The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2012, 2011 and 2010. Also discussed is our financial position as of December 31, 2012 and 2011. You should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report or incorporated herein by reference. This discussion and analysis contains forward-looking statements. Please refer to the sections of this Report entitled "Cautionary Statement Concerning Forward-looking Statements" and "Item 1A. Risk Factors" for discussion of some of the uncertainties, risks and assumptions associated with these statements.

Overview

    Through SkyWest Airlines and ExpressJet, we operate the largest regional
airline in the United States. As of December 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 the following:

                               CRJ200     ERJ145    ERJ135     CRJ700    CRJ900    EMB120    Total
United                              92        242         7         70         -        34      445
Delta                              147          -         -         60        46         8      261
US Airways                          15          -         -          -         -         -       15
American                            12          -         -          -         -         -       12
Alaska                               -          -         -          5         -         -        5
Subleased to an
un-affiliated entity                 2          -         -          -         -         -        2
Subleased to an affiliated
entity                               -          -         -          -         4         -        4

Total 268 242 7 135 50 42 744

For the year ended December 31, 2012, approximately 64.8% of our aggregate capacity was operated for United, approximately 32.2% was operated for Delta, approximately 1.4% was operated for Alaska, approximately 1.4% was operated for US Airways and approximately 0.2% was operated for American.

Under a fixed-fee flying arrangement, the major airline generally pays the regional airline a fixed-fee for each departure, with additional incentives based on completion of flights, on-time performance and baggage handling performance. In addition, the major and regional airline often enter into an arrangement pursuant to which the major airline bears the risk of changes in the price of fuel

and other such costs that are passed through to the major airline partner. Regional airlines benefit from a fixed-fee arrangement because they are sheltered from most of the elements that cause volatility in airline financial performance, including variations in ticket prices, passenger loads and fuel prices. However, regional airlines in fixed-fee arrangements do not benefit from positive trends in ticket prices, passenger loads or fuel prices and, because the major airline absorbs most of the costs associated with the regional airline flight, the margin between the fixed-fees for a flight and the expected per-flight costs tends to be smaller than the margins associated with revenue-sharing arrangements.

Under our fixed-fee arrangements, two compensation components have a significant impact on comparability of revenue and operating expense for the periods presented. One item is the reimbursement of fuel expense, which is a directly-reimbursed expense under all of our fixed-fee arrangements. Our major partners directly reimburse us for fuel expense incurred under each respective fixed fee contract and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed-fee arrangements will impact our fuel expense and our passenger revenue equally, with no impact on our operating income.

The second item is the compensation we receive for engine maintenance under our fixed-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 Connection and United CPA flying contracts, our major partner directly reimburses us for engine maintenance expense when the expense is incurred ("Directly-Reimbursed Engine Contracts"). We use the direct-expense method of accounting for our CRJ200 regional jet aircraft engine overhaul costs and, accordingly, we recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis. Under the direct-expense method, the maintenance liability is recorded when the maintenance services are performed ("CRJ200 Engine Overhaul Expense").

Because we use the direct-expense method of accounting for our CRJ200 engine expense, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine maintenance events and related expense we incur each reporting period under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our operating income for the presented reporting periods. The CRJ200 Engine Overhaul Expense incurred under the Fixed-Rate Engine Contracts decreased $22.4 million during the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in CRJ200 Engine Overhaul Expense was primarily due to a reduction in the number of scheduled engine maintenance events during the year ended December 31, 2012.

Because we recognize revenue when we incur engine maintenance expense on engines operating under our Directly-Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods.

We have an agreement with a third-party vendor to provide long-term engine maintenance covering scheduled and unscheduled repairs for engines on our CRJ700s operating under our Fixed-Rate Engine Contracts ("Power by the Hour Agreement"). Under the terms of the Power by the Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power by the Hour Agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. Because we record engine maintenance expense based on the fixed hourly rate pursuant to the Power by the Hour Agreement on our CRJ700s operating under our Fixed-Rate Engine Contracts, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine events and related expense we incur each reporting

period does not have a direct impact on the comparability of our operating income for the presented reporting periods. The table below summarizes how we are compensated by our major partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.

