Use these links to rapidly review the document
TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014 |
||
OR |
||
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-14719
SKYWEST, INC.
Incorporated under the Laws of Utah |
87-0292166
(IRS Employer ID No.) |
444 South River Road
St. George, Utah 84790
(435) 634-3000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer ý |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the registrant's common stock held by non- affiliates (based upon the closing sale price of the registrant's common stock on The Nasdaq National Market) on June 30, 2014 was approximately $622,772,406.
As of February 6, 2015, there were 51,337,574 shares of the registrant's common stock outstanding.
Documents Incorporated by Reference
Portions of the registrant's proxy statement to be used in connection with the Registrant's 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report as specified.
SKYWEST, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2
Unless otherwise indicated in this Report, "SkyWest," "we," "us," "our" and similar terms refer to SkyWest, Inc. and "SkyWest Airlines" refers to our wholly-owned subsidiary, SkyWest Airlines, Inc.
Effective December 31, 2011, our subsidiary, ExpressJet Airlines, Inc. was merged into our subsidiary, Atlantic Southeast Airlines, Inc., with the surviving corporation named ExpressJet Airlines, Inc. (the "ExpressJet Combination"). In this Report, "Atlantic Southeast" refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, "ExpressJet Delaware" refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and "ExpressJet" refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the ExpressJet Combination, for periods subsequent to the ExpressJet Combination.
Cautionary Statement Concerning Forward-Looking Statements
Certain of the statements contained in this Report should be considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as "may," "will," "expect," "intend," "anticipate," "believe," "estimate," "plan," "project," "could," "should," "hope," "likely," and "continue" and similar terms used in connection with statements regarding our outlook, anticipated operations, the revenue environment, our contractual relationships, and our anticipated financial performance. These statements include, but are not limited to, statements about our future growth and development plans, including our future financial and operating results, our plans for SkyWest Airlines and ExpressJet, our objectives, expectations and intentions and other statements that are not historical facts. Readers should keep in mind that all forward-looking statements are based on our existing beliefs about present and future events outside of our control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report materializes, or any other underlying assumption proves incorrect, our actual results will vary, and may vary materially, from those anticipated, estimated, projected, or intended. These risks and uncertainties include, but are not limited to, those described below in Item 1A. Risk Factors.
There may be other factors that may affect matters discussed in forward- looking statements set forth in this Report, which factors may also cause actual results to differ materially from those discussed. We assume no obligation to publicly update any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting these statements other than as required by applicable law.
General
Through SkyWest Airlines and ExpressJet, we offer scheduled passenger service with approximately 3,600 daily departures to destinations in the United States, Canada, Mexico and the Caribbean. Substantially all of our flights are operated as Delta Connection, United Express, US Airways Express, American Eagle or Alaska under code-share arrangements with Delta Air Lines, Inc. ("Delta"), United Air Lines, Inc. ("United"), US Airways Group, Inc. ("US Airways"), American Airlines, Inc. ("American") or Alaska Airlines, Inc. ("Alaska"), respectively. SkyWest Airlines and ExpressJet generally provide regional flying to our partners under long-term, fixed-fee code-share agreements. Among other features of our fixed-fee agreements, our partners generally reimburse us for specified direct operating expenses (including fuel expense, which is passed through to our partners), and pay us a fee for operating the aircraft.
On December 31, 2011, Atlantic Southeast and ExpressJet Delaware completed the ExpressJet Combination. Since November 17, 2011, the operations formerly conducted by Atlantic Southeast and
3
ExpressJet Delaware have been conducted under a single operating certificate issued by the U.S. Federal Aviation Administration (the "FAA"). We currently anticipate that we will complete the integration of the labor groups of Atlantic Southeast and ExpressJet Delaware into ExpressJet during 2015 and 2016.
SkyWest Airlines and ExpressJet have developed industry-leading reputations for providing quality regional airline service during their long operating histories. SkyWest Airlines has been flying since 1972 and ExpressJet (and its predecessors) since 1979. As of December 31, 2014, our consolidated fleet consisted of a total of 749 aircraft, of which 425 were assigned to United, 239 were assigned to Delta, 29 were assigned to American, 15 were assigned to US Airways, nine were assigned to Alaska, two were subleased to unaffiliated entities and 30 were removed from service. We currently operate two types of regional jet aircraft: the Bombardier Aerospace ("Bombardier") regional jet, which comes in three different configurations: the 50-seat Bombardier CRJ200 Regional Jet (the "CRJ200"), the 70-seat Bombardier CRJ700 Regional Jet (the "CRJ700") and the 70-90-seat Bombardier CRJ900 Regional Jet (the "CRJ900"); and the Embraer S.A. ("Embraer") regional jet, which we operate in three different configurations the 50-seat Embraer ERJ-145 regional jet (the "ERJ145"), the 37-seat Embraer ERJ-135 regional jet (the "ERJ135"), and the 76-seat Embraer E-175 jet (the "E175"). We also operate the 30-seat Embraer Brasilia EMB- 120 turboprop (the "EMB120").
We were incorporated in Utah in 1972. Our principal executive offices are located at 444 South River Road, St. George, Utah 84790, and our primary telephone number is (435) 634-3000. We maintain an Internet web site at www.skywest.com . Our website provides a link to the web site of the SEC, through which our annual, quarterly and current reports, as well as amendments to those reports, are available. In addition, we provide electronic or paper copies of our SEC filings free of charge upon request.
Our Operating Platforms
SkyWest Airlines
SkyWest Airlines provides regional jet and turboprop service to airports primarily located in the Midwestern and Western United States. SkyWest Airlines offered approximately 1,707 daily scheduled departures as of December 31, 2014, of which approximately 995 were United Express flights, 488 were Delta Connection flights, 84 were US Airways Express flights, 101 were American Eagle flights and 39 were Alaska-coded flights. SkyWest Airlines' operations are conducted principally from airports located in Chicago (O'Hare), Denver, Los Angeles, Houston, Minneapolis, Portland, Seattle, Phoenix, San Francisco and Salt Lake City. As of December 31, 2014, SkyWest Airlines operated a fleet of 362 aircraft consisting of the following:
|
CRJ200 | CRJ700 | CRJ900 | E175 | EMB120 | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
United |
82 | 70 | | 20 | 21 | 193 | |||||||||||||
Delta |
54 | 19 | 32 | | 6 | 111 | |||||||||||||
American |
16 | | | | | 16 | |||||||||||||
US Airways |
11 | | 4 | | | 15 | |||||||||||||
Alaska |
| 9 | | | | 9 | |||||||||||||
Other** |
2 | | | | 16 | 18 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
165 | 98 | 36 | 20 | 43 | 362 |
4
In November 2014, SkyWest Airlines announced that it intends to remove all EMB120 aircraft type from service, which we anticipate will be completed by end of the second quarter of 2015. The removal was based on several factors including, management's assessment of the need for pilots to operate upcoming deliveries for the E175 aircraft, the incremental training cost to hire new pilots compared to retraining existing EMB120 pilots to operate CRJ or E175 aircraft and the uncertainty related to the number of qualified pilots available for hire, combined with the overall age and the increased operating costs of the EMB120 fleet.
SkyWest Airlines conducts its code-share operations with its respective major airline partners pursuant to the following agreements:
Major airline partner
|
Agreement | |
---|---|---|
United |
"SkyWest Airlines United Express Agreements" and "SkyWest Airlines United Express Pro-rate Agreement" | |
Delta |
"SkyWest Airlines Delta Connection Agreement" and "SkyWest Airlines Delta Pro-rate Agreement" | |
American |
"SkyWest Airlines American Agreement" and "SkyWest Airlines American Pro-rate Agreement" | |
US Airways |
"SkyWest Airlines US Airways Agreement" | |
Alaska |
"SkyWest Airlines Alaska Agreement" |
A summary of the terms for each SkyWest Airlines code-share agreement with the respective major partner is provided under the heading "Code Share Agreements" below.
ExpressJet
ExpressJet provides regional jet service principally in the United States, primarily from airports located in Atlanta, Cleveland, Chicago (O'Hare), Denver, Houston, Detroit, Memphis, Newark, Minneapolis and Washington Dulles. ExpressJet offered more than 1,838 daily scheduled departures as of December 31, 2014, of which approximately 607 were Delta Connection flights, 1,138 were United Express flights and 93 were American Eagle flights. As of December 31, 2014, ExpressJet operated a fleet of 385 aircraft consisting of the following:
|
CRJ200 | ERJ145 | ERJ135 | CRJ700 | CRJ900 | Total | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
United |
7 | 216 | 9 | | | 232 | |||||||||||||
Delta |
59 | | | 41 | 28 | 128 | |||||||||||||
American |
13 | | | | | 13 | |||||||||||||
Other** |
2 | 10 | | | | 12 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
81 | 226 | 9 | 41 | 28 | 385 |
ExpressJet conducts its code-share operations with its respective major airline partners pursuant to the following agreements:
Major airline partner
|
Agreement | |
---|---|---|
United (ERJ aircraft types) |
"ExpressJet United ERJ Agreement" | |
United (CRJ aircraft types) |
"ExpressJet United CRJ Agreement" | |
Delta |
"ExpressJet Delta Connection Agreement" | |
American |
"ExpressJet American Agreement" and "ExpressJet American Pro-rate Agreement" |
5
A summary of the terms for each ExpressJet code-share agreement with the respective major partner is provided under the heading "Code Share Agreements" below.
Competition and Economic Conditions
The airline industry is highly competitive. SkyWest Airlines and ExpressJet compete principally with other code-sharing regional airlines, but also compete with regional airlines operating without code-share agreements, as well as low-cost carriers and major airlines. The combined operations of SkyWest Airlines and ExpressJet extend throughout most major geographic markets in the United States. Our competition includes, therefore, nearly every other domestic regional airline, and to a certain extent, most major and low-cost domestic carriers. The primary competitors of SkyWest Airlines and ExpressJet among regional airlines with code-share arrangements include Air Wisconsin Airlines Corporation ("Air Wisconsin"); Envoy Air Inc. ("Envoy"), PSA Airlines, Inc. ("PSA") and Piedmont Airlines ("Piedmont") (Envoy, PSA and Piedmont are owned by American); Horizon Air Industries, Inc. ("Horizon") (owned by Alaska Air Group, Inc.); Mesa Air Group, Inc. ("Mesa"); Endeavor, Inc. ("Endeavor") (owned by Delta); Republic Airways Holdings Inc. ("Republic"); and Trans State Airlines, Inc. ("Trans State"). Major airlines award contract flying to these regional airlines based primarily upon the following criteria: low cost, financial resources, geographical infrastructure, overall customer service levels relating to on-time arrival and departure statistics, low rates of flight cancellation, baggage handling performance and the overall image of the regional airline.
The principal competitive factors for code-share partner regional airlines are code-share agreement terms, customer service, aircraft types, fare pricing, flight schedules and markets and routes served. The principal competitive factors we experience with respect to our pro-rate flying include fare pricing, customer service, routes served, flight schedules, aircraft types and relationships with major partners.
The combined operations of SkyWest Airlines and ExpressJet represent the largest regional airline operations in the United States. However, many of the major and low-cost carriers are larger, and have greater financial and other resources than SkyWest Airlines and ExpressJet, individually or collectively. Additionally, regional carriers owned by major airlines, such as Endeavor, Envoy, PSA and Piedmont, may have access to greater resources, through their parent companies, than SkyWest Airlines and ExpressJet, and may have enhanced competitive advantages since they are subsidiaries of major airlines. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats.
Generally, the airline industry is highly sensitive to changes in general economic conditions, in large part due to the discretionary nature of a substantial percentage of both business and leisure travel. Many airlines have historically reported lower earnings or substantial losses during periods of economic recession, heavy fare discounting, high fuel costs and other disadvantageous environments. Economic downturns, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional carriers. The effect of economic downturns may be somewhat mitigated by the predominantly contract-based flying arrangements of SkyWest Airlines and ExpressJet. In addition, if Delta or United, or any of our other code-share partners, experience a prolonged decline in passenger load or are negatively affected by low ticket prices or high fuel prices, they will likely seek to renegotiate their code-share agreements with SkyWest Airlines and ExpressJet, as applicable, or materially reduce scheduled flights in order to reduce their costs. In addition, adverse weather conditions can negatively impact our operations and financial condition.
6
Industry Overview
Majors, Low-Cost Carriers and Regional Airlines
The airline industry in the United States has traditionally been dominated by several major airlines, including American, Delta and United. The major airlines offer scheduled flights to most major U.S. cities, numerous smaller U.S. cities, and cities throughout the world through a hub and spoke network.
Low-cost carriers, such as Southwest Airlines Co. ("Southwest") and JetBlue Airways Corporation ("JetBlue"), generally offer fewer conveniences to travelers and have lower cost structures than major airlines, which permits them to offer flights to and from many of the same markets as the major airlines, but at lower prices. Low-cost carriers typically fly direct flights with limited service to smaller cities, concentrating on higher demand flights to and from major population bases.
Regional airlines, such as SkyWest Airlines, ExpressJet, Mesa, Air Wisconsin, Endeavor, Trans State and Republic, typically operate smaller aircraft on lower-volume routes than major and low-cost carriers. Several regional airlines, including Envoy, PSA, Piedmont and Horizon, are wholly-owned subsidiaries of major airlines.
In contrast to low-cost carriers, regional airlines generally do not try to establish an independent route system to compete with the major airlines. Rather, regional airlines typically enter into relationships with one or more major airlines, pursuant to which the regional airline agrees to use its smaller, lower-cost aircraft to carry passengers booked and ticketed by the major airline between a hub of the major airline and a smaller outlying city. In exchange for such services, the major airline pays the regional airline either a fixed flight fee, termed "contract" or "fixed-fee" flights, or receives a percentage of applicable passenger ticket revenues, termed "pro-rate" or "revenue-sharing" flights as described in more detail below.
Relationship of Regional and Major Airlines
Regional airlines generally enter into code-share agreements with major airlines, pursuant to which the regional airline is authorized to use the major airline's two-letter flight designator codes to identify the regional airline's flights and fares in the central reservation systems, to paint its aircraft with the colors and/or logos of its code-share partner and to market and advertise its status as a carrier for the code-share partner. For example, SkyWest Airlines primarily operates as United Express out of Chicago (O'Hare), Denver, Houston, Los Angeles and San Francisco; as Delta Connection out of Salt Lake City, Detroit and Minneapolis; as an Alaska carrier out of Seattle and Portland; as a US Airways carrier out of Phoenix; and as American Eagle out of Los Angeles. ExpressJet operates primarily as Delta Connection out of Atlanta and Detroit; as United Express out of Chicago (O'Hare), Houston, Cleveland, Newark, Denver and Washington Dulles; and as American Eagle out of Dallas. Code-share agreements also generally obligate the major airline to provide services such as reservations, ticketing, ground support and gate access to the regional airline, and both partners often coordinate marketing, advertising and other promotional efforts. In exchange, the regional airline provides a designated number of low-capacity (usually between 30 and 76 seats) flights between larger airports served by the major airline and surrounding cities, usually in lower-volume markets. The financial arrangements between the regional airlines and their code-share partners usually involve contractual or fixed-fee payments based on the flights or a revenue-sharing arrangement based on the flight ticket revenues, as explained below:
7
flights, on- time performance and baggage handling performance. In addition, the major and regional airline often enter into an arrangement pursuant to which the major airline bears the risk of changes in the price of fuel and other such costs that are passed through to the major airline partner. Regional airlines benefit from a fixed-fee arrangement because they are sheltered from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, passenger loads and fuel prices. However, regional airlines in fixed-fee arrangements do not benefit from positive trends in ticket prices (including ancillary revenue programs), passenger loads or fuel prices because the major airlines absorb most of these costs associated with the regional airline flight, and the margin between the fixed-fees for a flight and the expected per-flight costs tends to be smaller than the margins associated with revenue-sharing arrangements.
Code-Share Agreements
SkyWest Airlines has code-share agreements with United, Delta, American, US Airways and Alaska. ExpressJet has code-share agreements with United, Delta and American.
These code-share agreements authorize Delta, United, American, Alaska and US Airways to identify our flights and fares under their two-letter flight designator codes ("DL," "UA" "AA", "AS" or "US," respectively) in the central reservation systems, and generally require us to paint our aircraft with their colors and logos and to market our status as Delta Connection, United Express, American Eagle, US Airways Express or Alaska, as applicable. Under each of our code-share agreements, our passengers participate in the major partner's frequent flyer program, and the major partner provides additional services such as reservations, ticket issuance, ground support services and gate access. We also coordinate our marketing, advertising and other promotional efforts with our major partners. During the year ended December 31, 2014, approximately 88.2% of our passenger revenues related to fixed-fee contract flights, where Delta, United, Alaska, American and US Airways controlled scheduling, ticketing, pricing and seat inventories. The remainder of our passenger revenues during the year ended December 31, 2014 related to pro-rate flights for Delta, United or American, where we controlled scheduling, ticketing, pricing and seat inventories, and shared revenues with Delta, United or American according to pro-rate formulas. The following summaries of our code-share agreements do not purport to be complete and are qualified in their entirety by reference to the applicable agreement. The number of aircraft under our fixed-fee arrangements and our pro-rate arrangements as of December 31, 2014 is reflected in the summary below.
8
Delta Connection Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines Delta Connection Agreement (fixed-fee arrangement) |
CRJ 20044
CRJ 70019
CRJ 90032 |
The contract expires on an individual aircraft basis with expirations commencing in 2015
The final aircraft expires in 2022
The average remaining term of the aircraft under contract is 4.8 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, De-ice
Insurance |
No performance-based financial incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet Delta Connection Agreement (fixed-fee arrangement) |
CRJ 20059
CRJ 70041
CRJ 90028 |
The contract expires on an individual aircraft basis with expirations commencing in 2015
The final aircraft expires in 2022
The average remaining term of the aircraft under contract is 4.1 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, De-ice Insurance |
Performance-based financial incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines Pro-rate Agreement (revenue-sharing agreement) |
EMB 1206
CRJ 20010 |
Terminates with 30-day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
9
United Express Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines United Express Agreements (fixed-fee arrangement) |
CRJ 20061
CRJ 70070
E17520
EMB 1209 |
The contract expires on an individual aircraft basis with expirations commencing in 2015
The final aircraft expires in 2026
The average remaining term of the aircraft under contract is 3.4 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet United ERJ Agreement (fixed-fee arrangement) |
ERJ 1359
ERJ 145216 |
The contract expires on an individual aircraft basis with expirations commencing in 2015
The final aircraft expires in 2017
The average remaining term of the aircraft under contract is 1.9 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives or penalties |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet United CRJ Agreement (fixed-fee arrangement) |
CRJ 2007 |
The contract expires on an individual basis with final aircraft terminating in March 2015
Upon termination, leased aircraft are expected to be returned to lessors |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines United Express Pro-rate Agreement (revenue-sharing arrangement) |
CRJ 20021
EMB 12012 |
Terminates with 120-day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
10
Alaska Capacity Purchase Agreement
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines Alaska Agreement (fixed-fee arrangement) |
CRJ 7009 |
Terminates 2018
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
US Airways Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines US Airways Agreement (fixed-fee arrangement) |
CRJ 20010
CRJ 9004 |
Terminates 2015
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines US Airways Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2001 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
American Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines American Agreement (fixed-fee agreement) |
CRJ 20012 |
Terminates 2016
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines American Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2004 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
|||||
|
||||||||||
ExpressJet American Agreement (fixed-fee agreement) |
CRJ 20011 |
Terminates 2017
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, De-ice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet American Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2002 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
SkyWest Airlines and ExpressJet Delta Connection Agreements
SkyWest Airlines and ExpressJet are each parties to a Delta Connection Agreement with Delta, pursuant to which SkyWest Airlines and ExpressJet provide contract flight services for Delta. The SkyWest Airlines and ExpressJet Delta Connection Agreements contain multi-year rate reset provisions that became operative in 2010 and reset each fifth year thereafter. The Delta Connection Agreements also provide that, beginning with the fifth anniversary of the execution of the agreements (September 8,
11
2010), Delta has the right to require that certain contractual rates under those agreements shall not exceed the second lowest of all carriers within the Delta Connection program. SkyWest Airlines and ExpressJet have agreed with Delta on contractual rates that are effective through December 31, 2015.
The SkyWest Airlines Delta Connection Agreement is scheduled to terminate on December 31, 2022, subject to certain Delta extension rights. The SkyWest Airlines Delta Connection Agreement is subject to early termination in various circumstances, including:
The ExpressJet Delta Connection Agreement is scheduled to terminate on December 31, 2022, subject to certain Delta extension rights. The ExpressJet Delta Connection Agreement is subject to early termination in various circumstances including:
SkyWest Airlines United Express Agreements
SkyWest Airlines and United are parties to two United Express agreements: a United Express agreement initially executed between SkyWest Airlines and United to operate certain CRJ200s, CRJ700s and EMB120s dated July 31, 2003, and a United Express agreement to operate 40 new E175 aircraft (collectively, the "SkyWest Airlines United ExpressJet Agreements"). Under the E175 agreement, SkyWest Airlines began service in May 2014 and 20 E175 aircraft had been delivered
12
as of December 31, 2014. We anticipate deliveries of the remaining E175 aircraft will continue through 2015. The E175 agreement has a 12-year term for each of the aircraft subject to the agreement.
The SkyWest Airlines United Express Agreements have a latest scheduled termination date in 2026. The SkyWest Airlines United Express Agreements are subject to early termination in various circumstances including:
ExpressJet United ERJ Agreement
Effective November 12, 2010, ExpressJet Delaware and Continental entered into the ExpressJet United ERJ Agreement, whereby ExpressJet Delaware agreed to provide regional airline service in the Continental flight system. The rights and obligations of ExpressJet Delaware under the ExpressJet United ERJ Agreement became the rights and obligations of ExpressJet as a consequence of the ExpressJet Combination. The rights and obligations of Continental under the ExpressJet United ERJ Agreement became the rights and obligations of United as a consequence of United's merger with Continental in 2010. The ExpressJet United ERJ Agreement was amended and restated on November 7, 2014, which among other modifications, reduced the term of the agreement.
The ExpressJet United ERJ Agreement terminates in December 2017, subject to early termination by United or ExpressJet upon the occurrence of certain events. United's termination rights include the right to terminate the ExpressJet United ERJ Agreement if ExpressJet's performance falls below identified standards (and such failure is not cured within 60 days following receipt of notice), upon the occurrence of a labor strike lasting 15 days or longer and upon the occurrence of a material default under certain lease agreements relating to aircraft operated by ExpressJet under the ExpressJet United ERJ Agreement (provided that such material default is not cured within 60 days following receipt of notice). ExpressJet's termination rights include the right to terminate the ExpressJet United ERJ Agreement if United fails to make payment of $500,000 or more due to ExpressJet under the ExpressJet United ERJ Agreement and such failure is not cured within five business days following receipt of notice. Additionally, effective January 1, 2018, United has the right to extend the term for a 12-month period for a certain number of aircraft upon 180 days written notice. United also has the right to extend the term for a second 12-month period for a certain number of aircraft upon 180 days written notice.
Under the terms of the ExpressJet United ERJ Agreement, ExpressJet operates 216 ERJ145s and nine ERJ135s in the United flight system. All of such ERJ145s and ERJ 135s are leased to ExpressJet by United pursuant to sublease or lease agreements. Upon the expiration of the ExpressJet United ERJ Agreement, ExpressJet is obligated to return the subleased or leased aircraft to United. As of December 31, 2014, ExpressJet had removed ten ERJ145s from service and was in the process of returning such aircraft to United. During the 2015 calendar year, ExpressJet anticipates removing 59 ERJ145s and nine ERJ135s from contract and intends to return the aircraft to United under the aircraft lease agreement.
13
ExpressJet United CRJ Agreement
ExpressJet and United are parties to the ExpressJet United CRJ Agreement dated February 10, 2010. As of December 31, 2014, ExpressJet operated seven CRJ200s under the United Express CRJ Agreement. The ExpressJet United CRJ Agreement terminates in March 2015.
SkyWest Airlines American Agreement
On September 11, 2012, SkyWest Airlines and American entered into the SkyWest Airlines American Agreement. The SkyWest Airlines American Agreement is scheduled to terminate in 2016 and is subject to early termination in various circumstances including:
ExpressJet American Agreement
On September 11, 2012, ExpressJet and American entered into the ExpressJet American Agreement. The ExpressJet American Agreement is scheduled to terminate in 2017. The ExpressJet American Agreement is subject to early termination in various circumstances including:
SkyWest Airlines Alaska Agreement
On April 13, 2011, SkyWest Airlines and Alaska entered into the SkyWest Airlines Alaska Capacity Purchase Agreement. The SkyWest Airlines Alaska Capacity Purchase Agreement is scheduled to terminate in 2018. In November 2014, SkyWest and Alaska reached an agreement under a 12-year fixed-fee arrangement for SkyWest to operate seven new E175 aircraft for Alaska, beginning in mid-2015. The SkyWest Airlines Alaska Capacity Purchase Agreement is subject to early termination in various circumstances including:
14
SkyWest Airlines US Airways Agreement
On November 17, 2011, SkyWest Airlines and US Airways entered into the SkyWest Airlines US Airways Agreement. Additionally, as of December 31, 2014, SkyWest Airlines operated one CRJ200 under a revenue-sharing arrangement.
The SkyWest Airlines US Airways Agreement is scheduled to terminate in 2015. The SkyWest Airlines US Airways Agreement is subject to early termination in various circumstances including:
Segment Financial Information
See Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Item 7 of this Report, and Note 2 to our Consolidated Financial Statements for the fiscal year ended December 31, 2014, included in Item 8 of this Report, for financial information regarding our business segments.
Training and Aircraft Maintenance
SkyWest Airlines and ExpressJet employees perform substantially all routine airframe and engine maintenance and periodic inspection of equipment at their respective maintenance facilities, and provide substantially all training to SkyWest Airlines and ExpressJet crew members and maintenance personnel at their respective training facilities. SkyWest Airlines and ExpressJet also contract with third-party vendors for non-routine airframe and engine maintenance.
Fuel
Historically, we have not experienced problems with the availability of fuel, and believe we will be able to obtain fuel in quantities sufficient to meet our existing and anticipated future requirements at competitive prices. Standard industry contracts generally do not provide protection against fuel price increases, nor do they ensure availability of supply; however, our fixed-fee agreements with Delta, United, American, Alaska and US Airways provide for fuel used in the performance of those agreements to be reimbursed by our major partners, thereby reducing our exposure to fuel price fluctuations. During the year ended December 31, 2014, United purchased the majority of the fuel for our United aircraft under contract directly from its fuel vendors; and Delta purchased the majority of the fuel for our Delta aircraft under contract directly from its fuel vendors. A substantial increase in the price of jet fuel, to the extent our fuel costs are not reimbursed, or our lack of adequate fuel supplies in the future, could have a material adverse effect on our business, financial condition, results of operations or liquidity.
15
Employee Matters
Railway Labor Act
Our relations with labor unions in the U.S. are governed by the Railway Labor Act (the "RLA"). Under the RLA, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (the "NMB") an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMB's usual rules, a labor union will be certified as the representative of the employees in a craft or class only if more than 50% of those employees vote for union representation. A certified labor union then enters into negotiations toward a collective bargaining agreement with the employer.
Under the RLA, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request that the NMB appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day "cooling off" period begins. At the end of this 30-day period, the parties may engage in "self help," unless the U.S. President appoints a Presidential Emergency Board ("PEB") to investigate and report on the dispute. The appointment of a PEB maintains the "status quo" for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in "self help." "Self help" includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. The U.S. Congress and the President have the authority to prevent "self help" by enacting legislation that, among other things, imposes a settlement on the parties.
Collective Bargaining
As of December 31, 2014, we had approximately 18,500 full-time equivalent employees. Approximately 45.1% of these employees were represented by unions, including the employee groups listed in the table below. Notwithstanding the completion of the ExpressJet Combination, ExpressJet's employee groups continue to be represented by those unions who provided representation prior to the ExpressJet Combination. Accordingly, the following table refers to ExpressJet's employee groups based upon their union affiliations prior to the ExpressJet Combination.
Employee Group
|
Approximate
Number of Active Employees Represented |
Representatives |
Status of
Agreement |
||||
---|---|---|---|---|---|---|---|
Atlantic Southeast Pilots |
1,631 | Air Line Pilots Association International | Amendable | ||||
Atlantic Southeast Flight Attendants |
1,132 | International Association of Machinists and Aerospace Workers | Amendable | ||||
Atlantic Southeast Flight Controllers |
53 | Transport Workers Union of America | Amendable | ||||
Atlantic Southeast Mechanics |
554 | International Brotherhood of Teamsters | Amendable | ||||
Atlantic Southeast Stock Clerks |
60 | International Brotherhood of Teamsters | Amendable | ||||
ExpressJet Delaware Pilots |
2,577 | Air Line Pilots Association International | Amendable | ||||
ExpressJet Delaware Flight Attendants |
1,210 | International Association of Machinists and Aerospace Workers | Amendable | ||||
ExpressJet Delaware Mechanics |
942 | International Brotherhood of Teamsters | Amendable | ||||
ExpressJet Delaware Dispatchers |
81 | Transport Workers Union of America | Amendable | ||||
ExpressJet Delaware Stock Clerks |
97 | International Brotherhood of Teamsters | Amendable |
16
The successful combination of ExpressJet Delaware and Atlantic Southeast and achievement of the anticipated benefits of our acquisition of ExpressJet Delaware will depend significantly on the results of our efforts to integrate the employee groups of Atlantic Southeast and ExpressJet Delaware and on maintaining productive employee relations. During December 2013 and January 2014, the Airline Pilots Association International ("ALPA"), which represents the Atlantic Southeast pilot and ExpressJet Delaware pilot groups, conducted a vote of the two employee groups, seeking approval of a joint collective bargaining agreement that ExpressJet had negotiated with ALPA representatives. The two employee groups rejected the joint collective bargaining agreement, which resulted in the agreements with those employee groups remaining amendable as indicated in the foregoing table. The decision of those employee groups to reject the joint collective bargaining agreement has precluded us from realizing some of the savings we had hoped to achieve through the ExpressJet Combination. ExpressJet intends to resume negotiations with ALPA in an effort to negotiate an acceptable agreement.
The integration of the workforces of ExpressJet Delaware and Atlantic Southeast has been, and we anticipate it will continue to be, challenging. Completing the integration of the workforces of the two airlines will require the resolution of potentially difficult issues relating to representation of various work groups and the relative seniority of the work groups at each carrier. Unexpected delays or expenses or other challenges to integrating the workforces could impact the anticipated synergies from the ExpressJet Combination and affect our financial performance.
As of December 31, 2014, SkyWest and SkyWest Airlines collectively employed 9,642 full-time equivalent employees, consisting of 6,209 pilots and flight attendants, 1,743 customer service personnel, 1,497 mechanics and other maintenance personnel, and 193 administration and support personnel. None of these employees are currently represented by a union. Collective bargaining group organization efforts among SkyWest Airlines' employees do, however, occur from time to time and we anticipate that such efforts will continue in the future. If unionization efforts are successful, we may be subjected to risks of work interruption or stoppage and/or incur additional expenses associated with increased union representation of our employees. Neither SkyWest nor SkyWest Airlines has ever experienced a work stoppage due to a strike or other labor dispute, and we consider SkyWest Airlines' relationships with its employees to be good.
Government Regulation
All interstate air carriers, including SkyWest Airlines and ExpressJet, are subject to regulation by the U.S. Department of Transportation (the "DOT"), the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operating activities; record-keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. Generally, governmental agencies enforce their regulations through, among other methods, certifications, which are necessary for the continued operations of SkyWest Airlines and ExpressJet, and proceedings, which can result in civil or criminal penalties or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, grounding of aircraft, inspection of aircraft, installation of new safety-related items and the mandatory removal and replacement of aircraft parts.
