet year-over-year).  Total operating expenses for the quarter ended September 30, 2003 increased at a lower rate than available seat miles.  The primary reason for the lower rate of increase was the increased stage lengths flown by the CRJs and the aggressive cost reduction initiatives implemented by the Company during the nine months ended September 30, 2003.

Total operating expenses and interest increased 18.0% to $198.6 million for the three months ended September 30, 2003, compared to $168.3 million for the three months ended September 30, 2002.  The increase in total operating expenses and interest was due principally to the growth in SkyWest’s CRJ fleet year-over-year.  As a percentage of consolidated operating revenues, total operating expenses and interest increased to 86.2% for the three months ended September 30, 2003, from 83.0% for the three months ended September 30, 2002.  The increase in operating expenses and interest as a percentage of consolidated operating revenues was primarily due to the reduction in the Company’s departure rates as operating revenues increased only 13.7% period-over-period, while total operating expenses and interest increased 18.0% period-over-period.

Airline operating costs per ASM (including interest expense) decreased 15.9% to 12.7¢ for the three months ended September 30, 2003 from 15.1¢ for the three months ended September 30, 2002.  The primary reason for the decrease was the increased capacity of CRJs which are less expensive to operate on a per-ASM basis than Brasilias.  Other factors relating to the change in operating expenses are discussed below.

The cost per ASM of salaries, wages and employee benefits decreased to 3.7¢ for the three months ended September 30, 2003, compared to 4.5¢ for the three months ended September 30, 2002.  The decrease was primarily the result of the increase in stage lengths flown by CRJs.  The average number of full-time equivalent employees increased 3.0% to 4,937 for the three months ended September 30, 2003 from 4,794 for the three months ended September 30, 2002.  The increase in number of employees was due, in large part, to the addition of personnel required for SkyWest’s current and anticipated expansion.

The cost per ASM for aircraft costs, including aircraft rent and depreciation, decreased to 3.2¢ for the three months ended September 30, 2003, from 3.6¢ for the three months ended September 30, 2002.  The decrease in costs per ASM was primarily due to the increase in the number of CRJs that were added to SkyWest’s fleet during the past twelve months.

The cost per ASM for maintenance expense decreased to 0.9¢ for the three months ended September 30, 2003, compared to 1.6¢ for the three months ended September 30, 2002.  The decrease in cost per ASM was primarily attributable to the increase in stage lengths flown by CRJs, a higher mix of new aircraft within the fleet and the favorable timing of certain maintenance-related events.  Under the Company’s United Express Agreement, specific amounts are included in the rates and charges for mature maintenance on CRJ engines that the Company records as revenue.  However, consistent with the change to a time and material maintenance policy, as more fully described in the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002, the Company records maintenance expense on its CRJ engines as it is incurred.  As a result, during the third quarter of 2003, the Company collected and recorded as revenue $4.2 million (pretax) under the United Express

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Agreement, with no corresponding offset for regional jet engine maintenance overhauls since there were none incurred.

The cost per ASM for fuel remained constant at 2.4¢ for the three months ended September 30, 2003 and 2002, respectively.  This was primarily due to the average price of fuel remaining constant at $1.04 during the three months ended September 30, 2003 and 2002, respectively.

The cost per ASM for other expenses, primarily consisting of landing fees, station rentals, computer reservation system fees and hull and liability insurance, decreased 25.8% to 2.3¢ for the three months ended September 30, 2003, from 3.1¢ for the three months ended September 30, 2002.  The decrease in cost per ASM was primarily due to the increase in stage lengths flown by CRJs and the Company taking advantage of a government program related to war-risk liability and hull insurance coverage whereby the Company’s liability insurance premiums decreased substantially.

Interest expense increased to approximately $3.4 million during the three months ended September 30, 2003, from approximately $0.2 million during the three months ended September 30, 2002.  The increase in interest expense was primarily due to the temporary long-debt financing of the CRJs acquired by the Company during the first nine months of 2003.

