What happened

Regional airline operator SkyWest (SKYW 1.97%) surprised markets with a fourth-quarter loss. A good bit of the difference between what was earned and what was expected comes down to accounting, but investors were in no mood to sort out the details.

Shares of SkyWest fell as much as 24% on Friday and were down about 16% in late-day trading, as investors recalibrated expectations following the negative surprise.

So what

SkyWest flies small planes under agreements with larger airline partners. It's usually a pretty stable business, but investors were caught off guard by the company's latest results.

SkyWest reported a fourth-quarter loss of $0.93 per share on revenue of $681 million, significantly underperforming analyst expectations for an $0.08-per-share profit on revenue of $711 million.

The airline has revised its contracts with its airline partners that will shift reimbursements from a fixed monthly rate to a partially variable rate. Over time, this should reduce the risk to SkyWest's earnings because it will give it more flexibility to adjust pricing along with costs. But in the near term, it means significant revenue deferrals that cut into quarterly results.

SkyWest said the latest quarter included $69 million in deferred revenue, as well as a $36 million noncash impairment charge on 10 aircraft it is no longer using and another $11 million worth of accelerated expenses on 21 leased aircraft that are in the process of being stored.

CEO Chip Childs said that SkyWest is performing well on an operating basis. "We continue to experience strong demand for our product, and our teams performed exceptionally well through the busy holiday season to deliver a solid 99.9% adjusted completion rate for the fourth quarter," he said in a statement.

Now what

Investors going along for the ride should buckle up and prepare for turbulence: SkyWest is adjusting its contracts to account for higher pilot pay, and that will cause a lot of volatility in 2023.

Management believes the adjustments are prudent efforts to reduce risk and maximize cash flow, but it will take a few quarters to work through the system. Meanwhile, despite the higher pilot wage rates, SkyWest is still, like most airlines, struggling to attract and retain qualified pilots, with larger airlines typically able to offer higher rates and better benefits.

SkyWest is a long-term survivor, but it is facing a difficult period of transition and is likely years away from growth. Given the outlook, a lot of investors are choosing to head for the exits.