SkyWest Airlines 2011 Annual Report Download - page 76

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2011
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
engine hour flown on a monthly basis and the third party vendor will assume the responsibility to
repair the engines at no additional cost to the Company, subject to certain specified exclusions.
Maintenance costs under these contracts are recognized when the engine hour is flown pursuant to the
terms of the contract. The Company uses the ‘‘deferral method’’ of accounting for its Brasilia
Turboprop engine overhauls wherein the overhaul costs are capitalized and depreciated to the next
estimated overhaul event. The costs of maintenance for airframe and avionics components, landing gear
and normal recurring maintenance are expensed as incurred. For leased aircraft, the Company is
subject to lease return provisions that require a minimum portion of the ‘‘life’’ of an overhaul be
remaining on the engine at the lease return date. For Brasilia Turboprop engine overhauls related to
leased aircraft to be returned, the Company adjusts the estimated useful lives of the final engine
overhauls based on the shorter of the remaining useful life or the respective lease return dates.
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, US
Airways, Alaska 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 ExpressJet are each parties to a Delta Connection Agreement with Delta,
pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The Delta
Connection Agreements provide for fifteen-year terms, subject to early termination by Delta, SkyWest
Airlines or ExpressJet, 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 ExpressJet from
performance for certain periods, and (iii) the right to terminate each of the Delta Connection
Agreements if SkyWest Airlines or ExpressJet fails to maintain competitive base rate costs, subject to
certain adjustment rights. The SkyWest Airlines and ExpressJet 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
ExpressJet 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 ExpressJet 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 ExpressJet Delta
Connection Agreement, Delta has agreed to compensate ExpressJet for its direct costs associated with
operating the Delta Connection flights, plus, if ExpressJet completes a certain minimum percentage of
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