SkyWest Airlines 2009 Annual Report Download - page 22

the carriers within the Delta Connection program. Because SkyWest Airlines and ASA have not
reached an agreement with Delta regarding the final contractual rates to be established under the
Delta Connection Agreements, we have evaluated our method for calculating the average rate of the
carriers within the Delta Connection Program under the revenue recognition accounting guidance and
recorded revenue under those agreements based on our management’s understanding of the applicable
terms in the Delta Connection Agreements and our management’s best estimate of the revenue that
will ultimately be realized upon settlement of the contractual rates with Delta with respect to the year
ended December 31, 2009. There can be no assurance that the methodology we have used to estimate
the average rate which will be established pursuant to the Delta Connection Agreements will ultimately
be used for purposes of determining the average rate to which we will be subject. If our disagreement
with Delta on this issue is not resolved consistent with management’s interpretation, our operating
results and financial condition may be negatively impacted.
The SkyWest Airlines and ASA Delta Connection Agreements provide that, beginning with the
fifth anniversary of the execution of the agreements (September 8, 2010), Delta has the right to require
that certain contractual rates under those agreements shall not exceed the 2nd lowest of all carriers
within the Delta Connection Program.
SkyWest Airlines and ASA are engaged in litigation with Delta, which may negatively impact our financial
results and our relationship with Delta
During the quarter ended December 31, 2007, Delta notified SkyWest, 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 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
Airlines and ASA during December 2007. Delta continues to withhold a portion of the funds we
believe are payable as weekly scheduled wire payments to SkyWest Airlines and ASA. As of
December 31, 2009, we had recognized a cumulative total of $32.4 million of revenue associated with
the funds withheld by Delta. On February 1, 2008, SkyWest Airlines and ASA filed a lawsuit in Georgia
state court disputing Delta’s treatment of the matter (the ‘‘Complaint’’). Delta filed an Answer to the
Complaint and a Counterclaim against SkyWest Airlines and ASA on March 24, 2008. Delta’s
Counterclaim alleges that ASA and SkyWest Airlines breached the Delta Connection Agreements by
invoicing Delta for the IROP expenses that were paid pursuant to Delta’s policies, and claims only a
portion of those expenses may be invoiced to Delta. Delta seeks unspecified damages in its
counterclaim.
On March 24, 2008, Delta filed a Motion to Dismiss the Complaint (the ‘‘Motion to Dismiss’’). A
hearing on the Motion to Dismiss was held September 5, 2008. In an order entered September 13,
2008, the Court granted in part and denied in part the Motion to Dismiss. The Court denied the
Motion to Dismiss with respect to the breach of contract claim contained in the Complaint. The Court
denied in part the Motion to Dismiss with respect to the action for declaratory judgment contained in
the Complaint, and granted in part the Motion to Dismiss to the extent the Complaint seeks to read
alternative or supplemental obligations created by prior conduct into the Delta Connection
Agreements. The Court granted the Motion to Dismiss with respect to claims for estoppel, unilateral
mistake, and mutual mistake contained in the Complaint. The Court’s ruling affects the current posture
of the case, but does not preclude pursuit of the claim for breach of contract or the claim for
declaratory relief, under which SkyWest Airlines and ASA continue to seek recovery of all amounts
withheld by Delta.
On July 31, 2009, SkyWest Airlines and ASA filed an Amended Complaint in the lawsuit adding
claims under Georgia law for voluntary payment and mutual departure from the strict terms of the
Delta Connection Agreements. Under those theories, SkyWest Airlines and ASA seek recovery of all of
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