We believe SkyWest Airlines and ExpressJet are in compliance in all material respects with FAA regulations and hold all operating and airworthiness certificates and licenses which are necessary to conduct their respective operations. We incur substantial costs in maintaining current certifications and otherwise complying with the laws, rules and regulations to which SkyWest Airlines and ExpressJet are subject. SkyWest Airlines' and ExpressJet's flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures. All air carriers operating in the United States of America are required to comply with federal laws and regulations pertaining to noise
17
abatement and engine emissions. All such air carriers are also subject to certain provisions of the Federal Communications Act of 1934, as amended, because of their extensive use of radio and other communication facilities. SkyWest Airlines and ExpressJet are also subject to certain federal and state laws relating to protection of the environment, labor relations and equal employment opportunity. We believe SkyWest Airlines and ExpressJet are in compliance in all material respects with these laws and regulations.
Environmental Matters
SkyWest, SkyWest Airlines and ExpressJet are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
Safety and Security
We are committed to the safety and security of our passengers and employees. Since the September 11, 2001 terrorist attacks, SkyWest Airlines and ExpressJet have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety and security of their operations. Some of the safety and security measures we have taken with our code-share partners include: aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security requirements.
Insurance
SkyWest, SkyWest Airlines and ExpressJet maintain insurance policies we believe are of types customary in the industry and in amounts we believe are adequate to protect against material loss. These policies principally provide coverage for public liability, passenger liability, baggage and cargo liability, property damage, including coverage for loss or damage to our flight equipment, and workers' compensation insurance. We cannot assure, however, that the amount of insurance we carry will be sufficient to protect us from material loss.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year, in part because the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by pleasure travel on our pro-rate routes, historically contributing to increased travel in the summer months, and are unfavorably affected by decreased business travel during the months from November through January and by inclement weather which can result in cancelled flights, principally during the winter months. Additionally, a significant portion of our fixed-fee arrangements is based on completing flights. We generally experience a significantly higher number of weather cancellations during the winter months, which negatively impacts our revenue during such months.
18
In addition to factors discussed elsewhere in this Report, the following are important risks which could adversely affect our future results. Additional risks and uncertainties not presently known to us or that we currently do not deem material may also impair our business operations. If any of the risks we describe below occur, or if any unforeseen risk develops, our operating results may suffer, our financial condition may deteriorate, the trading price of our common stock may decline and investors could lose all or part of their investment in us.
Risks Related to Our Operations
The amounts we receive under our code-share agreements may be less than the corresponding costs we incur.
Under our code-share agreements with Delta, United, American, Alaska and US Airways, we are compensated for certain costs we incur in providing services. Under our fixed-fee arrangements, our code-share partner directly reimburses us for certain costs we incur, as defined as "pass-through" costs. With respect to other costs we incur, our code-share partner is obligated to pay to us amounts based, in part, on pre-determined rates typically applied to production statistics (such as departures or block/flight time). During the year ended December 31, 2014, approximately 18% of our code-share operating costs were pass-through costs and approximately 82% of our code-share operating costs were reimbursable at pre-determined rates. These pre-determined rates may not equal the actual expenses we incur in delivering the associated services. There can be no assurance that the pre-determined rates contemplated by our code-share agreements will be higher than the costs SkyWest Airlines and ExpressJet will incur to provide the services required under their respective agreements. Labor and labor-related expenses, including crew training, and certain maintenance expenses are significant expenses intended to be covered by the pre-determined rates under our fixed-fee arrangements. If the amount we earn from our pre-determined rates under our fixed-fee arrangements is less than our operating costs (excluding pass-through costs), our financial position and operating results will be negatively affected.
We have aircraft lease and debt commitments that extend beyond our existing fixed-fee contractual term on certain aircraft.
Under our fixed-fee arrangements with Delta, United and US Airways, we have a total of 66 CRJ700s and CRJ900s with flying contract expirations ranging from mid-2015 to the end of 2016. Our underlying lease or debt financing obligation associated with each of these aircraft are scheduled to terminate between 2018 and 2024 on an aircraft-by-aircraft basis. We may not be successful in extending the flying contract term on these aircraft with our major partner at acceptable economic terms. In the event we are unsuccessful in extending the flying contract terms on these aircraft, we will pursue alternative uses for the aircraft over the remaining aircraft financing term including, but not limited to, operating the aircraft with another major carrier under a negotiated code-share agreement, subleasing the aircraft to another operator, and/or marketing the debt financed aircraft for sale. In the event we are unable to extend the flying contract terms at similar or improved economics for these aircraft at each respective contract's expiration, or if we pursue alternative uses for these aircraft that result in reduced economics than our current flying contracts, our financial results could be adversely affected.
The supply of pilots to the airline industry may be limited.
On July 8, 2013, as directed by the U.S. Congress, the FAA issued more robust pilot qualification and crew member flight training standards. With the issuance of the new standards, the supply of qualified pilot candidates eligible for hiring by the airline industry has been dramatically reduced. If we
19
are unable to secure the services of sufficient eligible pilots to staff our routes, our operations and financial results could be materially and adversely affected.
New student pilot certificates have decreased dramatically, especially in the past three years, and the pool of eligible pilots qualified to be new hires into the airline industry has been declining significantly. In addition, the major network air carriers have done only minimal pilot hiring in the past several years because of industry capacity reductions and the increase in statutory mandatory retirement age for pilots from age 60 to age 65. Also effective January 2014, mandatory pilot retirement rules began again to force major network carriers to hire replacement pilots.
The current pilot shortage may increase training costs and we may not have enough pilots to conduct our operations. Our projections of available pilots may impact our fleet planning decisions, including the removal of which could negatively impact our operations and financial results. Additionally, the lack of qualified pilots to conduct our operations would negatively impact our operations and financial condition.
Increased labor costs, strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business.
Our business is labor intensive, requiring large numbers of pilots, flight attendants, mechanics and other personnel. Labor costs constitute a significant percentage of our total operating costs. For example, during the year ended December 31, 2014, our salary, wage and benefit costs constituted approximately 39.2% of our total operating costs. Increases in our labor costs could result in a material reduction in our earnings. Any new collective bargaining agreements entered into by other regional carriers with their work forces may also result in higher industry wages and increased pressure on us to increase the wages and benefits of our employees. Future agreements with unionized and non-unionized employees may be on terms that are not as attractive as our current agreements or comparable to agreements entered into by our competitors.
Approximately 45.1% of our workforce is unionized. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct business. Relations between air carriers and labor unions in the U.S. are governed by the RLA, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. The RLA generally prohibits strikes or other types of self-help action both before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining processes required by the RLA have been exhausted.
SkyWest Airlines' employees are not currently represented by any union; however, collective bargaining group organization efforts among those employees occur from time to time. Such efforts will likely continue in the future and may ultimately result in some or all of SkyWest Airlines' employees being represented by one or more unions. Moreover, one or more unions representing ExpressJet employees may seek a single carrier determination by the National Mediation Board, which could require SkyWest Airlines to recognize such union or unions as the certified bargaining representative of SkyWest Airlines' employees. One or more unions representing ExpressJet employees may also assert that SkyWest Airlines' employees should be subject to ExpressJet's collective bargaining agreements. If SkyWest Airlines' employees were to unionize or be deemed to be represented by one or more unions, negotiations with unions representing SkyWest Airlines' employees could divert management attention and disrupt operations, which may result in increased operating expenses and may negatively impact our financial results. Moreover, we cannot predict the outcome of any future negotiations relating to union representation or collective bargaining agreements. Agreements reached in collective bargaining may increase our operating expenses and negatively impact our financial results.
20
The integration of the Atlantic Southeast and ExpressJet Delaware workforces will present significant challenges, including the possibility of labor-related disagreements that may adversely affect our operations and our financial performance.
The successful integration of Atlantic Southeast and ExpressJet Delaware and achievement of the anticipated benefits of the ExpressJet Merger largely depend upon the successful combination of the former employee groups of Atlantic Southeast and ExpressJet Delaware, and on maintaining productive employee relations. The integration of the workforces of the two airlines will require the resolution of potentially difficult issues relating to representation of various employee groups and the relative seniority of the employee groups at each carrier. Unexpected delays, expenses or other challenges to integrating the workforces could impact the anticipated synergies from the combination of Atlantic Southeast and ExpressJet Delaware and affect ExpressJet's operations and financial performance.
In order to integrate the former employee groups of Atlantic Southeast and ExpressJet Delaware, ExpressJet must negotiate a joint collective bargaining agreement covering each combined employee group. The process for integrating the former labor groups of ExpressJet Delaware and Atlantic Southeast is governed by a combination of the RLA, the McCaskill-Bond Amendment, and where applicable, the existing provisions of each company's collective bargaining agreements and union policy. Pending operational integration, ExpressJet intends to apply the terms of the existing collective bargaining agreements unless other terms have been negotiated. Under the McCaskill-Bond Amendment, seniority integration must be accomplished in a "fair and equitable" manner consistent with the process set forth in the Allegheny-Mohawk Labor Protective Provisions or internal union merger policies, if applicable. Employee dissatisfaction with the results of the seniority integration may lead to litigation that in some cases could delay implementation of the integrated seniority list. The National Mediation Board has exclusive authority to resolve representation disputes arising out of airline mergers.
During December 2013 and January 2014, ALPA, which represents the Atlantic Southeast pilot and ExpressJet Delaware pilot groups, conducted a vote of the two employee groups, seeking approval of a joint collective bargaining agreement that ExpressJet had negotiated with ALPA representatives. The two employee groups rejected the joint collective bargaining agreement, which resulted in the agreements with those employee groups remaining amendable. The decision of those employee groups to reject the joint collective bargaining agreement will preclude us from realizing some of the savings we had hoped to achieve through the ExpressJet Combination. All of ExpressJet's union labor contracts are currently amendable.
We can provide no assurance that a successful or timely resolution of labor negotiations for the former labor groups of Atlantic Southeast and ExpressJet Delaware will be achieved. There is a possibility that employees or unions could engage in job actions such as slow-downs, work-to- rule campaigns, sick-outs or other actions designed to disrupt ExpressJet's normal operations, in an attempt to pressure ExpressJet in collective bargaining negotiations. Although the RLA makes such actions unlawful until the parties have been lawfully released to self-help, and ExpressJet can seek injunctive relief against premature self-help, such actions can cause significant harm even if ultimately enjoined.
The Airline Safety and Pilot Training Improvement Act of 2009 could negatively affect our operations and our financial condition.
The Airline Safety and Pilot Training Improvement Act of 2009 (the "Improvement Act") became effective in August 2013. The Improvement Act added new certification requirements for entry-level commercial pilots, requires additional emergency training for airline personnel, improves availability of pilot records and mandates stricter rules to minimize pilot fatigue.
21
The Improvement Act also:
The Improvement Act (and associated regulations) has increased our compliance and FAA reporting obligations, has had a negative effect on pilot scheduling, work hours and the number of pilots required to be employed for our operations or other aspects of our operations, and may continue to negatively impact our operations and financial condition.
We are highly dependent on Delta and United.
As of December 31, 2014, we had 664 aircraft out of our total 749 aircraft operating under a fixed-fee arrangement or a revenue-sharing agreement with either Delta or United. If our code-share agreements with Delta or United are terminated, we would be significantly impacted and likely would not have an immediate source of revenue or earnings to offset such loss. A termination of either of these agreements would likely have a material adverse effect on our financial condition, operating revenues and net income unless we are able to enter into satisfactory substitute arrangements for the utilization of the affected aircraft by other code-share partners, or, alternatively, obtain the airport facilities and gates and make the other arrangements necessary to fly as an independent airline. We may not be able to enter into substitute code-share arrangements, and any such arrangements we might secure may not be as favorable to us as our current agreements. Operating our airlines independent from major partners would be a significant departure from our business plan, would likely be very difficult and would likely require significant time and resources, which may not be available to us at that point.
The current terms of the SkyWest Airlines and ExpressJet Delta Connection Agreements are subject to certain early termination provisions. Delta's termination rights include cross-termination rights (meaning that a breach by either of SkyWest Airlines or ExpressJet of its Delta Connection Agreement could, under certain circumstances, permit Delta to terminate any or all of the Delta Connection Agreements to which we or either of our operating subsidiaries is a party), the right to terminate each of the agreements upon the occurrence of certain force majeure events (including certain labor-related events) that prevent SkyWest Airlines or ExpressJet from performance for certain periods and the right to terminate each of the agreements if SkyWest Airlines or ExpressJet, as applicable, fails to maintain competitive base rate costs, subject to certain rights of SkyWest Airlines to take corrective action to reimburse Delta for lost revenues. The current terms of the SkyWest Airlines and ExpressJet United Express Agreements are subject to certain early termination provisions and subsequent renewals. United may terminate the SkyWest Airlines and ExpressJet United Express Agreements due to an uncured breach by SkyWest Airlines or ExpressJet of certain operational or performance provisions, including measures and standards related to flight completions, baggage handling and on-time arrivals. The current terms of the United CPA are subject to certain early termination provisions and subsequent renewals. United may terminate the United CPA due to an
22
uncured breach by ExpressJet of certain operational and performance provisions, including measures and standards related to flight completions and on-time arrivals.
We currently use the systems, facilities and services of Delta and United to support a significant portion of our operations, including airport and terminal facilities and operations, information technology support, ticketing and reservations, scheduling, dispatching, fuel purchasing and ground handling services. If Delta or United were to cease to maintain any of these systems, close any of these facilities or no longer provide these services to us, due to termination of one of our code-share agreements, a strike or other labor interruption by Delta or United personnel or for any other reason, we may not be able to obtain alternative systems, facilities or services on terms and conditions as favorable as those we currently receive, or at all. Since our revenues and operating profits are dependent on our level of flight operations, we could then be forced to significantly reduce our operations. Furthermore, upon certain terminations of our code-share agreements, Delta and United could require us to sell or assign to them facilities and assets, including maintenance facilities, we use in connection with the code-share services we provide. As a result, in order to offer airline service after termination of any of our code-share agreements, we may have to replace these facilities, assets and services. We may be unable to arrange such replacements on satisfactory terms, or at all.
Maintenance costs will likely continue to increase as the age of our regional jet fleet increases.
The average age of our CRJ200s, ERJ145s, CRJ700s and CRJ900s is approximately 12.9 years, 12.7 years, 9.6 years and 7.1 years respectively. All of the parts on these aircraft are no longer under warranty and we have started to incur more heavy airframe inspections and engine overhauls on those aircraft. Our non-engine maintenance costs are expected to continue to increase on our CRJ200, ERJ145, CRJ700 and CRJ900 fleets. Our non-engine maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages. If our maintenance costs increase at a higher rate than amounts we can recover in revenue, we will experience a negative impact on our financial results.
We may be negatively impacted if Delta or United experiences significant financial difficulties in the future.
For the year ended December 31, 2014 approximately 93.0% of the available seat miles ("ASMs") generated in our operations were attributable to our code-share agreements with Delta and United. If Delta or United experiences significant financial difficulties, we would likely be negatively affected. For example, volatility in fuel prices may negatively impact Delta's and United's results of operations and financial condition. Among other risks, Delta and United are vulnerable both to unexpected events (such as additional terrorist attacks or additional spikes in fuel prices) and to deterioration of the operating environment (such as a recession or significant increased competition). There is no assurance that Delta or United will be able to operate successfully under these financial conditions.
In light of the importance of our code-share agreements with Delta and United to our business, a default by Delta or United under any of these agreements, or the termination of any of these agreements could jeopardize our operations. Such events could leave us unable to operate many of our current aircraft, as well as additional aircraft we are obligated to purchase, which would likely result in a material adverse effect on our operations and financial condition.
The financial condition of Delta and United will continue to pose risks for our operations. Serial bankruptcies are not unprecedented in the commercial airline industry, and Delta and/or United could file for bankruptcy, in which case our code-share agreements could be subject to termination under the U.S. Bankruptcy Code. Regardless of whether subsequent bankruptcy filings prove to be necessary, Delta and United have required, and will likely continue to require, our participation in efforts to reduce costs and improve their respective financial positions. These efforts could result in lower utilization rates of our aircraft, lower departure rates on the contract flying portion of our business,
23
more volatile operating margins and more aggressive contractual positions, which could result in additional litigation. We believe that any of these developments could have a negative effect on many aspects of our operations and financial condition.
Disagreements regarding the interpretation of our code-share agreements with our major partners could have an adverse effect on our operating results and financial condition.
Long-term contractual agreements, such as our code-share agreements, are subject to interpretation and disputes may arise under such agreements if the parties to an agreement apply different interpretations to that agreement. Those disputes may divert management time and resources from the core operation of the business, and may result in litigation, arbitration or other forms of dispute resolution.
In recent years we have experienced disagreements with our major partners regarding the interpretation of various provisions of our code-share agreements. Some of those disagreements have resulted in litigation, and we may be subject to additional disputes and litigation in the future. Those disagreements have also required a significant amount of management time, financial resources and settlement negotiations of disputed matters.
To the extent that we continue to experience disagreements regarding the interpretation of our code-share or other agreements, we will likely expend valuable management time and financial resources in our efforts to resolve those disagreements. Those disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. Furthermore, there can be no assurance that any or all of those proceedings, if commenced, would be resolved in our favor. An unfavorable result in any such proceeding could have adverse financial consequences or require us to modify our operations. Such disagreements and their consequences could have an adverse effect on our operating results and financial condition.
We have a significant amount of contractual obligations.
As of December 31, 2014, we had a total of approximately $1.7 billion in total long-term debt obligations. Substantially all of this long-term debt was incurred in connection with the acquisition of aircraft, engines and related spare parts. We also have significant long-term lease obligations primarily relating to our aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in our consolidated balance sheets. At December 31, 2014, we had 554 aircraft under lease, with remaining terms ranging up to 11 years. Future minimum lease payments due under all long-term operating leases were approximately $1.5 billion at December 31, 2014. At a 4.8% discount factor, the present value of these lease obligations was equal to approximately $1.3 billion at December 31, 2014. Our high level of fixed obligations could impact our ability to obtain additional financing to support additional expansion plans or divert cash flows from operations and expansion plans to service the fixed obligations.
Our anticipated fleet replacement would require a significant increase in our leverage and the related cash requirements.
We currently have 246 CRJ200s with an average life of 12.9 years, 226 ERJ145s with an average life of 12.7 years and 43 EMB120s with an average life of 17.3 years. We have announced our intention to remove all of our EMB120s from service before the end of the second quarter of 2015, and we anticipate that over the next several years, we will continue to replace the CRJ200s and ERJ145s with larger regional jets or turboprops. Our fleet replacement strategy, if undertaken as we currently anticipate, will require significant amounts of capital to acquire these larger regional jets or turboprops.
There can be no assurance that our operations will generate sufficient cash flow or liquidity to enable us to obtain the necessary aircraft acquisition financing to replace our current fleet, or to make
24
required debt service payments related to our existing or anticipated future obligations. Even if we meet all required debt, lease and purchase obligations, the size of these long-term obligations could negatively affect our financial condition, results of operations and the price of our common stock in many ways, including:
If we need additional capital and cannot obtain such capital on acceptable terms, or at all, we may be unable to realize our fleet replacement plans or take advantage of unanticipated opportunities
We may be limited from expanding our flying within the Delta and United flight systems.
Additional growth opportunities within the Delta and United flight systems are limited by various factors. Except as contemplated by our existing code-share agreements, we cannot assure that Delta and United will contract with us to fly any additional aircraft. We may not receive additional growth opportunities, or may agree to modifications to our code-share agreements that reduce certain benefits to us in order to obtain additional aircraft, or for other reasons. Given the competitive nature of the airline industry, we believe that some of our competitors may be more inclined to accept reduced margins and less favorable contract terms in order to secure new or additional code-share operations. Even if we are offered growth opportunities by our major partners, those opportunities may involve economic terms or financing commitments that are unacceptable to us. Any one or more of these factors may reduce or eliminate our ability to expand our flight operations with our existing code-share partners. We also cannot provide any assurance that we will be able to obtain the additional ground and maintenance facilities, including gates, and support equipment, to expand our operations. The failure to obtain these facilities and equipment would likely impede our efforts to implement our business strategy and could materially and adversely affect our operating results and our financial condition.
Our business model depends on major airlines, including Delta and United, electing to contract with us instead of operating their own regional jets. Some major airlines own their own regional airlines or operate their own regional jets instead of entering into contracts with regional carriers. We have no guarantee that in the future our code-share partners will choose to enter into contracts with us instead of operating their own regional jets. Our partners are not prohibited from doing so under our code-share agreements. A decision by Delta or United to phase out code-share relationships and instead acquire and operate their own regional jets could have a material adverse effect on our financial condition, results of operations or the price of our common stock.
We could be adversely affected by an outbreak of a disease that affects travel behavior.
In 2014, the Ebola virus outbreak in West Africa caused general public concerns for passenger air travel. In recent years, outbreaks of the H1N1 flu virus and of Severe Acute Respiratory Syndrome ("SARS") had an adverse impact on travel behavior. Any outbreak of a disease (including a worsening of the outbreak of the Ebola virus) that affects travel behavior could have a material adverse impact on our operating results and financial condition. In addition, outbreaks of disease could result in quarantines of our personnel or an inability to access facilities or our aircraft, which could adversely affect our operations and financial condition.
25
Interruptions or disruptions in service at one of our hub airports, due to adverse weather or for any other reason, could have a material adverse impact on our operations.
We currently operate primarily through hubs in Atlanta, Los Angeles, Houston, Minneapolis, Detroit, San Francisco, Salt Lake City, Chicago, Denver, Houston, Washington, D.C., Newark, Cleveland and the Pacific Northwest. Nearly all of our flights either originate from or fly into one of these hubs. Our revenues depend primarily on our completion of flights and secondarily on service factors such as timeliness of departure and arrival. Any interruptions or disruptions could, therefore, severely and adversely affect us. Extreme weather can cause flight disruptions, and, during periods of storms or adverse weather, fog, low temperatures, etc., our flights may be canceled or significantly delayed. Hurricanes Katrina and Rita and Superstorm Sandy, in particular, caused severe disruption to air travel in the affected areas and adversely affected airlines operating in the region, including ExpressJet. We operate a significant number of flights to and from airports with particular weather difficulties, including Atlanta, Salt Lake City, Chicago, San Francisco, Newark and Denver. A significant interruption or disruption in service at one of our hubs, due to adverse weather, security closures or otherwise, could result in the cancellation or delay of a significant portion of our flights and, as a result, could have a severe adverse impact on our operations and financial performance.
Economic and industry conditions constantly change, and negative economic conditions in the United States and other countries may create challenges for us that could materially and adversely affect our operations and financial condition.
Our operations and financial condition are affected by many changing economic and other conditions beyond our control, including, among others:
The aggregate effect of any, or some combination, of the foregoing economic and industry conditions on our operations or financial condition is virtually impossible to forecast; however, the occurrence of any or all of such conditions in a significant manner could materially and adversely affect our operations and financial condition.
We could be adversely affected by significant disruptions in the supply of fuel or by high fuel prices.
Dependence on foreign imports of crude oil, limited refining capacity and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel. If there are additional outbreaks of hostilities or other conflicts in oil-producing areas or elsewhere, or a reduction in refining capacity (due to weather events, for example), or governmental limits on the production or sale of jet fuel, there could be a reduction in the supply of jet fuel and significant increases in the cost of jet fuel. Major reductions in the availability
26
of jet fuel or significant increases in its cost, or a continuation of high fuel prices for a significant period of time, would have a material adverse impact on us.
Pursuant to our fixed-fee arrangements, our major partners have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. However, we bear the economic risk of fuel price fluctuations on our pro-rate operations. As of December 31, 2014, essentially all of our EMB120s flown for Delta were flown under pro-rate arrangements, while approximately 57% of our EMB120s flown in the United system were flown under pro-rate arrangements. As of December 31, 2014, we operated 21 CRJ200s under a pro-rate agreement with United. We also operate ten CRJ200s under a pro-rate agreement with Delta, one CRJ200 under a pro-rate arrangement with US Airways and 6 CRJ200s under a pro-rate agreement with American. Our operating and financial results with respect to these pro-rate arrangements can be affected by the price and availability of jet fuel and in the event we are unable to pass on increased fuel prices to our pro-rate customers by increasing fares our financial performance would be adversely impacted.
Reduced utilization levels of our aircraft under our code-share agreements would adversely impact our financial results.
The majority of our code-share agreements set forth minimum levels of flight operations which our major partners are required to schedule for our operations and we are required to provide. These minimum flight operating levels are intended to compensate us for reduced operating efficiencies caused by production decreases made by our major partners under our respective code-share agreements. Historically, our major partners have utilized our flight operations at levels which exceed the minimum levels set forth in our code-share agreements, however, in recent years our major partners have reduced our utilization to levels which, at times, have been lower than the levels required by our code-share agreements. If our major partners schedule the utilization of our aircraft below historical levels (including taking into account the stage length and frequency of our scheduled flights), we may not be able to maintain operating efficiencies previously obtained, which would negatively impact our operating results and financial condition. Additionally, our major partners may change routes and frequencies of flights, which can shorten flight trip lengths. Changes in schedules may increase our flight costs, which could exceed the reimbursed rates paid by our major partners. Continued reduced utilization levels of our aircraft or other changes to our schedules under our code-share agreements would adversely impact our financial results.
There are long-term risks related to supply and demand of regional aircraft associated with our regional airline services strategy.
Our major airline partners have indicated that their committed supply of regional airline capacity is larger than they desire given current market conditions. Specifically, they have identified a general oversupply of 50-seat regional jets under contractual commitments with regional airlines. Delta in particular has reduced both the number of 50-seat regional jets within its network and the number of regional airlines with which it contracts. There are currently more than 100 50-seat aircraft within the Delta Connection system. In addition to reducing the number of 50-seat jets under contract, major airlines have reduced the utilization of regional aircraft, thereby reducing the revenue paid to regional airlines under capacity purchase agreements (See the risk factor titled "Reduced utilization levels of our aircraft under our code-share agreements would adversely impact our financial results" for additional details). This decrease has had, and may continue to have, a negative impact on our regional airline services revenue and financial results.
Declining interest rates could have a negative effect on our financial results.
Our earnings are affected by changes in interest rates due to the amount of our variable rate long-term debt and the amount of cash and securities we hold. Under the majority of our fixed-fee
27
arrangements with our major partners, we are directly reimbursed for interest expense on debt-financed aircraft as a pass-through cost. The reimbursement of the interest expense is recorded as passenger revenue in our consolidated statements of income. Thus, a decline in interest expense associated with contract aircraft would likely be offset by a reduced aircraft ownership cost passed through to our major partners. Interest expense decreased $2.7 million, or 3.9%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in interest expense was substantially due to a decrease in interest rates and the majority of this reduction was passed through to our major partners. Interest income decreased $0.4 million, or 11.0% during the year ended December 31, 2014, compared to the year ended December 31, 2013. Interest income is not a component of our contractual arrangements with our major partners. If interest rates were to decline, our major partners would receive the principal benefit of the interest expense decline, since interest expense is generally passed through to our major partners; however, if declining interest rates reduce our interest income, our financial results will be negatively affected.
If we have a failure in our technology or if we have security breaches of our information technology infrastructure, our business and financial condition may be adversely affected.
The performance and reliability of our technology are critical to our ability to compete effectively. Any internal technological error or failure or large-scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our internal network. Any individual, sustained or repeated failure of technology could impact our ability to conduct our business and result in increased costs. Our technological systems and related data may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.
In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our passengers and employees and information of our business partners. Our information systems are subject to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving, and may be difficult to anticipate or to detect for long periods of time. We may not be able to prevent all data security breaches or misuse of data. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, customers', employees' or business partners' information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business and financial condition.
Our business could be harmed if we lose the services of our key personnel.
Our business depends upon the efforts of our chief executive officer, Jerry C. Atkin, and our other key management and operating personnel. We may have difficulty replacing management or other key personnel who cease to be employed by us and, therefore, the loss of the services of any of these individuals could harm our business. We do not maintain key-person insurance on any of our executive officers.
Risks Related to the Airline Industry
We may be materially affected by uncertainties in the airline industry.
The airline industry has experienced tremendous challenges in recent years and will likely remain volatile for the foreseeable future. Among other factors, the financial challenges faced by major and
28
regional carriers and continuing hostilities in the Middle East and other regions have significantly affected, and are likely to continue to affect, the U.S. airline industry. These events have resulted in declines and shifts in passenger demand, increased insurance costs, increased government regulations and tightened credit markets, all of which have affected, and will likely continue to affect, the operations and financial condition of participants in the industry, including us, major carriers (including our major partners), low-cost carriers, competitors and aircraft manufacturers. These industry developments raise substantial risks and uncertainties, which will likely affect us, major carriers (including our major partners), competitors and aircraft manufacturers in ways that we are unable to currently predict.
The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential code-share partners.
The airline industry is highly competitive. We not only compete with other regional airlines, some of which are owned by or operated as code-share partners of major airlines, but we also face competition from low-cost carriers and major airlines on many of our routes. Low-cost carriers such as Southwest and JetBlue among others, operate at many of our hubs, resulting in significant price competition. Additionally, a large number of other carriers operate at our hubs, creating intense competition. Certain of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats. Increased fare competition could adversely affect our operations and the price of our common stock. The airline industry has undergone substantial consolidation, including the merger between American and US Airways in 2013, United and Continental in 2010, Delta and Northwest Airlines, Inc. in 2008, as well as the merger of Southwest and AirTran Airways, Inc. ("AirTran") in 2011. Any additional consolidation or significant alliance activity within the airline industry could limit the number of potential partners with whom we could enter into code-share relationships and could have a material adverse effect on our relationships with our code-share partners.
Due, in part, to the dynamic nature of the airline industry, major airlines may also make other strategic changes such as changing or consolidating hub locations. If our major partners were to make changes such as these in their strategy and operations, our operations and financial results could be adversely impacted.
Terrorist activities or warnings have dramatically impacted the airline industry, and will likely continue to do so.
The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general, including our operations. The primary effects experienced by the airline industry include a substantial loss of passenger traffic and revenue. If additional terrorist attacks are launched against the airline industry, there will be lasting consequences of the attacks, which may include loss of life, property damage, increased security and insurance costs, increased concerns about future terrorist attacks, increased government regulation and airport delays due to heightened security. Additional terrorist attacks and the fear of such attacks could negatively impact the airline industry, and result in further decreased passenger traffic and yields, increased flight delays or cancellations associated with new government mandates, as well as increased security, fuel and other costs. We cannot provide any assurance that these events will not harm the airline industry generally or our operations or financial condition in particular.
29
We are subject to significant governmental regulation.
All interstate air carriers, including SkyWest Airlines and ExpressJet, are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on our operations. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. A decision by the FAA to ground, or require time-consuming inspections of or maintenance on, all or any of our aircraft for any reason may have a material adverse effect on our operations. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations. From time to time, various airports throughout the country have considered limiting the use of smaller aircraft, such as our aircraft, at such airports. The imposition of any limits on the use of our aircraft at any airport at which we operate could have a material adverse effect on our operations.
The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.
An accident or incident involving one of our aircraft could result in significant potential claims of injured passengers and others, as well as repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses from the accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that our operations are less safe or reliable than other airlines.
Risks Related to Our Common Stock
We can issue additional shares without shareholder approval.
Our Restated Articles of Incorporation, as amended (the "Restated Articles"), authorize the issuance of up to 120,000,000 shares of common stock, all of which may be issued without any action or approval by our shareholders. As of December 31, 2014, we had 51,186,025 shares outstanding. In addition, as of December 31, 2014, we had equity-based incentive plans under which 4,080,423 shares are reserved for issuance and an employee stock purchase plan under which 1,260,759 shares are reserved for issuance, both of which may dilute the ownership interest of our shareholders. Our Restated Articles also authorize the issuance of up to 5,000,000 shares of preferred stock. Our board of directors has the authority to issue preferred stock with the rights and preferences, and at the price, which it determines. Any shares of preferred stock issued would likely be senior to shares of our common stock in various regards, including dividends, payments upon liquidation and voting. The value of our common stock could be negatively affected by the issuance of any shares of preferred stock.
30
The amount of dividends we pay may decrease or we may not pay dividends.
Historically, we have paid dividends in varying amounts on our common stock. The future payment and amount of cash dividends will depend upon our financial condition and results of operations, loan covenants and other factors deemed relevant by our board of directors. There can be no assurance that we will continue our practice of paying dividends on our common stock or that we will have the financial resources to pay such dividends.
The amount of common stock we repurchase may decrease from historical levels, or we may not repurchase any additional shares of common stock.
