SkyWest Airlines 2011 Annual Report Download - page 77

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2011
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
its Delta Connection flights, an additional percentage of such costs. Additionally, ExpressJet’s Delta
Connection Agreement provides for the payment of incentive compensation upon satisfaction of certain
performance goals. The incentives are defined in the ExpressJet 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
guidelines.
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. During the fourth quarter of 2010, SkyWest Airlines and Atlantic Southeast
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.
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
Company, SkyWest Airlines and Atlantic Southeast of a dispute under the Delta Connection
Agreements executed by Delta with SkyWest Airlines and Atlantic Southeast. The dispute relates to
allocation of liability for certain irregular operations (‘‘IROP’’) expenses that are paid by SkyWest
Airlines and ExpressJet (formerly Atlantic Southeast) to their passengers under certain situations. As a
result, Delta withheld a combined total of approximately $25 million (pre-tax) from one of the weekly
scheduled wire payments to SkyWest Airlines and Atlantic Southeast during December 2007. Delta
continues to withhold a portion of the funds the Company believes are payable as weekly scheduled
wire payments to SkyWest Airlines and ExpressJet (See Note 7 for additional details).
United Express Agreements
SkyWest Airlines and United have entered into a United Express Agreement, which sets forth the
principal terms and conditions governing SkyWest Airlines’ United Express operations. Under the terms
of the United Express Agreement, SkyWest Airlines is compensated primarily on a fee-per-completed-
block hour and departure basis and is reimbursed for fuel and other costs. Additionally, SkyWest
Airlines 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
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