The Emergency War Time Supplemental Appropriations Act of 2003 became effective on May 15, 2003, and the Company received approximately $6.5 million under the act.  This legislation provides for compensation to domestic airlines based on their proportional share of passenger security and infrastructure security fees paid, as well as reimbursement for installing fortified flight deck doors.  This new legislation also provides the suspension of passenger and infrastructure fees from June 1, 2003 through September 30, 2003 and an extension of war risk liability and hull insurance coverage through August 2004.  During the three months ended September 30, 2003, the Company did not record the benefits of amounts received, as the Company anticipates that a significant portion of the payment received by the Company will be payable due to its major partners pursuant to the terms of the Company’s code-sharing agreements.  These amounts have been recorded as other current liabilities in the accompanying balance sheet as of September 30, 2003.

For the Nine Months Ended September 30, 2003 and 2002

The following tables set forth information regarding the Company’s operating expense components for the nine months ended September 30, 2003 and 2002.  Operating expenses are expressed as a percentage of operating revenues. Individual expense components are also expressed as cents per ASM.

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Net income decreased to $49.3 million, or $0.85 per diluted share, for the nine months ended September 30, 2003, compared to $69.1 million, or $1.20 per diluted share, for the nine months ended September 30, 2002.  The $69.1 million of net income for the quarter ended September 30, 2002, reflects previously disclosed  adjustments to certain revenue and expense items related to changes in the Company’s maintenance policy.  Factors relating to the change in net income are discussed below.

Passenger revenues, which represented 99.4% of consolidated operating revenues for the nine months ended September 30, 2003, increased 14.9%, to $646.3 million for the nine months ended September 30, 2003, from $562.5 million or 99.3% of consolidated operating revenues for the nine months ended September 30, 2002.  The increase was primarily due to a 35.3% increase in ASMs, principally as a result of the delivery of 40 additional CRJs over the past twelve months.  Passenger revenues were also positively affected by the Company’s achievement of a 99.4% controllable completion factor and an actual completion factor of 98.7% of scheduled flights during the first nine months of 2003.

The Company continued to increase its services with its code-sharing partners and placed 31 CRJs in service and returned three CRJs previously operated under short-term lease arrangements during the nine months ended September 30, 2003.  Ten of the 31 aircraft were placed in service under the Delta Connection operations and 21 were placed in service under the United Express operations.  Revenue per ASM decreased 15.5% to 15.3¢ for the nine months ended September 30, 2003, from 18.1¢ for the nine months ended September 30, 2002, primarily due to an increase in ASMs produced by CRJs (resulting in lower revenue per ASM pursuant to the terms of the Company’s agreements with Delta and United).  However, the Company continues to realize econmic efficiencies on an ASM basis as total airlines expenses decreased 10.5% to 13.6¢ per ASM for the nine months ended September 30, 2003, from 15.2¢ per ASM for the nine months ended September 30, 2002.

Passenger load factor increased to 71.6% for the nine months ended September 30, 2003, from 68.1% for the nine months ended September 30, 2002.  The increase in load factor was due primarily to the further development of code-sharing relationships with United and Delta whereby SkyWest is experiencing higher than average load factors as the Company adds CRJs in its new markets.  The increase was also due, in part, to refinements in flight schedules made by the Company’s major partners.

Total airline expenses for the nine months ended September 30, 2003, excluding fuel charges (which are reimbursable by the Company’s major partners), increased approximately 14.9% from the same period in 2002.  The increase was primarily a result of a 35.3% increase in available seat miles due to the respective growth in the CRJ fleet year-over-year.  Total operating expenses for the nine months ended September 30, 2003 increased at a lower rate than ASMs.  The primary reason for the lower increase was due to the increased stage lengths flown by CRJs and the aggressive cost reduction initiatives implemented by the Company during the nine months ended September 30, 2003.

Total operating expenses and interest increased 21.2% to $578.0 million for the nine months ended September 30, 2003, compared to $476.8 million for the nine months ended September 30, 2002.  The increase in total operating expenses and interest was due principally to the growth in size of the Company’s CRJ fleet.  As a percentage of consolidated operating revenues, total operating expenses and interest increased to 88.9% for the nine months ended September 30, 2003, from 84.2% for the nine months ended September 30, 2002.  The total increase in operating expenses and interest, as a percentage of consolidated operating revenues, was primarily due to the reduction in the Company’s departure rates as operating revenues increased only 14.9% period-over-period, while total operating expenses and interest increased 21.2% period-over-period.

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Airline operating costs per ASM (including interest expense) decreased 10.5% to 13.6¢ for the nine months ended September 30, 2003, from 15.2¢ for the nine months ended September 30, 2002.  The decrease was primarily due to the increased capacity by CRJs, which are less expensive to operate on a per-ASM basis than Brasilias.  Other factors relating to the change in operating expenses are discussed below.

