SkyWest Airlines 2006 Annual Report Download - page 61

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upon satisfaction of certain performance goals. Under the ASA Delta Connection Agreement, excess
margins over certain percentages must be returned or shared with Delta, depending on various conditions.
Thepartiesto the Delta ConnectionAgreements make customary representations,warranties and
covenants, and theagreements contain other provisions typical of agreements of this kind,including with
respect to various operational, marketing and administrative matters.
TheSkyWest Airlines and ASA Delta Connection Agreementsalso providerevenuedesignated as an
amount per aircraft designed to reimburse the Companyfor certain aircraft ownership costs. In accordance
with Emerging Issues Task Force No. 01-08, Determining Whether an ArrangementContains a Lease
(“EITF 01-08”), the Company has concluded that a component of its revenue under the Delta Connection
Agreements is rental income, inasmuch as theDeltaConnection Agreements identify the“right of use” of
aspecific typeand number of aircraft over a stated period of time. The amounts deemed to be rental
income under theDeltaConnection Agreements for the years ended December 31, 2006, 2005 and 2004
were $290.5 million, $139.9 millionand$72.5 million, respectively. These amounts wererecorded as
passenger revenue on theCompany’s consolidated statements of income.
Effective July 31, 2003, SkyWest Airlines entered into the United Express Agreement, which setsforth
theterms and conditions governing the Company’s United Express operations. The United Express
Agreement has received all necessary approvals from the U.S. Bankruptcy Court chargedwith
administration of United’s Chapter 11 reorganization proceedings. Under the terms of the United Express
Agreement, SkyWestAirlines is compensated primarily on a fee-per-completed-block hour anddeparture
basis and is reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive
compensation upon theachievement of certain performance criteria.
TheUnited Express Agreement also provides that we earn revenue for an amount peraircraft
designed to reimburse theCompany forcertain aircraft ownership costs. In accordance with EITF01-08,
theCompany has concluded that acomponent of its revenue under the United Express Agreement is
rental income, inasmuch as the United Express Agreement identifies the “right of use” of a specific type
and number of aircraft over a stated period of time. The amounts deemed to be rental income under the
United ExpressAgreement for theyears ended December 31,2006,2005 and 2004 were $196.1, $168.4 and
$114.5 million, respectively. These amounts were recorded in passengerrevenue on the Company’s
consolidated statements of income. The United Express Agreement contains certain provisions pursuant to
which theparties could terminate theagreement, subject to certain rights of theotherparty, if certain
performance criteria are not maintained.
The Company’s revenues could be impacted by a number of factors, including changes to its code-
share agreements with Delta and United, contract modifications resulting fromcontract re-negotiations
andthe Company’s ability to earn incentive payments contemplated under its code-shareagreements.
Deferred Aircraft Credits
The Companyaccounts forincentives provided by aircraft manufacturers as deferred credits. The
deferred creditsrelated to leased aircraft areamortized on a straight-line basis as a reduction to rent
expense over thelease term. Credits related to owned aircraft reduce thepurchase price of the aircraft,
which has the effect of amortizing the credits on a straight-line basis as a reduction in depreciation expense
over the life of therelated aircraft. The incentives arecredits that may be used to purchase spare parts and
pay for training and other expenses.
Income Taxes
TheCompany recognizes a liability or asset for the deferred tax consequences of all temporary
differences between the tax basisofassets and liabilities and their reported amounts in theconsolidated