SkyWest Airlines 2010 Annual Report Download - page 82

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
calculates the incentives achieved during the month under the Continental CPA and recognizes revenue
accordingly.
ExpressJet and United are parties to the ExpressJet United Express Agreement, which sets forth
the principal terms and conditions governing ExpressJet’s United Express operations. Under the terms
of the United Express Agreement, ExpressJet is compensated primarily on a fee-per-completed-block
hour and departure basis and is reimbursed for fuel and other costs. Additionally, ExpressJet 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.
Other Revenue Items
Under the Company’s code-share agreements with Delta, United and Continental, the Company
earns revenue for an amount per aircraft designed to reimburse the Company for certain aircraft
ownership costs. The Company has concluded that a component of its revenue under these agreements
is rental income, inasmuch as the agreements identify the ‘‘right of use’’ of a specific type and number
of aircraft over a stated period of time. The amounts deemed to be rental income under the
agreements for the years ended December 31, 2010, 2009 and 2008 were $492.7 million, $490.1 million
and $496.5 million, respectively. These amounts were recorded as passenger revenue on the Company’s
consolidated statements of income. Under the SkyWest Inc. Delta Connection Agreement and the
SkyWest Airlines United Express Agreement, the Company receives a reimbursement for direct costs
associated with placing each additional aircraft into service. The reimbursement is applicable to
incremental costs specific to placing each additional aircraft into service. The Company recognizes the
revenue associated with these reimbursement payments once the aircraft is placed into service.
The Company’s passenger and ground handling revenues could be impacted by a number of
factors, including changes to the Company’s code-share agreements with Delta, United, Continental or
AirTran, integration of ExpressJet’s operations as contemplated by the ExpressJet Merger contract
modifications resulting from contract re-negotiations, the Company’s ability to earn incentive payments
contemplated under the Company’s code-share agreements and settlement of reimbursement disputes
with the Company’s major partners.
Deferred Aircraft Credits
The Company accounts for incentives provided by aircraft manufacturers as deferred credits. The
deferred credits related to leased aircraft are amortized on a straight-line basis as a reduction to rent
expense over the lease term. Credits related to owned aircraft reduce the purchase price of the aircraft,
which has the effect of amortizing the credits on a straight-line basis as a reduction in depreciation
expense over the life of the related aircraft. The incentives are credits that may be used to purchase
spare parts and pay for training and other expenses.
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