Note 2 — Passenger and Ground Handling Revenue

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,” “fixed-fee contracts” or “capacity purchase agreements”) with Delta Air Lines, Inc. (“Delta”), United Airlines, Inc. (“United”), American Airlines, Inc. (“American”) and Alaska Airlines, Inc. (“Alaska”) (each, a “major airline partner”), the major airline partner generally pays the Company a fixed-fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on flight completion 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 expenses and landing fee expenses. Under the fixed-fee arrangements, revenue is earned when each flight is completed and is reflected in passenger revenues. For the nine months ended September 30, 2016, approximately 95.5% of the Company’s available seat miles (“ASMs”) were flown under fixed-fee arrangements. Ground handling revenue primarily consists of customer service functions, such as gate and ramp agent services at applicable airports where the Company provides such services to other airlines.

Under the Company’s revenue-sharing arrangements (referred to as a “revenue-sharing” or “prorate” arrangement), the major airline partner and the Company negotiate a passenger fare proration formula, pursuant to which the Company receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on a Company airline and the other portion of their trip on the major airline partner. Revenue is recognized under the Company’s prorate flying agreements when each flight is completed based upon the portion of the prorate passenger fare the Company anticipates that it will receive for each completed flight. For the nine months ended September 30, 2016, approximately 4.5% of the Company’s ASMs were flown under prorate arrangements.

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 Company’s flying agreements have not been finalized at quarterly or annual financial statement dates, the Company records revenues based on the lower of the 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 airline 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 to receive incentive compensation upon the achievement of certain performance criteria. The incentives are defined in the agreements and are measured and determined on a monthly, quarterly or semi‑annual basis. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to that agreement accordingly.

The following table summarizes the significant provisions of each code share agreement the Company has with each major airline partner:

Delta Connection Agreements


Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
SkyWest Airlines Delta Connection Agreement (fixed-fee arrangement)	CRJ 200 CRJ 700 CRJ 900 E175	48 29 36 5	The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2025

ExpressJet Delta Connection Agreement (fixed-fee arrangement)	CRJ 200 CRJ 700 CRJ 900	38 36 28	The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2022

SkyWest Airlines Delta Connection Prorate Agreement (revenue-sharing arrangement)	CRJ 200	21	Terminable with 30-day notice

United Express Agreements

Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
SkyWest Airlines United Express Agreements (fixed-fee arrangement)	CRJ 200 CRJ 700 E175	54 47 49	The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2027

ExpressJet United ERJ Agreement (fixed-fee arrangement)	ERJ 135 ERJ 145	5 149	The contract is scheduled to expire on an individual aircraft basis commencing in 2016 The final aircraft is scheduled to expire in 2017, subject to two one-year extension provisions

SkyWest Airlines United Express Prorate Agreement (revenue-sharing arrangement)	CRJ 200	21	Terminable with 120-day notice

Alaska Capacity Purchase Agreement

Agreement

Aircraft type

Number of Aircraft

Term / Termination
Dates

SkyWest Airlines

Alaska Agreement

(fixed-fee arrangement)

CRJ 700

E175

CRJ 700 aircraft is scheduled to expire on an individual basis in 2016

E175 aircraft is scheduled to expire in 2027

American Agreements


Agreement	Aircraft type	Number of Aircraft	Term / Termination Dates
SkyWest Airlines American Agreement (fixed-fee arrangement)	 CRJ 200  CRJ 700	12 13	 CRJ 200 aircraft is scheduled to expire on an individual aircraft basis commencing in 2016 CRJ 700 aircraft is scheduled to expire in 2020

SkyWest Airlines American Prorate Agreement (revenue-sharing arrangement)	 CRJ 200	5	 Terminable with 120-day notice

ExpressJet American Agreement (fixed-fee arrangement)	 CRJ 200  ERJ 145	11 14	 Scheduled to expire in 2017

ExpressJet American Prorate Agreement (revenue-sharing arrangement)	 CRJ 200	3	 Terminable with 120-day notice

When an aircraft is scheduled to be removed from a fixed-fee arrangement, the Company may, as practical under the circumstances, negotiate an extension with the respective major airline partner, negotiate the placement of the aircraft with another major airline partner, return the aircraft to the lessor if the aircraft is leased and the lease is expiring, place owned aircraft for sale, or pursue other uses for the aircraft.

In addition to the contractual arrangements described above, SkyWest Airlines has entered into agreements with Alaska, United and Delta to place additional Embraer E175 dual-class regional jet aircraft (“E175”) into service for those major airline partners. As of September 30, 2016, the Company anticipated placing an additional 16 E175 aircraft with United, an additional seven E175 aircraft with Alaska and 14 E175 aircraft with Delta. The delivery dates for the new aircraft are expected to take place from October 2016 through the end of 2017.

The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi‑year rate reset provisions that became operative in 2010. A rate reset period became effective on January 1, 2016. The parties have agreed to contractual rates effective for the SkyWest Airlines and ExpressJet Delta Connection Agreements for the 2016 calendar year.

During the three and nine months ended September 30, 2016, the Company recorded $9.2 million and $19.4 million, respectively, in early lease return costs on six and nine CRJ700 aircraft, respectively, that were removed from operations under an early lease return arrangement.

Other Revenue Items

The Company’s passenger and ground handling revenues could be impacted by a number of factors, including changes to the Company’s code-share agreements with its major airline partners, contract modifications resulting from contract renegotiations, the Company’s ability to earn incentive payments contemplated under the Company’s code-share agreements and settlement of reimbursement disputes with the Company’s major airline partners.