SkyWest Airlines 2012 Annual Report Download - page 93

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
(6) Commitments and Contingencies (Continued)
Legal Matters
The Company is subject to certain legal actions which it considers routine to its business activities.
As of December 31, 2012, management believes, after consultation with legal counsel, that the ultimate
outcome of such legal matters is not likely to have a material adverse effect on the Company’s financial
position, liquidity or results of operations. However, the following is a significant outstanding legal
matter.
SkyWest Airlines and ExpressJet v. Delta
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 the allocation of liability for certain
IROP expenses paid by SkyWest Airlines and Atlantic Southeast 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 those 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, the Company has 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, the Company had recognized a cumulative total of $31.7 million of revenue associated with the
funds withheld by Delta.
During 2010, the Company and Delta began preliminary settlement discussions related to the
IROP dispute. Notwithstanding the legal merits of the case, the Company 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,
the Company 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,
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