Historically, we have repurchased shares of our common stock in varying amounts. Our future repurchases of shares of common stock, if any, and the number of shares of common stock we may repurchase will depend upon our financial condition, results of operations, loan covenants and other factors deemed relevant by our Board of Directors. There can be no assurance that we will continue our practice of repurchasing shares of common stock or that we will have the financial resources to repurchase shares of common stock in the future.
Provisions of our charter documents and code-share agreements may limit the ability or desire of others to gain control of our company.
Our ability to issue shares of preferred and common stock without shareholder approval may have the effect of delaying or preventing a change in control and may adversely affect the voting and other rights of the holders of our common stock, even in circumstances where such a change in control would be viewed as desirable by most investors. The provisions of the Utah Control Shares Acquisitions Act may also discourage the acquisition of a significant interest in or control of our company. Additionally, our code-share agreements contain termination and extension trigger provisions related to change in control type transactions that may have the effect of deterring a change in control of our company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Flight Equipment
As of December 31, 2014, our fleet consisted of the following types of owned and leased aircraft:
Aircraft Type
|
Number of
Owned Aircraft |
Number of
Leased Aircraft |
Passenger
Capacity |
Scheduled
Flight Range (miles) |
Average
Cruising Speed (mph) |
Average
Age (years) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
CRJ200s |
94 | 154 | 50 | 1,500 | 530 | 12.9 | |||||||||||||
CRJ700s |
70 | 69 | 70 | 1,600 | 530 | 9.6 | |||||||||||||
CRJ900s |
11 | 53 | 90 | 1,500 | 530 | 7.1 | |||||||||||||
E175s |
20 | | 76 | 2,100 | 530 | 0.4 | |||||||||||||
ERJ145s |
| 226 | 50 | 1,500 | 530 | 12.7 | |||||||||||||
ERJ135s |
| 9 | 37 | 1,500 | 530 | 13.6 | |||||||||||||
EMB120s |
18 | 25 | 30 | 300 | 300 | 17.3 |
The following table outlines the currently anticipated size and composition of our combined fleet for the periods indicated. The projected fleet size schedule below assumes aircraft financed under
31
operating leases will be returned to the lessor at the end of each lease and debt-financed aircraft will be retired or sold as the debt matures.
|
As of December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2016 | 2017 | 2018 | |||||||||
Additional aircraft deliveries |
|||||||||||||
E175 |
25 | 2 | | |
|
As of December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2015 | 2016 | 2017 | 2018 | |||||||||
Anticipated fleet size |
|||||||||||||
Total Bombardier Regional Jets |
414 | 390 | 342 | 307 | |||||||||
Total Embraer Regional Jets |
225 | 199 | 47 | 47 | |||||||||
Total Combined Fleet |
639 | 589 | 389 | 354 |
Bombardier and Embraer Regional Jets
The Bombardier and Embraer Regional Jets are among the quietest commercial jets currently available and offer many of the amenities of larger commercial jet aircraft, including flight attendant service, as well as a stand-up cabin, overhead and under seat storage, lavatories and in-flight snack and beverage service. The speed of Bombardier and Embraer Regional Jets is comparable to larger aircraft operated by the major airlines, and they have a range of approximately 1,600 miles (2,100 miles for the E175 aircraft); however, because of their smaller size and efficient design, the per-flight cost of operating a Bombardier or Embraer Regional Jet is generally less than that of a 120-seat or larger jet aircraft.
Brasilia Turboprops
The EMB120s are 30-seat, pressurized aircraft designed to operate more economically over short-haul routes than larger jet aircraft. In November 2014, SkyWest Airlines announced that it intends to remove all EMB120 aircraft from service, which we anticipate completing by the end of the second quarter of 2015.
Ground Facilities
SkyWest, SkyWest Airlines and ExpressJet own or lease the following principal properties:
SkyWest Facilities
SkyWest Airlines Facilities
32
ExpressJet Facilities
33
November 30, 2020, and the lease for the shop facility is scheduled to expire on October 31, 2017.
Our management deems the current facilities of SkyWest, SkyWest Airlines and ExpressJet as being suitable to support existing operations and believes these facilities will be adequate for the foreseeable future.
We are subject to certain legal actions which we consider routine to our business activities. As of December 31, 2014, our 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 our financial position, liquidity or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
The disclosure required by this item is not applicable.
34
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price for Our Common Stock
Our common stock is traded on The Nasdaq Global Select Market under the symbol "SKYW." At February 6, 2015, there were approximately 875 stockholders of record of our common stock. Securities held of record do not include shares held in securities position listings. The following table sets forth the range of high and low closing sales prices for our common stock, during the periods indicated.
|
2014 | 2013 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter
|
High | Low | High | Low | |||||||||
First |
$ | 14.98 | $ | 11.77 | $ | 16.10 | $ | 12.32 | |||||
Second |
13.72 | 11.21 | 16.11 | 13.19 | |||||||||
Third |
12.66 | 7.78 | 15.54 | 12.39 | |||||||||
Fourth |
13.28 | 7.07 | 17.05 | 13.57 |
The transfer agent for our common stock is Zions First National Bank, Salt Lake City, Utah.
Dividends
During 2014 and 2013, our Board of Directors declared regular quarterly dividends of $0.04 per share.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table contains information regarding our equity compensation plans as of December 31, 2014.
Plan Category
|
Number of Securities to be
Issued upon Exercise of Outstanding Options, Warrants and Rights |
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities
Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in the First Column) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders(1) |
2,888,074 | $ | 16.46 | 5,341,182 |
Stock Performance Graph
The following Performance Graph and related information shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission,(the "Commission"), nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except to the extent we specifically incorporate it by reference into such filing.
The following graph compares the cumulative total shareholder return on our common stock over the five-year period ended December 31, 2014, with the cumulative total return during such period of the Nasdaq Stock Market (U.S. Companies) and a peer group index composed of regional and major
35
passenger airlines with U.S operations that have equity securities traded on the Nasdaq Stock Market or the New York Stock Exchange, the members of which are identified below (the "Peer Group") for the same period. The following graph assumes an initial investment of $100.00 with dividends reinvested. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.
Comparison of Cumulative Five Year Total Return
|
INDEXED RETURNS | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Years Ending | |||||||||||||||||
|
Base
Period Dec09 |
||||||||||||||||||
Company Name / Index
|
Dec10 | Dec11 | Dec12 | Dec13 | Dec14 | ||||||||||||||
SkyWest, Inc . |
100 | 93.38 | 76.15 | 76.40 | 91.96 | 83.81 | |||||||||||||
NASDAQ Composite |
100 | 118.02 | 117.04 | 137.47 | 192.62 | 221.02 | |||||||||||||
Peer Group |
100 | 118.68 | 84.52 | 107.57 | 200.73 | 374.64 |
The Peer Group consists of regional and major passenger airlines with U.S operations that have equity securities traded on the Nasdaq Stock Market or the New York Stock Exchange. The members of the Peer Group are: Alaska Air Group, Inc.: Allegiant Travel Co.; American Airlines Group, Inc.; Delta Air Lines, Inc.; Hawaiian Holdings, Inc.; JetBlue Airways Corp.; Republic Airways, Holdings Inc.; SkyWest, Inc.; Southwest Airlines Co.; Spirit Airlines Inc.; United Continental Holdings Inc.; and Virgin America, Inc.
36
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and related notes included elsewhere in this Report.
Selected Consolidated Financial Data (amounts in thousands, except per share data):
|
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | 2011 | 2010(2) | |||||||||||
Operating revenues |
$ | 3,237,447 | $ | 3,297,725 | $ | 3,534,372 | $ | 3,654,923 | $ | 2,765,145 | ||||||
Operating income |
24,848 | 153,111 | 165,987 | 41,105 | 201,826 | |||||||||||
Net income (loss) |
(24,154 | ) | 58,956 | 51,157 | (27,335 | ) | 96,350 | |||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | (0.47 | ) | $ | 1.14 | $ | 1.00 | $ | (0.52 | ) | $ | 1.73 | ||||
Diluted |
$ | (0.47 | ) | $ | 1.12 | $ | 0.99 | $ | (0.52 | ) | $ | 1.70 | ||||
Weighted average shares: |
||||||||||||||||
Basic |
51,237 | 51,688 | 51,090 | 52,201 | 55,610 | |||||||||||
Diluted |
51,237 | 52,422 | 51,746 | 52,201 | 56,526 | |||||||||||
Total assets |
$ | 4,409,928 | $ | 4,233,219 | $ | 4,254,637 | $ | 4,281,908 | $ | 4,456,148 | ||||||
Current assets |
1,291,003 | 1,464,437 | 1,434,040 | 1,280,464 | 1,379,203 | |||||||||||
Current liabilities |
684,355 | 620,464 | 591,425 | 624,148 | 572,278 | |||||||||||
Long-term debt, net of current maturities |
1,533,990 | 1,293,179 | 1,470,567 | 1,606,993 | 1,738,936 | |||||||||||
Stockholders' equity |
1,400,346 | 1,434,939 | 1,387,175 | 1,334,261 | 1,420,923 | |||||||||||
Return (loss) on average equity(1) |
(1.7 | )% | 4.2 | % | 3.8 | % | (2.0 | )% | 6.9 | % | ||||||
Cash dividends declared per common share |
$ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 |
Selected Operating Data
|
Year Ended December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||
Block hours |
2,275,562 | 2,380,118 | 2,297,014 | 2,250,280 | 1,547,562 | |||||||||||
Departures |
1,357,454 | 1,453,601 | 1,435,512 | 1,390,523 | 1,001,766 | |||||||||||
Passengers carried |
58,962,010 | 60,581,948 | 58,803,690 | 55,836,271 | 40,411,089 | |||||||||||
Revenue passenger miles (000) |
31,499,397 | 31,834,735 | 30,088,278 | 29,109,039 | 20,227,220 | |||||||||||
Available seat miles (000) |
38,220,150 | 39,207,910 | 37,278,554 | 36,698,859 | 25,503,845 | |||||||||||
Revenue per available seat mile |
8.5¢ | 8.4¢ | 9.5¢ | 10.0¢ | 10.8¢ | |||||||||||
Cost per available seat mile |
8.6¢ | 8.2¢ | 9.2¢ | 10.1¢ | 10.4¢ | |||||||||||
Average passenger trip length |
534 | 525 | 512 | 521 | 501 | |||||||||||
Number of operating aircraft at end of year |
747 | 755 | 738 | 732 | 704 |
37
The following terms used in this section and elsewhere in this Report have the meanings indicated below:
"Revenue passenger miles" represents the number of miles flown by revenue passengers.
"Available seat miles" represents the number of seats available for passengers multiplied by the number of miles those seats are flown.
"Revenue per available seat mile" represents passenger revenue divided by available seat miles.
"Cost per available seat mile" represents operating expenses plus interest divided by available seat miles.
"Number of operating aircraft at end of year" excludes aircraft leased to un-affiliated and affiliated entities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents factors that had a material effect on our results of operations during the years ended December 31, 2014, 2013 and 2012. Also discussed is our financial position as of December 31, 2014 and 2013. You should read this discussion in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Report or incorporated herein by reference. This discussion and analysis contains forward-looking statements. Please refer to the sections of this Report entitled "Cautionary Statement Concerning Forward-looking Statements" and "Item 1A. Risk Factors" for discussion of some of the uncertainties, risks and assumptions associated with these statements.
Overview
Through SkyWest Airlines and ExpressJet, we operate the largest regional airline in the United States. As of December 31, 2014, SkyWest Airlines and ExpressJet offered scheduled passenger and air freight service with approximately 3,600 total daily departures to destinations in the United States, Canada, Mexico and the Caribbean. As of December 31, 2014, we had a combined fleet of 749 aircraft consisting of the following:
|
CRJ200 | CRJ700 | CRJ900 | ERJ135 | ERJ145 | E175 | EMB120 | Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
United |
89 | 70 | | 9 | 216 | 20 | 21 | 425 | |||||||||||||||||
Delta |
113 | 60 | 60 | | | | 6 | 239 | |||||||||||||||||
American |
29 | | | | | | | 29 | |||||||||||||||||
US Airways |
11 | | 4 | | | | | 15 | |||||||||||||||||
Alaska |
| 9 | | | | | | 9 | |||||||||||||||||
Subleased to an un-affiliated entity |
2 | | | | | | | 2 | |||||||||||||||||
Other |
4 | | | | 10 | | 16 | 30 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
248 | 139 | 64 | 9 | 226 | 20 | 43 | 749 |
For the year ended December 31, 2014, approximately 61.4% of our aggregate capacity was operated for United, approximately 31.6% was operated for Delta, approximately 3.2% was operated for American, approximately 2.1% was operated for Alaska and approximately 1.7% was operated for US Airways.
Under our fixed-fee arrangements, three compensation components have a significant impact on comparability of revenue and operating expense for the periods presented in this Report. The first item is the reimbursement of fuel expense, which is a directly-reimbursed expense under all of our fixed-fee arrangements. If we purchase fuel directly from vendors, our major partners reimburse us for fuel
38
expense incurred under each respective fixed-fee contract, and we record such reimbursement as passenger revenue. Thus, the price volatility of fuel and the volume of fuel expensed under our fixed-fee arrangements during a particular period will impact our fuel expense and our passenger revenue during the period equally, with no impact on our operating income. Over the past few years, some of our major airline partners have purchased an increased volume of fuel directly from vendors on flights we operated under our fixed-fee contracts, which has decreased both revenue and operating expenses compared to previous periods presented in this Report.
The second item is the reimbursement of landing fees and station rents, which is a directly-reimbursed expense under all of our fixed-fee arrangements. Our major partners reimburse us for landing fees and station rent expense incurred under each respective fixed-fee contract, and we record such reimbursement as passenger revenue. Over the past few years, some of our major airline partners have paid an increased volume of landing fees and station rents directly to our vendors on flights we operated under our flying contracts, which has also decreased both revenue and operating expenses compared to previous periods presented in this Report.
The third item is the compensation we receive for engine maintenance under our fixed-fee arrangements. Under our United CRJ and E175 contracts, American, US Airways and Alaska fixed-fee contracts, a portion of our compensation is based upon fixed hourly rates the aircraft is in operation, which is intended to cover various operating costs, including engine maintenance costs ("Fixed-Rate Engine Contracts"). Under the compensation structure for our Delta Connection and United ERJ145 flying contracts, our major partner reimburses us for engine maintenance expense when the expense is incurred as a pass-through cost ("Directly-Reimbursed Engine Contracts"). We use the direct-expense method of accounting for our CRJ200 regional jet aircraft engine overhaul costs and, accordingly, we recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis. Under the direct-expense method, the maintenance liability is recorded when the maintenance services are performed ("CRJ200 Engine Overhaul Expense").
Because we use the direct-expense method of accounting for our CRJ200 engine expense, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine maintenance events and related expense we incur each reporting period under the Fixed-Rate Engine Contracts has a direct impact on the comparability of our operating income for the presented reporting periods.
Because we recognize revenue at the same amount and in the same period when we incur engine maintenance expense on engines operating under our Directly-Reimbursed Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented reporting periods.
We have an agreement with a third-party vendor to provide long-term engine maintenance covering scheduled and unscheduled repairs for engines on our CRJ700s operating under our Fixed-Rate Engine Contracts (a "Power by the Hour Agreement"). Under the terms of the Power by the Hour Agreement, we are obligated to pay a set dollar amount per engine hour flown on a monthly basis and the vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the Power by the Hour Agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement. Because we record engine maintenance expense based on the fixed hourly rate pursuant to the Power by the Hour Agreement on our CRJ700s operating under our Fixed-Rate Engine Contracts, and because we recognize revenue using the applicable fixed hourly rates under our Fixed-Rate Engine Contracts, the number of engine events and related expense we incur each reporting period does not have a direct impact on the comparability of our operating income for the presented
39
reporting periods. The table below summarizes how we are compensated by our major partners under our flying contracts for engine expense and the method we use to recognize the corresponding expense.
Flying Contract
|
Compensation of Engine Expense | Expense Recognition | ||
---|---|---|---|---|
SkyWest Delta Connection |
Directly-Reimbursed Engine Contracts | Direct Expense Method | ||
ExpressJet Delta Connection |
Directly-Reimbursed Engine Contracts | Direct Expense Method | ||
SkyWest United Express (CRJ200) |
Fixed-Rate Engine Contracts | Direct Expense Method | ||
SkyWest United Express (CRJ700) |
Fixed-Rate Engine Contracts | Power by the Hour Agreement | ||
SkyWest United Express (E175) |
Fixed-Rate Engine Contracts | Power by the Hour Agreement | ||
SkyWest United Express (EMB120) |
Fixed-Rate Engine Contracts | Deferral Method | ||
ExpressJet United (CRJ200) |
Fixed-Rate Engine Contracts | Direct Expense Method | ||
ExpressJet United (ERJ145) |
Directly-Reimbursed Engine Contracts | Power by the Hour Agreement | ||
Alaska Agreement (CRJ700s) |
Fixed-Rate Engine Contracts | Power by the Hour Agreement | ||
SkyWest American Agreement (CRJ200) |
Fixed-Rate Engine Contracts | Direct Expense Method | ||
ExpressJet American Agreement (CRJ200) |
Fixed-Rate Engine Contracts | Direct Expense Method | ||
US Airways Agreement (CRJ200 / CRJ900) |
Fixed-Rate Engine Contracts | Direct Expense Method |
Historically, multiple contractual relationships with major airlines have enabled us to reduce our reliance on any single major airline code and to enhance and stabilize operating results through a mix of fixed-fee flying arrangements and our pro-rate flying arrangements. For the year ended December 31, 2014, contract flying revenue and pro-rate revenue represented approximately 88% and 12%, respectively, of our total passenger revenues. On contract routes, the major airline partner controls scheduling, ticketing, pricing and seat inventories and we are compensated by the major airline partner at contracted rates based on completed block hours, flight departures and other operating measures.
Financial Highlights
We had total operating revenues of $3.2 billion for the year ended December 31, 2014, a 1.8% decrease, compared to total operating revenues of $3.3 billion for the year ended December 31, 2013. We had a net loss of $24.2 million, or $(0.47) per diluted share, for the year ended December 31, 2014, compared to $59.0 million, or $1.12 per diluted share, for the year ended December 31, 2013.
The significant items affecting our financial performance during the year ended December 31, 2014 are outlined below:
Revenue
Under our fixed-fee arrangements, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue (referred to as pass through costs). These pass-through costs include fuel, landing fees, station rents and engine maintenance expenses under certain fixed-fee contracts. Excluding the pass-through expenses for fuel, landing fees and engine maintenance and the associated direct reimbursement from our major partners, our passenger revenues increased from $2,570 million for the year ended December 31, 2013 to $2,583 million for the year ended December 31, 2014, a $13 million increase. This increase during the 2014 year was primarily due to the addition of the E175 aircraft, certain contract renewals and modifications at improved rates and increased volume of departures on routes subject to government subsidies. Block hours incurred on completed flights is a significant driver of our revenue under our fixed-fee arrangements. During the three months ended March 31, 2014, we experienced unusual weather-related disruptions and cancelled approximately 15,800 more flights compared to the three months ended March 31, 2013, or a 144% increase in weather-cancelled flights. The decrease in block hour production from 2013 to 2014 was significantly concentrated in the ExpressJet ERJ145 aircraft type, which has a lower revenue per block hour than our other flying contracts, as the aircraft lease payments are paid directly by the major airline partner and we do not record revenue for expenses paid directly to vendors by our major partners.
40
Operating Expenses and Other Income items
Salaries, wages and employee benefits increased $46.8 million, or 3.9%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in salaries, wages and employee benefit expenses was primarily due to increased pilot costs associated with the implementation of the Airline Safety and Pilot Training Improvement Act of 2009 (the "Improvement Act"), which had a negative effect on pilot scheduling and work hours in 2014. We anticipate that the negative impact of compliance with the Improvement Act we experienced in 2014 will continue in future periods. The increase in salaries, wages and employee benefits was also due to additional hiring and training associated with the deliveries of our E175 aircraft, which we anticipate will continue into 2015.
During the year ended December 31, 2014, we recorded $74.8 million in special items that consisted primarily of impairment charges to write-down owned EMB120 aircraft and related long-lived assets to their estimated fair value, accrued obligations on the leased aircraft and related costs. The special item associated with the EMB120 aircraft was triggered by our decision to remove the EMB120 aircraft from service by the second quarter of 2015. The special item additionally consists of impairment charges to write-down certain ERJ145 long-lived assets to their estimated fair value and aircraft lease return and related costs. The special item associated with the ERJ145 aircraft was triggered by the execution of 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. The special item also includes the write-down of assets associated with the disposition of our paint facility located in Saltillo, Mexico, which was sold during the year ended December 31, 2014.
Other operating expenses, which primarily consist of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $24.5 million, or 10.2%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in other expenses during the year ended December 31, 2014 was primarily due to an increase in crew lodging expenses resulting from our compliance with the Improvement Act.
We recorded a gain of $24.9 million in other income during the year ended December 31, 2014 related to the completion of the sale of our ownership interest in Trip Linhas Arereas S.A., a Brazilian regional airline ("TRIP").
Other Significant Developments in 2014
In May 2014, SkyWest Airlines inducted its first E175 aircraft into service pursuant to the SkyWest Airlines United Express Agreement. As of December 31, 2014, we had taken delivery of 20 E175 aircraft and we anticipate taking delivery of the remaining 20 E175 aircraft in 2015. The United Express Agreement has a 12-year term for each of the aircraft subject to the agreement, and other terms which are generally consistent with the SkyWest Airlines United Express Agreement.
In November 2014, SkyWest Airlines reached an agreement with Alaska to place seven E175 aircraft into service pursuant to the SkyWest Airlines Alaska Agreement. We anticipate taking deliveries of the seven aircraft between mid-2015 and the first quarter of 2016.
In November 2014, ExpressJet reached an agreement with American to operate 15 used ERJ145s. We anticipate the aircraft will be placed into service during the first half of 2015. We intend to lease the aircraft from American and we anticipate operating the aircraft through the end of 2016.
In November 2014, we made the decision to remove all EMB120 aircraft from service by the end of the second quarter of 2015. As of December 31, 2014, we owned 18 EMB120s and leased 25 EMB120 aircraft. We are actively marketing our owned EMB120 aircraft and our EMB120 aircraft spare parts inventory.
41
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
42
Airlines, a third-party vendor provides our long-term engine services covering the scheduled and unscheduled repairs for engines on our CRJ700s operated under our Fixed-Rate Engine Contracts. Under the terms of the vendor agreement, we pay a set dollar amount per engine hour flown on a monthly basis and the third-party vendor assumes the obligation to repair the engines at no additional cost to us, subject to certain specified exclusions. Thus, under the third-party vendor agreement, we expense the engine maintenance costs as flight hours are incurred on the engines and using the contractual rate set forth in the agreement.
Aircraft Leases
The majority of SkyWest Airlines' aircraft are leased from third parties, while the majority of ExpressJet's aircraft flying for Delta and American are primarily debt-financed on a long-term basis, and all of ExpressJet's ERJ145 aircraft flying for United are leased from United for a nominal amount. In order to determine the proper classification of our leased aircraft as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Additionally, operating leases are not reflected in our consolidated balance sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our consolidated balance sheets.
Impairment of Long-Lived Assets
As of December 31, 2014, we had approximately $3.0 billion of property and equipment and related assets. Additionally, as of December 31, 2014, we had approximately $12.7 million in intangible assets. In accounting for these long-lived and intangible assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. We recorded an intangible of approximately $33.7 million relating to the acquisition of Atlantic Southeast in September 2005. The intangible is being amortized over fifteen years under the straight-line method. As of December 31, 2014, we had recorded $21.0 million in accumulated amortization expense. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets.
When considering whether or not impairment of long-lived assets exists, we group similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet type or contract level.
In November 2014, we made the decision to remove all EMB120 aircraft from service by the end of the second quarter of 2015. This decision resulted in an impairment review of our long-lived assets specific to the EMB120 aircraft, which included owned aircraft, capitalized engine overhaul assets, spare engines and other EMB120 specific long-lived assets. The impairment analysis required us to use judgment to estimate the fair value of our EMB120 long-lived assets. As the largest operator of the EMB120 aircraft in the United States, our decision to remove all our EMB120 aircraft from service by the end of the second quarter of 2015 may consequently have a negative impact on the fair value of our long-lived assets. The amounts we ultimately realize from the disposal of our EMB120 long-lived assets may vary from our December 31, 2014 fair value assessments.
43
In November 2014, ExpressJet entered into an amended and restated ExpressJet United ERJ Agreement, which reduced the term of the agreement from the year 2020 to 2017 and accelerated the removal of ERJ145 aircraft from the contract between the years 2015 and 2017. As of December 31, 2014, all of ExpressJet's ERJ145 aircraft were operated pursuant to the ExpressJet United ERJ Agreement. The reduced term of the ExpressJet United ERJ Agreement shortened our anticipated use of ERJ145 specific long-lived assets and resulted in an impairment review for such aircraft type specific assets, which included capitalized aircraft improvements, spare engines and other ERJ145 long-lived assets. The impairment analysis required us to use judgment to estimate the fair value of our ERJ145 long-lived assets. The amounts we ultimately realize from the disposal of our ERJ145 long-lived assets may vary from our December 31, 2014 fair value assessments.
In conjunction with the acquisition of ExpressJet Delaware, we acquired an aircraft paint facility located in Saltillo, Mexico. During the three months ended September 30, 2014, we discontinued use of the facility and wrote down the value of the facility and related assets to its estimated fair value. During the three months ended December 31 2014, we sold the paint facility to a third party for an amount that approximated our estimated fair market value.
Stock-Based Compensation Expense
We estimate the fair value of stock options as of the grant date using the Black-Scholes option pricing model. We use historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of our common stock and other factors.
Fair value
We hold certain assets that are required to be measured at fair value in accordance with United States GAAP. We determined fair value of these assets based on the following three levels of inputs:
Level 1 | | Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 |
|
|
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of our marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities. |
Level 3 |
|
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions. |
We utilize several valuation techniques in order to assess the fair value of our financial assets and liabilities. Our cash and cash equivalents primarily utilize quoted prices in active markets for identical assets or liabilities.
We have valued non-auction rate marketable securities using quoted prices in active markets for identical assets or liabilities. If a quoted price is not available, we utilize broker quotes in a non-active market for valuation of these securities. For auction-rate security instruments, quoted prices in active markets are no longer available. As a result, we have estimated the fair values of these securities utilizing a discounted cash flow model.
44
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15. This standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. We are evaluating the new guidance and plan to provide additional information about its expected impact at a future date.
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period ("ASU 2014-12"). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee's award to vest upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award, but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. ASU 2014-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2015. We do not believe the implementation of ASU 2014-12 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (ASU No. 2014-09). Under ASU No. 2014-09, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. Our management is currently evaluating the impact, the adoption of ASU No. 2014-09 will have on our consolidated financial statements.
In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20. The standard is effective in the first quarter of 2015. We do not believe the implementation of the standard will have a material impact on our consolidated financial statements.
45
Results of Operations
2014 Compared to 2013
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | % Change | |||||||
Revenue passenger miles (000) |
31,499,397 | 31,834,735 | (1.1 | )% | ||||||
Available seat miles ("ASMs") (000) |
38,220,150 | 39,207,910 | (2.5 | )% | ||||||
Block hours |
2,275,562 | 2,380,118 | (4.4 | )% | ||||||
Departures |
1,357,454 | 1,453,601 | (6.6 | )% | ||||||
Passengers carried |
58,962,010 | 60,581,948 | (2.7 | )% | ||||||
Passenger load factor |
82.4 | % | 81.2 | % | 1.2pts | |||||
Revenue per available seat mile |
8.5¢ | 8.4¢ | 1.2 | % | ||||||
Cost per available seat mile |
8.6¢ | 8.2¢ | 4.9 | % | ||||||
Fuel cost per available seat mile |
0.5¢ | 0.5¢ | 0.0 | % | ||||||
Average passenger trip length (miles) |
534 | 525 | 1.7 | % |
Revenues. Total operating revenues decreased $60.3 million, or 1.8%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Our fuel expense, landing fees, station rents and directly-reimbursed engine expense decreased by $79.1 million during the year ended December 31, 2014, as compared to the year ended December 31, 2013, due primarily to (i) our major partners purchasing an increased volume of fuel, landing fees and station rents directly from vendors on flights we operated under our code-share agreements and (ii) a reduction in the number of engine maintenance events. The following table summarizes the amount of fuel, landing fees, station rents, de-ice and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
Passenger revenues |
$ | 3,168,000 | $ | 3,239,525 | $ | (71,525 | ) | (2.2 | )% | ||||
Less: Fuel reimbursement from major partners |
76,675 | 91,925 | (15,250 | ) | (16.6 | )% | |||||||
Less: Landing fee and station rent reimbursements from major partners |
23,800 | 95,175 | (71,375 | ) | (75.0 | )% | |||||||
Less: Engine overhaul reimbursement from major partners |
130,505 | 123,024 | 7,481 | 6.1 | % | ||||||||
| | | | | | | | | | | | | |
Passenger revenue excluding fuel, landing fee, station rent and engine overhaul reimbursements |
$ | 2,937,020 | $ | 2,929,401 | $ | 7,619 | 0.3 | % |
Passenger revenues. Passenger revenues decreased $71.5 million, or 2.2%, during year ended December 31, 2014, compared to the year ended December 31, 2013. Our passenger revenues, excluding fuel, landing fees, station rents and engine overhaul reimbursements from major partners, increased $7.6 million, or 0.3%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in passenger revenues, excluding fuel, landing fees, station rents and engine overhaul reimbursements, was primarily due to the additional E175 operations that began in 2014, improvements in the provisions in certain of our flying contracts and additional revenue sharing
46
operations, partially offset by reductions in the ExpressJet fleet size, severe weather experienced in the first half of 2014 and reduced contract performance incentives.
Ground handling and other. Total ground handling and other revenues increased $11.3 million, or 19.3%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. Ground handling and other revenue primarily consists of ground handling services we provide to third-party airlines and government subsidies we receive for operating certain routes. Revenues associated with ground handling services we provide for our aircraft are recorded as passenger revenues. The increase in ground handling and other revenue was primarily due to an increased volume of departures during the 2014 year on routes subject to government subsidies.
Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014
Amount |
2013
Amount |
$ Change
Amount |
% Change
Percent |
2014 Cents
Per ASM |
2013 Cents
Per ASM |
|||||||||||||
Salaries, wages and benefits |
$ | 1,258,155 | $ | 1,211,307 | $ | 46,848 | 3.9 | % | 3.3 | 3.1 | |||||||||
Aircraft maintenance, materials and repairs |
682,773 | 686,381 | (3,608 | ) | (0.5 | )% | 1.8 | 1.8 | |||||||||||
Aircraft rentals |
305,334 | 325,360 | (20,026 | ) | (6.2 | )% | 0.8 | 0.8 | |||||||||||
Depreciation and amortization |
259,642 | 245,005 | 14,637 | 6.0 | % | 0.7 | 0.6 | ||||||||||||
Aircraft fuel |
193,247 | 193,513 | (266 | ) | (0.1 | )% | 0.5 | 0.5 | |||||||||||
Ground handling services |
123,917 | 129,119 | (5,202 | ) | (4.0 | )% | 0.3 | 0.3 | |||||||||||
Special items |
74,777 | | 74,777 | NM | 0.2 | | |||||||||||||
Station rentals and landing fees |
51,024 | 114,688 | (63,664 | ) | (55.5 | )% | 0.1 | 0.3 | |||||||||||
Other |
263,730 | 239,241 | 24,489 | 10.2 | % | 0.7 | 0.6 | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
3,212,599 | $ | 3,144,614 | $ | 67,985 | 2.2 | % | 8.4 | 8.0 | ||||||||||
Interest expense |
65,995 | 68,658 | (2,663 | ) | (3.9 | )% | 0.2 | 0.2 | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total airline expenses |
$ | 3,278,594 | $ | 3,213,272 | $ | 65,322 | 2.0 | % | 8.6 | 8.2 | |||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits increased $46.8 million, or 3.9%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in salaries, wages and employee benefits was primarily due to additional expenses attributable to the implementation of the Improvement Act, which had a negative effect on pilot scheduling and work hours and resulted in increased crew costs. The increase was also due to the additional E175 operations and training costs associated with the commencement of our E175 flight operations during 2014.
