SkyWest Airlines 2013 Annual Report Download - page 77

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
agreement with a third party vendor to provide long-term engine services covering the scheduled and
unscheduled repairs for certain of its Bombardier CRJ700 Regional Jets (‘‘CRJ700s’’) and
Embraer S.A. (‘‘Embraer’’) ERJ145 regional jet (‘‘ERJ 145’’) aircraft. Under the terms of the
agreement, the Company pays a set dollar amount per engine hour flown on a monthly basis and the
third party vendor will assume the responsibility to repair the engines at no additional cost to the
Company, subject to certain specified exclusions. Maintenance costs under these contracts are
recognized when the engine hour is flown pursuant to the terms of the contract. The Company uses the
‘‘deferral method’’ of accounting for its Embraer Brasilia EMB-120 turboprop aircraft (‘‘Brasilia
turboprop’’) engine overhauls wherein the overhaul costs are capitalized and depreciated to the next
estimated overhaul event. The costs of maintenance for airframe and avionics components, landing gear
and normal recurring maintenance are expensed as incurred. For leased aircraft, the Company is
subject to lease return provisions that require a minimum portion of the ‘‘life’’ of an overhaul be
remaining on the engine at the lease return date. For Brasilia turboprop engine overhauls related to
leased aircraft to be returned, the Company adjusts the estimated useful lives of the final engine
overhauls based on the shorter of the remaining useful life or the respective lease return dates.
Passenger and Ground Handling Revenues
The Company recognizes passenger and ground handling revenues when the service is provided.
Under the Company’s contract and pro-rate flying agreements with Delta, United, US Airways,
American and Alaska, revenue is considered earned when the flight is completed. Revenue is
recognized under the Company’s pro-rate flying agreements based upon the portion of the pro-rate
passenger fare the Company anticipates that it will receive. Other ancillary revenues commonly
associated with airlines such as baggage fee revenue, ticket change fee revenue and the marketing
component of the sale of mileage credits are retained by the Company’s major airline partners on
flights that the Company operates under its code-share agreements.
In the event that the contractual rates under the 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.
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.
In several of the Company’s agreements, the Company is eligible for incentive compensation upon
the achievement of certain performance criteria. The incentives are defined in the agreements and are
being measured and determined on a monthly, quarterly or semi-annual basis. At the end of period, the
Company calculates the incentives achieved during that period and recognizes revenue accordingly.
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