The cost per ASM for salaries, wages and employee benefits decreased to 3.9¢ for the nine months ended September 30, 2003, compared to 4.6¢ for the nine months ended September 30, 2002.  The decrease was primarily the result of the increase in stage lengths flown by CRJs.  The average number of full-time equivalent employees increased 3.9% to 4,851 for the nine months ended September 30, 2003 from 4,668 for the nine months ended September 30, 2002.  The increase in number of employees was due in large part, to the addition of personnel required for SkyWest’s current and anticipated expansion.

The cost per ASM for aircraft costs, including aircraft rent and depreciation, decreased to 3.4¢ for the nine months ended September 30, 2003, from 3.8¢ for the nine months ended September 30, 2002.  The decrease in costs–per-ASM was primarily due to the increase in the number of CRJs that have been added to the fleet during the past twelve months.

The cost per ASM for maintenance expense decreased to 0.9¢ for the nine months ended September 30, 2003, compared to 1.2¢ for the nine months ended September 30, 2002. The decrease in cost per ASM was primarily due to the greater stage lengths flown by the CRJs, a higher mix of new aircraft within the fleet and the favorable timing of certain maintenance-related events.  Under the Company’s United Express agreement, specific amounts are included in the rates and charges for mature maintenance on regional jet aircraft engines that the Company records as revenue.  However, consistent with the change to a time and material maintenance policy, as more fully described in the Company’s Annual Report on Form 10-K for the Year ended December 31, 2002, the Company records maintenance expense on its CRJ engines as it is incurred.  As a result, during the nine months ended September 30, 2003, the Company collected and recorded as revenue approximately $12.0 million (pretax) under its United Express agreement with no corresponding offset for CRJ maintenance overhauls, since there were none incurred.

The cost per ASM for fuel increased to 2.6¢ for the nine months ended September 30, 2003, from 2.2¢ for the nine months ended September 30, 2002.  This increase was primarily due to the average price of fuel increasing 18.1% per gallon, to $1.11 as of September 30, 2003 from $0.94 as of September 30, 2002.

The cost per ASM of other expenses, primarily consisting of commissions, landing fees, station rentals, computer reservation system fees and hull and liability insurance decreased 23.5% to 2.6¢ for the nine months ended September 30, 2003, from 3.4¢ for the nine months ended September 30, 2002.  The decrease in cost per ASM was primarily due to the increase in the number of CRJs that have been added to SkyWest’s fleet and the Company taking advantage of a government program related to war-risk liability and hull insurance coverage whereby the Company’s liability insurance premiums decreased substantially.

Interest expense increased to approximately $7.1 million during the nine months ended September 30, 2003, from approximately $0.3 million during the nine months ended September 30, 2002.  The increase in interest expense was primarily due to the temporary long-debt financing of the CRJs. acquired by the Company during the first nine months of 2003.

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Liquidity and Capital Resources

The Company had working capital of $445.0 million and a current ratio of 3.9:1 at September 30, 2003, compared to working capital of $391.8 million and a current ratio of 4.2:1 at December 31, 2002. The principal sources of funds during the nine months ended September 30, 2003 were $401.4 million of proceeds from the issuance of long-term debt, $130.2 million provided by operating activities, $33.1 million in proceeds from the sale-lease back of CRJs and $4.6 million from the sale of common stock in connection with the exercise of stock options and the Company’s Employee Stock Purchase Plan.  During the nine months ended September 30, 2003, the Company invested $473.6 million in flight equipment, $48.9 million in marketable securities, $7.3 million in other assets used in investing activities and $2.3 million in buildings and ground equipment.  The Company made payments on long-term debt of $19.2 million and paid $3.5 million in cash dividends.  These factors resulted in a $14.5 million decrease in cash and cash equivalents during the nine months ended September 30, 2003.