Aircraft maintenance, materials and repairs. Aircraft maintenance expense decreased $3.6 million, or 0.5%, during the year ended December 31, 2014, compared to the year ended December 31 2013. The following table summarizes the effect of engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
Aircraft maintenance, materials and repairs |
$ | 682,773 | $ | 686,381 | $ | (3,608 | ) | (0.5 | )% | ||||
Less: Engine overhaul reimbursement from major partners |
130,505 | 123,024 | 7,481 | 6.1 | % | ||||||||
Less: CRJ200 engine overhauls reimbursed at fixed hourly rate |
25,223 | 39,388 | (14,165 | ) | (36.0 | )% | |||||||
| | | | | | | | | | | | | |
Other aircraft maintenance, materials and repairs |
$ | 527,045 | $ | 523,969 | $ | 3,076 | 0.6 | % | |||||
| | | | | | | | | | | | | |
47
Other aircraft maintenance, materials and repairs, increased $3.1 million, or 0.6%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in aircraft maintenance expense excluding engine overhaul costs was primarily due to an increase in the number of scheduled maintenance events and aircraft parts replacement primarily due to the timing of major maintenance events and general aging of our EMB120, CRJ and ERJ fleet.
We recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis as maintenance expense. Under our Fixed-Rate Engine Contracts, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the Fixed-Rate Engine Contracts can have a significant impact on our financial results. During the year ended December 31, 2014, our CRJ200 engine expense under our Fixed-Rate Engine Contracts decreased $14.2 million compared to the year ended December 31, 2013. The decrease in CRJ200 engine overhauls reimbursed under our Fixed-Rate Engine Contracts was principally due to fewer scheduled engine maintenance events.
Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our applicable major partner at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amount and during the same period we recognized the expense in our consolidated statements of comprehensive income.
Aircraft rentals. Aircraft rentals decreased $20.0 million, or 6.2%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease was primarily due to a reduction in leased aircraft in our fleet and lower aircraft lease renewal rates since 2013.
Depreciation and amortization. Depreciation and amortization expense increased $14.6 million, or 6.0%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in depreciation and amortization expense was primarily due to the purchase of 20 E175 aircraft and related long lived assets in 2014, combined with acquisition of used aircraft and spare engines in 2014.
Fuel. Fuel costs decreased $0.3 million, or 0.1%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in fuel cost was primarily due to the decrease in the average fuel cost per gallon in 2014 compared to 2013, offset by the increased volume of fuel used in our expanded pro-rate flying operations during 2014 year compared to 2013. The average fuel cost per gallon was $3.33 and $3.60 for the years ended December 31, 2014 and 2013, respectively. The following table summarizes the gallons of fuel we purchased directly and our fuel expense, for the periods indicated:
|
For the year ended December, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per gallon amounts)
|
2014 | 2013 | % Change | |||||||
Fuel gallons purchased |
57,959 | 53,825 | 7.7 | % | ||||||
Fuel expense |
$ | 193,247 | $ | 193,513 | (0.1 | )% |
Ground handling service. Ground handling service expense decreased $5.2 million, or 4.0%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in ground handling service expense was primarily due to a reduction in outsourced customer service and ramp functions at airport locations serving our pro-rate operations.
Special items. Special items for the year ended December 31, 2014 included impairment charges to write-down owned EMB120 aircraft, including capitalized engine overhaul costs, and related long-lived assets to their estimated fair value and accrued obligations on leased aircraft and related costs of $57.1 million. The special item associated with the EMB120 aircraft was triggered by our decision in November 2014 to remove the EMB120 aircraft from service by the end of the second
48
quarter of 2015. The special item additionally consisted of impairment charges to write-down certain ERJ145 long-lived assets, including spare engines and capitalized aircraft improvements, to their estimated fair value and accrued obligations on leased aircraft and related costs of $12.9 million. The special item associated with the ERJ145 aircraft was triggered by our execution of an amended and restated contract with United in November 2014. The amended and restated contract provides for accelerated lease termination dates of certain ERJ145 aircraft and advances the termination date of the ExpressJet United ERJ Agreement to operate the ERJ145s from the year 2020 to 2017. The special item also includes the write-down of assets associated with the disposition of our paint facility located in Saltillo, Mexico of $4.8 million. We sold the Saltillo paint facility during the year ended December 31, 2014.
Station rentals and landing fees. Station rentals and landing fees expense decreased $63.7 million, or 55.5%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in station rentals and landing fees expense was primarily due to our major partners paying for an increased amount of station rents and landing fees directly to the applicable airports related to our contract flying arrangements.
Other operating expenses. Other operating expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $24.5 million, or 10.2%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in other operating expenses was primarily due to additional crew lodging expenses attributable to the requirements of the Improvement Act. The increase was also attributable to additional other operating expense items associated with incremental pro-rate operations in 2014.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) increased $65.3 million, or 2.0%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. Under our contract flying arrangements, we are reimbursed by our major airline partners for our actual fuel costs and engine overhaul costs under our Directly-Reimbursed Engine Contracts. We record such reimbursements as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
Total airline expense |
$ | 3,278,594 | $ | 3,213,272 | 65,322 | 2.0 | % | ||||||
Less: Fuel expense |
193,247 | 193,513 | (266 | ) | (0.1 | )% | |||||||
Less: Engine overhauls Directly-Reimbursed Engine Contracts |
130,505 | 123,024 | 7,481 | 6.1 | % | ||||||||
Less: CRJ200 engine overhauls reimbursed at fixed hourly rate |
25,223 | 39,388 | (14,165 | ) | (36.0 | )% | |||||||
| | | | | | | | | | | | | |
Total airline expense excluding fuel and engine overhauls and CRJ200 engine overhauls reimbursed at fixed hourly rate |
2,929,619 | 2,857,347 | 72,272 | 2.5 | % |
Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses increased $72.3 million, or 2.5%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in total airline expenses, excluding fuel and engine overhauls, was primarily due to the special items recorded during 2014 of $74.8 million, and an increase in salaries, wages and benefits and other operating expenses of $71.3 million, offset by a reduction in station rents and landing fees of $63.7 million, as further explained above.
49
Summary of other income (expense) items and provision for income taxes:
Other Income (expense), net. Other income (expense) for the 2014 year includes a gain of $24.9 million resulting from the sale of our ownership in TRIP stock, offset by losses from the sale of assets during 2014. Other income (expense) for the year ended December 31, 2014 primarily consisted of $10.1 million associated with our sale of stock in Mekong Aviation Joint Stock Company, an airline operating in Vietnam ("Air Mekong"), and recognition of maintenance deposit we collected associated with the aircraft sub-leases we terminated with Air Mekong.
Provision for income taxes. The income tax provision for the 2014 year included a valuation allowance of $6.0 million for previously generated state net operating loss benefits specific to ExpressJet that we anticipate to expire, $2.0 million of foreign income tax associated with our sale of ownership in TRIP stock, and the write-off of $2.4 million of tax assets associated with the sale of our paint facility located in Saltillo, Mexico during 2014. These discrete income tax provision items were partially offset by the income tax benefit associated with our loss before income tax of $16.3 million for 2014.
Net Income (loss). Primarily due to factors described above, we generated a net loss of $24.2 million, or $(0.47) per diluted share, for the year ended December 31, 2014, compared to net income of $59.0 million, or $1.12 per diluted share, for the year ended December 31, 2013.
Our Business Segments:
For the year ended December 31, 2014, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet. The following table sets forth our segment data for the years ended December 31, 2014 and 2013 (in thousands):
|
2014 | 2013 | $ Change | % Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount | Amount | Amount | Percent | |||||||||
Operating Revenues: |
|||||||||||||
SkyWest Airlines operating revenue |
$ | 1,888,693 | $ | 1,827,568 | $ | 61,125 | 3.3 | % | |||||
ExpressJet operating revenues |
1,346,859 | 1,466,341 | (119,482 | ) | (8.1 | )% | |||||||
Other operating revenues |
1,895 | 3,816 | (1,921 | ) | (50.3 | )% | |||||||
| | | | | | | | | | | | | |
Total Operating Revenues |
$ | 3,237,447 | $ | 3,297,725 | $ | (60,278 | ) | (1.8 | )% | ||||
Airline Expenses: |
|||||||||||||
SkyWest Airlines airline expense |
$ | 1,811,054 | $ | 1,688,049 | $ | 123,005 | 7.3 | % | |||||
ExpressJet airlines expense |
1,464,804 | 1,515,336 | (50,532 | ) | (3.3 | )% | |||||||
Other airline expense |
2,736 | 9,887 | (7,151 | ) | (72.3 | )% | |||||||
| | | | | | | | | | | | | |
Total Airline Expense(1) |
$ | 3,278,594 | $ | 3,213,272 | $ | 65,322 | 2.0 | % | |||||
Segment profit (loss): |
|||||||||||||
SkyWest Airlines segment profit |
$ | 77,639 | $ | 139,519 | $ | (61,880 | ) | (44.4 | )% | ||||
ExpressJet segment loss |
(117,945 | ) | (48,995 | ) | (68,950 | ) | 140.7 | % | |||||
Other profit (Loss) |
(841 | ) | (6,071 | ) | 5,230 | (86.1 | )% | ||||||
| | | | | | | | | | | | | |
Total Segment Profit (Loss) |
$ | (41,147 | ) | $ | 84,453 | $ | (125,600 | ) | (148.7 | )% | |||
Interest Income |
4,096 | 3,689 | 407 | 11.0 | % | ||||||||
Other Income (Expense), net |
20,708 | 10,390 | 10,318 | 99.3 | % | ||||||||
| | | | | | | | | | | | | |
Consolidated Income (Loss) Before Taxes |
$ | (16,343 | ) | $ | 98,532 | $ | (114,875 | ) | (116.6 | )% | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
50
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit decreased $61.9 million, or 44.4%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The decrease in the SkyWest Airlines' segment profit was due primarily to the following factors:
ExpressJet Segment Loss. ExpressJet segment loss increased $68.9 million, or 140.7%, during the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in ExpressJet segment loss was due primarily to the following factors:
51
2013 Compared to 2012
Operational Statistics. The following table sets forth our major operational statistics and the associated percentages-of-change for the periods identified below.
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | % Change | |||||||
Revenue passenger miles (000) |
31,834,735 | 30,088,278 | 5.8 | % | ||||||
Available seat miles ("ASMs") (000) |
39,207,910 | 37,278,554 | 5.2 | % | ||||||
Block hours |
2,380,118 | 2,297,014 | 3.6 | % | ||||||
Departures |
1,453,601 | 1,435,512 | 1.3 | % | ||||||
Passengers carried |
60,581,948 | 58,803,690 | 3.0 | % | ||||||
Passenger load factor |
81.2 | % | 80.7 | % | 0.5 pts | |||||
Revenue per available seat mile |
8.4¢ | 9.5¢ | (11.6 | )% | ||||||
Cost per available seat mile |
8.2¢ | 9.2¢ | (10.9 | )% | ||||||
Fuel cost per available seat mile |
0.5¢ | 1.1¢ | (54.5 | )% | ||||||
Average passenger trip length (miles) |
525 | 512 | 2.5 | % |
Revenues. Total operating revenues decreased $236.6 million, or 6.7%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. Under certain of our flying contracts, certain expenses are subject to direct reimbursement from our major partners and we record such reimbursements as passenger revenue. These reimbursed expenses include fuel, landing fees, station rents and certain engine maintenance expenses. Our fuel expense, landing fees, station rents and directly-reimbursed engine expense decreased by $331.0 million, during the year ended December 31, 2013, from the year ended December 31, 2012, due primarily (i) to our major partners purchasing an increased volume of fuel, landing fees and station rents directly from vendors on flights we operated under our code-share agreements and (ii) a reduction in the number of engine maintenance events. The following table summarizes the amount of fuel, landing fees, station rents, deice and engine overhaul reimbursements included in our passenger revenues for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | $ Change | % Change | |||||||||
Passenger revenues |
$ | 3,239,525 | $ | 3,467,546 | $ | (228,021 | ) | (6.6 | )% | ||||
Less: Fuel reimbursement from major partners |
91,925 | 329,748 | (237,823 | ) | (72.1 | )% | |||||||
Less: Landing fee and station rent reimbursements from major partners |
95,175 | 152,121 | (56,946 | ) | (37.4 | )% | |||||||
Less: Engine overhaul reimbursement from major partners |
123,024 | 159,220 | (36,196 | ) | (22.7 | )% | |||||||
| | | | | | | | | | | | | |
Passenger revenue excluding fuel, landing fee, station rent and engine overhaul reimbursements |
$ | 2,929,401 | $ | 2,826,457 | $ | 102,944 | 3.6 | % |
Passenger revenues. Passenger revenues decreased $228.0 million, or 6.6%, during year ended December 31, 2013, compared to the year ended December 31, 2012. Our passenger revenues, excluding fuel, landing fee, station rent and engine overhaul reimbursements from major partners, increased $102.9 million, or 3.6%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in passenger revenues, excluding fuel, landing fee, station rent and engine overhaul reimbursements, was primarily due to an increase in block hours of 3.6% during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in block hours was due primarily to an increase in total number of aircraft in operation. Block hour production is a significant revenue driver in our flying contracts with our major partners.
52
Ground handling and other. Total ground handling and other revenues decreased $8.6 million, or 12.9%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. Revenue attributed to ground handling services for our aircraft is reflected in our consolidated statements of comprehensive income under the heading "Operating RevenuesPassenger" and revenue attributed to ground handling services we provide for third-party aircraft is reflected in our consolidated statements of comprehensive income under the heading "Operating RevenuesGround handling and other." The decrease was primarily related to the decrease in our ground handling for other airlines and a reduction of rental revenue associated with the termination of an aircraft sub-lease we had executed with Air Mekong.
Individual expense components attributable to our operations are expressed in the following table on the basis of cents per ASM. (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013
Amount |
2012
Amount |
$ Change
Amount |
% Change
Percent |
2013
Cents Per ASM |
2012
Cents Per ASM |
|||||||||||||
Aircraft fuel |
$ | 193,513 | $ | 426,387 | $ | (232,874 | ) | (54.6 | )% | 0.5 | 1.1 | ||||||||
Salaries, wages and benefits |
1,211,307 | 1,171,689 | 39,618 | 3.4 | % | 3.1 | 3.1 | ||||||||||||
Aircraft maintenance, materials and repairs |
686,381 | 659,869 | 26,512 | 4.0 | % | 1.8 | 1.8 | ||||||||||||
Aircraft rentals |
325,360 | 333,637 | (8,277 | ) | (2.5 | )% | 0.8 | 0.9 | |||||||||||
Depreciation and amortization |
245,005 | 251,958 | (6,953 | ) | (2.8 | )% | 0.6 | 0.7 | |||||||||||
Station rentals and landing fees |
114,688 | 169,855 | (55,167 | ) | (32.5 | )% | 0.3 | 0.5 | |||||||||||
Ground handling services |
129,119 | 125,148 | 3,971 | 3.2 | % | 0.3 | 0.3 | ||||||||||||
Other |
239,241 | 229,842 | 9,399 | 4.1 | % | 0.6 | 0.6 | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total operating expenses |
3,144,614 | 3,368,385 | (223,771 | ) | (6.6 | )% | 8.0 | 9.0 | |||||||||||
Interest expense |
68,658 | 77,380 | (8,722 | ) | (11.3 | )% | 0.2 | 0.2 | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total airline expenses |
$ | 3,213,272 | $ | 3,445,765 | (232,493 | ) | (6.7 | )% | 8.2 | 9.2 | |||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Fuel. Fuel costs decreased $232.9 million, or 54.6%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. During the third quarter of 2012, United began purchasing the majority of the fuel for flights we operated under our United Express contracts. The resulting decrease in our fuel expense was primarily due to an increase in the number of gallons of fuel purchased by our major partners on flights we operated under our flying contracts. The following table summarizes the gallons of fuel we purchased directly and our fuel expense, for the periods indicated:
|
For the year ended December, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per gallon amounts)
|
2013 | 2012 | % Change | |||||||
Fuel gallons purchased |
53,825 | 118,765 | (54.7 | )% | ||||||
Fuel expense |
$ | 193,513 | $ | 426,387 | (54.6 | )% |
Salaries, Wages and Employee Benefits. Salaries, wages and employee benefits increased $39.6 million, or 3.4%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in salaries, wages and employee benefits was primarily due to an increase in crew and mechanic wages attributable to increased departures and block-hour production and due to an increase in health insurance and workers compensation expenses.
Aircraft maintenance, materials and repairs. Aircraft maintenance expense increased $26.5 million, or 4.0%, during the year ended December 31, 2013, compared to the year ended December 31 2012.
53
The following table summarizes the effect of engine overhaul reimbursements included in our aircraft maintenance expense for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | $ Change | % Change | |||||||||
Aircraft maintenance, materials and repairs |
$ | 686,381 | $ | 659,869 | $ | 26,512 | 4.0 | % | |||||
Less: Engine overhaul reimbursement from major partners |
123,024 | 159,220 | (36,196 | ) | (22.7 | )% | |||||||
Less: CRJ200 engine overhauls reimbursed at fixed hourly rate |
39,388 | 55,183 | (15,795 | ) | (28.6 | )% | |||||||
| | | | | | | | | | | | | |
Other aircraft maintenance, materials and repairs |
$ | 523,969 | $ | 445,466 | $ | 78,503 | 17.6 | % | |||||
| | | | | | | | | | | | | |
Other aircraft maintenance, materials and repairs, increased $78.5 million, or 17.6%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in aircraft maintenance expense excluding engine overhaul costs for the year ended December, 2013, compared to the year ended December 31, 2012, was primarily due to an increase in the number of scheduled maintenance events and the replacement and repair of aircraft parts and components at ExpressJet and SkyWest Airlines.
We recognize engine maintenance expense on our CRJ200 engines on an as-incurred basis as maintenance expense. Under our Fixed-Rate Engine Contracts, we recognize revenue at fixed hourly rates for mature engine maintenance on regional jet engines. Accordingly, the timing of engine maintenance events associated with aircraft under the Fixed-Rate Engine Contracts can have a significant impact on our financial results. During the year ended December 31, 2013, our CRJ200 engine expense under our Fixed-Rate Engine Contracts decreased $15.8 million compared to the year ended December 31, 2012. The decrease in CRJ200 engine overhauls reimbursed under our Fixed-Rate Engine Contracts was principally due to fewer scheduled engine maintenance events.
Under our Directly-Reimbursed Engine Contracts, we are reimbursed for engine overhaul costs by our applicable major partner at the time the maintenance event occurs. Such reimbursements are reflected as passenger revenue in the same amount and during the same period we recognized the expense in our consolidated statements of comprehensive income.
Aircraft rentals. Aircraft rentals decreased $8.3 million, or 2.5%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease was primarily due to aircraft lease renewals at lower rates during 2013.
Depreciation and amortization. Depreciation and amortization expense decreased $7.0 million, or 2.8%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease in depreciation and amortization expense was primarily due to certain rotable assets being fully depreciated during the year ended 2013 and a lower volume of capital expenditures.
Station rentals and landing fees. Station rentals and landing fees expense decreased $55.2 million, or 32.5%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease in station rentals and landing fees expense was primarily due to our major partners paying for certain station rents and landing fees directly to the applicable airports, rather than requiring us to make those payments and obtain reimbursement from our major partners.
Ground handling service. Ground handling service expense increased $4.0 million, or 3.2%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in ground handling service expense was primarily due to SkyWest Airlines outsourcing the customer service and ramp functions of several pro-rate stations.
54
Other expenses. Other expenses, primarily consisting of property taxes, hull and liability insurance, crew simulator training and crew hotel costs, increased $9.4 million, or 4.1%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in other expenses during the year ended December 31, 2013 was primarily due to the increase in property tax expense due to refunds received during the year ended December 31, 2012 (primarily a pass-through cost under our flying contracts) and an increase in legal expense due to the settlement of Delta's claims related to travel by certain employees of SkyWest Airlines and ExpressJet.
Total airline expenses. Total airline expenses (consisting of total operating and interest expenses) decreased $232.5 million, or 6.7%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. We are reimbursed for our actual fuel costs by our major partners under our contract flying arrangements. We record the amount of those reimbursements as revenue. Under our Directly-Reimbursed Engine Contracts, we are reimbursed for our engine overhaul expense, which we record as revenue. The following table summarizes the amount of fuel and engine overhaul expenses which are included in our total airline expenses for the periods indicated (dollar amounts in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | $ Change | % Change | |||||||||
Total airline expense |
$ | 3,213,272 | $ | 3,445,765 | $ | (232,493 | ) | (6.7 | )% | ||||
Less: Fuel expense |
193,513 | 426,387 | (232,874 | ) | (54.6 | )% | |||||||
Less: Engine overhauls Directly-Reimbursed Engine Contracts |
123,024 | 159,220 | (36,196 | ) | (22.7 | )% | |||||||
Less: CRJ200 engine overhauls reimbursed at fixed hourly rate |
39,388 | 55,183 | (15,795 | ) | (28.6 | )% | |||||||
| | | | | | | | | | | | | |
Total airline expense excluding fuel and engine overhauls and CRJ200 engine overhauls reimbursed at fixed hourly rate |
2,857,347 | $ | 2,804,975 | $ | 52,372 | 1.9 | % |
Excluding fuel and engine overhaul costs and CRJ200 engine overhauls reimbursed at fixed hourly rates, our total airline expenses increased $52.4 million, or 1.9%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The percentage increase in total airline expenses, excluding fuel and engine overhauls, was different than the percentage increase in passenger revenues, excluding fuel and engine overhaul reimbursements from major partners, due primarily to the factors described above.
Summary of other income (expense) items:
Other, net. Other, net, increased $21.0 million during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase was primarily attributable to the termination of our aircraft sub- lease with Air Mekong, and our recognition of $5.1 million of other income primarily due to the maintenance deposits we collected during the nine months ended September 30, 2013 and sale of our shares of Air Mekong. In conjunction with the sale of the Air Mekong shares, we recognized a gain of $5.0 million. During the year ended December 31, 2012, we incurred other expense primarily consisting of losses from our equity investments in TRIP and Air Mekong.
Interest Income. Interest income decreased $4.2 million during the year ended December 31, 2013, compared to the year ended December 31, 2012. The decrease was primarily due to our receipt of $49 million of cash from United for amounts previously deferred under the United Express Agreement. Prior to repayment, the deferred amounts accrued interest at 8%.
55
Net Income. Primarily due to factors described above, net income increased to $59.0 million, or $1.12 per diluted share, for the year ended December 31, 2013, compared to $51.2 million, or $0.99 per diluted share, for the year ended December 31, 2012.
Our Business Segments:
For the year ended December 31, 2013, we had two reportable segments which are the basis of our internal financial reporting: SkyWest Airlines and ExpressJet. The following table sets forth our segment data for the years ended December 31, 2013 and 2012 (in thousands):
|
2013 | 2012 | $ Change | % Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount | Amount | Amount | Percent | |||||||||
Operating Revenues: |
|||||||||||||
SkyWest Airlines operating revenue |
$ | 1,827,568 | $ | 1,930,149 | $ | (102,581 | ) | (5.3 | )% | ||||
ExpressJet operating revenues |
1,466,341 | 1,593,527 | (127,186 | ) | (8.0 | )% | |||||||
Other operating revenues |
3,816 | 10,696 | (6,880 | ) | (64.3 | )% | |||||||
| | | | | | | | | | | | | |
Total Operating Revenues |
$ | 3,297,725 | $ | 3,534,372 | $ | (236,647 | ) | (6.7 | )% | ||||
Airline Expenses: |
|||||||||||||
SkyWest airlines expense |
$ | 1,688,049 | $ | 1,824,084 | $ | (136,035 | ) | (7.5 | )% | ||||
ExpressJet airlines expense |
1,515,336 | 1,611,982 | (96,646 | ) | (6.0 | )% | |||||||
Other airline expense |
9,887 | 9,699 | 188 | 1.9 | % | ||||||||
| | | | | | | | | | | | | |
Total Airline Expense(1) |
3,213,272 | $ | 3,445,765 | $ | (232,493 | ) | (6.7 | )% | |||||
Segment profit (loss): |
|||||||||||||
SkyWest Airlines segment profit |
$ | 139,519 | $ | 106,065 | $ | 33,454 | 31.5 | % | |||||
ExpressJet segment loss |
(48,995 | ) | (18,455 | ) | (30,540 | ) | (165.5 | )% | |||||
Other profit (Loss) |
(6,071 | ) | 997 | (7,068 | ) | (708.9 | )% | ||||||
| | | | | | | | | | | | | |
Total Segment Profit |
$ | 84,453 | $ | 88,607 | $ | (4,154 | ) | (4.7 | )% | ||||
Interest Income |
3,689 | 7,928 | (4,239 | ) | (53.5 | )% | |||||||
Other |
10,390 | (10,639 | ) | 21,029 | (197.7 | )% | |||||||
| | | | | | | | | | | | | |
Consolidated Income Before Taxes |
98,532 | $ | 85,896 | $ | 12,636 | 14.7 | % | ||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
SkyWest Airlines Segment Profit. SkyWest Airlines segment profit increased $33.5 million, or 31.5%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in SkyWest Airlines' segment profit was due primarily to the following factors:
56
ExpressJet Segment Loss. ExpressJet segment loss increased $30.5 million, or 165.5%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase in ExpressJet segment loss was due primarily to the following factors:
Liquidity and Capital Resources
Sources and Uses of Cash2014 Compared to 2013
Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the years ended December 31, 2014 and 2013, and our total cash and marketable securities position as of December 31, 2014 and December 31, 2013 (in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | $ Change | % Change | |||||||||
Net cash provided by operating activities |
$ | 285,539 | $ | 289,890 | $ | (4,351 | ) | (1.5 | )% | ||||
Net cash used in investing activities |
(585,226 | ) | (65,961 | ) | (519,265 | ) | 787.2 | % | |||||
Net cash provided by (used in) financing activities |
261,326 | (187,065 | ) | 448,391 | (239.7 | )% |
57
|
December 31,
2014 |
December 31,
2013 |
$ Change | % Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash and cash equivalents |
$ | 132,275 | $ | 170,636 | $ | (38,361 | ) | (22.5 | )% | ||||
Restricted cash |
11,582 | 12,219 | (637 | ) | (5.2 | )% | |||||||
Marketable securities |
415,273 | 487,239 | (71,966 | ) | (14.8 | )% | |||||||
| | | | | | | | | | | | | |
Total |
$ | 559,130 | $ | 670,094 | (110,964 | ) | (16.6 | )% | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash Flows from Operating Activities. Net cash provided by operating activities decreased $4.4 million, or 1.5%, during 2014, compared to 2013. The primary factors impacting our cash provided from operating activities include: our income before income taxes was $58.4 million, excluding special items of $74.8 million, in 2014, compared to income before income taxes of $98.5 million for 2013, resulting in a decrease in cash flows from operating activities of $40.1 million. This reduction in cash from operating activities was substantially offset by an increase in non-cash depreciation expense of $14.6 million from 2013 to 2014, primarily due to 20 E175 aircraft purchased in 2014; a reduction in capitalized EMB120 engine overhaul events, which are reflected as an operating activity, of $10.8 million from 2013 to 2014 primarily due to a reduction in the number of overhaul events; and other changes in working capital accounts.
Cash Flows from Investing Activities. Net cash used in investing activities increased $519.3 million, or 787.2% during 2014, compared to 2013. The increase in cash used in investing activities was primarily due to the acquisition of 20 E175 aircraft, one used CRJ700 aircraft and related rotable spare assets in 2014, which in total represented an increase of $563.4 million compared to the aircraft acquisition and related rotable spare aircraft purchases from 2013. This amount was offset by $40.0 million in aircraft deposits paid in 2013 associated with the order of 40 E175 aircraft. No additional aircraft deposits were made and no aircraft deposits were received during 2014.
Cash Flows from Financing Activities. Net cash provided by financing activities increased $448.4 million, or 239.7%, during 2014, compared to 2013. The increase was primarily related to proceeds from the issuance of long-term debt of $460.6 million associated with 20 E175 aircraft acquired during 2014. The remaining change in cash flows from financing activities was primarily due to increased principal payments on long-term debt and a reduction in treasury stock purchase activity.
Sources and Uses of Cash2013 Compared to 2012
Cash Position and Liquidity. The following table provides a summary of the net cash provided by (used in) our operating, investing and financing activities for the years ended December 31, 2013 and 2012, and our total cash and marketable securities position as of December 31, 2013 and December 31, 2012 (in thousands).
|
For the year ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | $ Change | % Change | |||||||||
Net cash provided by operating activities |
$ | 289,890 | $ | 288,824 | 1,066 | 0.4 | % | ||||||
Net cash used in investing activities |
(65,961 | ) | (108,360 | ) | 42,399 | 39.1 | % | ||||||
Net cash used in financing activities |
(187,065 | ) | (176,218 | ) | (10,847 | ) | (6.2 | )% |
58
|
December 31,
2013 |
December 31,
2012 |
$ Change | % Change | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash and cash equivalents |
$ | 170,636 | $ | 133,772 | 36,864 | 27.6 | % | ||||||
Restricted cash |
12,219 | 19,553 | (7,334 | ) | (37.5 | )% | |||||||
Marketable securities |
487,239 | 556,117 | (68,878 | ) | (12.4 | )% | |||||||
| | | | | | | | | | | | | |
Total |
670,094 | $ | 709,442 | (39,348 | ) | (5.5 | )% | ||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cash Flows from Operating Activities. Net cash provided by operating activities increased $1.1 million, or 0.4%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase was primarily due to our receipt of $49 million of cash from United during the year ended December 31, 2013 for amounts previously deferred under the United Express Agreement. This increase was mostly offset by changes in our working capital accounts.
Cash Flows from Investing Activities. Net cash used in investing activities decreased $42.4 million, or 39.1% during the year ended December 31, 2013, compared to the year ended December 31, 2012. During the year ended December 31, 2013, net sales of marketable securities increased $127.4 million as compared to the year ended December 31, 2012. This change was partially offset by an increase in deposits on aircraft of $40 million and an increase in purchases of aircraft and rotable spares of $45.2 million during the year ended December 31, 2013, compared to the year ended December 31, 2012.
Cash Flows from Financing Activities. Net cash used in financing activities increased $10.8 million, or 6.2%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The increase was primarily related to increased expense attributable to the increase in purchase of treasury shares of $10.8 million during the year ended December 31, 2013, compared to the year ended December, 2012.
Liquidity and Capital Resources as of December 31, 2014 and 2013
We believe that in the absence of unusual circumstances, the working capital currently available to us, together with our projected cash flows from operations, will be sufficient to meet our present financial requirements, including anticipated expansion, planned capital expenditures, and scheduled lease payments and debt service obligations for at least the next 12 months.
At December 31, 2014, our total capital mix was 47.7% equity and 52.3% long-term debt, compared to 52.6% equity and 47.4% long-term debt at December 31, 2013.
As of December 31, 2014 and 2013, SkyWest Airlines had a $25 million line of credit. As of December 31, 2014 and 2013, SkyWest Airlines had no amount outstanding under the facility. The facility is scheduled to expire on March 31, 2015 and has a variable interest rate of Libor plus 3%.
As of December 31, 2014 and 2013, we had $79.9 million and $88.5 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.
As of December 31, 2014 and 2013, we classified $11.6 million and $12.2 million as restricted cash, respectively, related to our workers compensation policies.
59
Significant Commitments and Obligations
General
The following table summarizes our commitments and obligations as noted for each of the next five years and thereafter (in thousands):
|
Total | 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Operating lease payments for aircraft and facility obligations |
$ | 1,536,321 | $ | 342,984 | $ | 269,210 | $ | 199,009 | $ | 153,338 | $ | 118,273 | $ | 453,507 | ||||||||
Firm aircraft commitments |
572,498 | 562,526 | 9,972 | | | | | |||||||||||||||
Interest commitments(A) |
395,677 | 69,978 | 62,218 | 54,273 | 46,875 | 40,084 | 122,249 | |||||||||||||||
Principal maturities on long-term debt |
1,745,811 | 211,821 | 216,340 | 190,648 | 168,769 | 161,329 | 796,904 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total commitments and obligations |
$ | 4,250,307 | $ | 1,187,309 | $ | 557,740 | $ | 443,930 | $ | 368,982 | $ | 319,686 | $ | 1,372,660 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Purchase Commitments and Options
On May 21, 2013, we announced our execution of an agreement with Embraer, S.A. for the purchase of 100 new E175 dual-class regional jet aircraft. Of the 100 aircraft, 47 are considered firm deliveries and the remaining 53 aircraft are considered conditional deliveries until we enter into capacity purchase agreements with other major airlines to operate the aircraft. As of December 31, 2014, we took delivery of 20 E175 aircraft and we anticipate taking delivery of the remaining 27 firm delivery aircraft through the first quarter of 2016.
