SkyWest Airlines 2012 Annual Report Download - page 41

Our management deems the current facilities of SkyWest, SkyWest Airlines and ExpressJet as being
suitable to support existing operations and believes these facilities will be adequate for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
We are subject to certain legal actions which we consider routine to our business activities. As of
December 31, 2012, our management believed, after consultation with legal counsel, that the ultimate
outcome of such legal matters is not likely to have a material adverse effect on our financial position,
liquidity or results of operations. However, the following is a significant outstanding legal matter, which
if not resolved consistent with the position we have taken in such matters, would negatively impact our
financial results.
SkyWest Airlines and ExpressJet v. Delta
During the quarter ended December 31, 2007, Delta notified SkyWest, SkyWest Airlines and
Atlantic Southeast (now ExpressJet) of a dispute under the Delta Connection Agreements executed by
Delta with SkyWest Airlines and Atlantic Southeast . The dispute relates to the allocation of liability
for certain irregular operation (‘‘IROP’’) expenses paid by SkyWest Airlines and Atlantic Southeast
(now ExpressJet) to their passengers and vendors under certain situations. During the period between
the execution of the Delta Connection Agreements in September 2005 and December 2007, SkyWest
Airlines and Atlantic Southeast passed through to Delta IROP expenses that were paid pursuant to
Delta’s policies, and Delta accepted and reimbursed those expenses. Delta now claims it is obligated to
reimburse only a fraction of the IROP expenses. 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. Since December 2007, Delta has continued to
withhold payments from the weekly scheduled wire payments to SkyWest Airlines and Atlantic
Southeast (now ExpressJet), and has disputed subsequent billings for IROP expenses. On February 1,
2008, SkyWest Airlines and Atlantic Southeast filed a Complaint in the Superior Court for Fulton
County, Georgia (‘‘Superior Court’’) challenging Delta’s treatment of the matter and seeking recovery
of the payments withheld by Delta and any future withholdings related to this issue. Delta filed an
Answer to the SkyWest Airlines and Atlantic Southeast Complaint and a Counterclaim against SkyWest
Airlines and Atlantic Southeast on March 24, 2008. Delta’s Counterclaim alleged that SkyWest Airlines
and Atlantic Southeast breached the Delta Connection Agreements by invoicing Delta for IROP
expenses that were paid pursuant to Delta’s policies, and claims only a portion of those expenses may
be invoiced to Delta. Since July 1, 2008, we have not recognized revenue related to IROP expense
reimbursements withheld by Delta because collection of those reimbursements is the subject of
litigation and is not reasonably assured. As of December 31, 2012, we had recognized a cumulative
total of $31.7 million of revenue associated with the funds withheld by Delta.
During 2010, we began preliminary settlement discussions with Delta related to the dispute.
Notwithstanding the legal merits of the case, we offered to settle the claim for approximately
$5.9 million less than the cumulative total of revenue recognized related to this matter. Those
settlement discussions were not successful; however, as a result of the settlement offer, we wrote off
$5.9 million of related receivables as of December 31, 2010.
After proceedings that included contested motions, document discovery, and depositions, Delta
voluntarily dismissed its Counterclaim. Discovery in that action was not complete at the time of
dismissal. On February 14, 2011, SkyWest Airlines and Atlantic Southeast voluntarily dismissed their
claims in the Superior Court, and filed a new complaint (the ‘‘State Court Complaint’’) in the Georgia
State Court of Fulton County (the ‘‘State Court’’). The claims continue to include breach of contract,
breach of contract based on mutual departure, breach of contract based on voluntary payment, and
breach of the duty of good faith and fair dealing. Delta moved for partial dismissal of the State Court
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