The Company’s position in marketable securities, consisting primarily of bonds, bond funds and commercial paper, increased to $344.5 million at September 30, 2003, compared to $294.5 million at December 31, 2002.  The increase was due primarily to the Company’s successful completion of aircraft financing transactions wherein the Company entered into permanent long-term, third-party US leveraged lease transactions or long-term debt transactions and reduced its net investment in previous aircraft acquisitions.  At September 30, 2003, the Company’s total capital mix was 66.5% equity and 33.5% debt, compared to 83.6% equity and 16.4% debt at December 31, 2002.  The change in the total capital mix reflected the Company’s incurrence of approximately $243.2 million of debt financing related to 16 CRJs acquired by the Company during 2003.  As of September 30, 2003, the Company had financed six CRJ deliveries under interim financing arrangements with the manufacturer.  These arrangements allow the Company to continue to take delivery of firm ordered CRJs while arranging for long-term permanent financing.  Subsequent to September 30, 2003, long-term debt was secured for four of six aircraft and the interim debt relating to these four aircraft was extinguished with the manufacturer.  The Company intends to enter into additional interim financing arrangements with the manufacturer when long-term financing is not currently available in the market; however there can be no assurance that the Company will be able to obtain such financing, or that, if obtained, such financing would be favorable to the Company.  The financing agreements associated with the 16 CRJs permit the Company to refinance the debt into long-term lease agreements with third-party lessors.  Accordingly the interim financing has been classified as long-term debt in the accompanying financial statements.

The Company expended approximately $35.5 million for aircraft related capital expenditures during the nine months ended September 30, 2003. These expenditures consisted primarily of $14.4 million for engine overhauls, $8.5 million for aircraft improvements, $10.3 million for rotable spares and $2.3 million for buildings, ground equipment and other assets.

The Company has available $10.0 million in an unsecured bank line of credit through January 31, 2004, with interest payable at the bank’s base rate less one-quarter percent, which was a net rate of 3.75% at September 30, 2003.  The Company believes that in the absence of unusual circumstances the working capital available to the Company will be sufficient to meet its present requirements, including expansion, capital expenditures, lease payments and debt service requirements for at least the next 12 months.

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On September 15, 2003, the Company announced the completion of a firm order for 30, 70-seat CRJs for the United Express operations.  The Company anticipates that it will begin taking delivery of these aircraft in January 2004 and continue through May 2005.  The Company’s firm aircraft orders, as of September 30, 2003, consisted of orders for ten , 50-seat and 30, 70-seat CRJs scheduled for delivery through May 2005.  Gross committed expenditures for these aircraft and related equipment, including estimated amounts for contractual price escalations will be approximately $211 million for the remainder of 2003, $192 million through September 30, 2004 and $528 million for the period October 1, 2004 through May 31, 2005.  The contract also includes options for another 80 aircraft that can be delivered in either 70 or 90 seat configurations.  The Company anticipates delivery dates for these aircraft could start in June 2005 and continue through September 2008.

The Company has significant long-term lease obligations primarily relating to its aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in the Company’s consolidated balance sheets.  At September 30, 2003, the Company leased 142 aircraft with remaining lease terms ranging from one to 16 years.  Future minimum lease payments due under all long-term operating leases were approximately $1.7 billion at September 30, 2003.  At a 7.0% discount factor, the present value of these lease obligations would be equal to approximately $1.1 billion at September 30, 2003.

As part of the Company’s leveraged lease agreements, the Company typically indemnifies the equity/owner participant against liabilities that may arise due to changes in benefits from tax ownership of the respective leased aircraft.

Substantially all the Company’s long-term debt was incurred in connection with the acquisition of Brasilia and CRJ aircraft.  Certain amounts related to the Brasilia aircraft are supported by continuing subsidy payments through the export support program of the Federative Republic of Brazil.  The subsidy payments reduced the stated interest rates to an average effective rate of approximately 4.0%, on $10.7 million of the Company’s long-term debt at September 30, 2003.  The continuing subsidy payments are at risk to the Company if the Federative Republic of Brazil does not meet its obligations under the export support program.  While the Company has no reason to believe, based on information currently available, that the Company will not continue to receive these subsidy payments from the Federative Republic of Brazil in the future, there can be no assurance that such a default will not occur.  On the remaining long-term debt related to the Brasilia aircraft of $19.0 million, the lender has assumed the risk of the subsidy payments and the average effective rate on this

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debt was approximately 3.8% at September 30, 2003.  The average effective rate on the debt related to the CRJ aircraft of $333.9 million was 3.9% at September 30, 2003, and is not subject to subsidy payments.

Seasonality

As is common in the airline industry, the Company’s pro-rate operations are favorably affected by increased travel, historically occurring in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months.