SkyWest Airlines 2005 Annual Report Download - page 35

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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. In the event that our contractual
rates have not been finalized at quarterly or annual financial statement dates, we record revenues based on a prior period’s approved
rates, adjusted to reflect management’s current estimate of the results of the then-current contract negotiations. Our agreements with
our code-share partners 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. Our revenues could be impacted by a number of
factors, including changes to the code-share agreements, contract modifications resulting from contract renegotiations and our ability
to earn incentive payments contemplated under applicable agreements.
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, thus substantially reducing significant estimates
and judgments inherent under the accrual method. We use the “deferral method” of accounting for our Brasilia turboprop engine
overhauls, which provides for engine overhaul costs to be capitalized and depreciated over the estimated useful life of the engine. 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. Under the terms of the 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.
Aircraft Leases
The majority of SkyWest Airlines’ aircraft are leased from third parties, while ASA’s aircraft are primarily debt-financed on a
long-term basis. 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 condensed consolidated balance
sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our condensed consolidated
balance sheet.
Impairment of Long-Lived and Intangible Assets
As of December 31, 2005, we had approximately $2.6 billion of property and equipment and related assets. Additionally, as of
December 31, 2005, we had approximately $33.0 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 $33.0 million relating to the acquisition of ASA. The intangiblel is being amortized over fifteen years under the
strait-line method. As of December 31, 2005, we had recorded $718,000 in 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. On a
periodic basis, we evaluate whether the book value of our aircraft is impaired in accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” Based on the results of the evaluations, our management concluded no
impairment was necessary as of December 31, 2005. However, there is inherent risk in estimating the future cash flows used in
the impairment test. If cash flows do not materialize as estimated, there is a risk the impairment charges recognized to date may
be inaccurate, or further impairment charges may be necessary in the future.