SkyWest Airlines 2005 Annual Report Download - page 54

50
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.
Passenger and Ground Handling Revenues
Passenger and ground handling revenues are recognized when service is provided. Under the Company’s contract and pro-rate
flying agreements with Delta and United, as well as the Company’s prior arrangement with Continental, 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.
On September 7, 2005, the Company completed its acquisition of all of the issued and outstanding capital stock of ASA from
ASA Holdings, Inc. a subsidiary of Delta. ASA is a regional airline with primary hub operations in Atlanta, Salt Lake City and
Cincinnati. In connection with the acquisition of ASA, SkyWest Airlines and ASA entered into Delta Connection Agreements,
which became effective September 8, 2005. On September 14, 2005, Delta filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. With the approval of the U.S. Bankruptcy Court charged with administration of Delta’s reorganization
proceedings, Delta assumed the Delta Connection Agreements on October 6, 2005 (see footnote 2 of the consolidated financial
statements).
Each of the Delta Connection Agreements provides for a fifteen-year term, subject to early termination by Delta or SkyWest
Airlines or ASA, as applicable, upon the occurrence of certain events. Delta’s termination rights include (i) cross-termination
rights between the two Delta Connection Agreements, (ii) the right to terminate each of the Delta Connection Agreements upon
the occurrence of certain force major events, including certain labor-related events, that prevent SkyWest Airlines or ASA from
performance for certain periods, and (iii) the right to terminate each of the ASA Delta Connection Agreements if SkyWest
Airlines or ASA fails to maintain competitive base rate costs, subject to certain adjustment rights. In addition to the termination
rights, Delta has the right to extend the term of the Delta Connection Agreements upon the occurrence of certain events or at the
expiration of the initial term. SkyWest Airlines and ASA have the right to terminate their respective Delta Connection
Agreements upon the occurrence of certain breaches by Delta, including the failure to cure payment defaults. SkyWest Airlines
and ASA also have cross-termination rights between the two Delta Connection Agreements.
Under the terms of the SkyWest Airlines Delta Connection Agreement, Delta agrees to compensate SkyWest Airlines for its
direct costs associated with operating the Delta Connection flights, plus a payment based on block hours flown. However, among
other changes, the SkyWest Airlines Delta Connection Agreement established a multi-year rate reset provision. Under the terms
of the ASA Delta Connection Agreement, Delta agrees to compensate ASA for its direct costs associated with operating the Delta
Connection flights, plus, if ASA completes a certain minimum percentage of its Delta Connection flights, an additional
percentage of such costs. Additionally, ASA’s Delta Connection Agreement provides for the payment of incentive compensation
upon satisfaction of certain performance goals. Under the ASA Delta Connection Agreement, excess margins over certain
percentages must be returned or shared with Delta, depending on various conditions. The parties to the Delta Connection
Agreements make customary representations, warranties and covenants, and the agreements contain other provisions typical of
agreements of this kind, including with respect to various operational, marketing and administrative matters.
The SkyWest Airlines and ASA Delta Connection Agreements also provide a weekly payment for an amount per aircraft
designed to reimburse the Company for certain aircraft ownership costs. In accordance with Emerging Issues Task Force No. 01-
08, Determining Whether an Arrangement Contains a Lease, the Company has concluded that a component of its revenue under
the Delta Connection Agreements is rental income, inasmuch as the Delta Connection Agreements identify the "right of use" of a
specific type and number of aircraft over a stated period of time. The amounts deemed to be rental income under the Delta
Connection Agreement for the years ended December 31, 2005 and 2004 were $139.9 million and $72.5 million, respectively.
These amounts were recorded in passenger revenue on the Company’s consolidated statements of income.
Effective July 31, 2003, SkyWest Airlines entered into the United Express Agreement, which sets forth the principal terms and
conditions governing the Company’s United Express operations. The United Express Agreement has received all necessary
approvals from the U.S. Bankruptcy Court. Under the terms of the United Express Agreement, SkyWest Airlines is compensated
primarily on a fee-per-completed-block hour and departure basis and is reimbursed for fuel and other costs. Additionally,
SkyWest Airlines is eligible for incentive compensation upon the achievement of certain performance criteria.