SkyWest Airlines 2008 Annual Report Download - page 9

SkyWest Airlines currently conducts its Delta Connection operations pursuant to the terms of an
Amended and Restated Delta Connection Agreement which obligates Delta to compensate SkyWest
Airlines for its direct costs associated with operating Delta Connection flights, plus a payment based on
block hours flown (the ‘‘SkyWest Airlines Delta Connection Agreement’’). In addition, the SkyWest
Airlines Delta Connection Agreement provides for us to increase our profitability if we reduce our
total costs. SkyWest Airlines’ United code-share operations are conducted under a United Express
Agreement pursuant to which SkyWest Airlines is paid primarily on a fee-per-completed block hour
and departure basis plus a margin based on performance incentives (the ‘‘United Express Agreement’’).
Under the United Express Agreement, excess margins over certain percentages must be returned or
shared with United, depending on various conditions. SkyWest Airlines and Midwest are parties to an
Airlines Services Agreement entered into on December 20, 2006 (the ‘‘Midwest Services Agreement’’).
In June 2008, SkyWest Airlines was notified that Midwest was in the process of organizing a financial
restructuring. SkyWest Airlines subsequently agreed to reduce the number of aircraft operating under
the Midwest Services Agreement from 21 aircraft to 12 aircraft. SkyWest Airlines also agreed to defer a
portion of Midwest’s weekly payment obligations for the period 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. In exchange for SkyWest Airlines’ obligation to provide the
designated number of flights and perform 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, a
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 or pay directly certain of
SkyWest Airlines’ operating costs, including costs related to fuel, landing fees, and catering.
ASA
ASA provides regional jet service primarily in the United States primarily from hubs located in
Atlanta and Cincinnati. ASA offered more than 775 daily scheduled departures as of December 31,
2008, all of which were Delta Connection flights. ASA’s fleet as of December 31, 2008, all of which
were flown for Delta, consisted of 39 CRJ700s, 110 CRJ200s, and 12 ATR-72 turboprops (these aircraft
were no longer in revenue service and ASA expects to return the aircraft to the lessor by February 28,
2009). Under the terms of the Second Amended and Restated Delta Connection Agreement executed
by ASA and Delta (the ‘‘ASA Delta Connection Agreement’’), Delta has agreed to compensate ASA
for its direct costs associated with operating Delta Connection flights, plus, if ASA completes a certain
minimum percentage of its Delta Connection flights, a specified margin on such costs. Additionally, the
ASA Delta Connection Agreement provides for incentive compensation upon satisfaction of certain
performance goals. Under the ASA Delta Connection Agreement, excess margins over certain
percentages must be returned to or shared with Delta, depending on various conditions.
Growth Opportunities
During the five years ended December 31, 2008, our total operating revenues expanded at a
compounded annual rate of 29.6% and the number of daily flights we operated increased from
approximately 1,500 as of December 31, 2004 to approximately 2,300 as of December 31, 2008. With
the exception of our acquisition of ASA, our growth during that five-year period was internally
generated. We believe there are additional opportunities for expansion of our operations, consisting
primarily of:
•Delivery of Aircraft Under Firm Order. We have firm orders to acquire 18 new CRJ700s and one
new CRJ900. On January 9, 2009, we announced that ASA reached an agreement with Delta to
operate an additional ten CRJ900 regional jet aircraft. The aircraft were previously ordered by
5