We have not historically funded a substantial portion of our aircraft acquisitions with working capital. Rather, we have generally funded our aircraft acquisitions through a combination of operating leases and long-term debt financing. At the time of each aircraft acquisition, we evaluate the financing alternatives available to us, and select one or more of these methods to fund the acquisition. At present, we intend to fund our acquisition of any additional aircraft through a combination of operating leases and debt financing, consistent with our historical practices. Based on current market conditions and discussions with prospective leasing organizations and financial institutions, we currently believe that we will be able to obtain financing for our committed acquisitions, as well as additional aircraft, without materially reducing the amount of working capital available for our operating activities.
Aircraft Lease and Facility Obligations
We also have significant long-term lease obligations, primarily relating to our aircraft fleet. At December 31, 2014, we had 554 aircraft under lease with remaining terms ranging from one to 11 years. Future minimum lease payments due under all long-term operating leases were approximately $1.5 billion at December 31, 2014. Assuming a 4.8% discount rate, which is the average rate used to approximate the implicit rates within the applicable aircraft leases, the present value of these lease obligations would have been equal to approximately $1.3 billion at December 31, 2014.
Long-term Debt Obligations
As of December 31, 2014, we had $1.7 billion of long-term debt obligations related to the acquisition of CRJ200, CRJ700, CRJ900 and E175 aircraft. The average effective interest rate on those long-term debt obligations was approximately 4.1% at December 31, 2014.
60
Guarantees
We have guaranteed the obligations of SkyWest Airlines under the SkyWest Airlines Delta Connection Agreement and the SkyWest Airlines United Express Agreement for the E175 aircraft. We have also guaranteed the obligations of ExpressJet under the ExpressJet Delta Connection Agreement and the ExpressJet United ERJ Agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Aircraft Fuel
In the past, we have not experienced difficulties with fuel availability and we currently expect to be able to obtain fuel at prevailing prices in quantities sufficient to meet our future needs. Pursuant to our contract flying arrangements, United, Delta, Alaska, American and US Airways have agreed to bear the economic risk of fuel price fluctuations on our contracted flights. We bear the economic risk of fuel price fluctuations on our pro-rate operations. For each of the years ended December 31, 2014, 2013 and 2012, approximately 3%, 3% and 3% of our ASMs were flown under pro-rate arrangements. For the years ended December 31, 2014, 2013 and 2012, the average price per gallon of aircraft fuel was $3.33, $3.45 and $3.59, respectively. For illustrative purposes only, we have estimated the impact of the market risk of fuel on our pro-rate operations using a hypothetical increase of 25% in the price per gallon we purchase. Based on this hypothetical assumption, we would have incurred an additional $29.1 million, $25.3 million and $24.3 million in fuel expense for the years ended December 31, 2014, 2013 and 2012, respectively.
Interest Rates
Our earnings are affected by changes in interest rates due to the amounts of variable rate long-term debt and the amount of cash and securities held. The interest rates applicable to variable rate notes may rise and increase the amount of interest expense. We would also receive higher amounts of interest income on cash and securities held at the time; however, the market value of our available-for-sale securities would likely decline. At December 31, 2014, 2013 and 2012, we had variable rate notes representing 41.3%, 29.5% and 31.7% of our total long-term debt, respectively. For illustrative purposes only, we have estimated the impact of market risk using a hypothetical increase in interest rates of one percentage point for both variable rate long-term debt and cash and securities. Based on this hypothetical assumption, we would have incurred an additional $5.8 million in interest expense and received $5.5 million in additional interest income for the year ended December 31, 2014; we would have incurred an additional $4.8 million in interest expense and received $6.7 million in additional interest income for the year ended December 31, 2013; and we would have incurred an additional $5.5 million in interest expense and received $6.5 million in additional interest income for the year ended December 31, 2012. However, under our contractual arrangement with our major partners, the majority of the increase in interest expense would be passed through and recorded as passenger revenue in our consolidated statements of comprehensive income (loss). If interest rates were to decline, our major partners would receive the principal benefit of the decline, since interest expense is generally passed through to our major partners, resulting in a reduction to passenger revenue in our consolidated statement of comprehensive income (loss).
We currently intend to finance the acquisition of aircraft through manufacturer financing, third-party leases or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire these aircraft. To the extent we place these aircraft in service under our code-share agreements with Delta, United, or other carriers, our code-share agreements currently provide that reimbursement rates will be adjusted higher or lower to reflect changes in our aircraft rental rates.
61
Auction Rate Securities
We have investments in auction rate securities, which are classified as available for sale securities and reflected at fair value. As of December 31, 2014, we had investments in auction rate securities valued at a total of $2.3 million which were classified as "Other Assets" on our consolidated balance sheet. For a more detailed discussion on auction rate securities, including our methodology for estimating their fair value, see Note 6 to our consolidated financial statements appearing in Item 8 of this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth below should be read together with the "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere herein.
62
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
SkyWest, Inc.
We have audited the accompanying consolidated balance sheets of SkyWest, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SkyWest, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SkyWest, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Salt
Lake City, Utah
February 18, 2015
63
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
December 31,
2014 |
December 31,
2013 |
|||||
---|---|---|---|---|---|---|---|
CURRENT ASSETS: |
|||||||
Cash and cash equivalents |
$ | 132,275 | $ | 170,636 | |||
Marketable securities |
415,273 | 487,239 | |||||
Restricted cash |
11,582 | 12,219 | |||||
Income tax receivable |
2,779 | 840 | |||||
Receivables, net |
83,099 | 111,186 | |||||
Inventories, net |
137,452 | 138,094 | |||||
Prepaid aircraft rents |
397,850 | 360,781 | |||||
Deferred tax assets |
94,385 | 156,050 | |||||
Other current assets |
16,308 | 27,392 | |||||
| | | | | | | |
Total current assets |
1,291,003 | 1,464,437 | |||||
| | | | | | | |
PROPERTY AND EQUIPMENT: |
|||||||
Aircraft and rotable spares |
4,608,663 | 4,080,886 | |||||
Deposits on aircraft |
40,000 | 40,000 | |||||
Buildings and ground equipment |
274,900 | 279,965 | |||||
| | | | | | | |
|
4,923,563 | 4,400,851 | |||||
Less-accumulated depreciation and amortization |
(1,902,375 | ) | (1,749,058 | ) | |||
| | | | | | | |
Total property and equipment, net |
3,021,188 | 2,651,793 | |||||
| | | | | | | |
OTHER ASSETS |
|||||||
Intangible assets, net |
12,748 | 14,998 | |||||
Other assets |
84,989 | 101,991 | |||||
| | | | | | | |
Total other assets |
97,737 | 116,989 | |||||
| | | | | | | |
Total assets |
$ | 4,409,928 | $ | 4,233,219 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See accompanying notes to consolidated financial statements.
64
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
65
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
OPERATING REVENUES: |
||||||||||
Passenger |
$ | 3,168,000 | $ | 3,239,525 | $ | 3,467,546 | ||||
Ground handling and other |
69,447 | 58,200 | 66,826 | |||||||
| | | | | | | | | | |
Total operating revenues |
3,237,447 | 3,297,725 | 3,534,372 | |||||||
| | | | | | | | | | |
OPERATING EXPENSES: |
||||||||||
Salaries, wages and benefits |
1,258,155 | 1,211,307 | 1,171,689 | |||||||
Aircraft maintenance, materials and repairs |
682,773 | 686,381 | 659,869 | |||||||
Aircraft rentals |
305,334 | 325,360 | 333,637 | |||||||
Depreciation and amortization |
259,642 | 245,005 | 251,958 | |||||||
Aircraft fuel |
193,247 | 193,513 | 426,387 | |||||||
Ground handling services |
123,917 | 129,119 | 125,148 | |||||||
Special items |
74,777 | | | |||||||
Station rentals and landing fees |
51,024 | 114,688 | 169,855 | |||||||
Other, net |
263,730 | 239,241 | 229,842 | |||||||
| | | | | | | | | | |
Total operating expenses |
3,212,599 | 3,144,614 | 3,368,385 | |||||||
| | | | | | | | | | |
OPERATING INCOME |
24,848 | 153,111 | 165,987 | |||||||
| | | | | | | | | | |
OTHER INCOME (EXPENSE): |
||||||||||
Interest income |
4,096 | 3,689 | 7,928 | |||||||
Interest expense |
(65,995 | ) | (68,658 | ) | (77,380 | ) | ||||
Other, net |
20,708 | 10,390 | (10,639 | ) | ||||||
| | | | | | | | | | |
Total other expense, net |
(41,191 | ) | (54,579 | ) | (80,091 | ) | ||||
INCOME (LOSS) BEFORE INCOME TAXES |
(16,343 | ) | 98,532 | 85,896 | ||||||
PROVISION FOR INCOME TAXES |
7,811 | 39,576 | 34,739 | |||||||
| | | | | | | | | | |
NET INCOME (LOSS) |
$ | (24,154 | ) | $ | 58,956 | $ | 51,157 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
BASIC EARNINGS (LOSS) PER SHARE |
$ | (0.47 | ) | $ | 1.14 | $ | 1.00 | |||
| | | | | | | | | | |
DILUTED EARNINGS (LOSS) PER SHARE |
$ | (0.47 | ) | $ | 1.12 | $ | 0.99 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted average common shares: |
||||||||||
Basic |
51,237 | 51,688 | 51,090 | |||||||
Diluted |
51,237 | 52,422 | 51,746 | |||||||
COMPREHENSIVE INCOME (LOSS): |
||||||||||
Net income (loss) |
$ | (24,154 | ) | $ | 58,956 | $ | 51,157 | |||
Proportionate share of other companies foreign currency translation adjustment, net of taxes |
(1,129 | ) | 66 | (251 | ) | |||||
Net unrealized appreciation (depreciation) on marketable securities, net of taxes |
(719 | ) | (13 | ) | 316 | |||||
| | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME (LOSS) |
$ | (26,002 | ) | $ | 59,009 | $ | 51,222 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
See accompanying notes to consolidated financial statements.
66
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
|
Common Stock |
|
Treasury Stock |
Accumulated
Other Comprehensive Income (Loss) |
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Retained
Earnings |
|
||||||||||||||||||||
|
Shares | Amount | Shares | Amount | Total | |||||||||||||||||
Balance at December 31, 2011 |
75,834 | $ | 598,985 | $ | 1,104,144 | (25,221 | ) | $ | (370,309 | ) | $ | 1,441 | $ | 1,334,261 | ||||||||
Net income |
| | 51,157 | | | | 51,157 | |||||||||||||||
Proportionate share of other companies foreign currency translation adjustment, net of tax of $154 |
| | | | | (251 | ) | (251 | ) | |||||||||||||
Net unrealized appreciation on marketable securities, net of tax of $194 |
| | | | | 316 | 316 | |||||||||||||||
Exercise of common stock options and issuance of restricted stock |
392 | 1,879 | | | | | 1,879 | |||||||||||||||
Sale of common stock under employee stock purchase plan |
487 | 4,068 | | | | | 4,068 | |||||||||||||||
Stock based compensation expense related to the issuance of stock options and restricted stock |
| 4,693 | | | | | 4,693 | |||||||||||||||
Tax benefit from exercise of common stock options |
| 138 | | | | | 138 | |||||||||||||||
Treasury stock purchases |
| | | (59 | ) | (902 | ) | | (902 | ) | ||||||||||||
Cash dividends declared ($0.16 per share) |
| | (8,184 | ) | | | | (8,184 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 |
76,713 | 609,763 | 1,147,117 | (25,280 | ) | (371,211 | ) | 1,506 | 1,387,175 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
| | 58,956 | | | | 58,956 | |||||||||||||||
Proportionate share of other companies foreign currency translation adjustment, net of tax of $8 |
| | | | | 66 | 66 | |||||||||||||||
Net unrealized depreciation on marketable securities, net of tax of $43 |
| | | | | (13 | ) | (13 | ) | |||||||||||||
Exercise of common stock options and issuance of restricted stock |
313 | 835 | | | | | 835 | |||||||||||||||
Sale of common stock under employee stock purchase plan |
300 | 3,696 | | | | | 3,696 | |||||||||||||||
Stock based compensation expense related to the issuance of stock options and restricted stock |
| 4,363 | | | | | 4,363 | |||||||||||||||
Tax deficiency from exercise of common stock options |
| (146 | ) | | | | | (146 | ) | |||||||||||||
Treasury stock purchases |
| | | (816 | ) | (11,739 | ) | | (11,739 | ) | ||||||||||||
Cash dividends declared ($0.16 per share) |
| | (8,254 | ) | | | | (8,254 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 |
77,326 | 618,511 | 1,197,819 | (26,096 | ) | (382,950 | ) | 1,559 | 1,434,939 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net (loss) |
| | (24,154 | ) | | | | (24,154 | ) | |||||||||||||
Proportionate share of other companies foreign currency translation adjustment, net of tax of $678 |
| | | | | (1,129 | ) | (1,129 | ) | |||||||||||||
Net unrealized depreciation on marketable securities, net of tax of $437 |
| | | | | (719 | ) | (719 | ) | |||||||||||||
Exercise of common stock options and issuance of restricted stock |
330 | 287 | | | | | 287 | |||||||||||||||
Sale of common stock under employee stock purchase plan |
295 | 3,752 | | | | | 3,752 | |||||||||||||||
Stock based compensation expense related to the issuance of stock options and restricted stock |
| 5,318 | | | | | 5,318 | |||||||||||||||
Tax deficiency from exercise of common stock options |
| (1,347 | ) | | | | | (1,347 | ) | |||||||||||||
Treasury stock purchases |
| | | (669 | ) | (8,414 | ) | | (8,414 | ) | ||||||||||||
Cash dividends declared ($0.16 per share) |
| | (8,187 | ) | | | | (8,187 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2014 |
77,951 | $ | 626,521 | $ | 1,165,478 | (26,765 | ) | $ | (391,364 | ) | $ | (289 | ) | $ | 1,400,346 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
67
SKYWEST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to consolidated financial statements.
68
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies
SkyWest, Inc. (the "Company"), through its subsidiaries, SkyWest Airlines, Inc. ("SkyWest Airlines") and ExpressJet Airlines, Inc. ("ExpressJet"), operates the largest regional airline in the United States. As of December 31, 2014, SkyWest and ExpressJet offered scheduled passenger and air freight service with approximately 3,600 total daily departures to different destinations in the United States, Canada, Mexico and the Caribbean. Additionally, the Company provides ground handling services for other airlines throughout its system. As of December 31, 2014, the Company had a combined fleet of 749 aircraft consisting of the following:
For the year ended December 31, 2014, approximately 61.4% of the Company's aggregate capacity was operated for United, approximately 31.6% was operated for Delta, approximately 3.2% was operated for American, approximately 2.1% was operated for Alaska and approximately 1.7% was operated for US Airways.
SkyWest Airlines has been a code-share partner with Delta in Salt Lake City and United in Los Angeles since 1987 and 1997, respectively. In 2011, SkyWest Airlines entered into a code-share agreement with Alaska and with US Airways. In September 2012, SkyWest Airlines and ExpressJet entered into code share agreements (the "American Agreements") with American Airlines, Inc. ("American"). As of December 31, 2014, SkyWest Airlines operated as a Delta Connection carrier in Salt Lake City and Minneapolis, a United Express carrier in Los Angeles, San Francisco, Denver, Houston, Chicago and the Pacific Northwest, an Alaska carrier in Seattle/ Tacoma and Portland, a US Airways carrier in Phoenix and an American carrier in Los Angeles.
On November 17, 2011, the Company's wholly-owned subsidiaries, Atlantic Southeast Airlines, Inc. and ExpressJet Airlines, Inc., consolidated their operations under a single operating certificate, and on December 31, 2012, Atlantic Southeast Airlines, Inc. and ExpressJet Airlines, Inc. were merged, with the surviving corporation named ExpressJet Airlines, Inc. (the "ExpressJet Combination"). In the following Notes to Consolidated Financial Statements, "Atlantic Southeast" refers to Atlantic Southeast Airlines, Inc. for periods prior to the ExpressJet Combination, "ExpressJet Delaware" refers to ExpressJet Airlines, Inc., a Delaware corporation, for periods prior to the ExpressJet Combination, and "ExpressJet" refers to ExpressJet Airlines, Inc., the Utah corporation resulting from the combination of Atlantic Southeast and ExpressJet Delaware, for periods subsequent to the ExpressJet Combination. At the time of the ExpressJet Combination, Atlantic Southeast had been a code-share partner with Delta in Atlanta since 1984 and a code-share partner with United since February 2010. As of December 31, 2014, ExpressJet operated as a Delta Connection carrier in Atlanta and Detroit, a United Express
69
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
carrier in Chicago (O'Hare), Washington, D.C. (Dulles International Airport), Cleveland, Newark, Houston and Denver, and an American carrier in Dallas.
Basis of Presentation
The Company's consolidated financial statements include the accounts of SkyWest, Inc. and its subsidiaries, including SkyWest Airlines and ExpressJet, with all inter-company transactions and balances having been eliminated.
In preparing the accompanying consolidated financial statements, the Company has reviewed, as determined necessary by the Company's management, events that have occurred after December 31, 2014, through the filing date of the Company's annual report with the U.S. Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company classified $11.6 million and $12.2 million of cash as restricted cash as required by the Company's workers' compensation policy and classified it accordingly in the consolidated balance sheets as of December 31, 2014 and 2013, respectively.
Marketable Securities
The Company's investments in marketable debt and equity securities are deemed by management to be available-for-sale and are reported at fair market value with the net unrealized appreciation (depreciation) reported as a component of accumulated other comprehensive income (loss) in stockholders' equity. At the time of sale, any realized appreciation or depreciation, calculated by the
70
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
specific identification method, is recognized in other income and expense. The Company's position in marketable securities as of December 31, 2014 and 2013 was as follows (in thousands):
At December 31, 2014
|
Amortized
Cost |
Gross
unrealized holding gains |
Gross
unrealized holding losses |
Fair
market value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total cash and cash equivalents |
$ | 132,275 | $ | | $ | | $ | 132,275 | |||||
| | | | | | | | | | | | | |
Available-for-sale securities: |
|||||||||||||
Bond and bond funds |
$ | 410,618 | $ | 9 | $ | (464 | ) | $ | 410,163 | ||||
Asset backed securities |
5,108 | 3 | (1 | ) | 5,110 | ||||||||
| | | | | | | | | | | | | |
Total available-for-sale securities |
$ | 415,726 | $ | 12 | $ | (465 | ) | $ | 415,273 | ||||
| | | | | | | | | | | | | |
Total cash and cash equivalents and available for sale securities |
$ | 548,001 | $ | 12 | $ | (465 | ) | $ | 547,548 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
At December 31, 2013
|
Amortized
Cost |
Gross
unrealized holding gains |
Gross
unrealized holding losses |
Fair
market value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Total cash and cash equivalents |
$ | 170,636 | $ | | $ | | $ | 170,636 | |||||
| | | | | | | | | | | | | |
Available-for-sale securities: |
|||||||||||||
Bond and bond funds |
$ | 486,571 | $ | 487 | $ | (9 | ) | $ | 487,049 | ||||
Asset backed securities |
182 | 8 | | 190 | |||||||||
| | | | | | | | | | | | | |
Total available-for-sale securities |
486,753 | 495 | $ | (9 | ) | 487,239 | |||||||
| | | | | | | | | | | | | |
Total cash and cash equivalents and available for sale securities |
$ | 657,389 | $ | 495 | $ | (9 | ) | $ | 657,875 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Marketable securities had the following maturities as of December 31, 2014 (in thousands):
Maturities
|
Amount | |||
---|---|---|---|---|
Year 2015 |
$ | 233,858 | ||
Years 2016 through 2019 |
181,406 | |||
Years 2020 through 2027 |
| |||
Thereafter |
2,317 |
As of December 31, 2014 and 2013, the Company had classified $415.3 million and $487.2 million of marketable securities, respectively, as short-term since it had the intent to maintain a liquid portfolio and the ability to redeem the securities within one year. The Company has classified approximately $2.3 million and $2.2 million of investments as non-current and has identified them as "Other assets" in the Company's consolidated balance sheet as of December 31, 2014 and 2013, respectively (see Note 7).
71
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Inventories
Inventories include expendable parts, fuel and supplies and are valued at cost (FIFO basis) less an allowance for obsolescence based on historical results and management's expectations of future operations. Expendable inventory parts are charged to expense as used. An obsolescence allowance for flight equipment expendable parts is accrued based on estimated lives of the corresponding fleet types and salvage values. The inventory allowance as of December 31, 2014 and 2013 was $11.6 million and $10.1 million, respectively. These allowances are based on management estimates, which can be modified based on future changes in circumstances.
Property and Equipment
Property and equipment are stated at cost and depreciated over their useful lives to their estimated residual values using the straight-line method as follows:
Assets
|
Depreciable Life |
Residual
Value |
||
---|---|---|---|---|
Aircraft and rotable spares |
10 - 18 years | 0 - 30% | ||
Ground equipment |
5 - 10 years | 0% | ||
Office equipment |
5 - 7 years | 0% | ||
Leasehold improvements |
Shorter of 15 years or lease term | 0% | ||
Buildings |
20 - 39.5 years | 0% |
Impairment of Long-Lived Assets
As of December 31, 2014, the Company had approximately $4.9 billion of property and equipment and related assets. Additionally, as of December 31, 2014, the Company had approximately $12.7 million in intangible assets. In accounting for these long-lived and intangible assets, the Company makes estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. On September 7, 2005, the Company acquired all of the issued and outstanding capital stock of Atlantic Southeast and recorded an intangible asset of approximately $33.7 million relating to the acquisition. The intangible asset is being amortized over fifteen years under the straight-line method. As of December 31, 2014 and 2013, the Company had $21.0 million and $18.7 million in accumulated amortization expense, attributable to the acquisition, respectively. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, a significant change in the condition of the long-lived assets and operating cash flow losses associated with the use of the long-lived assets. On a periodic basis, the Company evaluates whether impairment indicators are present. When considering whether or not impairment of long-lived assets exists, the Company groups similar assets together at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and compare the undiscounted cash flows for each asset group to the net carrying amount of the assets supporting the asset group. Asset groupings are done at the fleet or contract level.
In November 2014, the Company made the decision to remove all its Embraer Brasilia EMB-120 ("EMB120") turboprop aircraft from service by the end of the second quarter of 2015. This decision
72
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
resulted in an impairment review of the Company's long-lived assets specific to the EMB120 aircraft, which included owned aircraft, capitalized engine overhaul amounts, spare engines and other EMB120 specific long-lived assets. The impairment analysis required the Company to use judgment to estimate fair value of its EMB120 long-lived assets. The estimated fair value of the long-lived assets was based on third-party valuations for similar assets. The amounts the Company may ultimately realize from the disposal of the Company's EMB120 long-lived assets may vary from the December 31, 2014 fair value assessments. See Note 8, Special items , for the impairment charges recorded during the year ended December 31, 2014 related to the EMB120 long-lived assets.
In November 2014, ExpressJet entered into an amended and restated ExpressJet United ERJ Agreement, which reduced the term of the agreement from the year 2020 to 2017 and accelerated the removal of its Embraer ERJ145 regional jet ("ERJ145") aircraft from the contract between the years 2015 and 2017. As of December 31, 2014, all of ExpressJet's ERJ145 aircraft were operated pursuant to the ExpressJet United ERJ Agreement. The reduced term of the ExpressJet United ERJ Agreement shortened the Company's anticipated use of ERJ145 specific long-lived assets and resulted in an impairment review for the ERJ145 aircraft type specific assets, which included capitalized aircraft improvements, spare engines and other ERJ145 long-lived assets. The impairment analysis required the Company to use judgment to estimate the fair value of the Company's ERJ145 long-lived assets. The estimated fair value of the long-lived assets was based on third-party valuations for similar assets. The amounts the Company may ultimately realize from the disposal of the Company's ERJ145 long-lived assets may vary from the December 31, 2014 fair value assessments. See Note 8, Special items , for the impairment charges recorded during the year ended December 31, 2014 related to the ERJ145 long-lived assets.
In conjunction with the acquisition of ExpressJet Delaware, the Company acquired an aircraft paint facility located in Saltillo, Mexico. During the three months ended September 30, 2014, the Company discontinued use of the facility and wrote down the value of the facility and related assets to its estimated fair value. During the three months ended December 31, 2014, the Company sold the paint facility to a third party for an amount that approximated the estimated fair market value. See Note 8, Special items , for the impairment charges recorded during the year ended December 31, 2014 related to the write-down of the Saltillo, Mexico paint facility and related assets.
The Company did not impair its long-lived assets during 2013 or 2012.
Capitalized Interest
Interest is capitalized on aircraft purchase deposits as a portion of the cost of the asset and is depreciated over the estimated useful life of the asset. During the years ended December 31, 2014, 2013 and 2012, the Company capitalized interest costs of approximately $1.8 million, $1.2 million, and $0, respectively.
Maintenance
The Company operates under a FAA-approved continuous inspection and maintenance program. The Company uses the direct expense method of accounting for its regional jet engine overhauls wherein the expense is recorded when the overhaul event occurs. The Company has engine services
73
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.
74
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
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.
The following summarizes the significant provisions of each code share agreement the Company has with each major partner:
Delta Connection Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines Delta Connection Agreement (fixed-fee arrangement) |
CRJ 20044
CRJ 70019
CRJ 90032 |
The contract expires on an individual aircraft basis with expirations commencing in 2015
The final aircraft expires in 2022
The average remaining term of the aircraft under contract is 4.8 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, Deice
Insurance |
No financial performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
75
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
ExpressJet Delta Connection Agreement (fixed-fee arrangement) |
CRJ 20059
CRJ 70041
CRJ 90028 |
The contract expires on an individual aircraft basis with expirations scheduled in 2015
The final aircraft expires in 2022
The average remaining term of the aircraft under contract is 4.1 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, Deice Insurance |
Performance based financial incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines Pro-rate Agreement (revenue-sharing agreement) |
EMB 1206
CRJ 20010 |
Terminates with 30-day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
United Express Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines United Express Agreements (fixed-fee arrangement) |
CRJ 20061
CRJ 70070
E17520
EMB 1209 |
The contract expires on an individual aircraft basis with expirations scheduled in 2015
The final aircraft expires in 2026
The average remaining term of the aircraft under contract is 3.4 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
76
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Performance
Incentive Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
ExpressJet United ERJ Agreement (fixed-fee arrangement) |
ERJ 1359
ERJ 145216 |
The contract expires on an individual aircraft basis with expirations scheduled in 2015
The final aircraft expires in 2017
The average remaining term of the aircraft under contract is 1.9 years
Upon expiration, aircraft may be renewed or extended |
Fuel
Engine Maintenance
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives or penalties |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet United CRJ Agreement (fixed-fee arrangement) |
CRJ 2007 |
The contract expires on an individual basis with final aircraft terminating in March 2015
Upon termination, leased aircraft are expected to be returned to lessors |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines United Express Pro-rate Agreement (revenue-sharing arrangement) |
CRJ 20021
EMB 12012 |
Terminates with 120-day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
Alaska Capacity Purchase Agreement
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines Alaska Agreement (fixed-fee arrangement) |
CRJ 7009 |
Terminates 2018
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
77
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
US Airways Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines US Airways Agreement (fixed-fee arrangement) |
CRJ 20010
CRJ 9004 |
Terminates 2015
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines US Airways Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2001 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
American Agreements
Agreement
|
Number of
aircraft under contract |
Term / Termination
Dates |
Pass-through costs
or costs paid directly by major partner |
Incentive
Structure |
Payment Structure | |||||
---|---|---|---|---|---|---|---|---|---|---|
SkyWest Airlines American Agreement (fixed-fee agreement) |
CRJ 20012 |
Terminates 2016
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
SkyWest Airlines American Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2004 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
|||||
|
||||||||||
ExpressJet American Agreement (fixed-fee agreement) |
CRJ 20011 |
Terminates 2017
Upon expiration, aircraft may be renewed or extended |
Fuel
Landing fees, Station Rents, Deice
Insurance |
Performance based incentives |
Rate per block hour, per departure and per aircraft under contract |
|||||
|
||||||||||
ExpressJet American Pro-rate Agreement (revenue-sharing agreement) |
CRJ 2002 |
Terminates with 120- day notice |
None |
None |
Pro-rata sharing of the passenger fare revenue |
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 Delta, United, Alaska, American or US Airways, contract modifications resulting from contract re-negotiations, 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 partners.
78
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
Under the Company's fixed-fee agreements with Delta, United, Alaska, US Airways and American, the compensation structure generally consists of a combination of agreed-upon rates for operating flights and direct reimbursement for other certain costs associated with operating the aircraft. A portion of the Company's contract flying compensation is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is rental income, inasmuch as the agreements identify the "right of use" of a specific type and number of aircraft over a stated period of time. The amounts deemed to be rental income under the agreements for the years ended December 31, 2014, 2013 and 2012 were $497.0 million, $500.2 million and $506.7 million, respectively. These amounts are reflected as passenger revenues on the Company's consolidated statements of comprehensive (loss). The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statement of comprehensive income (loss) since the use of the aircraft is not a separate activity of the total service provided and there is not a separate profitability measurement for the deemed rental activity of the aircraft.
Deferred Aircraft Credits
The Company accounts for incentives provided by aircraft manufacturers as deferred credits. The deferred credits related to leased aircraft are amortized on a straight-line basis as a reduction to rent expense over the lease term. Credits related to owned aircraft reduce the purchase price of the aircraft, which has the effect of amortizing the credits on a straight-line basis as a reduction in depreciation expense over the life of the related aircraft. The incentives are credits that may be used to purchase spare parts and pay for training and other expenses.
Income Taxes
The Company recognizes a liability or asset for the deferred tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that are expected to result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income (loss) per common share. During the years ended December 31, 2014, 2013 and 2012, 3,191,000, 3,072,000 and 3,889,000 shares reserved for issuance upon the exercise of outstanding options were excluded from the computation of Diluted EPS respectively, as their inclusion would be anti-dilutive.
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)
The calculation of the weighted average number of common shares outstanding for Basic EPS and Diluted EPS are as follows for the years ended December 31, 2014, 2013 and 2012 (in thousands):
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Numerator: |
||||||||||
Net Income (Loss) |
$ | (24,154 | ) | $ | 58,956 | $ | 51,157 | |||
Denominator: |
||||||||||
Denominator for basic earnings per-share weighted average shares |
51,237 | 51,688 | 51,090 | |||||||
Dilution due to stock options and restricted stock |
| 734 | 656 | |||||||
| | | | | | | | | | |
Denominator for diluted earnings per-share weighted average shares |
51,237 | 52,422 | 51,746 | |||||||
Basic earnings (loss) per-share |
$ | (0.47 | ) | $ | 1.14 | $ | 1.00 | |||
Diluted earnings (loss) per-share |
$ | (0.47 | ) | $ | 1.12 | $ | 0.99 |
Comprehensive Income (Loss)
Comprehensive income (loss) includes charges and credits to stockholders' equity that are not the result of transactions with the Company's shareholders. Also, comprehensive income (loss) consisted of net income (loss) plus changes in unrealized appreciation (depreciation) on marketable securities and unrealized gain (loss) on foreign currency translation adjustment related to the Company's equity investment in Trip Linhas Aereas, a regional airline operating in Brazil ("TRIP") and Mekong Aviation Joint Stock Company, an airline operating in Vietnam ("Air Mekong") (see Note 7), net of tax, for the periods indicated (in thousands):
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Net Income (Loss) |
$ | (24,154 | ) | $ | 58,956 | 51,157 | ||||
Proportionate share of other companies foreign currency translation adjustment, net of tax |
(1,129 | ) | 66 | (251 | ) | |||||
Unrealized appreciation (depreciation) on marketable securities, net of tax |
(719 | ) | (13 | ) | 316 | |||||
| | | | | | | | | | |
Comprehensive income (loss) |
$ | (26,002 | ) | $ | 59,009 | $ | 51,222 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for receivables and accounts payable approximate fair values because of the immediate or short-term maturity of these financial instruments. Marketable securities are reported at fair value based on market quoted prices in the consolidated balance sheets. If quoted prices in active markets are no longer available, the Company has estimated the fair values of these securities utilizing a discounted cash flow analysis as of December 31, 2014. These analyses consider, among other items, the collateralization underlying the
80
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
security investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectation of the next time the security is expected to have a successful auction. The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for similar debt and was approximately $1,813.1 million as of December 31, 2014, as compared to the carrying amount of $1,745.8 million as of December 31, 2014. The Company's fair value of long-term debt as of December 31, 2013 was $1,509.2 million as compared to the carrying amount of $1,470.6 million as of December 31, 2013.
Segment Reporting
Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company's chief operating decision maker ("CODM")when deciding how to allocate resources and in assessing performance. The Company's two operating segments consist of the operations conducted by its two subsidiaries, SkyWest Airlines and ExpressJet. Information pertaining to the Company's reportable segments is presented in Note 2, Segment Reporting .
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board issued ASU No. 2014-15. This standard provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2016, with early adoption permitted. The Company is evaluating the new guidance and plans to provide additional information about its expected impact at a future date.
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period ("ASU 2014-12"). The FASB issued ASU 2014-12 to provide explicit guidance for share-based awards which allow for an employee to vest in an award upon achievement of a performance condition met after completion of a requisite service period regardless of whether the employee is rendering service on the date the performance target is achieved. ASU 2014-12 provides that the performance target should not be reflected in estimating the grant-date fair value of the award, but rather compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and recognized prospectively over the remaining requisite service period. ASU 2014-12 is effective for fiscal years and interim periods within those years beginning after December 15, 2015. The Company does not believe the implementation of ASU 2014-12 will have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (ASU No. 2014-09). Under ASU No. 2014-09, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective
81
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(1) Nature of Operations and Summary of Significant Accounting Policies (Continued)
approach or report the cumulative effect as of the date of adoption. The Company is currently evaluating the impact, the adoption of ASU No. 2014-09 will have on the Company's consolidated financial statements.
In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard changes the requirements for reporting discontinued operations in Subtopic 205-20. The standard is effective in the first quarter of 2015. The Company does not believe the implementation of the standard will have a material impact to the Company's consolidated financial statements.
(2) Segment Reporting
Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available to, and regularly evaluated by, the Company's CODM when deciding how to allocate resources and in assessing performance.
The Company's two operating segments consist of the operations conducted by its two subsidiaries, SkyWest Airlines and ExpressJet. Corporate overhead expense incurred by the Company is allocated to the operating expenses of its two operating subsidiaries.
The following represents the Company's segment data for the years ended December 31, 2014, 2013 and 2012 (in thousands).
|
Year ended December 31, 2014 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
SkyWest
Airlines |
ExpressJet | Other | Consolidated | |||||||||
Operating revenues |
$ | 1,888,693 | $ | 1,346,859 | $ | 1,895 | $ | 3,237,447 | |||||
Operating expense |
1,766,669 | 1,446,050 | (120 | ) | 3,212,599 | ||||||||
Depreciation and amortization expense |
171,183 | 88,459 | | 259,642 | |||||||||
Interest expense |
44,385 | 18,754 | 2,856 | 65,995 | |||||||||
Segment profit (loss)(1) |
77,639 | (117,945 | ) | (841 | ) | (41,147 | ) | ||||||
Identifiable intangible assets, other than goodwill |
| 12,748 | | 12,748 | |||||||||
Total assets |
3,019,799 | 1,390,129 | | 4,409,928 | |||||||||
Capital expenditures (including non-cash) |
673,133 | 23,790 | | 696,923 |
|
Year ended December 31, 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
SkyWest
Airlines |
ExpressJet | Other | Consolidated | |||||||||
Operating revenues |
$ | 1,827,568 | $ | 1,466,341 | $ | 3,816 | $ | 3,297,725 | |||||
Operating expense |
1,644,129 | 1,494,302 | 6,183 | 3,144,614 | |||||||||
Depreciation and amortization expense |
155,667 | 89,338 | | 245,005 | |||||||||
Interest expense |
43,920 | 21,034 | 3,704 | 68,658 | |||||||||
Segment profit (loss)(1) |
139,519 | (48,995 | ) | (6,071 | ) | 84,453 | |||||||
Identifiable intangible assets, other than goodwill |
| 14,998 | | 14,998 | |||||||||
Total assets |
2,532,431 | 1,700,788 | | 4,233,219 | |||||||||
Capital expenditures (including non-cash) |
103,387 | 38,657 | | 142,044 |
82
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(2) Segment Reporting (Continued)
|
Year ended December 31, 2012 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
SkyWest
Airlines |
ExpressJet | Other | Consolidated | |||||||||
Operating revenues |
$ | 1,930,149 | $ | 1,593,527 | $ | 10,696 | $ | 3,534,372 | |||||
Operating expense |
1,774,876 | 1,588,400 | 5,109 | 3,368,385 | |||||||||
Depreciation and amortization expense |
153,915 | 98,043 | | 251,958 | |||||||||
Interest expense |
49,208 | 23,582 | 4,590 | 77,380 | |||||||||
Segment profit (loss)(1) |
106,065 | (18,455 | ) | 997 | 88,607 | ||||||||
Identifiable intangible assets, other than goodwill |
| 17,248 | | 17,248 | |||||||||
Total assets |
2,633,369 | 1,621,268 | | 4,254,637 | |||||||||
Capital expenditures (including non-cash) |
74,636 | 20,204 | | 94,840 |
(3) Long-term Debt
Long-term debt consisted of the following as of December 31, 2014 and 2013 (in thousands):
83
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(3) Long-term Debt (Continued)
During the year ended December 31, 2014, the Company acquired 20 new E175 aircraft and one used CRJ700 aircraft through the issuance of debt.
As of December 31, 2014, the Company had $1.7 billion of long-term debt obligations related to the acquisition of CRJ200, CRJ700, CRJ900 and E175 aircraft. The average effective interest rate on the debt related to those long-term debt obligations was approximately 4.1% at December 31, 2014.
The aggregate amounts of principal maturities of long-term debt as of December 31, 2014 were as follows (in thousands):
2015 |
$ | 211,821 | ||
2016 |
216,340 | |||
2017 |
190,648 | |||
2018 |
168,769 | |||
2019 |
161,329 | |||
Thereafter |
796,904 | |||
| | | | |
|
$ | 1,745,811 | ||
| | | | |
| | | | |
| | | | |
As of December 31, 2014 and 2013, SkyWest Airlines had a $25 million line of credit. As of December 31, 2014 and 2013, SkyWest Airlines had no amount outstanding under the facility. The facility expires on March 31, 2015 and has a variable interest rate of Libor plus 3.0%.
As of December 31, 2014 and 2013, the Company had $79.9 million and $88.5 million, respectively, in letters of credit and surety bonds outstanding with various banks and surety institutions.
(4) Income Taxes
The provision for income taxes includes the following components (in thousands):
|
Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Current tax provision (benefit): |
||||||||||
Federal |
$ | (176 | ) | $ | 1,767 | $ | | |||
State |
838 | 343 | 441 | |||||||
Foreign |
2,081 | | | |||||||
| | | | | | | | | | |
|
2,743 | 2,110 | 441 | |||||||
| | | | | | | | | | |
Deferred tax provision (benefit): |
||||||||||
Federal |
4,697 | 34,728 | 31,791 | |||||||
State |
371 | 2,738 | 2,507 | |||||||
| | | | | | | | | | |
|
5,068 | 37,466 | 34,298 | |||||||
| | | | | | | | | | |
Provision (benefit) for income taxes |
$ | 7,811 | $ | 39,576 | $ | 34,739 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
84
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(4) Income Taxes (Continued)
The following is a reconciliation between the statutory federal income tax rate of 35% and the effective rate which is derived by dividing the provision for income taxes by income (loss) before for income taxes (in thousands):
|
Year ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Computed provision (benefit) for income taxes at the statutory rate |
$ | (5,720 | ) | $ | 34,486 | $ | 30,064 | |||
Increase (decrease) in income taxes resulting from: |
||||||||||
State income tax provision (benefit), net of federal income tax benefit |
(107 | ) | 2,867 | 2,220 | ||||||
Non-deductible expenses |
3,865 | 3,257 | 2,919 | |||||||
Valuation allowance changes affecting the provision for income taxes |
5,981 | 1,430 | 1,614 | |||||||
Foreign income taxes, net of federal & state benefit |
1,973 | | | |||||||
Other, net |
1,819 | (2,464 | ) | (2,078 | ) | |||||
| | | | | | | | | | |
Provision for income taxes |
$ | 7,811 | $ | 39,576 | $ | 34,739 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
For the year ended December 31, 2014, the Company recorded a $6.0 million valuation allowance against certain deferred tax assets primarily associated with ExpressJet state net operating losses with a limited carry forward period. The valuation allowance was based on the Company's assessment of deferred tax assets that are anticipated to expire before the deferred tax assets may be utilized. The Company additionally recorded a $2.0 million foreign tax expense associated with Brazilian withholding tax on the sale of the Company's equity ownership in TRIP. Included in Other, net above is an unrecorded tax benefit of $3.4 million related to losses resulting from the disposition of a paint facility in Mexico.
For the year ended December 31, 2013, the Company recorded a $1.4 million valuation allowance against certain deferred tax assets primarily associated with ExpressJet state net operating losses with a limited carry forward period. The valuation allowance was based on the Company's assessment at December 31, 2013 of deferred tax assets that were anticipated to expire before the deferred tax assets may be utilized.
For the year ended December 31, 2012, the Company recorded a $1.6 million valuation allowance against certain deferred tax assets associated with capital losses with a limited carry forward period. The valuation allowance was based on the Company's assessment at December 31, 2012 of deferred tax assets that were anticipated to expire before the deferred tax assets may be utilized.
85
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(4) Income Taxes (Continued)
The significant components of the Company's net deferred tax assets and liabilities as of December 31, 2014 and 2013 are as follows (in thousands):
|
As of December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Deferred tax assets: |
|||||||
Intangible Asset |
$ | 34,819 | $ | 36,164 | |||
Accrued benefits |
43,853 | 40,850 | |||||
Net operating loss carryforward |
152,361 | 85,885 | |||||
AMT credit carryforward |
17,590 | 17,649 | |||||
Deferred aircraft credits |
53,797 | 44,350 | |||||
Accrued reserves and other |
27,008 | 30,987 | |||||
| | | | | | | |
Total deferred tax assets |
329,428 | 255,885 | |||||
| | | | | | | |
Valuation allowance |
(9,025 | ) | (3,044 | ) | |||
| | | | | | | |
Deferred tax liabilities: |
|||||||
Accelerated depreciation |
(895,405 | ) | (824,149 | ) | |||
| | | | | | | |
Total deferred tax liabilities |
(895,405 | ) | (824,149 | ) | |||
| | | | | | | |
Net deferred tax liability |
$ | (575,002 | ) | $ | (571,308 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company's deferred tax liabilities were primarily generated through accelerated depreciation, combined with shorter depreciable tax lives, allowed under the IRS tax code for purchased aircraft and support equipment compared to the Company's US GAAP depreciation policy for such assets using the straight-line method (see note 1 Nature of Operations and Summary of Significant Accounting Policies).
The Company's valuation allowance is related to certain deferred tax assets with a limited carry forward period. The Company does not anticipate utilizing these deferred tax assets prior to the lapse of the carry forward period.
At December 31, 2014 and 2013, the Company had federal net operating losses of approximately $379.3 million and $191.5 million and state net operating losses of approximately $452.2 million and $651.2 million, respectively. The estimated effective tax rate applicable to the state and federal net operating losses as of December 31, 2014 was 35.0% and 2.6%, respectively. The Company anticipates that the federal and state net operating losses will start to expire in 2026 and 2015, respectively. The Company has recorded a valuation allowance for state net operating losses the Company anticipates will expire before the benefit will be realized due to the limited carry forward periods. As of December 31, 2014 and 2013, the Company also had an alternative minimum tax credit of approximately $17.6 million which does not expire.
86
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(5) Commitments and Contingencies
Lease Obligations
The Company leases 554 aircraft, as well as airport facilities, office space, and various other property and equipment under non-cancelable operating leases which are generally on a long-term net rent basis where the Company pays taxes, maintenance, insurance and certain other operating expenses applicable to the leased property. The following table summarizes future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2014 (in thousands):
The majority of the Company's leased aircraft are owned and leased through trusts whose sole purpose is to purchase, finance and lease these aircraft to the Company; therefore, they meet the criteria of a variable interest entity. However, since these are single owner trusts in which the Company does not participate, the Company is not considered at risk for losses and is not considered the primary beneficiary. As a result, based on the current rules, the Company is not required to consolidate any of these trusts or any other entities in applying the accounting guidance. The Company's management believes that the Company's maximum exposure under these leases is the remaining lease payments.
The Company's leveraged lease agreements typically obligate the Company to indemnify the equity/owner participant against liabilities that may arise due to changes in benefits from tax ownership of the respective leased aircraft. The terms of these contracts range up to 11 years. The Company did not accrue any liability relating to the indemnification to the equity/owner participant because of management's assessment that the probability of this occurring is remote.
Total rental expense for non-cancelable aircraft operating leases was approximately $305.3 million, $325.4 million and $333.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The minimum rental expense for airport station rents was approximately $29.0 million, $35.1 million and $43.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Self-insurance
The Company self-insures a portion of its potential losses from claims related to workers' compensation, environmental issues, property damage, medical insurance for employees and general liability. Losses are accrued based on an estimate of the ultimate aggregate liability for claims incurred, using standard industry practices and the Company's actual experience. Actual results could differ from these estimates.
87
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(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, 2014, 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.
Concentration Risk and Significant Customers
The Company requires no collateral from its major partners or customers but monitors the financial condition of its major partners. Under the majority of the Company's code-share agreements, the Company receives weekly payments from its major code share partners that approximates a significant percentage of the compensation earned for such period. Additionally, the Company provides certain customer service functions at multiple airports for various airlines and the Company maintains an allowance for doubtful accounts receivable based upon expected collectability of all accounts receivable. The Company's allowance for doubtful accounts totaled $326,600 and $94,000 as of December 31, 2014 and 2013, respectively. For the years ended December 31, 2014, 2013 and 2012, the Company's contractual relationships with Delta and United combined accounted for approximately 88.7%, 91.6% and 94.8%, respectively of the Company's total revenues.
Employees Under Collective Bargaining Agreements
As of December 31, 2014, the Company had approximately 18,500 full-time equivalent employees. Approximately 45.1% of these employees were represented by unions, including the following employee groups. Notwithstanding the completion of the ExpressJet Combination, ExpressJet's employee groups continue to be represented by those unions who provided representation prior to the ExpressJet Combination.
Accordingly, the following table refers to ExpressJet's employee groups based upon their union affiliations prior to the ExpressJet Combination.
Employee Group
|
Approximate
Number of Active Employees Represented |
Representatives |
Status of
Agreement |
||||
---|---|---|---|---|---|---|---|
Atlantic Southeast Pilots |
1,631 | Air Line Pilots Association International | Amendable | ||||
Atlantic Southeast Flight Attendants |
1,132 | International Association of Machinists and Aerospace Workers | Amendable | ||||
Atlantic Southeast Flight Controllers |
53 | Transport Workers Union of America | Amendable | ||||
Atlantic Southeast Mechanics |
554 | International Brotherhood of Teamsters | Amendable | ||||
Atlantic Southeast Stock Clerks |
60 | International Brotherhood of Teamsters | Amendable | ||||
ExpressJet Delaware Pilots |
2,577 | Air Line Pilots Association International | Amendable | ||||
ExpressJet Delaware Flight Attendants |
1,210 | International Association of Machinists and Aerospace Workers | Amendable | ||||
ExpressJet Delaware Mechanics |
942 | International Brotherhood of Teamsters | Amendable | ||||
ExpressJet Delaware Dispatchers |
81 | Transport Workers Union of America | Amendable | ||||
ExpressJet Delaware Stock Clerks |
97 | International Brotherhood of Teamsters | Amendable |
88
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(5) Commitments and Contingencies (Continued)
Between December 2013 and January 2014, the Airline Pilots Association International ("ALPA"), which represents the Atlantic Southeast pilot and ExpressJet Delaware pilot groups, conducted a vote of the two employee groups, seeking approval of a joint collective bargaining agreement that ExpressJet had negotiated with ALPA representatives. The two employee groups rejected the joint collective bargaining agreement, which resulted in the agreements with those employee groups remaining amendable as indicated in the foregoing table. ExpressJet intends to resume negotiations with ALPA in an effort to negotiate an acceptable agreement.
(6) Fair Value Measurements
The Company holds certain assets that are required to be measured at fair value in accordance with United States GAAP. The Company determined fair value of these assets based on the following three levels of inputs:
Level 1 | | Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 |
|
|
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Some of the Company's marketable securities primarily utilize broker quotes in a non-active market for valuation of these securities. |
Level 3 |
|
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, therefore requiring an entity to develop its own assumptions. |
89
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(6) Fair Value Measurements (Continued)
As of December 31, 2014, the Company held certain assets that are required to be measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below (in thousands):
|
Fair Value Measurements
as of December 31, 2014 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Level 1 | Level 2 | Level 3 | |||||||||
Marketable Securities |
|||||||||||||
Bonds |
$ | 410,163 | $ | | $ | 410,163 | $ | | |||||
Asset backed securities |
5,110 | | 5,110 | | |||||||||
| | | | | | | | | | | | | |
|
415,273 | | 415,273 | | |||||||||
Cash, Cash Equivalents and Restricted Cash |
143,857 | 143,857 | | | |||||||||
Other Assets(a) |
2,309 | | | 2,309 | |||||||||
| | | | | | | | | | | | | |
Total Assets Measured at Fair Value |
$ | 561,439 | 143,857 | $ | 415,273 | $ | 2,309 | ||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
Fair Value Measurements
as of December 31, 2013 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Level 1 | Level 2 | Level 3 | |||||||||
Marketable Securities |
|||||||||||||
Bonds |
$ | 487,049 | $ | | $ | 487,049 | $ | | |||||
Commercial paper |
190 | | 190 | | |||||||||
| | | | | | | | | | | | | |
Asset backed securities |
487,239 | | 487,239 | | |||||||||
Cash, Cash Equivalents and Restricted Cash |
$ | 182,855 | 182,855 | | | ||||||||
Other Assets(a) |
2,245 | | | 2,245 | |||||||||
| | | | | | | | | | | | | |
Total Assets Measured at Fair Value |
$ | 672,339 | $ | 182,855 | $ | 487,239 | $ | 2,245 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Based on market conditions, the Company uses a discounted cash flow valuation methodology for auction rate securities. Accordingly, for purposes of the foregoing consolidated financial statements, these securities were categorized as Level 3 securities. The Company's "Marketable Securities" classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities.
No significant transfers between Level 1, Level 2 and Level 3 occurred during the year ended December 31, 2014. The Company's policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
90
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(6) Fair Value Measurements (Continued)
The following table presents the Company's assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2014 (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs
|
Auction Rate
Securities |
|||
---|---|---|---|---|
Balance at January 1, 2014 |
$ | 2,245 | ||
Total realized and unrealized gains or (losses) |
||||
Included in earnings |
| |||
Included in other comprehensive income |
64 | |||
Transferred out |
| |||
Settlements |
| |||
| | | | |
Balance at December 31, 2014 |
$ | 2,309 | ||
| | | | |
| | | | |
| | | | |
(7) Investment in Other Companies
In 2012, the Company sold its 20% interest in TRIP to Trip Investimentos Ltda. ("Trip Investimentos") for $42 million. The purchase price was scheduled to be paid in three installments over a two-year period and the Company received the final payment in July 2014. Under the terms of the agreement, Trip Investimentos could not transfer the TRIP shares until the final installment payment was made to the Company, which prevented the Company from recognizing the gain on the transaction until the Company received the final payment. Accordingly, the Company recorded the gain from the sale of its TRIP shares of $24.9 million during the year ended December 31, 2014, which is reflected in "Other Income" in the Consolidated Statements of Comprehensive Income (Loss).
As part of the sale transaction, the Company also received an option to acquire 15.38% of the ownership in Trip Investimentos. The option has an initial exercise price per share equal to the price paid by Trip Investimentos to acquire the TRIP shares from the Company. The exercise price escalates annually at a specified rate and the Company can exercise the option, at its discretion, between the second and fourth anniversaries of July 2014. The Company recorded the fair value of the option as additional consideration received in the transaction. The value of the option was recorded at a nominal amount based on the Company's assessment of the option's fair value.
In 2010, the Company invested $7 million for a 30% ownership interest in Mekong Aviation Joint Stock Company, an airline operating in Vietnam ("Air Mekong") and, in 2011, invested an additional $3 million. In 2013, the Company sold its shares of Air Mekong and recognized a gain of $5 million during the year ended December 31, 2013, which is reflected in other income in the Consolidated Statements of Comprehensive Income (Loss). Additionally, in 2013, the Company terminated its sub-lease of certain aircraft to Air Mekong and recognized $5.1 million of other income during the year ended December 31, 2013 primarily due to the recognition of collected and realized contingent rent payments, net of the write-off of certain maintenance deposits.
91
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(8) Special Items
The following table summarizes the components of the Company's special items, for the year ended December 31, 2014, 2013 and 2012 (in thousands):
|
Year ended
December 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Special items: |
||||||||||
EMB120 aircraft related items(1) |
$ | 57,046 | $ | | $ | | ||||
ERJ145 aircraft related items(2) |
12,931 | | | |||||||
Paint facility and related items(3) |
4,800 | | | |||||||
| | | | | | | | | | |
Total Special items |
$ | 74,777 | $ | | $ | | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
92
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(9) Capital Transactions
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock in one or more series without shareholder approval. No shares of preferred stock are presently outstanding. The Company's Board of Directors is authorized, without any further action by the shareholders of the Company, to (i) divide the preferred stock into series; (ii) designate each such series; (iii) fix and determine dividend rights; (iv) determine the price, terms and conditions on which shares of preferred stock may be redeemed; (v) determine the amount payable to holders of preferred stock in the event of voluntary or involuntary liquidation; (vi) determine any sinking fund provisions; and (vii) establish any conversion privileges.
Stock Compensation
On May 4, 2010, the Company's shareholders approved the adoption of the SkyWest Inc. 2010 Long-Term Incentive Plan, which provides for the issuance of up to 5,150,000 shares of common stock to the Company's directors, employees, consultants and advisors (the "2010 Incentive Plan"). The 2010 Incentive Plan provides for awards in the form of options to acquire shares of common stock, stock appreciation rights, restricted stock grants, restricted stock units and performance awards. The 2010 Incentive Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"), which is authorized to designate option grants as either incentive stock options for income tax purposes ("ISO") or non-statutory stock options ISOs are granted at not less than 100% of the market value of the underlying common stock on the date of grant. Non-statutory stock options are granted at a price as determined by the Compensation Committee.
In prior years, the Company adopted three stock option plans: the Executive Stock Incentive Plan (the "Executive Plan"), the 2001 Allshare Stock Option Plan (the "Allshare Plan") and SkyWest Inc. Long-Term Incentive Plan (the "2006 Incentive Plan"). As of December 31, 2014, options to purchase an aggregate 1,821,804 shares of the Company's common stock remained outstanding under the Executive Plan, the Allshare Plan and the 2006 Incentive Plan. There are no additional shares of common stock available for issuance under these plans.
The fair value of stock options awarded under the Company's stock option plans has been estimated as of the grant date using the Black-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee termination in the option pricing model. The expected term of options granted is derived from the output of the option pricing model and represents the period of time that options granted are expected to be outstanding. The expected volatilities are based on the historical volatility of the Company's traded stock and other factors. The Company granted 255,503, 173,560 and 200,115 stock options to employees under the 2010 Incentive Plan during the years ended December 31, 2014, 2013 and 2012, respectively. The following table shows the
93
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(9) Capital Transactions (Continued)
assumptions used and weighted average fair value for grants in the years ended December 31, 2014, 2013 and 2012.
|
2014 | 2013 | 2012 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Expected annual dividend rate |
1.32 | % | 1.21 | % | 1.23 | % | ||||
Risk-free interest rate |
1.50 | % | 0.92 | % | 0.81 | % | ||||
Average expected life (years) |
5.8 | 6.0 | 5.6 | |||||||
Expected volatility of common stock |
0.431 | 0.446 | 0.409 | |||||||
Forfeiture rate |
0.0 | % | 0.0 | % | 0.0 | % | ||||
Weighted average fair value of option grants |
$ | 4.47 | $ | 5.04 | $ | 4.43 |
The Company recorded share-based compensation expense only for those options that are expected to vest. The estimated fair value of the stock options is amortized over the vesting period of the respective stock option grants.
During the year ended December 31, 2014, the Company granted 312,749 shares of restricted stock units to the Company's employees under the 2010 Incentive Plan. The restricted stock units granted during the year ended December 31, 2014 have a three-year vesting period, during which the recipient must remain employed with the Company or its subsidiaries. The weighted average fair value of the restricted stock units on the date of grants made during the year ended December 31, 2014 was $12.01 per share. Additionally, during the year ended December 31, 2014 the Company granted 44,631 fully-vested shares of common stock to the Company's directors with a weighted average grant-date fair value of $12.10. The following table summarizes the activity of restricted stock units granted to employees and fully-vested common shares granted to the Company's directors as of December 31, 2014, 2013 and 2012:
|
Number of
Shares |
Weighted-Average
Grant-Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Non-vested shares outstanding at December 31, 2011 |
611,602 | $ | 15.08 | ||||
Granted |
318,139 | 13.04 | |||||
Vested |
(212,841 | ) | 14.95 | ||||
Cancelled |
(18,015 | ) | 14.20 | ||||
| | | | | | | |
Non-vested shares outstanding at December 31, 2012 |
698,885 | 14.21 | |||||
Granted |
312,104 | 13.41 | |||||
Vested |
(231,465 | ) | 14.35 | ||||
Cancelled |
(45,933 | ) | 13.69 | ||||
| | | | | | | |
Non-vested shares outstanding at December 31, 2013 |
733,591 | 13.79 | |||||
Granted |
357,380 | 12.01 | |||||
Vested |
(329,522 | ) | 14.38 | ||||
Cancelled |
(38,273 | ) | 12.83 | ||||
| | | | | | | |
Non-vested shares outstanding at December 31, 2014 |
723,176 | 12.70 |
During the year ended December 31, 2014, 2013 and 2012, the Company recorded equity-based compensation expense of $5.3 million, $4.4 million and $4.7 million, respectively.
94
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(9) Capital Transactions (Continued)
As of December 31, 2014, the Company had $4.0 million of total unrecognized compensation cost related to non-vested stock options and non-vested restricted stock grants. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. The Company expects to recognize this cost over a weighted average period of 1.2 years.
Options are exercisable for a period as defined by the Compensation Committee on the date granted; however, no stock option will be exercisable before six months have elapsed from the date it is granted and no incentive stock option shall be exercisable after ten years from the date of grant. The following table summarizes the stock option activity for all of the Company's plans for the years ended December 31, 2014, 2012 and 2011:
|
2014 | 2013 | 2012 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Number of
Options |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term |
Aggregate
Intrinsic Value ($000) |
Number of
Options |
Weighted
Average Exercise Price |
Number of
Options |
Weighted
Average Exercise Price |
||||||||||||||||
Outstanding at beginning of year |
3,407,575 | $ | 17.99 | 1.8 years | 3,653,859 | $ | 18.44 | 4,176,673 | $ | 19.26 | ||||||||||||||
Granted |
255,503 | 11.96 | 173,560 | 13.24 | 200,115 | 13.06 | ||||||||||||||||||
Exercised |
(6,701 | ) | 12.10 | (75,080 | ) | 10.91 | (179,204 | ) | 10.57 | |||||||||||||||
Cancelled |
(768,303 | ) | 6.81 | (344,764 | ) | 20.67 | (543,725 | ) | 25.35 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at end of year |
2,888,074 | 16.46 | 1.7 years | | 3,407,575 | 17.99 | 3,653,859 | 18.44 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at December 31, 2014 |
2,324,336 | 17.39 | 0.8 years | | ||||||||||||||||||||
Exercisable at December 31, 2013 |
2,818,464 | 18.83 | 1.1 years | |
The total intrinsic value of options to acquire shares of the Company's common stock that were exercised during the years ended December 31, 2014, 2013 and 2012 was $30,000, $172,000 and $191,000, respectively.
The following table summarizes the status of the Company's non-vested stock options as of December 31, 2014:
|
Number of
Shares |
Weighted-Average
Grant-Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Non-vested shares at beginning of year |
589,111 | $ | 5.07 | ||||
Granted |
255,503 | $ | 4.36 | ||||
Vested |
(217,918 | ) | 5.58 | ||||
Cancelled |
(62,958 | ) | 4.74 | ||||
| | | | | | | |
Non-vested shares at end of year |
563,738 | $ | 4.56 |
95
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(9) Capital Transactions (Continued)
The following table summarizes information about the Company's stock options outstanding at December 31, 2014:
|
Options Outstanding | Options Exercisable | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Number
Outstanding |
Weighted Average
Remaining Contractual Life |
Weighted Average
Exercise Price |
Number
Exercisable |
Weighted
Average Exercise Price |
||||||||||
$8 to $16 |
1,482,592 | 3.2 years | $ | 14.09 | 918,584 | $ | 14.98 | ||||||||
$17 to $22 |
1,108,895 | 0.1 years | 17.13 | 1,108,895 | 17.13 | ||||||||||
$23 to $28 |
296,587 | 0.1 years | 25.80 | 296,587 | 25.80 | ||||||||||
| | | | | | | | | | | | | | | |
$8 to $28 |
2,888,074 | 1.7 years | $ | 16.46 | 2,324,336 | $ | 17.39 | ||||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Taxes
A portion of the Company's granted options qualify as ISOs for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Stock option grants of non-qualified options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised. Due to the treatment of incentive stock options for tax purposes, the Company's effective tax rate from year to year is subject to variability.
(10) Retirement Plans and Employee Stock Purchase Plans
SkyWest Retirement Plan
The Company sponsors the SkyWest, Inc. Employees' Retirement Plan (the "SkyWest Plan"). Employees who have completed 90 days of service and are at least 18 years of age are eligible for participation in the SkyWest Plan. Employees may elect to make contributions to the SkyWest Plan. The Company matches 100% of such contributions up to 2%, 4% or 6% of the individual participant's compensation, based upon length of service. Additionally, a discretionary contribution may be made by the Company. The Company's combined contributions to the SkyWest Plan were $19.3 million, $18.3 million and $16.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.
ExpressJet and Atlantic Southeast Retirement Plan
ExpressJet (formerly Atlantic Southeast) sponsors the Atlantic Southeast Airlines, Inc. Investment Savings Plan (the "Atlantic Southeast Plan"). Employees who have completed 90 days of service and are 18 years of age are eligible for participation in the Atlantic Southeast Plan. Employees may elect to make contributions to the Atlantic Southeast Plan; however, ExpressJet limits the amount of company match at 6% of each participant's total compensation, except for those with ten or more years of service whose company match is limited to 8% of total compensation. Additionally, ExpressJet matches the individual participant's contributions from 20% to 75%, depending on the length of the participant's service. Additionally, participants are 100% vested in their elective deferrals and rollover amounts and from 10% to 100% vested in company matching contributions based on length of service.
96
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(10) Retirement Plans and Employee Stock Purchase Plans (Continued)
Effective December 31, 2002, ExpressJet Delaware adopted the ExpressJet Airlines, Inc. 401(k) Savings Plan (the "ExpressJet Retirement Plan"). Substantially all of ExpressJet Delaware's domestic employees were covered by this plan at the time of the ExpressJet Combination. Effective January 1, 2009, the ExpressJet Retirement Plan was amended such that certain matching payment amounts have been reduced or eliminated depending on the terms of the collective bargaining unit or work group, as applicable.
ExpressJet's contribution to the Atlantic Southeast and the ExpressJet Retirement Plans was $27.2 million, $26.7 million and $26.4 million for the years ended December 31, 2014, 2012 and 2011, respectively.
