SkyWest Airlines 2007 Annual Report Download - page 48

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Impairment of Long Lived and Intangible Assets
As of December 31, 2007, the Company had approximately $2.7 billion of property and equipment and related
assets. Additionally, as of December 31, 2007, the Company had approximately $28.5 million in intangible assets. In
accounting for these long-lived and intangible assets, the Company makes estimates about the expected useful lives of the
assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the
assets and the cash flows they generate. On September 7, 2005, the Company completed the acquisition of all of the issued
and outstanding capital stock of ASA. The consolidated statements of income for the year ended December 31, 2005 reported
herein contain 114 days of operations relating to ASA from September 8, 2005 to December 31, 2005.The Company
recorded an intangible asset of approximately $33.7 million relating to the acquisition of ASA. The intangible is being
amortized over fifteen years under the strait-line method. As of December 31, 2007 and 2006, the Company had $5.2 million
and $3.0 million in accumulated amortization expense, respectively. Factors indicating potential impairment include, but are
not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the
long-lived assets and operating cash flow losses associated with the use of the long-lived assets. On a periodic basis, the
Company evaluates whether the book value of its aircraft is impaired in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Based on the results of the
evaluations, the Company’ s management concluded no impairment was necessary as of December 31, 2007.
Capitalized Interest
Interest is capitalized on aircraft purchase deposits and long-term construction projects as a portion of the cost of the
asset and is depreciated over the estimated useful life of the asset. During the years ended December 31, 2007, 2006 and
2005, the Company capitalized interest costs of approximately $0, $0.6 million, and $2.8 million, respectively.
Maintenance
The Company operates under an FAA-approved continuous inspection and maintenance program. The Company
uses the direct expense method of accounting for its regional jet engine overhauls where the expense is recorded when the
overhaul event occurs. In 2004, the Company entered into an engine services agreement with a third party vendor to provide
long-term engine services covering the scheduled and unscheduled repairs for certain of its CRJ700 regional jet aircraft.
Under the terms of the agreement, the Company pays a set dollar amount per engine hour flown on a monthly basis and the
third party vendor will assume the responsibility to repair the engines at no additional cost to the Company, subject to certain
specified exclusions. Maintenance costs under these contracts are recognized pursuant to the terms of the contract. The
Company uses the “deferral method” of accounting for its Brasilia turboprop engine overhauls where the overhaul costs are
capitalized and depreciated over the estimated useful life of the engine. The costs of maintenance for airframe 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, the Company adjusts
the estimated useful lives of the final engine overhauls based on the respective lease return dates.
Passenger and Ground Handling Revenues
The Company recognizes passenger and ground handling revenues when the service is provided. Under the
Company’ s contract and pro-rate flying agreements with Delta, United and Midwest, revenue is considered earned when the
flight is completed.
SkyWest Airlines and ASA have each entered into a Delta Connection Agreement with Delta, pursuant to which
SkyWest Airlines and ASA provide contract flight services for Delta. Each of the Delta Connection Agreements provides for
a fifteen-year term, subject to early termination by Delta, SkyWest Airlines or ASA, as applicable, upon the occurrence of
certain events. Delta’ s termination rights include (i) cross-termination rights between the two Delta Connection Agreements,
(ii) the right to terminate each of the Delta Connection Agreements upon the occurrence of certain force majeure events,
including certain labor-related events, that prevent SkyWest Airlines or ASA from performance for certain periods, and
(iii) the right to terminate each of the 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 has the right to
extend the term of the Delta Connection Agreements upon the occurrence of certain events or at the expiration of the initial
term. SkyWest Airlines and ASA have the right to terminate their respective Delta Connection Agreement upon the
occurrence of certain breaches by Delta, including the failure to cure payment defaults (See Note 4). SkyWest Airlines and
ASA also have cross-termination rights between the two Delta Connection Agreements.