SkyWest Airlines 2006 Annual Report Download - page 40

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configurations. Delivery datesforthese aircraft remain subject to finaldetermination as agreed upon by us
and our major partners.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1toour consolidated financial statements
for the year endedDecember 31, 2006, included in Item 8 of this Report. Critical accounting policies are
those policies thatare most importanttothe preparation of our consolidatedfinancial statementsandrequire
management’s subjective andcomplex judgments due to the need to make estimates about the effect of
matters that are inherently uncertain. Our critical accounting policies relate to revenue recognition, aircraft
maintenance, aircraft leases andimpairment of long-lived assets and intangibles as discussed below. The
application of these accountingpolicies involves theexercise of judgment andthe use of assumptions as to
future uncertainties and, as a result, actual results will differ, and coulddiffer materially from such estimates.
RevenueRecognition
Passenger and ground handling revenues are recognized when service is provided. Underour contract
and pro-rate flying agreements with our code-share partners, revenue is consideredearned when the flight
is completed. In the event that our contractual rates have not beenfinalizedat quarterly or annual
financial statement dates, we record revenues basedon a prior period’s approvedrates, 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 partiescould terminatethe
respective agreement, subject to certain rights of the other party, if certain performance criteria arenot
maintained. Our revenues could be impacted by anumber of factors, including changes to the code-share
agreements, contractmodifications resulting from contract renegotiations and our abilitytoearn incentive
paymentscontemplated under applicable agreements.
Maintenance
We use the direct-expense method of accounting for our regional jetaircraft engine overhaul costs.
Under this method, the maintenance liability is notrecorded untilthe maintenance servicesare performed,
thus substantially reducingsignificantestimates andjudgments inherent underthe accrualmethod.Weuse
the“deferral method” of accountingfor our Brasilia turboprop engine overhauls, which provides for
engine overhaul costs to be capitalized anddepreciated over the estimated useful life of the engine. For
leasedaircraft, we are subject to lease return provisions that require a minimum portion of the “life” of an
overhaul be remaining on theengineatthelease return date.With respect to engine overhauls related to
leasedBrasiliaturboprops to be returned,we adjust the estimated useful lives of the final engine overhauls
based on therespective lease return dates. With respect to SkyWest Airlines, a third-party vendor provides
our long-termengine services covering the scheduled and unscheduled repairs for engines on our
CRJ700s. Under theterms of theagreement, we pay a set dollar amount per engine hour flown on a
monthly basis andthe third-party vendor assumes theobligation to repair the engines at no additional cost
to us, subject to certainspecifiedexclusions.
Aircraft Leases
Themajority of SkyWest Airlines’ aircraft are leased from third parties, while ASA’s aircraft are
primarily debt-financed on a long-term basis.Inorder to determine the proper classification of our leased
aircraft as either operating leases or capitalleases, we must make certainestimates at the inception of the
lease relating to theeconomic usefullife andthe fair value of an assetas well as select an appropriate
discount rate to be used in discounting future lease payments. These estimates are utilized by management
in makingcomputations 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