SkyWest Airlines 2011 Annual Report Download - page 23

The current terms of the SkyWest, SkyWest Airlines and ExpressJet Delta Connection Agreements
are subject to certain early termination provisions. Delta’s termination rights include cross-termination
rights (meaning that a breach by any of SkyWest, SkyWest Airlines or ExpressJet of its Delta
Connection Agreement could, under certain circumstances, permit Delta to terminate any or all of the
Delta Connection Agreements), the right to terminate each of the agreements upon the occurrence of
certain force majeure events (including certain labor-related events) that prevent SkyWest Airlines or
ExpressJet from performance for certain periods and the right to terminate each of the agreements if
SkyWest Airlines or ExpressJet, as applicable, fails to maintain competitive base rate costs, subject to
certain rights of SkyWest Airlines to take corrective action to reimburse Delta for lost revenues. The
current terms of the SkyWest Airlines and ExpressJet United Express Agreements are subject to certain
early termination provisions and subsequent renewals. United may terminate the SkyWest Airlines and
ExpressJet United Express Agreements due to an uncured breach by SkyWest Airlines or ExpressJet of
certain operational or performance provisions, including measures and standards related to flight
completions, baggage handling and on-time arrivals. The current terms of the Continental CPA are
subject to certain early termination provisions and subsequent renewals. Continental may terminate the
Continental CPA due to an uncured breach by ExpressJet of certain operational and performance
provisions, including measures and standards related to flight completions and on-time arrivals.
We currently use the systems, facilities and services of Delta, United and Continental to support a
significant portion of our operations, including airport and terminal facilities and operations,
information technology support, ticketing and reservations, scheduling, dispatching, fuel purchasing and
ground handling services. If Delta, United or Continental were to cease any of these systems, close any
of these facilities or no longer provide these services to us, due to termination of one of our code-share
agreements, a strike or other labor interruption by Delta, United or Continental personnel or for any
other reason, we may not be able to replace those systems, facilities or services on terms and conditions
as favorable as those we currently receive, or at all. Since our revenues and operating profits are
dependent on our level of flight operations, we could then be forced to significantly reduce our
operations. Furthermore, upon certain terminations of our code-share agreements, Delta, United and
Continental could require us to sell or assign to them facilities and assets, including maintenance
facilities, we use in connection with the code-share services we provide. As a result, in order to offer
airline service after termination of any of our code-share agreements, we may have to replace these
facilities, assets and services. We may be unable to arrange such replacements on satisfactory terms, or
at all.
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, Continental, Alaska and US Airways, 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, 2011, approximately 30%
of our costs were pass-through costs and approximately 70% 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 ExpressJet are parties to Delta Connection Agreements with Delta, pursuant
to which SkyWest Airlines and ExpressJet 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 ExpressJet reached
19