SkyWest Airlines 2008 Annual Report Download - page 67

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
In the event the Company has a reimbursement dispute with a major partner, the Company
evaluates the dispute under its established revenue recognition criteria and, provided the revenue
recognition criteria have been met, the Company recognizes revenue based on management’s estimate
of the resolution of the dispute. During the quarter ended December 31, 2007, Delta notified the
Company, SkyWest Airlines and ASA of a dispute under the Delta Connection Agreements executed by
Delta with SkyWest Airlines and ASA. The dispute relates to allocation of liability for certain irregular
operations (‘‘IROP’’) expenses that are paid by SkyWest Airlines and ASA to their passengers under
certain situations. As a result, Delta withheld a combined total of approximately $25 million (pretax)
from one of the weekly scheduled wire payments to SkyWest and ASA during December 2007. Delta
continues to withhold a portion of the funds the Company believes are payable as weekly scheduled
wire payments to SkyWest and ASA (See Note 4 for additional details).
The Delta Connection Agreements executed by SkyWest Airlines and ASA provide for fifteen-year
terms, 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. The SkyWest Airlines and ASA Delta
Connection Agreements establish a multi-year rate reset provisions. In the Delta Connection
Agreements, the fixed-fee rates are specifically defined through 2009. The parties agreed that on or
after a specified date in 2010 the parties would reset such rates to reflect SkyWest Airlines’ actual costs
in 2010 (with a similar process on each 5th year thereafter). 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. SkyWest Airlines and ASA also have cross-termination
rights between the two Delta Connection Agreements.
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. 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. The
incentives are defined in the ASA Delta Connection Agreement as being measured and determined on
a monthly and quarterly basis. At the end of each quarter, the Company calculates the incentives
achieved during the quarter and recognizes revenue accordingly. The parties to the Delta Connection
Agreements make customary representations, warranties and covenants, including with respect to
various operational, marketing and administrative matters.
SkyWest Airlines has 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
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