SkyWest Airlines 2007 Annual Report Download - page 49

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Under the terms of the SkyWest Airlines Delta Connection Agreement, Delta has agreed to compensate SkyWest
Airlines for the direct costs associated with operating the Delta Connection flights, plus a payment based on block hours
flown. The SkyWest Airlines Delta Connection Agreement established a multi-year rate reset provision. Under the terms of
the ASA Delta Connection Agreement, Delta has agreed to compensate ASA for its direct costs associated with operating the
Delta Connection flights, plus, if ASA completes a certain minimum percentage of its Delta Connection flights, an additional
percentage of such costs. Additionally, ASA’ s Delta Connection Agreement provides for the payment of incentive
compensation 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. The parties to the Delta
Connection Agreements make customary representations, warranties and covenants, including with respect to various
operational, marketing and administrative matters.
Effective July 31, 2003, SkyWest Airlines entered into a United Express Agreement, which sets forth the principal
terms and conditions governing SkyWest Airlines’ United Express operations. Under the terms of the United Express
Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-block hour and departure basis and is
reimbursed for fuel and other costs. Additionally, SkyWest Airlines is eligible for incentive compensation upon the
achievement of certain performance criteria.
SkyWest Airlines and Midwest are parties to an Airlines Services Agreement entered into on December 20, 2006
(the “Midwest Services Agreement”). Under the terms of the Midwest Services Agreement, SkyWest Airlines has agreed to
operate up to 25 Bombardier CRJ200 Regional Jets (“CRJ200s”) under Midwest’ s code. In exchange for SkyWest Airlines’
obligation to provide the designated number of flights and performing other obligations under the Midwest Services
Agreement, Midwest has agreed to pay SkyWest Airlines on a weekly basis a fixed-fee per completed block hour, fixed-fee
per completed departure, a fixed-fee for overhead, and a one-time start-up payment for each aircraft delivered. The Midwest
Services Agreement provides for incentives or penalties based upon SkyWest Airlines’ performance, including on-time
arrival performance and completion percentage rates. Additionally, Midwest has agreed to reimburse certain of SkyWest
Airlines’ operating costs, including costs related to fuel, landing fees, and catering.
Under the Company’ s revenue agreements with Delta, United and Midwest, the Company earns revenue for an
amount per aircraft designed to reimburse the Company for certain aircraft ownership costs. In accordance with Emerging
Issues Task Force No. 01-08, Determining Whether an Arrangement Contains a Lease (“EITF 01-08”), the Company has
concluded that a component of its revenue under these agreements is rental income, inasmuch as the Agreements identify 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 agreements for the years ended December 31, 2007, 2006 and 2005 were $516.9 million, $486.6 million and
$308.3 million, respectively. These amounts were recorded as passenger revenue on the Company’ s consolidated statements
of income.
The Company’ s revenues could be impacted by a number of factors, including changes to the Company’ s code-share
agreements with Delta, United or Midwest, contract modifications resulting from contract re-negotiations and the Company’ s
ability to earn incentive payments contemplated under the Company’ s code-share agreements.
Deferred Aircraft Credits
The Company accounts for incentives provided by aircraft manufacturers as deferred credits. The deferred credits
related to leased aircraft are amortized on a straight-line basis as a reduction to rent expense over the lease term. Credits
related to owned aircraft reduce the purchase 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 the related aircraft. The incentives are credits that may be
used to purchase spare parts and pay for training and other expenses.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between
the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled.
Net Income Per Common Share
Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted
EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised