SkyWest Airlines 2009 Annual Report Download - page 72

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2009
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Connection Agreements. SkyWest Airlines and ASA and Delta have exchanged subsequent
correspondence, and SkyWest Airlines and ASA continue to negotiate with Delta in an effort to
determine an appropriate methodology for calculating the average rates of 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, the
Company has evaluated the 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 management’s understanding of the applicable terms in the Delta
Connection Agreements and 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.
The SkyWest Airlines and the ASA Delta Connection Agreements provides 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.
In the event the Company has a reimbursement dispute with a major partner, the Company
evaluates the dispute under its established revenue recognition criteria and, provided the revenue
recognition criteria have been met, the Company recognizes revenue based on management’s estimate
of the resolution of the dispute. During the quarter ended December 31, 2007, Delta notified the
Company, 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 certain irregular
operations (‘‘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 the Company believes are payable as weekly
scheduled wire payments to SkyWest Airlines and ASA (See Note 5 for additional details).
SkyWest Airlines and United have entered into a United Express Agreement, which sets forth the
principal terms and conditions governing SkyWest Airlines’ United Express operations. Under the terms
of the United Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-
block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest
Airlines is eligible for incentive compensation upon the achievement of certain performance criteria.
The incentives are defined in the United Express Agreement as being measured and determined on a
monthly basis. At the end of each month, the Company calculates the incentives achieved during the
month and recognizes revenue accordingly.
On June 10, 2009, SkyWest Airlines and Midwest reached a mutual understanding to terminate the
service SkyWest Airlines provided under the Midwest Services Agreement. As a result, SkyWest
Airlines removed its remaining 12 CRJ200 regional jet aircraft from Midwest in stages through January
2010. Additionally, SkyWest Airlines agreed to cancel an unsecured note from Midwest in the amount
of approximately $9.3 million in exchange for a $4.0 million payment from Midwest that was collected
and recorded as revenue by SkyWest Airlines.
On November 4, 2009, SkyWest Airlines entered into a code-share agreement with AirTran. Under
the terms of the code-share agreement, SkyWest Airlines has agreed to operate five CRJ200s for
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