SkyWest Airlines 2013 Annual Report Download - page 46

other such costs that are passed through to the major airline partner. Regional airlines benefit from a
fixed-fee arrangement because they are sheltered from many of the elements that could cause volatility
in airline financial performance, including variations in ticket prices, passenger loads and fuel prices.
However, regional airlines in fixed-fee arrangements do not benefit from positive trends in ticket prices,
passenger loads or fuel prices and, because the major airline absorbs many of the costs associated with
the regional airline flight, the margin between the fixed fees for a flight and the expected per-flight
costs tends to be smaller than the margins associated with revenue-sharing arrangements.
Under our fixed-fee arrangements, three compensation components have a significant impact on
comparability of revenue and operating expense for the periods presented in this Report. One item is
the reimbursement of fuel expense, which is a directly-reimbursed expense under all of our fixed-fee
arrangements. If we purchase fuel directly from vendors, our major partners reimburse us for fuel
expense incurred under each respective fixed-fee contract, and we record such reimbursement as
passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our
fixed-fee arrangements during a particular period will impact our fuel expense and our passenger
revenue during the period equally, with no impact on our operating income. Over the past few years,
some of our major airline partners have purchased an increased volume of fuel directly from vendors
on flights we operated under our flying contracts, which also impacts the comparability of revenue and
operating expense for the periods presented in this Report.
The second item is the reimbursement of landing fees and station rents, which is a directly-
reimbursed expense under all of our fixed-fee arrangements. Our major partners reimburse us for
landing fees and station rent expense incurred under each respective fixed-fee contract, and we record
such reimbursement as passenger revenue. Over the past few years, some of our major airline partners
have paid an increased volume of landing fees and station rents directly to our vendors on flights we
operated under our flying contracts, which also impacts the comparability of revenue and operating
expense for the periods presented in this Report.
The third item is the compensation we receive for engine maintenance under our fixed-fee
arrangements. Under our United, American, US Airways and Alaska flying contracts, a portion of our
compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to
compensate us for engine maintenance costs (‘‘Fixed-Rate Engine Contracts’’). Under the
compensation structure for our Delta Connection and United CPA flying contracts, our major partner
reimburses us for engine maintenance expense when the expense is incurred (‘‘Directly-Reimbursed
Engine Contracts’’). We use the direct-expense method of accounting for our CRJ200 regional jet
aircraft engine overhaul costs and, accordingly, we recognize engine maintenance expense on our
CRJ200 engines on an as-incurred basis. Under the direct-expense method, the maintenance liability is
recorded when the maintenance services are performed (‘‘CRJ200 Engine Overhaul Expense’’).
Because we use the direct-expense method of accounting for our CRJ200 engine expense, and
because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine
Contracts, the number of engine maintenance events and related expense we incur each reporting
period under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our
operating income for the presented reporting periods.
Because we recognize revenue at the same amount and in the same period when we incur engine
maintenance expense on engines operating under our Directly-Reimbursed Engine Contracts, the
number of engine events and related expense we incur each reporting period does not have a direct
impact on the comparability of our operating income for the presented reporting periods.
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