Flying Contract              Compensation of Engine Expense    Expense Recognition
SkyWest Delta Connection     Directly-Reimbursed Engine        Direct Expense
                             Contracts                         Method
ExpressJet Delta             Directly-Reimbursed Engine        Direct Expense
Connection                   Contracts                         Method
SkyWest United Express       Fixed-Rate Engine Contracts       Direct Expense
(CRJ200)                                                       Method
SkyWest United Express       Fixed-Rate Engine Contracts       Power by the Hour
(CRJ700)                                                       Agreement
SkyWest United Express       Fixed-Rate Engine Contracts       Deferral Method
(EMB120)
ExpressJet United Express    Fixed-Rate Engine Contracts       Direct Expense
(CRJ200)                                                       Method
ExpressJet United Express    Fixed-Rate Engine Contracts       Power by the Hour
(ERJ145)                                                       Agreement
ExpressJet United CPA        Directly-Reimbursed Engine        Power by the Hour
                             Contracts                         Agreement
Alaska Agreement             Fixed-Rate Engine Contracts       Power by the Hour
                                                               Agreement
American Eagle Agreement     Fixed-Rate Engine Contracts       Direct Expense
(CRJ200)                                                       Method
US Airways Express           Fixed-Rate Engine Contracts       Direct Expense
(CRJ200)                                                       Method

Historically, multiple contractual relationships have enabled us to reduce reliance on any single major airline code and to enhance and stabilize operating results through a mix of contract flying and our controlled or "pro-rate" flying. For the year ended December 31, 2012, contract flying revenue and pro-rate revenue represented approximately 91% and 9%, respectively, of our total passenger revenues. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours, flight departures and other operating measures.

We had revenues of $3.5 billion for the year ended December 31, 2012, a 3.3% decrease, compared to revenues of $3.7 billion for the year ended December 31, 2011. We had a net income of $51.2 million, or $0.99 per diluted share, for the year ended December 31, 2012, compared to a net loss of $27.3 million or $0.52 per diluted share, for the year ended December 31, 2011.

The significant items affecting our financial performance during the year ended December 31, 2012 are outlined below:

Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue, including fuel and certain engine maintenance expenses. Our fuel expense and directly-reimbursed engine expense decreased by $162.9 million and $13.9 million, respectively, during the year ended December 31, 2012, from the year ended December 31, 2011, due primarily to United purchasing an increased volume of fuel directly from vendors on flights we operated under our United Express Agreements and due to a reduction in the number of engine events from the prior year. Excluding the impact of the decrease in direct fuel and engine maintenance expense and associated reimbursements, our passenger revenues increased $59.5 million for year ended December 31, 2012 compared to the year ended December 31, 2011, which was primarily due to an increase in block-hour production, receipt of higher incentive payments and favorable compensation negotiations with our major partners.

Because we use the direct-expense method of accounting for our CRJ200 engines and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine maintenance events and related expense we incur each reporting period operating under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our operating income for the presented reporting periods. The CRJ200 Engine Overhaul Expense incurred under the Fixed-Rate Engine Contracts decreased $22.4 million during the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in CRJ200 Engine Overhaul Expense

was primarily due to a reduction in the number of scheduled engine maintenance events during the year ended December 31, 2012.

Aircraft maintenance expense, excluding reimbursed engine overhauls and engine overhauls for our CRJ200s under our Fixed-Rate Engine Contracts, decreased $16.8 million, or 3.6%, during the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in aircraft maintenance expense, excluding engine overhaul costs, for the year ended December 31, 2012, compared to the year ended December 31, 2011, was principally due to fewer scheduled maintenance events and certain cost reduction initiatives undertaken during the year ended December 31, 2012.

Additionally, we experienced a $10.4 million reduction in other operating expenses, during the year ended December 31, 2012, compared to the year ended December 31, 2011. The decrease in other operating expenses was primarily due to the reduction in property tax expense resulting from refunds received during the year ended December 31, 2012, a reduction in simulator training expense and a reduction in legal and consulting expenses.

