SkyWest Airlines 2014 Annual Report Download - page 79

SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
agreements with third-party vendors to provide long-term engine services covering the scheduled and
unscheduled repairs for certain of its Bombardier CRJ700 Regional Jets (‘‘CRJ700s’’), Embraer
ERJ145 regional jet aircraft and Embraer E-175 jet (‘‘E175’’) aircraft. Under the terms of the
agreements, the Company pays a set dollar amount per engine hour flown on a monthly basis and the
third party vendors 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 each contract.
The Company uses the ‘‘deferral method’’ of accounting for its EMB120 turboprop aircraft engine
overhauls, wherein the overhaul costs are capitalized and depreciated to the next estimated overhaul
event, or remaining lease term for leased aircraft, whichever is shorter. In November 2014, the
Company decided to remove the EMB120 aircraft from service by the end of the second quarter of
2015, which reduced the previously anticipated remaining useful life of the EMB120 aircraft and
related aircraft type specific assets, which resulted in an impairment review of the EMB120 capitalized
engine overhaul amounts. See note 8 Special items.
The costs of maintenance for airframe and avionics components, landing gear and normal
recurring maintenance are expensed as incurred.
Passenger and Ground Handling Revenues
The Company recognizes passenger and ground handling revenues when the service is provided
under its code-share agreements. Under the Company’s fixed-fee arrangements (referred to as
‘‘fixed-fee arrangements, ‘‘contract flying’’ or ‘‘capacity purchase agreements’’) with Delta, United, US
Airways, American and Alaska, the major airline generally pays the Company a fixed-fee for each
departure, flight or block time incurred, and an amount per aircraft in service each month with
additional incentives based on completion of flights and on-time performance. The major airline
partner also directly reimburses the Company for certain direct expenses incurred under the fixed-fee
arrangement such as fuel expense and landing fee expenses. Under the fixed-fee arrangements, revenue
is earned when each flight is completed.
Under a Revenue-Sharing Arrangement (referred to as a ‘‘revenue-sharing’’ or ‘‘pro-rate’’
arrangements), the major airline and regional airline negotiate a passenger fare proration formula,
pursuant to which the regional airline receives a percentage of the ticket revenues for those passengers
traveling for one portion of their trip on the regional airline and the other portion of their trip on the
major airline. Revenue is recognized under the Company’s pro-rate flying agreements when each flight
is completed based upon the portion of the pro-rate passenger fare the Company anticipates that it will
receive for each completed flight.
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.
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