ExpressJet Delaware also provided medical bridge coverage for employees between the ages of 60 to 65, with at least ten years of service who have retired from the Company. In December 2007, the Fair Treatment for Experienced Pilots Act (H.R. 4343) was enacted. This law increased the mandatory retirement age of commercial pilots from 60 to 65. As a result of this legislation, ExpressJet is no longer required to provide medical bridge coverage to its pilots between the ages of 60 to 65. In 2008, ExpressJet Delaware's practice of providing medical bridge coverage for non-pilot employees was frozen, and does not permit non-pilot employees retiring on or after January 1, 2009 to participate in such coverage. As of December 31, 2014 the Company did not have any participants under the medical bridge coverage.
Employee Stock Purchase Plans
In May 2009, the Company's Board of Directors approved the SkyWest, Inc. 2009 Employee Stock Purchase Plan (the "2009 Stock Purchase Plan"). All employees who have completed 90 days of employment with the Company or one of its subsidiaries are eligible to participate in the 2009 Stock Purchase Plan, except employees who own five percent or more of the Company's common stock. The 2009 Stock Purchase Plan enables employees to purchase shares of the Company's common stock at a five percent discount, through payroll deductions. Employees can contribute up to 15% of their base pay, not to exceed $25,000 each calendar year, for the purchase of shares. Shares are purchased semi-annually at a five percent discount based on the end of the period price. Employees can terminate their participation in the 2009 Stock Purchase Plan at any time upon written notice.
The following table summarizes purchases made under the 2009 Employee Stock Purchase Plans during the years ended December 31, 2014, 2013 and 2012:
|
Year Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2014 | 2013 | 2012 | |||||||
Number of shares purchased |
295,035 | 299,786 | 487,451 | |||||||
Average price of shares purchased |
$ | 12.72 | $ | 12.33 | $ | 8.35 |
The 2009 Stock Purchase Plan is a non-compensatory plan under the accounting guidance. Therefore, no compensation expense was recorded for the years ended December 31, 2014, 2013 and 2012.
97
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(11) Stock Repurchase
The Company's Board of Directors has authorized the repurchase of up to 25,000,000 shares of the Company's common stock in the public market since 2007. Effective September 14, 2012, the Company's Board of Directors adopted the SkyWest, Inc. 2012 Stock Repurchase Plan (the "Stock Repurchase Plan"), which provided for the repurchase of up to 5,044,516 shares of common stock, from time to time in open market or privately negotiated transactions, as contemplated by Rule 10b5-1 promulgated under the Exchange Act, as amended. The Stock Repurchase Plan expired on October 15, 2014. During the years ended December 31, 2014, 2013 and 2012, the Company repurchased 0.7 million, 0.8 million, 0.1 million shares of common stock for approximately $8.4 million, $11.7 million and $0.9 million, respectively at a weighted average price per share of $12.54, $14.40 and $15.32, respectively.
(12) Related-Party Transactions
The Company's President, Chairman of the Board and Chief Executive Officer, serves on the Board of Directors of Zions Bancorporation ("Zions"). The Company maintains a line of credit (see Note 3) and certain bank accounts with Zions. Zions is an equity participant in leveraged leases on two CRJ200, two CRJ700 and four EMB120 aircraft operated by the Company's subsidiaries. Zions also refinanced six CRJ200 and two CRJ700 aircraft in 2012 for terms of three to four years, becoming the debtor on these aircraft. Zions also serves as the Company's transfer agent. The Company's cash balance in the accounts held at Zions as of December 31, 2014 and 2013 was $90.6 million and $81.8 million, respectively.
(13) Quarterly Financial Data (Unaudited)
Unaudited summarized financial data by quarter for 2014 and 2013 is as follows (in thousands, except per share data):
|
Year Ended December 31, 2014 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
Year | |||||||||||
Operating revenues |
$ | 772,386 | $ | 816,574 | $ | 834,633 | $ | 813,854 | $ | 3,237,447 | ||||||
Operating income |
(27,774 | ) | 13,244 | 59,080 | (19,702 | ) | 24,848 | |||||||||
Net income (loss) |
(22,887 | ) | (14,737 | ) | 41,338 | (27,868 | ) | (24,154 | ) | |||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
(0.44 | ) | (0.29 | ) | 0.81 | (0.54 | ) | (0.47 | ) | |||||||
Diluted |
(0.44 | ) | (0.29 | ) | 0.79 | (0.54 | ) | (0.47 | ) | |||||||
Weighted average common shares: |
||||||||||||||||
Basic: |
51,467 | 51,183 | 51,127 | 51,174 | 51,237 | |||||||||||
Diluted: |
51,467 | 51,183 | 52,036 | 51,174 | 51,237 |
98
SKYWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2014
(13) Quarterly Financial Data (Unaudited) (Continued)
|
Year Ended December 31, 2013 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
Year | |||||||||||
Operating revenues |
$ | 803,487 | $ | 839,130 | $ | 850,740 | $ | 804,368 | $ | 3,297,725 | ||||||
Operating income |
15,561 | 50,555 | 56,174 | 30,820 | 153,111 | |||||||||||
Net income (loss) |
3,233 | 20,720 | 26,394 | 8,609 | 58,956 | |||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
0.06 | 0.40 | 0.51 | 0.17 | 1.14 | |||||||||||
Diluted |
0.06 | 0.39 | 0.50 | 0.17 | 1.12 | |||||||||||
Weighted average common shares: |
||||||||||||||||
Basic: |
51,763 | 51,881 | 51,881 | 51,228 | 51,688 | |||||||||||
Diluted: |
52,497 | 52,547 | 52,610 | 52,034 | 52,422 |
99
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Accounting Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission rules and forms. Our Chief Accounting Officer performs functions that are substantially similar to the functions of a chief financial officer with respect to the oversight of our disclosure controls and procedures. Our management, including our Chief Executive Officer and Chief Accounting Officer, concluded that, as of December 31, 2014, those controls and procedures were effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the three months ended December 31, 2014, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework (2013). Based on that evaluation, management believes that our internal control over financial reporting was effective as of December 31, 2014.
The effectiveness of our internal control over financial reporting as of December 31, 2014, has been audited by Ernst & Young LLP ("Ernst & Young"), the independent registered public accounting firm who also has audited our Consolidated Financial Statements included in this Report. Ernst & Young's report on our internal control over financial reporting appears on the following page.
100
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
SkyWest, Inc.
We have audited SkyWest, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). SkyWest, Inc. and subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, SkyWest, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of SkyWest, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 of SkyWest, Inc. and subsidiaries and our report dated February 18, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Salt
Lake City, Utah
February 18, 2015
101
None.
Items 10, 11, 12, 13 and 14 in Part III of this Report are incorporated herein by reference to our definitive proxy statement for our 2014 Annual Meeting of Shareholders scheduled for May 5, 2015. We intend to file our definitive proxy statement with the SEC not later than 120 days after December 31, 2014, pursuant to Regulation 14A of the Exchange Act.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
102
All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable, and therefore have been omitted.
Number | Exhibit |
Incorporated
by Reference |
||||
---|---|---|---|---|---|---|
3.1 | Restated Articles of Incorporation | (1) | ||||
|
3.2 |
|
Amended and Restated Bylaws |
|
|
(14) |
|
4.1 |
|
Specimen of Common Stock Certificate |
|
|
(2) |
|
10.1 |
|
Amended and Restated Delta Connection Agreement, dated as of September 8, 2005, between SkyWest Airlines, Inc. and Delta Air Lines, Inc. |
|
|
(3) |
|
10.2 |
|
Second Amended and Restated Delta Connection Agreement, dated as of September 8, 2005, between Atlantic Southeast Airlines, Inc. and Delta Air Lines, Inc. |
|
|
(3) |
|
10.3 |
|
United Express Agreement dated July 31, 2003, between United Air Lines, Inc., and SkyWest Airlines, Inc. |
|
|
(4) |
|
10.4 |
|
Stock Option Agreement dated January 28, 1987 between Delta Air Lines, Inc. and SkyWest, Inc. |
|
|
(5) |
|
10.5 |
|
Lease Agreement dated December 1,1989 between Salt Lake City Corporation and SkyWest Airlines, Inc. |
|
|
(6) |
|
10.6(a) |
|
Master Purchase Agreement dated November 7, 2000 between Bombardier, Inc. and SkyWest Airlines, Inc. |
|
|
(7) |
|
10.6(b) |
|
Supplement to Master Purchase Agreement dated November 7, 2000 between Bombardier, Inc. and SkyWest Airlines, Inc. |
|
|
(4) |
|
10.7 |
|
SkyWest, Inc. Amended and Combined Incentive and Non-Statutory Stock Option Plan |
|
|
(8) |
|
10.8 |
|
SkyWest Inc. 2006 Employee Stock Purchase Plan |
|
|
(9) |
|
10.8(a) |
|
First Amendment to SkyWest, Inc. 2006 Employee Stock Purchase Plan |
|
|
(11) |
|
10.9 |
|
SkyWest Inc. Executive Stock Incentive Plan |
|
|
(10) |
|
10.10 |
|
SkyWest Inc. 2001 Allshare Stock Option Plan |
|
|
(10) |
|
10.12 |
|
SkyWest, Inc. 2002 Deferred Compensation Plan, as amended and restated effective January 1, 2008 |
|
|
(11) |
|
10.12(a) |
|
First Amendment to the Restated SkyWest, Inc. 2002 Deferred Compensation Plan |
|
|
(11) |
|
10.13 |
|
SkyWest, Inc. 2006 Long-Term Incentive Plan |
|
|
(11) |
|
10.13(a) |
|
First Amendment to the SkyWest, Inc. 2006 Long-Term Incentive Plan |
|
|
(11) |
|
10.13(b) |
|
Second Amendment to the SkyWest, Inc. 2006 Long-Term Incentive Plan |
|
|
(11) |
103
Number | Exhibit |
Incorporated
by Reference |
||||
---|---|---|---|---|---|---|
10.14 | SkyWest, Inc. 2009 Employee Stock Purchase Plan | (11) | ||||
|
10.15 |
|
Capacity Purchase Agreement, dated November 12, 2010, by and among ExpressJet Airlines, Inc. and Continental Airlines, Inc. |
|
|
(12) |
|
10.16 |
|
Aircraft Purchase Agreement, dated December 7, 2012, between Mitsubishi Aircraft Corporation and SkyWest Inc. |
|
|
(13) |
|
10.17 |
|
Letter Agreement dated December 7, 2012, between Mitsubishi Aircraft Corporation and SkyWest, Inc. |
|
|
(13) |
|
10.18 |
|
Purchase Agreement COM0028-13 between Embraer S.A. and SkyWest Inc. dated February 15, 2013 |
|
|
(15) |
|
10.19 |
|
Purchase Agreement COM0344-13 between Embraer S.A. and SkyWest Inc. dated June 17, 2013 |
|
|
(15) |
|
10.20 |
|
Form of Indemnification Agreement executed by and between SkyWest, Inc. and each of Jerry C. Atkin, W. Steve Albrecht, J. Ralph Atkin, Margaret Billson, Henry J. Eyring, Robert G. Sarver, Steven F. Udvar-Hazy, James L. Welch, Bradford R. Rich, Michael J. Kraupp, Eric J. Woodward, Russell A. Childs and Bradford R. Holt, as of August 6, 2013 |
|
|
(15) |
|
10.21 |
|
Form of Indemnification Agreement executed by and between SkyWest, Inc. and each of Ronald J. Mittelstaedt and Keith E. Smith, as of October 1, 2013 |
|
|
(16) |
|
10.22 |
|
Amended and Restated Capacity Purchase Agreement, dated as of November 7, 2014, by and between ExpressJet Airlines, Inc. and United Airlines* |
|
Filed herewith |
|
|
21.1 |
|
Subsidiaries of the Registrant |
|
|
(14) |
|
23.1 |
|
Consent of Independent Registered Public Accounting Firm |
|
Filed herewith |
|
|
31.1 |
|
Certification of Chief Executive Officer |
|
Filed herewith |
|
|
31.2 |
|
Certification of Chief Financial Officer |
|
Filed herewith |
|
|
32.1 |
|
Certification of Chief Executive Officer |
|
Filed herewith |
|
|
32.2 |
|
Certification of Chief Financial Officer |
|
Filed herewith |
|
|
101.INS** |
|
XBRL Instance Document |
|
|
|
|
101.SCH** |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
|
101.CAL** |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
101.LAB** |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
101.PRE** |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
101.DEF** |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
104
105
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
SkyWest, Inc.
We have audited the consolidated financial statements of SkyWest, Inc. and subsidiaries (the "Company") as of December 31, 2014 and 2013, and for each of the three years in the period ended December 31, 2014, and have issued our report thereon dated February 18, 2015 (included elsewhere in this Form 10-K). Our audits also included the financial statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/
Ernst & Young LLP
Salt Lake City, Utah
February 18, 2015
106
SKYWEST, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2014, 2013 and 2012
(Dollars in thousands)
107
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K for the year ended December 31, 2014, to be signed on its behalf by the undersigned, thereunto duly authorized, on February 18, 2015.
SKYWEST, INC. | ||||
|
|
By: |
|
/s/ ERIC J. WOODWARD Eric J. Woodward Chief Accounting Officer (Principal Accounting Officer) |
Pursuant to the requirement of the Securities Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons in the capacities and on the dates indicated.
Name
|
Capacities
|
Date
|
||
---|---|---|---|---|
|
|
|
|
|
/s/ JERRY C. ATKIN
Jerry C. Atkin |
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | February 18, 2015 | ||
/s/ WADE J. STEEL Wade J. Steel |
|
Executive Vice President (Principal Financial Officer) |
|
February 18, 2015 |
/s/ ERIC J. WOODWARD Eric J. Woodward |
|
Chief Accounting Officer (Principal Accounting Officer) |
|
February 18, 2015 |
/s/ STEVEN F. UDVAR-HAZY Steven F. Udvar-Hazy |
|
Lead Director |
|
February 18, 2015 |
/s/ W. STEVE ALBRECHT Steve Albrecht |
|
Director |
|
February 18, 2015 |
/s/ MARGARET S. BILLSON Margaret S. Billson |
|
Director |
|
February 18, 2015 |
/s/ HENRY J. EYRING Henry J. Eyring |
|
Director |
|
February 18, 2015 |
108
Name
|
Capacities
|
Date
|
||
---|---|---|---|---|
|
|
|
|
|
/s/ RONALD J. MITTELSTAEDT
Ronald J. Mittelstaedt |
Director | February 18, 2015 | ||
/s/ ROBERT G. SARVER Robert G. Sarver |
|
Director |
|
February 18, 2015 |
/s/ KEITH E. SMITH Keith E. Smith |
|
Director |
|
February 18, 2015 |
/s/ JAMES L. WELCH James L. Welch |
|
Director |
|
February 18, 2015 |
109
Exhibit 10.22
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO RULE 24B-2 AND ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST. COPIES OF THIS EXHIBIT CONTAINING THE OMITTED INFORMATION HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE OMITTED PORTIONS OF THIS DOCUMENT ARE MARKED WITH A [***]
AMENDED AND RESTATED
CAPACITY PURCHASE AGREEMENT
BETWEEN
UNITED AIRLINES, INC.
AND
EXPRESSJET AIRLINES, INC.
ORIGINALLY DATED AS OF NOVEMBER 12, 2010
EFFECTIVE AS AMENDED AND RESTATED AS OF JULY 1, 2014
TABLE OF CONTENTS
|
|
Page |
|
|
|
Parties |
|
1 |
|
|
|
Recitals |
|
1 |
|
|
|
ARTICLE I |
DEFINITIONS |
1 |
|
|
|
ARTICLE II |
CAPACITY PURCHASE, SCHEDULES AND FARES |
1 |
|
|
|
Section 2.01 |
Capacity Purchase |
1 |
Section 2.02 |
Flight-Related Revenues |
5 |
Section 2.03 |
Pass Travel |
5 |
Section 2.04 |
Requests for Proposal |
5 |
Section 2.05 |
Early Replacement of Certain Covered Aircraft |
5 |
Section 2.06 |
Intentionally Omitted |
7 |
Section 2.07 |
Other Withdrawal of Aircraft |
7 |
Section 2.08 |
Commodity Events |
10 |
Section 2.09 |
Return Conditions; Storage; Return Protocol |
13 |
Section 2.10 |
Separate Withdrawal Rights |
16 |
Section 2.11 |
Intentionally Omitted |
16 |
Section 2.12 |
Additional Replacement Rights of United |
16 |
Section 2.13 |
Extension Rights of United |
17 |
|
|
|
ARTICLE III |
CONTRACTOR COMPENSATION |
17 |
|
|
|
Section 3.01 |
Base and Incentive Compensation |
17 |
Section 3.02 |
Periodic Adjustment of Base and Incentive Compensation and Commodity Prices |
17 |
Section 3.03 |
Contractor Expenses |
18 |
Section 3.04 |
United Expenses |
18 |
Section 3.05 |
Audit Rights; Financial Information |
18 |
Section 3.06 |
Billing and Payment; Reconciliation |
19 |
Section 3.07 |
Synergy Savings |
21 |
Section 3.08 |
One-Time Payment for Short Schedule Change Notice in CLE |
21 |
|
|
|
ARTICLE IV |
CONTRACTOR OPERATIONS AND AGREEMENTS WITH UNITED |
22 |
|
|
|
Section 4.01 |
Crews, Etc. |
22 |
Section 4.02 |
Governmental Regulations |
22 |
Section 4.03 |
Quality of Service |
23 |
Section 4.04 |
Incidents or Accidents |
24 |
Section 4.05 |
Emergency Response |
24 |
Section 4.06 |
Safety Matters |
24 |
Section 4.07 |
Master Facility and Ground Handling Agreement |
24 |
Section 4.08 |
Codeshare Terms |
24 |
Section 4.09 |
Administrative Support and Information Services |
25 |
Section 4.10 |
Fuel Procurement and Fuel Services |
25 |
Section 4.11 |
Slots and Route Authorities |
25 |
Section 4.12 |
Use of United Marks |
26 |
Section 4.13 |
Use of Contractor Marks |
26 |
Section 4.14 |
Catering Standards |
26 |
Section 4.15 |
Ticket Handling Terms |
26 |
Section 4.16 |
Fuel Efficiency and Revenue Programs |
26 |
Section 4.17 |
Reasonable Operating Constraints and Conditions |
26 |
Section 4.18 |
Covered Aircraft Subleases |
26 |
Section 4.19 |
Unauthorized Payments |
26 |
|
|
|
ARTICLE V |
CERTAIN RIGHTS OF UNITED |
29 |
|
|
|
Section 5.01 |
Use of Covered Aircraft |
29 |
Section 5.02 |
Change of Control |
30 |
Section 5.03 |
Limitation on Transfers of Interest |
30 |
|
|
|
ARTICLE VI |
INSURANCE |
30 |
|
|
|
Section 6.01 |
Minimum Insurance Coverages |
30 |
Section 6.02 |
Endorsements |
31 |
Section 6.03 |
Evidence of Insurance Coverage |
31 |
Section 6.04 |
Insurance Through Combined Placement |
31 |
Section 6.05 |
Insurance Through Other Than Combined Placement |
32 |
|
|
|
ARTICLE VII |
INDEMNIFICATION |
32 |
|
|
|
Section 7.01 |
Contractor Indemnification of United |
32 |
Section 7.02 |
United Indemnification of Contractor |
33 |
Section 7.03 |
Indemnification Claims |
33 |
Section 7.04 |
Employers Liability; Independent Contractors; Waiver of Control |
34 |
Section 7.05 |
Survival |
35 |
|
|
|
ARTICLE VIII |
TERM, TERMINATION AND DISPOSITION OF AIRCRAFT |
35 |
|
|
|
Section 8.01 |
Term |
35 |
Section 8.02 |
Early Termination |
35 |
Section 8.03 |
Disposition of Aircraft during Wind-Down Period |
37 |
Section 8.04 |
Adjustments for Uncured Event of Default |
40 |
|
|
|
ARTICLE IX |
REPRESENTATIONS, WARRANTIES AND COVENANTS |
42 |
|
|
|
Section 9.01 |
Representations and Warranties of Contractor |
42 |
Section 9.02 |
Representations and Warranties of United |
42 |
|
|
|
ARTICLE X |
MISCELLANEOUS |
43 |
|
|
|
Section 10.01 |
Conversion of Covered Aircraft Livery |
43 |
Section 10.02 |
Notices |
44 |
Section 10.03 |
Binding Effect; Assignment |
45 |
Section 10.04 |
Amendment and Modification |
45 |
Section 10.05 |
Waiver |
46 |
Section 10.06 |
Interpretation |
46 |
Section 10.07 |
Confidentiality |
46 |
Section 10.08 |
Survival |
47 |
Section 10.09 |
Counterparts |
47 |
Section 10.10 |
Severability |
47 |
Section 10.11 |
Equitable Remedies; Limitation on Damages |
47 |
Section 10.12 |
Relationship of Parties |
48 |
Section 10.13 |
Entire Agreement; No Third-Party Beneficiaries |
48 |
Section 10.14 |
Governing Law |
48 |
Section 10.15 |
Guaranty |
48 |
Section 10.16 |
Right of Set-Off |
49 |
Section 10.17 |
Cooperation with Respect to Reporting |
49 |
Section 10.18 |
Amendment of Certain Contracts |
49 |
Section 10.19 |
Additional Provisions Relating to Labor Strike |
49 |
Section 10.20 |
Customer Satisfaction Goal |
50 |
Section 10.21 |
Additional Agreements Relating to ORD |
50 |
Section 10.22 |
Effective Amendment |
50 |
|
|
|
SCHEDULE 1: |
Covered Aircraft |
|
SCHEDULE 1A: |
Replacement Schedule Applicable in an Event of Default |
|
SCHEDULE 2: |
Transition Aircraft and Spare Engines |
|
SCHEDULE 3: |
Compensation for Capacity Purchase |
|
|
|
|
EXHIBIT A: |
Definitions |
|
EXHIBIT B: |
Form of Amended and Restated Covered Aircraft Sublease |
|
EXHIBIT C: |
Second Amended and Restated Master Facility and Ground Handling Agreement |
|
EXHIBIT D: |
Terms of Codeshare Arrangements |
|
EXHIBIT E: |
Non-Revenue Pass Travel Privileges |
|
EXHIBIT F: |
Fuel Services |
|
EXHIBIT G: |
Use of United Marks and Other Identification |
|
EXHIBIT H: |
Use of Contractor Marks |
|
EXHIBIT I: |
Catering Standards |
|
EXHIBIT J: |
Reasonable Operating Constraints and Conditions |
|
EXHIBIT K: |
Ticket Handling Terms |
|
EXHIBIT L: |
Fuel Efficiency Program |
|
EXHIBIT M: |
Form of Guaranty |
|
EXHIBIT N: |
Amended and Restated Administrative Support and Information Services Provisioning Agreement |
|
EXHIBIT O: |
Charter Flight Operations |
|
EXHIBIT P: |
Form of Storage Sublease |
|
AMENDED AND RESTATED CAPACITY PURCHASE AGREEMENT
This Amended and Restated Capacity Purchase Agreement (this Agreement ), dated as of November 7, 2014, to be effective as of July 1, 2014, is between United Airlines, Inc., a Delaware corporation (together with its successors and permitted assigns, United ), formerly known as Continental Airlines, Inc., a Delaware corporation ( Continental ) and ExpressJet Airlines, Inc., a Utah corporation ( ExpressJet ), as successor by merger of ExpressJet Airlines, Inc., a Delaware corporation ( Delaware Express ).
WHEREAS , Delaware Express and Continental were parties to that certain Capacity Purchase Agreement, dated as of November 12, 2010 (as amended heretofore, the Existing CPA );
WHEREAS , Contractor and United desire to make certain changes to the terms and conditions in the Existing CPA;
WHEREAS , the Existing CPA is hereby amended and restated in its entirety; and
WHEREAS , the parties have previously entered into, or, will subsequent to the delivery of this Agreement, enter into, the Ancillary Agreements (as defined herein), including aircraft leases, in each case intending that such Ancillary Agreements be considered, and they are, an integral part of this Agreement.
NOW, THEREFORE , in consideration of the foregoing premises and the mutual covenants and obligations hereinafter contained, the parties agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement (including, unless otherwise defined therein, in the Schedules, Appendices and Exhibits to this Agreement) shall have the meanings set forth in Exhibit A hereto.
ARTICLE II
CAPACITY PURCHASE, SCHEDULES AND FARES
Section 2.01 Capacity Purchase .United agrees to purchase the capacity of each Covered Aircraft for the period beginning on the date such aircraft becomes a Covered Aircraft under this Agreement and ending on the earlier of (i) the sublease or lease expiration date, as applicable, for such aircraft on Schedule 1 and (ii) the date on which such aircraft is withdrawn pursuant to a Wind-Down Schedule or otherwise withdrawn from this Agreement, as such date may be extended, shortened or otherwise modified pursuant to the terms of this Agreement, all under the terms and conditions set forth herein and for the consideration described in Article III . Subject to the terms and conditions of this Agreement, Contractor shall provide all of the capacity of the Covered Aircraft solely to United and use the Covered Aircraft solely to operate the Scheduled Flights.
(a) Fares, Rules and Seat Inventory . United shall establish and publish all fares and related tariff rules for all seats on the Covered Aircraft. Contractor shall not publish any fares, tariffs, or related information for the Covered Aircraft. In addition, subject to the terms and conditions of the Non-Revenue Pass Travel Privileges attached hereto as Exhibit E , United shall have complete control over all seat inventory and inventory and revenue management decisions for the Covered Aircraft, including overbooking levels, discount seat levels and allocation of seats among various fare buckets.
(b) Flight Schedules .
(i) Subject to the terms and conditions of this Agreement, including, but not limited to, Sections 2.01(b)(ii) , 2.01(b)(iii) and 8.04 , United shall, in its sole discretion, establish and publish all schedules for the Covered Aircraft (such scheduled flights, together with Charter Flights, flights otherwise made at Uniteds request, Maintenance Flights and any flights using Spare Aircraft, referred to herein collectively as Scheduled Flights ), including determining the city-pairs served, frequencies, utilization and timing of scheduled arrivals and departures, and shall, in its sole discretion, make all determinations regarding the establishment and scheduling of any flights other than Scheduled Flights; provided , that such schedules shall be subject to Reasonable Operating Constraints and Conditions, it being understood for the avoidance of doubt, however, that, in anticipation of the removal of aircraft from the capacity purchase provisions of this Agreement, aircraft shall be removed from scheduled service in compliance with the provisions of Annex B to each of the Covered Aircraft Subleases (the form of which is attached hereto as Exhibit B ); and provided further that Contractor shall operate all Charter Flights in accordance with the provisions set forth on Exhibit O . United shall also be entitled, in its sole discretion and at any time prior to takeoff, to direct Contractor to delay or cancel a Scheduled Flight, including without limitation for delays and cancellations that are ATC or weather related, and Contractor shall take all necessary action to give effect to any such direction. Not later than the fourth Wednesday of each calendar month, United shall provide Contractor with a planned flight schedule for the Covered Aircraft (other than Spare Aircraft), taking into account Reasonable Operating Constraints and Conditions, for each of the next four months (the Proposed Schedule ). On the fourth Friday of each calendar month, Contractor and United shall meet to review the Proposed Schedule. At such meeting, United shall review and consider any changes to the Proposed Schedule suggested by Contractor. Not later than five Business Days prior to the beginning of each calendar month, or, if later, the day after such meeting, United will deliver to Contractor the Final Monthly Schedule. Following such monthly meetings, delivery of the Final Monthly Schedule and consideration by United of such changes to the Proposed Schedule as suggested by Contractor, however, United may make such adjustments to the proposed Final Monthly Schedule as it deems appropriate (subject to Reasonable Operating Constraints and Conditions).
(ii) Subject to Section 8.04 , United agrees to (i) discontinue all flight operations of Covered Aircraft (which, for the avoidance of doubt, exclude spoke flight operations from a United Hub Airport or spoke location) at *** by ***, and (ii) use commercially reasonable efforts to discontinue all flight operations of Covered Aircraft (which, for the avoidance of doubt, exclude spoke flight operations from a United Hub Airport or spoke location) (y) at *** by *** and (z) at *** by ***; provided that, if both (I) United delivers to Contractor an irrevocable notice of withdrawal with respect to ten (10) or more aircraft on or
before the date that is sixty (60) days prior to *** and (II) Contractor fails to comply in all material respects with Section 2.09 of this Agreement and Annex B to the Covered Aircraft Sublease with respect to such Covered Aircraft to be so withdrawn from the capacity purchase provisions of this Agreement, then, in addition to (and not in limitation of any of) Uniteds other rights under this Agreement, United shall in no circumstance be deemed to be in breach of the foregoing clause (i) until thirty (30) days after Contractor has so complied; provided further , that, solely with respect to ***, if both (I) United delivers to Contractor an irrevocable notice of withdrawal with respect to *** or more aircraft on or before the date that is sixty (60) days prior to *** and (II) Contractor fails to comply in all material respects with Section 2.09 of this Agreement and Annex B to the Covered Aircraft Sublease with respect to such Covered Aircraft to be so withdrawn from the capacity purchase provisions of this Agreement, then, in addition to (and not in limitation of any of) Uniteds other rights under this Agreement, United shall in no circumstance be deemed to be in breach of the foregoing clause (ii) until thirty (30) days after Contractor has so complied; provided further , that, if both (I) United is unable to comply with the preceding clauses (y) or (z) and (II) Contractor has complied in all material respects with Section 2.09 of this Agreement and Annex B to the Covered Aircraft Sublease with respect to Covered Aircraft to be withdrawn from the capacity purchase provisions of this Agreement by ***, with respect to ***, or ***, with respect to ***, as the case may be, then United and Contractor shall cooperate in good faith to increase the per block hour rate set forth on Schedule 3 (any such modified per block hour rate, a Modified Block Hour Rate ) in respect of only the Covered Aircraft for which flight operations have not been so discontinued at *** and/or *** (excluding, for the avoidance of doubt, spoke flight operations to *** or *** from a United Hub Airport or spoke location), as the case may be (any such aircraft, Continuing Aircraft ), by an amount which reimburses Contractor for the incremental costs that Contractor would have reasonably avoided if such flight operations had been discontinued as provided in the preceding clauses (y) and/or (z) , as the case may be; provided further , that, in respect of each Continuing Aircraft, the effectiveness of any such Modified Block Hour Rate shall commence as of either (a) in the case of Uniteds inability to discontinue operations as contemplated in clause (y) , *** or (b) in the case of Uniteds inability to discontinue operations as contemplated in clause (z) , *** and, in each case, shall continue until each such Continuing Aircraft is no longer subject to flight operations in *** or ***, as the case may be (which, for the avoidance of doubt, excludes spoke flight operations from a United Hub Airport or spoke location); provided further , for the avoidance of doubt, that United agrees that it shall not specify dates for such withdrawal of any aircraft to the extent that such designation would cause Contractor to be required to remove from the capacity purchase provisions of this Agreement more than *** aircraft during any calendar month in calendar year ***.
(iii) Notwithstanding the foregoing, effective as of the date first set forth above, in respect of any scheduled period, if United submits any Proposed Schedule which provides for average daily scheduled utilization measured in the aggregate for the Covered Aircraft fleet (excluding Spare Aircraft) available to schedule ( Average Utilization ) greater than either (x) for the calendar months of January, February, April, May, September, October, November and December, *** hours per aircraft per day or (y) for the calendar months of March, June, July and August, *** hours per aircraft per day (such utilization levels, in the prior clauses (x) and (y), as applicable, the Maximum Utilization Levels ), then Contractor shall have the option, upon delivering to United written notice greater than 100 calendar days prior to the commencement of such applicable scheduled period, to request for any reason a schedule
reduction to reduce the Average Utilization to the applicable Maximum Utilization Level or to a greater level as specified by Contractor (a Schedule Reduction Request ). Upon receipt of a Schedule Reduction Request, United shall amend the Proposed Schedule initially delivered by United to Contractor to reduce the Average Utilization reflected in such Proposed Schedule to the applicable Maximum Utilization Level or to a greater level as specified by Contractor and such reduction shall thereafter be reflected in the applicable Final Monthly Schedule (a Schedule Reduction ); provided that any flights canceled due to any such Schedule Reduction shall not be deemed Controllable Cancellations and shall be deemed Uncontrollable Cancellations; provided further that, if the Schedule Reduction Request is not timely submitted in accordance with the requirements of this Section 2.01(b)(iii) , then such flights included in the Schedule Reduction Request, if canceled, shall be deemed Controllable Cancellations for all purposes under this Agreement except as otherwise provided in this Agreement.
