SkyWest Airlines 2012 Annual Report Download - page 81

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
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
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.
During 2012, the Company reached an agreement with Delta to add 34 additional used dual-class
Bombardier regional jet aircraft that were previously operated by other regional carriers for Delta in
exchange for the early termination of 66 Bombardier CRJ200 regional jet aircraft (‘‘CRJ200s’’) under
the SkyWest Airlines and ExpressJet Delta Connection Agreements. The Company anticipates the 34
additional dual-class aircraft will be subleased from Delta for a nominal amount. The 34 additional
dual-class aircraft consist of 29 Bombardier CRJ900 regional jet aircraft (‘‘CRJ900s’’) and five
CRJ700s. As of December 31, 2012, the Company had taken delivery of 15 CRJ900s and five CRJ700s.
The Company anticipates that the remaining dual-class aircraft to be provided by Delta will be
delivered by June 2013. The Company anticipates that all 66 CRJ200 aircraft will be removed from the
Delta Connection Agreements by December 31, 2015. Of the 66 CRJ200s to be removed from service,
41 CRJ200s are subleased from Delta for a nominal amount, which are scheduled to be returned to
Delta without obligation to the Company.
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
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