SkyWest Airlines 2007 Annual Report Download - page 16

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cease any of these operations or no longer provide these services to us, due to termination of one of our code-share
agreements, a strike or other labor interruption by Delta, United or Midwest personnel or for any other reason, we may not be
able to replace these services on terms and conditions as favorable as those we currently receive, or at all. Since our revenues
and operating profits are dependent on our level of flight operations, we could then be forced to significantly reduce our
operations. Furthermore, upon certain terminations of our code-share agreements, Delta, United and Midwest could require
us to sell or assign to them facilities and inventories, including maintenance facilities, we use in connection with the code-
share services we provide. As a result, in order to offer airline service after termination of any of our code-share agreements,
we may have to replace these airport facilities, assets and services. We may be unable to arrange such replacements on
satisfactory terms, or at all.
We may be negatively impacted by the troubled financial condition and restructurings of Delta and United.
A substantial percentage of our total revenues is attributable to our code-share agreements with Delta and United,
which both recently emerged from bankruptcy proceedings. The U.S. Bankruptcy Courts charged with administration of the
Delta and United bankruptcy cases have entered final orders approving the assumption of our code-share agreements.
Notwithstanding those approvals, these bankruptcies and restructurings present considerable continuing risks and
uncertainties for our code-share agreements and, consequently, for our operations.
Although a plan of reorganization has been confirmed in each of the United and Delta bankruptcy proceedings, there
is no assurance that either United or Delta will ultimately succeed in its reorganization efforts or will remain a going concern
over the long term. The increase in fuel prices may negatively impact both Delta’ s and United’ s confirmed reorganization
plans. Other aspects of the Delta and United bankruptcies and reorganizations pose additional risks to our code-share
agreements. There is no assurance that Delta or United will be able to operate successfully under the terms of its confirmed
plan.
In light of the importance of our code-share agreements with Delta and United to our business, the termination of
these agreements could jeopardize our operations. Such events could leave us unable to operate much of our current aircraft
fleet and the additional aircraft we are obligated to purchase, Which would likely result, in a material adverse effect on our
operations and financial condition.
Even though Delta and United have emerged from bankruptcy proceedings, their respective financial positions will
continue to pose risks for our operations. Serial bankruptcies are not unprecedented in the commercial airline industry, and
Delta and/or United could file for bankruptcy again after emergence from Chapter 11, in which case our code-share
agreements could be subject to termination under the U.S. Bankruptcy Code. Regardless of whether subsequent bankruptcy
filings prove to be necessary, Delta and United have required, and will likely continue to require, our participation in efforts
to reduce costs and improve their respective financial positions. These efforts could result in lower utilization rates of our
aircraft, lower departure rates on the contract flying portion of our business, and more volatile operating margins. We believe
that any of these developments could have a negative effect on many aspects of our operations and financial performance.
The amounts we receive under our code-share agreements may be less than the actual amounts of the corresponding
costs we incur.
Under our code-share agreements with Delta, United and Midwest, we are compensated for certain costs we incur in
providing services. With respect to costs that are defined as “pass-through” costs, our code-share partner is obligated to pay
to us the actual amount of the cost (and, with respect to the ASA Delta Connection Agreement, a pre-determined rate of
return based upon the actual cost we incur). With respect to other costs, our code-share partner is obligated to pay to us
amounts based, in part, on pre-determined rates for certain costs. During the year ended December 31, 2007, approximately
54% of our costs were pass-through costs and approximately 46% of our costs were reimbursable at pre-determined rates.
These pre-determined rates may not be based on the actual expenses we incur in delivering the associated services. If we
incur expenses that are greater than the pre-determined reimbursement amounts payable by our code-share partners, our
financial results will be negatively affected.
SkyWest Airlines and ASA are engaged in litigation with Delta, which may negatively impact our financial results and
our relationship with Delta
During the quarter ended December 31, 2007, Delta notified SkyWest, SkyWest Airlines and ASA of a dispute
under the SkyWest Airlines and ASA Delta Connection Agreements. The dispute relates to allocation of liability for certain
irregular operations (“IROP”) expenses that are paid by SkyWest Airlines and ASA to Delta Connection passengers under
certain situations. As a result of the dispute, Delta withheld a combined total of approximately $25 million (pretax) from one