SkyWest Airlines 2003 Annual Report Download - page 21

In the event that the Company’s contractual rates have not been finalized at quarterly and or annual report dates, the Company
records revenues based on a prior period’s approved rates, adjusted to reflect management’s current estimate of the results of
these negotiations. If the contractual rates differ from those estimated by management, the Company will reflect these changes in
future condensed consolidated financial statements upon finalization of negotiations.
The Company’s results of operations included a positive pretax amount of $5.9 million, or $0.10 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
The Company operates under an FAA-approved continuous inspection and maintenance program. The Company’s historical
maintenance accounting policy for engine overhaul costs has included a combination of accruing for overhaul costs on a per-
flight-hour basis at rates estimated to be sufficient to cover the overhauls (the accrual method) and capitalizing the cost of engine
overhauls and expensing the capitalized cost over the estimated useful life of the overhaul (the deferral method). Through
December 31, 2001, the Company used the deferral method of accounting for EMB120 engines and was using the accrual method
for CRJ200 engines. As discussed below, during the quarter ended March 31, 2002, the Company elected to change its method of
accounting for CRJ200 engine overhauls to expensing overhaul maintenance events as incurred (the direct-expense method). The
costs of maintenance for airframe and avionics components, landing gear and normal recurring maintenance are expensed as
incurred. For leased aircraft, the Company is 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. For EMB120 engine overhauls related to leased aircraft to be
returned, the Company adjusts the estimated useful lives of the final engine overhauls based on the respective lease return dates.
Effective August 1, 2001, the Company and GE Engine Services, Inc. (GE) executed a sixteen-year engine services agreement
(the “Services Agreement") covering the scheduled and unscheduled repair of CRJ200 engines. Under the terms of the Services
Agreement, the Company agreed to pay GE a fixed rate per-engine-hour, payable monthly, and GE assumed the responsibility to
overhaul the Company’s CRJ200 engines as required during the term of the Services Agreement, subject to certain exclusions.
The Company accounted for all CRJ200 engine overhaul costs through December 31, 2001 under the accrual method using an
estimated hourly accrual rate through August 1, 2001, and then for the period from August 1, 2001 through December 31, 2001
using the fixed rate per-engine-hour pursuant to the Services Agreement.
In response to changing market conditions, the Company and one of its major partners agreed to modify the method of
reimbursement for CRJ200 engine overhaul costs under their contract flying arrangement beginning in 2002 from reimbursement
based on contract flights to reimbursement based on actual engine overhaul costs at the maintenance event. In April 2002, the
Company and GE signed a letter agreement (the Letter Agreement) amending the Services Agreement in response to the change
with the Company’s major partner. Pursuant to the Letter Agreement, payments under the Services Agreement were modified
from the per-engine-hour basis, payable monthly, to a time and materials basis, payable at the maintenance event. The revised
payment schedule extended through December 31, 2002, at which time monthly payments were to resume on the fixed rate per-
engine-hour, as adjusted for the difference in the actual payments made under the Letter Agreement during 2002 as compared to
the payments that would have been made under the Services Agreement during 2002. As discussed below, on March 14, 2003, the
Services Agreement was further amended.
Due to the change in the Company’s contractual arrangement with one of its major partners and based on the Letter Agreement,
the Company elected to change from the accrual method to the direct-expense method for CRJ200 engine overhaul costs effective
January 1, 2002. The Company believes the direct-expense method is preferable in the circumstances because the maintenance
liability 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,
effective January 1, 2002, the Company reversed its engine overhaul accrual that totaled $14,081,000 by recording a cumulative
effect of change in accounting principle of $8,589,000 (net of income taxes of $5,492,000).
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