SkyWest Airlines 2006 Annual Report Download - page 50

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44
ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aircraft Fuel
In thepast, we have not experienced difficultieswith fuel availability and we currently expect to be
able to obtain fuel at prevailing prices in quantities sufficientto meet our future needs. Pursuant to our
contract flyingarrangements, United has agreed to bear theeconomic risk of fuel price fluctuations on our
United Express flights. On our Delta Connection regional jetflights, Delta hasagreed to bear the
economic risk of fuel price fluctuations. On the majority of ourDelta Connection routes flown using
Brasiliaturboprops, we are required to bear the economic risk of fuel fluctuations. At present, we believe
that our results from operations will not be materially and adversely affected by fuel price volatility.
Interest Rates
Our earnings are affected by changes in interest ratesdue to theamounts of variable rate long-term
debt and the amountof cash and securities held.Theinterestrates applicable to variable rate notesmay
rise and increase the amount of interest expense. We would also receive higher amounts of interest income
on cash and securities held at thetime; however, the market value of our available-for-sale securities would
likely decline. At December 31, 2006, we hadvariable rate notes representing 55.4% of ourtotal long-term
debt compared to 74.7% of our long-term debt at December 31, 2005. For illustrative purposes only, we
have estimatedthe impactofmarket riskusingahypothetical increase in interest rates of one percentage
point forboth variable rate long-term debt and cash andsecurities. Based on this hypotheticalassumption,
we would have incurredan additional $10,170,000 in interest expense and received $4,605,000 in additional
interest incomefor theyear ended December31, 2006 and we would have incurred an additional
$6,701,000 in interest expense and received $4,895,000 in additional interest income for the year ended
December31,2005.
We currently intend to finance the acquisition of aircraftthrough manufacturer financing, third-party
leases or long-term borrowings. Changes in interest ratesmay impactouractual costs of acquiring these
aircraft. To theextentwe placethese aircraft into service underour code-shareagreements with Deltaand
United, ourcode-share agreements currently provide that reimbursement rates will be adjusted to levels
we believe are adequate to address any changes in ouraircraft ownership costs.
We have an interest rate swap agreementto manage its exposure on the debt instrument relatedto
ourheadquarters. Our policies do not permit us to enter into derivative instruments for any purpose other
than cash flowhedging purposes. Accordingly, we do notspeculate using derivative instruments. We assess
interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may
adversely impactexpectedfuture cash flowsand by evaluatinghedgingopportunities. Thefair valuesofthe
Company’s derivative instrumentsarerecognized as other current liabilities in theaccompanying balance
sheet. In accordance with provisions of SFAS No. 133, we recorded liabilities of $221,000 and $344,000 at
December31, 2006 and 2005 respectively, in theaccompanying consolidated balance sheets setforth in
Item 8 below representing the fair value of the outstanding interest rate swap agreement. We decreased
interest expense by $123,000 and $347,000 during the years ended December 31, 2006 and 2005,
respectively, relating to adjustments to the fairvalueof the derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth belowshouldbe readtogether with the “Management’sDiscussion and
Analysis of Financial Condition and Resultsof Operations,” appearing elsewhere herein.