The items identified above were the principal factors that contributed to the significant improvement in our financial results during the year ended December 31, 2012, compared to the year ended December 31, 2011.

During 2012, we reached an agreement with Delta to add 34 additional used dual-class Bombardier regional jet aircraft in exchange for the early termination of 66 CRJ200 aircraft under our Delta Connection Agreements. The additional dual-class aircraft were previously operated for Delta by other regional carriers. We anticipate the 34 additional dual-class aircraft will be subleased from Delta for a nominal amount. The 34 additional aircraft consist of five CRJ700s and 29 CRJ900s. As of December 31, 2012, we had taken delivery of 15 of the additional CRJ900s and five of the additional CRJ700s. We anticipate that the remaining aircraft will be delivered by June 2013. We anticipate that all 66 CRJ200 aircraft will be removed from the Delta Connection Agreements by December 31, 2015. Of the 66 CRJ200s scheduled to be removed, 41 CRJ200s are subleased from Delta for a nominal amount, which are scheduled to be returned to Delta without obligation to us.

During 2012, we signed the American Agreements, which provide for us to operate 23 CRJ200s. The aircraft flown for American have been removed from our SkyWest Airlines and ExpressJet Delta Connection Agreements. We started our operations under 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 available seat miles ("ASMs") for the year ended December 31, 2012 increased 1.6%, compared to the year ended December 31, 2011. During the year ended December 31, 2012, we generated 37.3 billion ASMs, compared to 36.7 billion ASMs during the year ended December 31, 2011.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 1 to our consolidated financial statements for the year ended December 31, 2012, included in Item 8 of this Report. Critical accounting policies are those policies that are most important to the preparation of our consolidated financial statements and require management's subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, aircraft maintenance, aircraft leases, impairment of long-lived assets and intangibles, stock-based compensation expense and fair value as discussed below. The application of these accounting policies involves the exercise of judgment and the use of assumptions as

to future uncertainties and, as a result, actual results will differ, and could differ materially from such estimates.

Revenue Recognition

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 pursuant to which the parties could terminate the respective agreement, subject to certain rights of the other party, if certain performance criteria are not maintained. Our revenues could be impacted by a number of factors, including changes to the applicable code-share agreements, contract modifications resulting from contract renegotiations and our ability to earn incentive payments contemplated under applicable agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement date, we record that period's revenues based on the lower of the prior period's approved rates adjusted for the current contract negotiations and our estimate of rates that will be implemented. Also, in the event we have a reimbursement dispute with a major partner at a quarterly or annual financial statement date, we evaluate the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are required to exercise judgment and use assumptions in the application of our revenue recognition policy.

Maintenance

We use the direct-expense method of accounting for our regional jet aircraft engine overhaul costs. Under this method, the maintenance liability is not recorded until the maintenance services are performed. We use the "deferral method" of accounting for our Brasilia turboprop engine overhauls, which provides for engine overhaul costs to be capitalized and depreciated to the next estimated overhaul event or to the remaining useful life, whichever is shorter. For leased aircraft, we are subject to lease return provisions that require a minimum portion of the "life" of an overhaul be remaining on the engine at the lease return date. With respect to engine overhauls related to leased Brasilia turboprops to be returned, we adjust the estimated useful lives of the final engine overhauls based on the respective lease return dates. With respect to SkyWest Airlines, a third-party vendor provides our long-term engine services covering the scheduled and unscheduled repairs for engines on our CRJ700s operated under our Fixed-Rate Engine Contracts. Under the terms of the vendor agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the third-party vendor agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement.

Aircraft Leases

The majority of SkyWest Airlines' aircraft are leased from third parties, while ExpressJet's aircraft flying for Delta are primarily debt-financed on a long-term basis, and the majority of ExpressJet's aircraft flying for United are leased from United for a nominal amount. In order to determine the proper classification of our leased aircraft as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Additionally, operating leases are not reflected

in our consolidated balance sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our consolidated balance sheets.

