SkyWest Airlines 2009 Annual Report Download - page 45

policies relate to revenue recognition, aircraft maintenance, aircraft leases, impairment of long-lived
assets and intangibles, stock-based compensation expense and fair value as discussed below. The
application of these accounting policies involves the exercise of judgment and the use of assumptions as
to future uncertainties and, as a result, actual results will differ, and could differ materially from such
estimates.
Revenue Recognition
Passenger and ground handling revenues are recognized when service is provided. Under our
contract and pro-rate flying agreements with our code-share partners, revenue is considered earned
when the flight is completed. Our agreements with our code-share partners contain certain provisions
pursuant to which the parties could terminate the respective agreement, subject to certain rights of the
other party, if certain performance criteria are not maintained. Our revenues could be impacted by a
number of factors, including changes to the code-share agreements, contract modifications resulting
from contract renegotiations and our ability to earn incentive payments contemplated under applicable
agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement
date, we record that period’s revenues based on the lower of prior period’s approved rates adjusted for
the current contract negotiations and our estimate of rates that will be implemented in accordance with
revenue recognition guidelines. Also, in the event we have a reimbursement dispute with a major
partner at a quarterly or annual financial statement date, we evaluate the dispute under established
revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize
revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are
required to exercise judgment and use assumptions in the application of our revenue recognition policy.
Maintenance
We use the direct-expense method of accounting for our regional jet aircraft engine overhaul costs.
Under this method, the maintenance liability is not recorded until the maintenance services are
performed. We use the ‘‘deferral method’’ of accounting for our Brasilia turboprop engine overhauls,
which provides for engine overhaul costs to be capitalized and depreciated over the estimated useful
life of the engine. For leased aircraft, we are subject to lease return provisions that require a minimum
portion of the ‘‘life’’ of an overhaul be remaining on the engine at the lease return date. With respect
to engine overhauls related to leased Brasilia turboprops to be returned, we adjust the estimated useful
lives of the final engine overhauls based on the respective lease return dates. With respect to SkyWest
Airlines, a third-party vendor provides our long-term engine services covering the scheduled and
unscheduled repairs for engines on our CRJ700s operated under the SkyWest Airlines United Express
Agreement. Under the terms of the vendor agreement, we pay a set dollar amount per engine hour
flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no
additional cost to us, subject to certain specified exclusions.
Aircraft Leases
The majority of SkyWest Airlines’ aircraft are leased from third parties, while ASA’s aircraft are
primarily debt-financed on a long-term basis. In order to determine the proper classification of our
leased aircraft as either operating leases or capital leases, we must make certain estimates at the
inception of the lease relating to the economic useful life and the fair value of an asset as well as select
an appropriate discount rate to be used in discounting future lease payments. These estimates are
utilized by management in making computations as required by existing accounting standards that
determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft
leases have been classified as operating leases, which results in rental payments being charged to
expense over the terms of the related leases. Additionally, operating leases are not reflected in our
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