SkyWest Airlines 2006 Annual Report Download - page 60

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expense is recorded when the overhaul event occurs. In 2004, the Company enteredinto an engine services
agreement with a third party vendor to provide long-termengine services coveringthe scheduled and
unscheduled repairs for certain of its CRJ700 regionaljet aircraft. Under the termsof the agreement, the
Company pays aset dollar amount per engine hourflown on a monthly basis and thethird party vendor
will assume theresponsibility to repair theengines at no additional cost to theCompany, subject to certain
specified exclusions. Maintenance costs under thesecontracts arerecognized pursuant to the termsof the
contract. The Company uses the“deferral method” of accounting for its Brasilia turboprop engine
overhauls wherethe overhaulcosts are capitalized and depreciated over theestimated useful life of the
engine. Thecosts of maintenance forairframe and avionics components, landing gear and normal
recurring maintenance are expensed as incurred. For leased aircraft, the Company is subject to lease
return provisions that require a minimum portion of the “life” of an overhaul be remaining on the engine
at the lease return date. For Brasilia turboprop engine overhauls related to leased aircraft to be returned,
theCompany adjusts the estimateduseful lives of thefinal engineoverhauls basedon therespective lease
return dates.
Passenger and Ground HandlingRevenues
Passenger and ground handling revenues are recognized when service is provided. Under the
Company’s contract and pro-rate flyingagreements with Delta and United, revenue is considered earned
when theflightiscompleted.Intheevent thatthe contractual rateshave not been finalized at quarterly or
annual financial statement dates, the Company records revenues basedon a prior period’s approved rates,
adjusted, as applicable, to reflectmanagement’s current estimate of the results of the then-current contract
negotiations.
On September 7, 2005, the Company completed the acquisition of allof the issued and outstanding
capitalstock of ASA from ASAHoldings.In connectionwiththe acquisitionof ASA, SkyWest Airlines
and ASAentered into Delta Connection Agreements with Delta, which became effective September 8,
2005. On September 14, 2005,Deltafiled forreorganization 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 assumedthe Delta Connection Agreements on October 6, 2005 (see
footnote 2of the consolidated financial statements).
Each of the DeltaConnection Agreements provides for afifteen-year term, subject to early
termination by Delta or SkyWest Airlines or ASA, as applicable, upon the occurrence of certainevents.
Delta’stermination rightsinclude (i) cross-termination rights between the twoDeltaConnection
Agreements, (ii) theright to terminate each of the Delta Connection Agreements upon the occurrence of
certain forcemajor events, including certain labor-related events, that prevent SkyWestAirlines or ASA
from performance for certain periods, and (iii) the right to terminate each of theASA 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 hastheright to extend the term of theDelta
Connection Agreements upon the occurrence of certain events or at theexpiration of the initial term.
SkyWest Airlines and ASA have the rightto terminate their respective Delta Connection Agreements
upon the occurrence of certain breaches by Delta, including the failureto curepayment defaults. SkyWest
Airlines andASAalso have cross-termination rights between the two Delta Connection Agreements.
Under theterms of the SkyWest Airlines DeltaConnection Agreement, Delta agrees to compensate
SkyWest Airlines for its direct costs associated with operating the DeltaConnection flights, plus a payment
based on block hours flown. The SkyWest Airlines Delta ConnectionAgreement contains 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 theDelta Connection flights, plus, if ASA completes a
certain minimumpercentage of its Delta Connection flights, an additional percentage of such costs.
Additionally, ASA’s Delta Connection Agreement provides for the payment of incentivecompensation