SkyWest Airlines 2010 Annual Report Download - page 79

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Passenger and Ground Handling Revenues
The Company recognizes passenger and ground handling revenues when the service is provided.
Under the Company’s contract and pro-rate flying agreements with Delta, United, Continental and
AirTran, revenue is considered earned when the flight is completed. Revenue is recognized under the
Company’s pro-rate flying agreements based upon the portion of the pro-rate passenger fare the
Company anticipates that it will receive.
Delta Connection Agreements
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. The Delta Connection Agreements provide for fifteen-year terms, subject to early
termination by Delta, SkyWest Airlines or Atlantic Southeast, as applicable, upon the 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 Atlantic Southeast from performance for certain periods, and (iii) the right to terminate
each of the Delta Connection Agreements if SkyWest Airlines or Atlantic Southeast fails to maintain
competitive base rate costs, subject to certain adjustment rights. The SkyWest Airlines and Atlantic
Southeast Delta Connection Agreements contain multi-year rate reset provisions beginning in 2010 and
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 Atlantic Southeast 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 Atlantic Southeast 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 Atlantic Southeast Delta
Connection Agreement, Delta has agreed to compensate Atlantic Southeast for its direct costs
associated with operating the Delta Connection flights, plus, if Atlantic Southeast completes a certain
minimum percentage of its Delta Connection flights, an additional percentage of such costs.
Additionally, Atlantic Southeast’s Delta Connection Agreement provides for the payment of incentive
compensation upon satisfaction of certain performance goals. The incentives are defined in the Atlantic
Southeast 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 made customary
representations, warranties and covenants, including with respect to various operational, marketing and
administrative matters.
In the event that the contractual rates under the Delta Connection 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 the
Company’s estimate of rates that will be implemented in accordance with revenue recognition
75