SkyWest Airlines 2014 Annual Report Download - page 47

In November 2014, ExpressJet executed an amended and restated contract with United that
accelerates the lease termination dates of certain ERJ145 aircraft and accelerated the termination date
of the ExpressJet United ERJ Agreement to operate the ERJ145s from the year 2020 to 2017. As of
December 31, 2014, ExpressJet operated 216 ERJ145s and nine ERJ135s and had removed
ten ERJ145s from contract, which are in the process of being returned to United. We anticipate
ExpressJet will remove 59 ERJ145s and nine ERJ135s from United service during 2015 and will return
the aircraft to United.
In December 2014, SkyWest Airlines reached an agreement with Delta to operate 12 additional
used CRJ200 aircraft that SkyWest Airlines intends to lease from Delta. The aircraft deliveries started
December 2014 and are scheduled to continue through the second quarter of 2015.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 to our consolidated financial
statements for the year ended December 31, 2014, included in Item 8 of this Report. Critical
accounting policies are those policies that are most important to the preparation of our consolidated
financial statements and require management’s subjective and complex judgments due to the need to
make estimates about the effect of matters that are inherently uncertain. Our critical accounting
policies relate to revenue recognition, aircraft maintenance, aircraft leases, impairment of long-lived
assets and intangibles, stock-based compensation expense and fair value as discussed below. The
application of these accounting policies involves the exercise of judgment and the use of assumptions as
to future uncertainties and, as a result, actual results will likely differ, and could differ materially from
such estimates.
Revenue Recognition
Passenger and ground handling revenues are recognized when service is provided. Under our
contract and pro-rate flying agreements with our code-share partners, revenue is considered earned
when each flight is completed. Our agreements with our code-share partners contain certain provisions
pursuant to which the parties could terminate the respective agreement, subject to certain rights of the
other party, if certain performance criteria are not maintained. Our revenues could be impacted by a
number of factors, including changes to the applicable code-share agreements, contract modifications
resulting from contract renegotiations and our ability to earn incentive payments contemplated under
applicable agreements. In the event contracted rates are not finalized at a quarterly or annual financial
statement date, we record that period’s revenues based on the lower of the prior period’s approved
rates adjusted for the current contract negotiations and our estimate of rates that will be implemented.
Also, in the event we have a reimbursement dispute with a major partner at a quarterly or annual
financial statement date, we evaluate the dispute under established revenue recognition criteria and,
provided the revenue recognition criteria have been met, we recognize revenue for that period based
on our estimate of the resolution of the dispute. Accordingly, we are required to exercise judgment and
use assumptions in the application of our revenue recognition policy.
Maintenance
We use the direct-expense method of accounting for our regional jet aircraft engine overhaul costs.
Under this method, the maintenance liability is not recorded until the maintenance services are
performed. We use the ‘‘deferral method’’ of accounting for our EMB120 engine overhauls, which
provides for engine overhaul costs to be capitalized and depreciated to the next estimated overhaul
event or to the remaining useful life, factoring lease termination dates on leased aircraft, whichever is
shorter. In conjunction with our decision in November 2014 to remove the EMB120 aircraft from
service by the end of the second quarter of 2015, the capitalized engine overhaul amounts were
evaluated for impairment. See Impairment of Long-Lived Assets below. With respect to SkyWest
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