SkyWest Airlines 2009 Annual Report Download - page 71

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2009
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
occurrence of certain events. Delta’s termination rights include (i) cross-termination rights between the
two Delta Connection Agreements, (ii) the right to terminate each of the Delta Connection
Agreements upon the occurrence of certain force majeure events, including certain labor-related events,
that prevent SkyWest Airlines or ASA from performance for certain periods, and (iii) the right to
terminate each of the Delta Connection Agreements if SkyWest Airlines or ASA fails to maintain
competitive base rate costs, subject to certain adjustment rights. The SkyWest Airlines and ASA Delta
Connection Agreements contain multi-year rate reset provisions beginning in 2010 and each 5th year
thereafter. In the Delta Connection Agreements, the fixed-fee rates are specifically defined through
2009. The parties agreed that on or after a specified date in 2010 the parties would reset such rates to
reflect SkyWest Airlines’ actual costs in 2010 (with a similar process on each 5th year thereafter). In
addition to the termination rights, Delta has the right to extend the term of the Delta Connection
Agreements upon the occurrence of certain events or at the expiration of the initial term. SkyWest
Airlines and ASA have the right to terminate their respective Delta Connection Agreement upon the
occurrence of certain breaches by Delta, including the failure to cure payment defaults. SkyWest
Airlines and ASA also have cross-termination rights between the two Delta Connection Agreements.
Under the terms of the SkyWest Airlines Delta Connection Agreement, Delta has agreed to
compensate SkyWest Airlines for the direct costs associated with operating the Delta Connection
flights, plus a payment based on block hours flown. Under the terms of the ASA Delta Connection
Agreement, Delta has agreed to compensate ASA for its direct costs associated with operating the
Delta Connection flights, plus, if ASA completes a certain minimum percentage of its Delta Connection
flights, an additional percentage of such costs. Additionally, ASA’s Delta Connection Agreement
provides for the payment of incentive compensation upon satisfaction of certain performance goals. The
incentives are defined in the ASA Delta Connection Agreement as being measured and determined on
a monthly and quarterly basis. At the end of each quarter, the Company calculates the incentives
achieved during the quarter and recognizes revenue accordingly. The parties to the Delta Connection
Agreements make customary representations, warranties and covenants, including with respect to
various operational, marketing and administrative matters.
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. In the event
that the contractual rates under those agreements have not been finalized at quarterly or annual
financial statement dates, the Company records revenues based on the lower of prior period’s approved
rates, as adjusted to reflect any contract negotiations and our estimate of rates that will be
implemented in accordance with revenue recognition guidelines. 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 within the Delta Connection Program.
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’s letter also notified SkyWest Airlines and ASA of Delta’s estimate of the average
rates to be applied under those 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
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