SkyWest Airlines 2008 Annual Report Download - page 66

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SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
of the evaluations, the Company’s management concluded no impairment was necessary as of
December 31, 2008.
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, 2008, 2007 and 2006, the Company capitalized interest costs of
approximately $1.4 million, $0, and $0.6 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
wherein the expense is recorded when the overhaul event occurs. The Company has 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 when
the engine hour is flown pursuant to the terms of the contract. The Company uses the ‘‘deferral
method’’ of accounting for its Brasilia turboprop engine overhauls wherein 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. Revenue is recognized under the Company’s
pro-rate flying agreements based upon the portion of the pro-rate passenger fare the Company
anticipates that it will receive.
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. Among other
provisions, those Delta Connection Agreements provide that, upon the third anniversary of the
execution of the agreements (September 8, 2008), the contractual rates under those agreements shall
not exceed the average rate of all carriers within the Delta Connection Program. As of December 31,
2008, SkyWest Airlines and ASA had not finalized the contractual rates with Delta. In the event that
the contractual rates have not been finalized at quarterly or annual financial statement dates, the
Company records revenues based on the prior period’s approved rates adjusted for the current contract
negotiations.
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