SkyWest Airlines 2013 Annual Report Download - page 89

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
(5) 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, 2013, management believed, after consultation with legal counsel, that the ultimate
outcome of such legal matters was 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
irregular operation (‘‘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, 2013, the Company had recognized a cumulative total of
$31.7 million of revenue associated with the funds withheld by Delta prior to July 1, 2008.
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, 2013.
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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