SkyWest Airlines 2008 Annual Report Download - page 68

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
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. The
incentives are defined in the United Express Agreement as being measured and determined on a
monthly basis. At the end of each month, the Company calculates the incentives achieved during the
month and recognizes revenue accordingly.
SkyWest Airlines and Midwest are parties to an Airlines Services Agreement entered into on
December 20, 2006. Under the terms of the Midwest Services Agreement, SkyWest Airlines has agreed
to operate up to 25 Bombardier 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
reimbursement of certain direct costs when a new aircraft is 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. In June 2008, SkyWest Airlines was notified that Midwest was in the process of organizing a
financial restructuring. SkyWest Airlines subsequently reached agreement with Midwest to reduce the
number of aircraft operating under the Midwest Services Agreement from 21 aircraft to 12 aircraft. As
part of the modified terms, SkyWest Airlines agreed to defer a portion of Midwest’s weekly payment
obligations from July 1, 2008 through November 30, 2008. The amount SkyWest Airlines agreed to
defer plus certain amounts Midwest owed to SkyWest Airlines at June 30, 2008, will be payable, with
interest by Midwest in four equal quarterly payments starting on August 31, 2009. The total amount
SkyWest Airlines has agreed to defer through November 30, 2008 is $9.0 million. Because of the unique
modified payment terms associated with the deferred amounts, the Company did not recognize the
revenue associated with the deferred payments in the Company’s consolidated statements of income for
the year ended December 31, 2008.
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, 2008, 2007 and 2006 were $496.5 million,
$516.9 million and $486.6 million, respectively. These amounts were recorded as passenger revenue on
the Company’s consolidated statements of income. Under the SkyWest Inc. Delta Connection
Agreement, the SkyWest Airlines United Express Agreement and the Midwest Airlines Services
Agreement, the Company receives a reimbursement for direct start-up costs for each additional aircraft
placed into service. The start-up reimbursement is applicable to incremental costs specific to placing
each additional aircraft into service. The Company recognizes the revenue associated with these
reimbursement payments once the aircraft is placed into service.
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