SkyWest Airlines 2010 Annual Report Download - page 25

relating to representation of various work groups and the relative seniority of the work groups at each
carrier. Unexpected delays, expenses or other challenges to integrating the workforces could impact the
anticipated synergies from the combination of Atlantic Southeast and ExpressJet and affect the
operations and financial performance of the combined airline.
The amounts we receive under our code-share agreements may be less than the corresponding costs we incur.
Under our code-share agreements with Delta, United and Continental, 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. 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, 2010, approximately 31% of our costs were
pass-through costs and approximately 69% 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.
SkyWest Airlines and Atlantic Southeast have each entered into a Delta Connection Agreement
with Delta, pursuant to which SkyWest Airlines and Atlantic Southeast provide contract flight services
for Delta. Among other provisions, those Delta Connection Agreements provide that Delta has the
right to require that certain contractual rates under those agreements shall not exceed the second
lowest rates of all carriers within the Delta Connection Program. On November 19, 2010, SkyWest
Airlines and Atlantic Southeast reached agreements with Delta related to the second lowest rate
provisions to be applied under their respective Delta Connection Agreements. As a result, SkyWest
Airlines and Atlantic Southeast have established the contractual rates which will apply under those
agreements through December 31, 2015.
There can be no assurance that the agreed-upon rates will be higher than the costs SkyWest
Airlines and Atlantic Southeast will incur to provide the services required under their respective Delta
Connection Agreement. The new rates and future rate adjustments could negatively affect our financial
position and operating results.
SkyWest Airlines and Atlantic Southeast 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
Atlantic Southeast of a dispute under the Delta Connection Agreements executed by Delta with
SkyWest Airlines and Atlantic Southeast. The dispute relates to allocation of liability for certain
irregular operations, or ‘‘IROP’’ expenses that are paid by SkyWest Airlines and Atlantic Southeast to
their passengers and vendors 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 Atlantic Southeast 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 Atlantic
Southeast. As of June 30, 2008, we had recognized a cumulative total of $31.7 million of revenue
associated with the funds withheld by Delta. On February 1, 2008, SkyWest Airlines and Atlantic
Southeast 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 Atlantic Southeast on March 24, 2008. Delta’s Counterclaim alleges that Atlantic Southeast 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. Since July 1, 2008, we have
not recognized revenue related to IROP expense reimbursements withheld by Delta because collection
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