SkyWest Airlines 2010 Annual Report Download - page 80

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SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
guidelines. Among other provisions, the 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 Atlantic Southeast requiring them to either adjust the rates payable under their respective
Delta Connection Agreements or accept termination of those agreements. Delta’s letters also notified
SkyWest Airlines and Atlantic Southeast of Delta’s estimate of the average rates to be applied under
those agreements. On October 28, 2009, SkyWest Airlines and Atlantic Southeast 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 Connection
Agreements. SkyWest Airlines and Atlantic Southeast, on one hand, and Delta, on the other hand,
exchanged subsequent correspondence, and in November 2010, the parties reached an agreement
related to the average rate provisions applied under the Delta Connection Agreements.
The Delta Connection Agreements also provide 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 second lowest of all carriers within the Delta
Connection Program. On September 8, 2010, Delta sent letters to SkyWest Airlines and Atlantic
Southeast requiring them to either adjust the rates payable under their respective Delta Connection
Agreements or accept termination of those agreements. Delta’s letters also notified SkyWest Airlines
and Atlantic Southeast of Delta’s estimate of the second lowest rates to be applied under those
agreements. On September 10, 2010, SkyWest Airlines and Atlantic Southeast 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 Connection
Agreements. During the fourth quarter of 2010, SkyWest Airlines and Atlantic Southeast Airlines
reached an agreement with Delta on contractual rates satisfying the 2010 rate reset provision and the
second-lowest rate provision and agreed to rates through December 31, 2015. Delta additionally waived
its right to require that the contractual rates payable under the Delta Connection Agreements shall not
exceed the second-lowest rates of all carriers within the Delta Connection Program through
December 31, 2015. As a result of finalizing contractual rates payable under the Delta Connection
Agreements from September 8, 2008 through December 31, 2010, the Company recorded $10.3 million
in additional revenue during the quarter ended December 31, 2010.
Under the terms of the SkyWest Airlines and Atlantic Southeast Delta Connection Agreements,
Delta has agreed to compensate SkyWest Airlines and Atlantic Southeast for initiatives that directly
result in pass through cost savings. Delta shall share such savings on an equal basis for a twelve month
period. During the quarter ended December 31, 2010, Delta paid and SkyWest and Atlantic Southeast
recognized approximately $6.9 million in cost savings revenue.
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
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