SkyWest Airlines 2009 Annual Report Download - page 21

first quarter of 2010, and the 14 United Express regional jets to be flown by ASA will be in operation
by May of 2010. We also anticipate that ASA will operate these aircraft under a capacity purchase
agreement with a five-year term, and other terms which are generally consistent with the existing
SkyWest Airlines United Express Agreement.
Also on October 16, 2009, SkyWest Airlines extended to United a secured term loan in the
amount of $80 million. The term loan bears interest at a rate of 11%, with a ten-year amortization
period. The loan is secured by certain ground equipment and airport slot rights held by United.
SkyWest Airlines also agreed to defer certain amounts otherwise payable to SkyWest Airlines under the
existing SkyWest Airlines United Express Agreement. The maximum deferral amount is $49 million and
any amounts deferred accrue a deferral fee of 8%, payable weekly. United’s right to defer such
payments is scheduled to terminate in ten years.
A default by United under the SkyWest Airlines United Express Agreement, the ASA United
Express Agreement, the term loan extended by SkyWest Airlines to United or United’s obligation to
repay certain amounts deferred pursuant to the financing arrangement we established with United in
October 2009, could have a material adverse effect on our financial condition, results of operations,
liquidity and the price of our common stock.
The amounts we receive under our code-share agreements may be less than the actual amounts of the
corresponding costs we incur.
Under our code-share agreements with Delta and United, we are compensated for certain costs we
incur in providing services. With respect to costs that are defined as ‘‘pass-through’’ costs, our
code-share partner is obligated to pay to us the actual amount of the cost (and, with respect to the
ASA Delta Connection Agreement, a pre-determined rate of return based upon the actual cost we
incur). With respect to other costs, our code-share partner is obligated to pay to us amounts based, in
part, on pre-determined rates for certain costs. During the year ended December 31, 2009,
approximately 46% of our costs were pass-through costs and approximately 54% of our costs were
reimbursable at pre-determined rates. These pre-determined rates may not be based on the actual
expenses we incur in delivering the associated services. If we incur expenses that are greater than the
pre-determined reimbursement amounts payable by our code-share partners, our financial results will
be negatively affected.
The rates we are paid under the Delta Connection Agreements are subject to adjustment and, if adjusted
downward beyond our current estimates, our financial results would be negatively affected.
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, beginning with the third anniversary of
the execution of the agreements (September 8, 2008), Delta has the right to require that certain
contractual rates under those agreements shall not exceed the average rate of all carriers. As of
December 31, 2009, SkyWest Airlines and ASA had not finalized the contractual rates under their
respective Delta Connection Agreements. On October 23, 2009, Delta sent letters to SkyWest Airlines
and ASA requiring them to either adjust the rates payable under their respective Delta Connection
Agreements or accept termination of those agreements. Delta also notified SkyWest Airlines and ASA
of Delta’s estimate of the average rates to be applied under the Delta Connection Agreements. On
October 28, 2009, SkyWest Airlines and ASA notified Delta of their election to adjust the rates payable
under the Delta Connection Agreements; however, they also notified Delta of their disagreement with
Delta’s estimated rates and their belief that the methodology Delta used to calculate its estimated rates
is inconsistent with the terms of the Delta Connection Agreements. SkyWest Airlines and ASA have
exchanged subsequent correspondence with Delta, and SkyWest Airlines and ASA continue to negotiate
with Delta in an effort to determine an appropriate methodology for calculating the average rates of
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