SkyWest Airlines 2006 Annual Report Download - page 39

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ASA has been a code-share partner with Delta in Atlanta since1984. ASAexpanded its operations as
a Delta Connection carrier to also include Cincinnati and SaltLake City in September 2002 and
April 2003, respectively. ASA operates approximately 750 daily flights, all in theDeltaConnection system.
Historically, multiple contractual relationships have enabledus to reduce reliance on any singlemajor
airlinecode andtoenhance andstabilizeoperating resultsthroughamix of ourcontrolled or “pro-rate”
flying and contract flying. On contract routes,themajor airline partner controls scheduling, ticketing,
pricingand seat inventories andwe are compensated by themajorairline partner at contracted rates based
on the completed block hours, flight departures and other operating measures. On pro-rate flights, we
control scheduling, ticketing,pricing andseatinventories andreceive a pro-ratedportion of passenger
fares. SinceAugust 1, 2003, all of our CRJ flights have been contract flights. For theyear ended
December 31,2006, essentiallyall of our Brasilia turboprops flown for Deltawere flown under pro-rate
arrangements while approximately 71% of our Brasilia turboprops flown in theUnited system were flown
under contractual arrangements,with the remaining 29% percent flown underpro-rate arrangements.
In September 2005, Delta filed forreorganization under Chapter 11 of theU.S. Bankruptcy
Code. Prior to thedateofDelta’s bankruptcy filing, each of SkyWest Airlines and ASAentered into an
amended Delta Connection Agreement which provides for a 15-year term,subject to certain termination
and extension rights. Deltareceived allnecessary approvals from theU.S. Bankruptcy Court and theDelta
Connection Agreements were assumed by Delta on October 6, 2005. Under theterms of its Delta
Connection Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour
and departurebasis, is reimbursed for fueland otherdirectcosts, and is paid a margin based on completed
blockhours. Under its Delta Connection Agreement, ASA is compensatedprimarily on a fee-per-
completed-block-hour basis, is directly reimbursed for fuel and other costs, and is paid amarginbased on
performanceincentives.Notwithstandingthe assumptionby Deltaof the Delta ConnectionAgreements,
Delta’s bankruptcy filing could still lead to many other unforeseen expenses, risks anduncertainties for
SkyWest Airlines,ASA or both.
Although Deltahasfiled aproposedplanof reorganizationand scheduledahearingseeking
confirmation of theproposed plan, it could convertits reorganization proceeding to a liquidation
proceeding under the U.S. Bankruptcy Code or liquidatesome or all of its assets through one or more
transactions with third parties. Such events could jeopardize our Delta Connection operations, leaveus
unable to efficiently utilizethe additional aircraft which we are currently obligated to purchase, or result in
other outcomes which could have a material adverse effect on our operatingresults or financial condition.
Although a plan of reorganization has been confirmed in United’s bankruptcy proceedings, which
became effective on February 1, 2006, there is no assurance that United will be able to operate successfully
under the terms of itsplan. In the event United is notable to performsuccessfully under theterms of its
plan, our United Express operations couldbejeopardized, which could have a material adverse effect on
our operating results or financial condition.
On November 21,2006, we announced that SkyWest had been selected by Delta to operate12
CRJ700spreviously operated by Comair. Deliveries of these aircraft began in January 2007 and are
scheduled to be completed by April 2007. On December 21, 2006 we announced that SkyWest Airlines was
selected by Midwest to enter into an airlineservices agreement. Under the termsof theagreement,
SkyWest Airlines will operateup to 25 additional CRJ200s. Theinitial 15 aircraft are scheduledfor
deliverybeginning in April 2007. Our total firm aircraft orders and commitments, as of December31, 2006,
consisted of orders for eight additional new CRJ900s, planstoacquire 11 additional CRJ200s through third-
partyleasearrangementsand commitments to sublease 12 CRJ700’s from Delta.Totalexpenditures for
these aircraft and relatedflightequipment, includingamounts for contractual price escalations are
estimated to be approximately $363.5 million through April2007. Additionally, our agreement with
Bombardier includes options for another 38 aircraft that canbedelivered in either 70 or 90-seat