SkyWest Airlines 2006 Annual Report Download - page 15

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Thefinancial arrangements betweenthe regional airlines andtheir code-share partners usually involve
contract, or fixed-fee, payments based on the flights or a revenue-sharingarrangement basedon the flight
ticket revenues,asexplainedbelow:
•Fixed-Fee Arrangements. Undera fixed-fee arrangement, themajorairline generally pays the
regional airlineafixed-fee based on the flight, with additionalincentives based on completion of
flights, on-timeperformance and baggage handling performance. In addition, the majorand
regional airlineoften enter into an arrangementpursuant to which the major airline bearsthe risk
of changes in theprice of fuel and other such costs that arepassed through to the major airline
partner. Regional airlines benefitfrom a fixed-fee arrangement because they aresheltered from
most of the elements that cause volatility in airline earnings, including variations in ticketprices,
passengerloadsand fuel prices. However, regionalairlines in fixed-fee arrangements do not benefit
from positive trends in ticket prices, passenger loads or fuel prices and, because the major airlines
absorb most of therisks, the margin betweenthe fixed-fees for a flightand the expected per-flight
coststends to be smallerthanthe margins associated with revenue-sharing arrangements.
•Revenue-Sharing Arrangements. Under a revenue-sharing arrangement, the major airline and
regional airline negotiateaprorationformula,pursuant to which theregional airline receives a
percentage of the ticketrevenues for those passengers traveling forone portion of their trip on the
regional airlineand the otherportion of their trip on the major airline. Substantially all costs
associated withthe regional airlineflight are borne by theregional airline. In such a
revenue-sharingarrangement, theregional airlinerealizes increased profits as ticketprices and
passenger loads increase or fuel prices decrease and, correspondingly, realizes decreasedprofits as
ticket prices and passenger loadsdecrease or fuel prices increase.
Code-Share Agreements
SkyWest Airlines operates underaUnited Express Agreement with United, and SkyWestAirlines and
ASA operate under Delta Connection Agreements with Delta. These code-share agreements authorize
Delta and United to identify our flights and fares undertheir two-letter flight designator codes (“DL” and
“UA”) in the central reservation systems, and authorize us to paint our aircraft with their colors andlogos
andtomarketour status as TheDelta Connection or United Express. Under each of our code-share
agreements, our passengers participate in the major partner’s frequent flyer program,and themajor
partner provides additional services such as reservations, ticket issuance, ground support servicesand gate
access. We also coordinate our marketing, advertising and other promotionalefforts with Delta and
United. As of December 31,2006,approximately 94.0% of SkyWest Airlines’ and ASA’s total daily flights
were structured as contract flights, where Delta or United controls scheduling, ticketing, pricing and seat
inventories. Theremainder of our flights are pro-rate flights, where SkyWest Airlines and ASA control
scheduling, ticketing, pricing and seat inventories, and share revenues with Delta or United according to
pro-rate formulas. Thefollowing summaries of our code-share agreements do not purport to be complete
and are qualified in their entirety by referenceto the applicable agreement. Under our code-share
agreements, we have commitments from ourmajor partners to place35 additional regional jets into service
over the next year.
SkyWestAirlines Delta Connection Agreement
SkyWest Airlines andDelta are parties to theSkyWest Airlines Delta Connection Agreement, dated
as of September 8, 2005. As of December 31, 2006,SkyWest Airlines operated nineCRJ900s, nine
CRJ700s, 57 CRJ200s and 14 Brasilia turboprops under the SkyWest Airlines DeltaConnection
Agreement. SkyWestAirlines operates these aircraft to provide Delta Connection service between Delta
hubs and destinations designated by Delta. As of December 31, 2006, SkyWest Airlines wasoperating