Impairment of Long-Lived Assets

As of December 31, 2012, we had approximately $2.7 billion of property and equipment and related assets. Additionally, as of December 31, 2012, we had approximately $17.2 million in intangible assets. In accounting for these long-lived and intangible assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. We recorded an intangible of approximately $33.7 million relating to the acquisition of Atlantic Southeast in September 2005. The intangible is being amortized over fifteen years under the straight-line method. As of December 31, 2012, we had recorded $16.5 million in accumulated amortization expense. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets.

When considering whether or not impairment of long-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet or contract level. Based on the results of the evaluations performed as of December 31, 2012, our management concluded no impairment of long-lived assets was necessary 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 options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of our common stock and other factors.

Fair value

We hold certain assets that are required to be measured at fair value in accordance with United States GAAP. We determined fair value of these assets based on the following three levels of inputs:

Level 1   -   Quoted prices in active markets for identical assets or liabilities.
Level 2   -   Observable inputs other than Level 1 prices such as quoted prices for
              similar assets or liabilities; quoted prices in markets that are not
              active; or other inputs that are observable or can be corroborated by
              observable market data for substantially the full term of the assets
              or liabilities. Some of our marketable securities primarily utilize
              broker quotes in a non-active market for valuation of these
              securities.
Level 3   -   Unobservable inputs that are supported by little or no market activity
              and that are significant to the fair value of the assets or
              liabilities, therefore requiring an entity to develop its own
              assumptions.

We utilize several valuation techniques in order to assess the fair value of our financial assets and liabilities. Our cash and cash equivalents primarily utilize quoted prices in active markets for identical assets or liabilities.

We have valued non-auction rate marketable securities using quoted prices in active markets for identical assets or liabilities. If a quoted price is not available, we utilize broker quotes in a non-active market for valuation of these securities. For auction-rate security instruments, quoted prices in active markets are no longer available. As a result, we have estimated the fair values of these securities 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          2011        $ Change    % Change
                                         Amount        Amount        Amount      Percent
Operating Revenues:
SkyWest Airlines operating revenue     $ 1,930,149   $ 2,002,830   $  (72,681 )      (3.6 )%
ExpressJet operating revenues            1,593,527     1,640,837      (47,310 )      (2.9 )%
Other operating revenues                    10,696        11,256         (560 )      (5.0 )%

Total Operating Revenues               $ 3,534,372   $ 3,654,923   $ (120,551 )      (3.3 )%
Airline Expenses:
SkyWest airlines expense               $ 1,824,084   $ 1,944,816   $ (120,732 )      (6.2 )%
ExpressJet airlines expense              1,611,982     1,739,623     (127,641 )      (7.3 )%
Other airline expense                        9,699         9,762          (63 )      (0.6 )%

Total Airline Expense(1)               $ 3,445,765   $ 3,694,201   $ (248,436 )      (6.7 )%
Segment profit (loss):
SkyWest Airlines segment profit        $   106,065   $    58,014   $   48,051        82.8 %
ExpressJet segment (loss)                  (18,455 )     (98,786 )     80,331       (81.3 )%
Other profit                                   997         1,494         (497 )     (33.3 )%

Total Segment Profit (Loss)            $    88,607   $   (39,278 ) $  127,885      (325.6 )%
Interest Income                              7,928         8,236         (308 )      (3.7 )%
Purchase Accounting Gain
(adjustment)                                     -        (5,711 )      5,711       100.0 %
Other                                      (10,639 )     (13,417 )      2,778       (20.7 )%

Consolidated Income (Loss) Before
Taxes                                  $    85,896   $   (50,170 ) $  136,066      (271.2 )%

SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $48.1 million, or 82.8%, during the year ended December 31, 2012, compared to the year ended December 31, 2011. The increase in SkyWest Airline's profit was due primarily to the following factors:

º •
º CRJ200 engine overhaul expense incurred under the SkyWest Airlines Fixed-Rate Engine Contracts decreased $22.6 million. The decrease in CRJ200 engine overhaul expense was primarily due to a reduction in the number of scheduled engine maintenance events.

º •
º Non-pass-through operating revenue increased by $46.2 million. The . . .