(c) Maintenance Flights . Notwithstanding anything to the contrary contained in this Section 2.01 , Contractor shall be entitled to use the Covered Aircraft (i) for the purpose of flying maintenance flights as required to facilitate the proper maintenance of the Covered Aircraft and (ii) for a reasonable number of ferry flights to accommodate Scheduled Flights, in each case, consistent with past practice (all such flights referred to as Maintenance Flights ).
(d) Spare Aircraft . Notwithstanding anything to the contrary contained in this Section 2.01 but subject to the provisions below in this Section 2.01(d) , Contractor shall maintain the number of spare regional jet aircraft equal to the quotient obtained by dividing (x) the sum of the number of Covered Aircraft subject to scheduling for such month (excluding, in all events, aircraft not available due to maintenance requirements), by (y) ***, and rounding the quotient to the nearest whole number. The spare regional jet aircraft shall be constituted from Covered Aircraft (the Spare Aircraft ). For the avoidance of doubt, Covered Aircraft scheduled for the sole purpose of increasing simplicity through network optimization and reduction in the number of United Hub Airports at which hub flying occurs and funding daytime maintenance shall be disregarded for the purpose of the foregoing two sentences of this Section 2.01(d) . Contractor shall be entitled to use the Spare Aircraft in Contractors reasonable discretion to replace another aircraft in the operation of a flight scheduled in the Final Monthly Schedule. In addition, subject to applicable Reasonable Operating Constraints and Conditions, Contractor shall use Spare Aircraft to operate flights as directed by United (unless such Spare Aircraft was, prior to such direction by United, already scheduled as contemplated by the immediately preceding sentence), including flights originally scheduled to be operated by other United service providers. As contemplated by the return procedures provided in each Covered Aircraft Sublease (including in Paragraph F of Annex B thereto), Contractor acknowledges that Contractor may have excess spare engines that could be used as a Short Term Replacement Engine, as such term is defined in Annex B in Exhibit B hereto (such excess spare engines, the Sublessee Excess Spare Engines ), and to support the return of aircraft hereunder, Contractor will make such Sublessee Excess Spare Engines available as Short Term Replacement Engines. To ensure that Contractor has Sublessee Excess Spare Engines, until ***, Contractor shall retain and devote up to *** Contractor-owned serviceable spare engines (the *** Spares ) which shall be over and above the number of spare engines that are required under the Engine Maintenance Agreement (after consideration of the number of Covered Aircraft then operating hereunder) to support the return of aircraft hereunder. Prior to the use of such Sublessee Excess Spare Engines, the parties will determine a mutually acceptable rate to be paid by United to Contractor
for the use of such engine; provided that with respect to the *** Spares such rate shall be the per-hour and per-cycle maintenance costs for such engines under the Engine Maintenance Agreement or, if any such engine is not covered by the Engine Maintenance Agreement, Contractors reasonable per-hour and per-cycle maintenance costs for such engine.
(e) Maintenance Bases . With respect to Rest Over-Night (RON) maintenance, United shall meet and confer with Contractor to discuss scheduling the Covered Aircraft to operate in a reduced number of maintenance bases (compared to the number of maintenance bases in existence as September 1, 2014). With respect to daytime maintenance, each of Contractor and United shall use commercially reasonable efforts to develop a daytime maintenance program by ***.
Section 2.02 Flight-Related Revenues . Contractor acknowledges and agrees that all revenues resulting from the sale and issuance of passenger tickets associated with the operation of the Covered Aircraft and all other sources of revenue associated with the operation of the Covered Aircraft, including without limitation (a) revenues relating to the transportation of cargo or mail by Covered Aircraft, (b) revenues associated with food, beverage, duty-free services and other onboard and related products provided in connection with the operation of Covered Aircraft, (c) guaranteed or incentive payments from airport, state, local or municipal authorities in connection with scheduling flights of Covered Aircraft to such airport or locality (including without limitation incentive payments and grants paid or payable to United or Contractor in connection with or determined by any job growth deemed to result from any Scheduled Flights) and (d) revenues relating to Charter Flights (collectively, Flight Related Revenue ) are the sole property of and shall be retained by United or, if received by Contractor or any of its Affiliates, shall be promptly remitted to United. The parties agree that Flight Related Revenue shall not include manufacturer rebates or other incentives attributable to the acquisition by Contractor of a Covered Aircraft. Contractor agrees that it shall reasonably cooperate with United so as to permit United to receive all Flight Related Revenue (and United agrees to promptly reimburse Contractor for the reasonable out-of-pocket expenses incurred by Contractor in connection therewith). Contractors and its Affiliates obligations to remit funds under this Section 2.02 shall only apply to the extent Contractor or its Affiliates actually receives Flight Related Revenue.
Section 2.03 Pass Travel . All pass travel and other non-revenue travel on any Scheduled Flight or other flight operated by United shall be administered in accordance with the Non-Revenue Pass Travel Privileges policy attached hereto as Exhibit E .
Section 2.04 Requests for Proposal . With respect to any request for proposal or RFP issued by United to multiple operators of regional jet aircraft for the provision of regional airlines services prior to the end of the Term, United agrees to include Contractor in the parties to which such RFP is delivered.
Section 2.05 Early Replacement of Certain Covered Aircraft . United shall be entitled to withdraw and replace up to *** Covered Aircraft from this Agreement, in accordance with and subject to the limitations, terms and conditions contained in this Section 2.05 .
(a) For each Covered Aircraft withdrawn from this Agreement pursuant to this Section 2.05 , Contractor and/or one of its Affiliates (selected by Contractor) will use its commercially reasonable efforts to procure and provide an aircraft of the type selected by United (a Replacement Aircraft ), which must be of a type that (i) on the date of the notice of replacement provided pursuant to Section 2.05(b) below, is operated or contracted to be operated by Contractor or its Affiliates and (ii) after taking into account the procurement of such Replacement Aircraft pursuant to this Section 2.05(a) , Contractor and its Affiliates shall be operating at least *** aircraft of such aircraft type as of the date of such replacement, and enter into a separate capacity purchase agreement or amend an existing capacity purchase agreement with United on or prior to the Replacement Date (as defined below) pursuant to which such Replacement Aircraft shall be utilized on a capacity purchase basis. The separate or amended agreement shall contain block hour rates and other economic terms applicable to such Replacement Aircraft that are consistent with those contained in the most recent Capacity Purchase Arrangement entered into by Contractor or any of its Affiliates with respect to such aircraft type (excluding any Affiliate CPA and the United Agreement); provided , that such rates and other economic terms shall be adjusted to reflect the lower of then-applicable market aircraft acquisition costs or Contractors actual costs for the acquisition of such Replacement Aircraft ( Similar Economic Term Transaction ), the rates and economic terms of which shall be set forth in a certificate delivered to United signed by an authorized officer of Contractor; provided , in all events, that the term of such separate or amended agreement (x) with respect to each Replacement Aircraft that is a new aircraft shall be for a period no less than *** years, and (y) with respect to each other Replacement Aircraft shall be for a period not less than the remaining term under this Agreement of the Covered Aircraft being replaced by such Replacement Aircraft; and provided further , that unless otherwise agreed by the parties, such separate agreement shall be in a form substantially similar to the terms and conditions set forth herein and in the Ancillary Agreements (other than as provided in this Section 2.05 ); provided , however , unless otherwise agreed by the parties, such separate agreement shall not contain provisions substantially similar to Sections 6.04 , 6.05 or 10.01 of this Agreement and, in any provision substantially similar to Section 6.01(a) , all references to $*** million shall be $*** million with respect to any aircraft with more than 50 passenger seats. Contractor acknowledges that any failure by Contractor to timely provide the certification required pursuant to Section 2.05(b) , procure and provide a Replacement Aircraft or enter into a separate capacity purchase agreement or amend an existing capacity purchase agreement as contemplated above with United on or prior to the Replacement Date shall not prevent United from exercising its right to withdraw Covered Aircraft from this Agreement pursuant to this Section 2.05 .
(b) To effect a replacement under Section 2.05(a) , at any time and from time to time, United shall give Contractor not less than *** months written notice of replacement of any Covered Aircraft (or, in the case of a Replacement Aircraft of a type for which Contractor or such Affiliate is already certificated, such lesser period as available aircraft or aircraft delivery positions may allow, as determined by United in its reasonable discretion); provided , absent the consent of Contractor in its sole discretion, that United shall not be entitled to replace more than *** Covered Aircraft in any given month. Such notice shall be irrevocable (except as provided below) and shall specify a replacement date (the Replacement Date ) for each such Covered Aircraft to be replaced and the type and number of Covered Aircraft to be replaced. Within 90 days of its receipt of such notice from United, Contractor may, at its option, provide United with a certificate signed by an authorized officer of Contractor stating that Contractor believes in good
faith that it will be able to procure and provide a Replacement Aircraft and enter into a separate capacity purchase agreement or amend an existing capacity purchase agreement as contemplated above with United on or prior to the Replacement Date. Such certificate shall further identify whether or not such Replacement Aircraft shall be a new aircraft and set forth the rates and other economic terms based on the Similar Economic Term Transaction. If Contractor so certifies to United, then United and Contractor shall each use their respective reasonable commercial efforts to enter into a separate capacity purchase agreement or amend an existing capacity purchase agreement as contemplated above within the following 30 days. If Contractor does not timely provide such certification, or does not procure and provide a Replacement Aircraft on or prior to the Replacement Date, or if United and Contractor do not enter into a separate capacity purchase agreement or amend an existing capacity purchase agreement as contemplated above within such 30-day period notwithstanding Uniteds use of its reasonable commercial efforts, then United shall have the option to cancel the withdrawal of the Covered Aircraft to be replaced or to withdraw such aircraft without entering into arrangements for a Replacement Aircraft. United shall have complete discretion to select the particular Covered Aircraft and the particular Engines to be withdrawn on any Replacement Date pursuant to this Section 2.05 . Promptly after receipt of such notice (but in any event within 20 days thereafter), Contractor shall deliver to United a reasonably detailed current summary and forecast of the maintenance and repair status and condition of each Covered Aircraft and Engine and a list detailing the location of each Engine (by aircraft or, if appropriate, maintenance facility). Within 75 days after receipt of such summary, United shall select the individual aircraft and Engines to be replaced, and shall provide written notice to Contractor of its selection. United shall bear the cost of any engine swaps necessary to accommodate its Engine selections, and shall agree to such Engine swaps under the applicable Covered Aircraft Subleases.
(c) Upon the Replacement Date, the applicable Covered Aircraft to be replaced shall cease being a Covered Aircraft, and Contractor shall immediately deliver possession of such aircraft to United or its designee and the term of the Covered Aircraft Sublease for such aircraft and the Engines shall, upon such delivery, terminate in accordance with the terms of such Covered Aircraft Sublease, except as otherwise provided in Section 2.09(c) . In addition, the provisions of Section 2.09 shall apply to such Covered Aircraft.
(d) If any Affiliate CPAs or other Capacity Purchase Arrangements between United and Contractor or its Affiliates are in effect at the time when any rights under this Section 2.05 are exercised by any party, and such agreements contain correlative provisions to this Section 2.05 , then all numerical limits relating to the number of aircraft (whether aggregate or monthly) shall apply to this Agreement and to all such other agreements in the aggregate. Notwithstanding anything to the contrary contained in this Section 2.05 , Uniteds right to withdraw aircraft under this Section 2.05 and its corresponding provisions in any Affiliate CPA or other Capacity Purchase Arrangement between United and Contractor or its Affiliate shall apply only to aircraft leased or subleased by United to Contractor or such Affiliate.
Section 2.06 Intentionally Omitted .
Section 2.07 Other Withdrawal of Aircraft .
(a) At any time from time to time, United shall be entitled to withdraw any Covered Aircraft from the capacity purchase provisions of this Agreement by providing 120 calendar days written notice to Contractor of the withdrawal of such Covered Aircraft from this Agreement, which notice shall be irrevocable and shall specify the total number of Covered Aircraft to be withdrawn pursuant to such notice and a desired withdrawal schedule, specifying, for each particular aircraft, the date of withdrawal. Notwithstanding Uniteds right to withdraw aircraft from the capacity purchase provisions of this Agreement pursuant to the foregoing sentence, United agrees that it shall not specify dates for such withdrawal of any such aircraft to the extent that such designation would cause Contractor to be required to remove from the capacity purchase provisions of this Agreement more than (i) *** aircraft during any calendar month in calendar year ***, or (ii) *** aircraft during any calendar month in calendar years ***, in each case taking into account scheduled sublease expiration dates as provided in Schedule 1 hereto, this Section 2.07(a), Section 2.07(g) and the Replacement Wind-Down Schedule. For the avoidance of doubt, it is acknowledged that nothing herein shall limit Uniteds right to withdraw aircraft from the capacity purchase provisions of this Agreement arising under Section 2.05 , Section 2.07(b) , Section 2.07(g) , Section 2.08 , Section 2.09(a) or Article VIII .
(b) In the event of a Labor Strike, or during any 30-day cooling-off period under the Railway Labor Act applicable to Contractor and one of its collective bargaining units or within 30 days after the end of any such period, or at such other times as United and Contractor shall agree from time to time, United shall be entitled to withdraw Covered Aircraft from the capacity purchase provisions of this Agreement in accordance with and subject to the limitations, terms and conditions contained in this Section 2.07(b) and Sections 2.07(c) through (e) , by providing written notice of the withdrawal of Covered Aircraft from this Agreement, which notice shall be revocable and shall specify the total number of Covered Aircraft to be withdrawn pursuant to such notice and a desired withdrawal schedule, specifying, for each particular aircraft, the date of withdrawal. If such notice is delivered during the 30-day cooling off period referenced above or within 30 days after the end of such cooling off period ( provided that a Labor Strike has not been initiated during such period), then the withdrawal schedule in such notice shall be subject to Reasonable Operating Constraints and Conditions. For each Covered Aircraft withdrawn pursuant to this Section 2.07(b) , such aircraft shall be operated by an Affiliate of Contractor and become subject to an Affiliate CPA if (i) United and Contractor mutually agree that such Affiliate of Contractor is capable of performing its obligations under such Affiliate CPA immediately upon the execution of such Affiliate CPA, (ii) at the time of such withdrawal, neither Contractor nor, if any Affiliate CPA is then in effect, each Affiliate of Contractor that is a party to an Affiliate CPA shall be, and Contractor and, if applicable, each such Affiliate shall certify to United that it is not, in material default under, or in material breach of, this Agreement or any Ancillary Agreement or, if applicable, such Affiliate CPA, (iii) such withdrawn aircraft shall become subject to the Affiliate CPA on the day following the date of its withdrawal from this Agreement, and (iv) such operation by an Affiliate is not prohibited by any collective bargaining agreements or similar arrangements then in effect between Contractor and any labor union. If any of the conditions set forth in clauses (i) through (iv) above is not satisfied, United shall be entitled to withdraw Covered Aircraft pursuant to this Section 2.07(b) without entering into an Affiliate CPA. Subject to United identifying the Covered Aircraft and particular Engines to be withdrawn pursuant to Section 2.07(c) below, the withdrawal schedule may begin immediately upon its delivery, and shall not provide for the withdrawal of more than *** Covered Aircraft per month (subject, in the case of any notice delivered during the 30-day
cooling off period or the subsequent 30-day period referenced above ( provided that a Labor Strike has not been initiated during such period), to Reasonable Operating Constraints and Conditions).
(c) Taking into account the aircraft type specified in the notice of withdrawal, United shall have complete discretion to select the particular Covered Aircraft and the particular Engines to be withdrawn during any particular month pursuant to this Section 2.07 ; provided , that if the Covered Aircraft are to be withdrawn pursuant to Section 2.07(a) or (b) , then (i) United shall use reasonable efforts to avoid Engine swaps prior to such withdrawal, (ii) Contractor shall carry out such Engine swaps as are requested prior to such withdrawal and facilitate such Engine swaps as are requested following such withdrawal, and (iii) United shall bear the direct costs of Engine swaps requested following such withdrawal. Not more than 2 days after its receipt or delivery of any withdrawal notice pursuant to this Section 2.07 , Contractor shall deliver to United a reasonably detailed current summary and forecast of the maintenance and repair status and condition of each Covered Aircraft and Engine and a list detailing the location of each Engine (by aircraft or, if appropriate, maintenance facility). Within 10 days after receipt of such summary, United shall select the individual aircraft and Engines to be replaced, and shall provide written notice to Contractor of its selection. United shall bear the cost of any engine swaps necessary to accommodate its engine selections. Notwithstanding the provisions of this Section 2.07 , Uniteds rights to withdraw any or all aircraft pursuant to this Section 2.07 shall be superseded by any rights of either United or Contractor arising under Article VIII (including without limitation any withdrawal rights, and any Wind-Down Schedule provided pursuant to Article VIII shall be controlling). In addition, the provisions of Section 2.09 shall apply to the withdrawal of any Covered Aircraft pursuant to this Section 2.07 ; provided, however , that Contractor and United agree (because such lease shall be reinstated if such aircraft are deemed Covered Aircraft pursuant to Section 2.07(e)) not to file with the FAA or the international registry a termination of the applicable Covered Aircraft Sublease in the case of a withdrawal of a Covered Aircraft under this Section 2.07 until the earlier of (1) the 30th calendar day after such withdrawal or (2) the date such aircraft becomes subject to a Capacity Purchase Arrangement with any third party.
(d) In connection with the foregoing, Contractor agrees that each of its Affiliates that operate ERJ Aircraft shall adopt Contractors maintenance program as soon as reasonably practicable.
(e) Upon the resolution of any Labor Strike or expiration of any 30-day cooling-off period under the Railway Labor Act, 50% (rounded downward to the nearest whole number) of any Covered Aircraft (i) that have been withdrawn by United pursuant to Section 2.07(b) and (ii) that have not otherwise become subject to a Capacity Purchase Arrangement with Contractor or any third party as of the date of such resolution or expiration (each, an Available Labor Strike Withdrawn Aircraft ), consisting of those Available Labor Strike Withdrawn Aircraft with the longest remaining term under the applicable Covered Aircraft Sublease, shall immediately become a Covered Aircraft under this Agreement (and not subject to any Termination Date or Wind-Down Schedule provided as a result of Uniteds exercise of rights described in Section 2.07(b) ) and the Covered Aircraft Sublease shall be reinstated without further act. United, at its option, may elect to ground all or a portion of the remaining Available Labor Strike Withdrawn Aircraft by providing Contractor written notice of such election within
30 days following the resolution of the applicable Labor Strike or expiration of the applicable 30-day cooling-off period. Such notice shall identify the individual Available Labor Strike Withdrawn Aircraft to remain withdrawn. Any remaining Available Labor Strike Withdrawn Aircraft that are not so designated within such 30 days shall immediately become a Covered Aircraft under this Agreement (and any Termination Date or Wind-Down Schedule provided for in a withdrawal notice delivered pursuant to Section 2.07(b) shall be null and void) and the Covered Aircraft Sublease shall be reinstated without further act.
(f) Intentionally Omitted .
(g) The parties agree to the early withdrawal from this Agreement of Covered Aircraft Numbers ***, as identified in Schedule 1 hereto, as provided in footnote 2 to Schedule 1 ; provided that United retains the right to swap any or all such aircraft with any other Covered Aircraft of the ERJ-145XR aircraft type and its Engines on a one-for-one basis and withdraw such ERJ-145XR aircraft and its Engines instead; and provided further that:
(i) United shall provide Contractor the specific withdrawal date for such Covered Aircraft by providing no less than (x) with respect to the number of aircraft to be so withdrawn, one hundred twenty (120) days irrevocable written notice prior to such withdrawal date and (y) with respect to the tail and engine numbers of the aircraft and Engines to be withdrawn, ninety (90) days written notice prior to such withdrawal date;
(ii) Contractor shall return to United any aircraft withdrawn pursuant to this Section 2.07(g) in accordance with the return conditions set forth in the applicable Covered Aircraft Sublease for such aircraft and the requirements of this Agreement, including, but not limited to, Section 2.09 ;
(iii) United shall not specify dates for withdrawal of any such aircraft to the extent that such designation would cause Contractor to be required to remove from the capacity purchase provisions of this Agreement more than, collectively, *** Covered Aircraft in any calendar month in calendar year ***, taking into account scheduled sublease expiration dates as provided in Schedule 1 hereto, Section 2.07(a) , this Section 2.07(g) and the Replacement Wind-Down Schedule; provided that, for the avoidance of doubt, it is acknowledged that nothing herein shall limit Uniteds right to withdraw aircraft from the capacity purchase provisions of this Agreement arising under Section 2.05 , Section 2.07(a) , Section 2.07(b) , Section 2.08 , Section 2.09(a) or Article VIII ; and
(iv) in connection with any such swap, the terms of the applicable Covered Aircraft Subleases will be amended, if necessary, to accommodate the foregoing swap.
Section 2.08 Commodity Events .
(a) If a Commodity Withdrawal Event shall occur, then at any time during the sixty days following any such event (the Commodity Withdrawal Period ), United shall be entitled to withdraw Covered Aircraft from the capacity purchase provisions of this Agreement
in accordance with and subject to the limitations, terms and conditions contained in this Section 2.08 .
(b) At any time and from time to time during a Commodity Withdrawal Period, United may give Contractor written notice of the occurrence of such Commodity Withdrawal Event and of Uniteds election to exercise its right under Section 2.08(a) to withdraw Covered Aircraft from this Agreement, which notice shall specify the total number of Covered Aircraft to be withdrawn pursuant to such notice and a withdrawal schedule, specifying the aircraft type and the date of withdrawal; provided , that the first withdrawal shall not be scheduled for any date prior to the 30th day after the date of such notice; and provided further , that the withdrawal schedules for all Commodity Withdrawal Events shall not provide for the withdrawal of more than 25 Covered Aircraft per month in the aggregate. Covered Aircraft shall be withdrawn from the capacity purchase provisions of this Agreement on the date of return set forth in any such notice that is in compliance with the provisions of this Section 2.08 .
(c) Taking into account the aircraft type specified in the notice of withdrawal, United shall have complete discretion to select the particular Covered Aircraft and particular Engines to be withdrawn during any particular month pursuant to this Section 2.08 . Promptly after its receipt or delivery of any withdrawal notice pursuant to this Section 2.08 (but in any event within three Business Days thereafter), Contractor shall deliver to United a reasonably detailed current summary and forecast of the maintenance and repair status and condition of each Covered Aircraft and Engine. Within three Business Days of receipt of such summary, United shall select the individual aircraft and Engines to be replaced, and shall provide written notice to Contractor of its selection. United shall bear the cost of any engine swaps necessary to accommodate its Engine selections, and shall agree to such Engine swaps under the applicable Covered Aircraft Subleases.
(d) In connection with any withdrawal pursuant to this Section 2.08 , United shall be responsible for the direct severance and crew training expenses (if any) incurred by Contractor (using commercially reasonable efforts to mitigate such costs) and reasonably documented in connection with such withdrawal of such aircraft. In addition, the provisions of Section 2.09 shall apply to the withdrawal of any Covered Aircraft pursuant to this Section 2.08 .
(e) Once a Covered Aircraft has been withdrawn pursuant to this Section 2.08 , United may not operate such aircraft, or cause such aircraft to be operated, within Uniteds regional airline service without returning such aircraft to the capacity purchase provisions of this Agreement pursuant to Section 2.08(g) .
(f) If a Commodity Replacement Event shall occur, then at any time during the sixty days following any such event (the Commodity Replacement Period ), Contractor shall be entitled to require United to return to the capacity purchase provisions of this Agreement (and to execute a Covered Aircraft Sublease with respect to) each Covered Aircraft withdrawn from the capacity purchase provisions of this Agreement pursuant to any First Commodity Withdrawal Event (if the Commodity Replacement Event is a First Commodity Replacement Event) or any Second Commodity Withdrawal Event (for any Commodity Replacement Event) in accordance with and subject to the limitations, terms and conditions contained in this Section 2.08 ; provided , that such Covered Aircraft to be returned is not, at the time of such
return, a Disposed Aircraft (in which case Contractor shall not be entitled to require the return of such aircraft, and references in Section 2.08(g) to Covered Aircraft shall not include Disposed Aircraft).
(g) At any time and from time to time during a Commodity Replacement Period, Contractor may give United written notice of the occurrence of such Commodity Replacement Event and of Contractors election to exercise its right under Section 2.08(f) to return Covered Aircraft to this Agreement. At any time and from time to time, United may give Contractor written notice of Uniteds election to exercise its right to return to this Agreement Covered Aircraft withdrawn pursuant to Section 2.08(a) . Any notice delivered pursuant to this Section 2.08(g) shall specify the total number of Covered Aircraft to be returned pursuant to such notice and a return schedule specifying the date of return; provided , that the first return shall not be scheduled for any date prior to the 60th day after the date of such notice; and provided further , that the return schedules pursuant to all notices delivered pursuant to this Section 2.08(g) shall not provide for the return of more than 10 Covered Aircraft per month, or more than 2 Covered Aircraft per day, in each case in the aggregate (with preference given to schedules set forth in earlier notices). Covered Aircraft shall be returned to the capacity purchase provisions of this Agreement, and each of United and Contractor shall enter into a Covered Aircraft Sublease with respect to such aircraft, on the date of return set forth in any such notice that is in compliance with the provisions of this Section 2.08 . Notwithstanding anything in this Section 2.08 to the contrary, (x) if any Covered Aircraft is scheduled to be withdrawn pursuant to a Commodity Withdrawal Event on any date subsequent to the 60th day after Contractor delivers written notice to United of a Commodity Replacement Event occurring subsequent to such Commodity Withdrawal Event, then such withdrawal shall automatically deemed to be canceled, and no return in respect of such aircraft shall be necessary, and (y) if any Covered Aircraft is scheduled to be returned pursuant to a Commodity Replacement Event on any date subsequent to the 30th day after United delivers written notice to Contractor of a Commodity Withdrawal Event occurring subsequent to such Commodity Replacement Event, then such return shall automatically deemed to be canceled, and no withdrawal in respect of such aircraft shall be necessary. In connection with any return pursuant to this Section 2.08(g) , United shall be responsible for the following direct expenses (if any) incurred by Contractor or its Affiliate (using commercially reasonable efforts to mitigate such costs) and reasonably documented in connection with such return: initial crew training costs and aircraft repositioning costs.
(h) If at any time the aggregate number of Covered Aircraft withdrawn pursuant to Section 2.08(b) exceeds (x) the aggregate number of Covered Aircraft returned pursuant to Section 2.08(g) plus (y) the aggregate number of Additional Aircraft previously included in Uniteds regional airline service and operated by Contractor or its Affiliates pursuant to this Section 2.08(h) (such excess number of aircraft, as adjusted pursuant to the last sentence of this Section 2.08(h) , constituting a Commodity Aircraft Deficit ), then, at least 18 months (or such lesser period as available aircraft or aircraft delivery positions may allow, as determined by United in its reasonable discretion) prior to the entry of any Additional Aircraft into Uniteds regional airline service on or before the earlier of the eleventh anniversary of the Original Execution Date and the occurrence of a Termination Date pursuant to Section 8.02 , United agrees to give Contractor written notice of its intention to use Additional Aircraft (up to the number of aircraft constituting a Commodity Aircraft Deficit), and to offer Contractor and its Affiliates the opportunity to bid on such Additional Aircraft. The obligation to award Additional
Aircraft to Contractor (or, at the election of Contractor, its Affiliates) arising pursuant to this Section 2.08 shall apply only to the extent of any Commodity Aircraft Deficit. The Commodity Aircraft Deficit shall be reduced by one aircraft for each Additional Aircraft that does not become subject to a separate capacity purchase agreement (and accompanying ancillary agreements) or any amendments to an existing capacity purchase agreement (and accompanying ancillary agreements) between United and Contractor or its Affiliate as a result of Contractors or its Affiliates failure to agree to terms and conditions that are as beneficial to United as the terms and conditions contained in a bona fide bid of any third party to which United in good faith would intend to award the Additional Aircraft (and in fact does award such aircraft pursuant to such bona fide bid) (or, if no bona fide bid has been received, then those terms and conditions contained in the most recent Similar Economic Term Transaction as set forth in a certificate delivered to United signed by an authorized officer of Contractor), after providing Contractor with a certificate signed by an authorized officer of United setting forth the material terms of such bid (specifically including all terms material and beneficial to Contractor) and providing Contractor not less than 20 days to review and match such bid and agree to such terms and conditions as contemplated under this Section 2.08(h) (it being understood that any failure of Contractor or its Affiliates to provide or enter into an agreement with respect to a Replacement Aircraft pursuant to Section 2.05 shall not constitute a failure for purposes of this Section 2.08(h) ).
(i) The aggregate number of Covered Aircraft withdrawn pursuant to Section 2.08(b) in respect of all First Commodity Withdrawal Events, net of the aggregate number of Covered Aircraft returned pursuant to this Section 2.08(g) , shall not be more than 50 in the aggregate. The aggregate number of Covered Aircraft withdrawn pursuant to Section 2.08(b) in respect of all Commodity Withdrawal Events, net of the aggregate number of Covered Aircraft returned pursuant to this Section 2.08(g) , shall not be more than 100 in the aggregate. If any Affiliate CPAs or other Capacity Purchase Arrangement between United and Contractor or its Affiliates are in effect pursuant to this Article II at the time when any rights under this Section 2.08 are exercised by any party, and such agreements contain correlative provisions to this Section 2.08 , then all numerical limits relating to the number of aircraft (whether aggregate or monthly) shall apply to this Agreement and to all such other agreements in the aggregate. Notwithstanding anything to the contrary contained in this Section 2.08 , Uniteds right to withdraw aircraft under this Section 2.08 and its corresponding provisions in any Affiliate CPA or other Capacity Purchase Arrangement between United and Contractor or its Affiliate in effect pursuant to this Article II shall only apply to aircraft leased or subleased by United to Contractor or such Affiliate.
Section 2.09 Return Conditions; Storage; Return Protocol .
(a) Upon the date for withdrawal from the capacity purchase provisions of this Agreement of a Covered Aircraft subject to a Covered Aircraft Sublease pursuant to Sections 2.05 , 2.07 , 2.08 , 2.12 , 8.03(a) , 8.03(b) , 8.03(c) or 8.03(d) , such aircraft shall cease being a Covered Aircraft, Contractor shall immediately deliver possession of such aircraft to United or its designee, or, in the case of Section 2.07 , to the applicable Affiliate of Contractor. Upon such delivery of possession, if all conditions set forth in the applicable Covered Aircraft Sublease and annexes thereto, including any return conditions, have been satisfied in accordance with its terms, then the Covered Aircraft Sublease for such aircraft shall terminate as of such date
in accordance with the terms of such Covered Aircraft Sublease (regardless of the underlying term of such Covered Aircraft Sublease); provided that so long as the applicable Covered Aircraft is not being withdrawn from this Agreement pursuant to Section 8.02(c) , the Covered Aircraft Sublease may remain in effect as provided in Section 2.09(c) or, to the extent provided by Section 2.09(b) , the Covered Aircraft Sublease may be replaced with a Storage Sublease; provided further , that, if the withdrawal is pursuant to Section 8.03(d) , then the Covered Aircraft Sublease for Covered Aircraft with a sublease expiration date of December 31, 2017, or any later date if the Term of this Agreement with respect to any such Covered Aircraft has been extended pursuant to Section 2.13 hereof, in each case as provided in Schedule 1 , shall be replaced with a Storage Sublease as provided by Section 2.09(b) below (or the Covered Aircraft Sublease may otherwise remain in effect as provided in Section 2.09(c) ), it being understood for the avoidance of doubt that the foregoing shall not in any way limit either Uniteds ability (as Sublessor) to deliver a Deferment Notice or Contractors duties (as Sublessee) to comply with applicable Deferred Obligations, in each case as contemplated in Annex B to Exhibit B hereto. Without limiting the rights or obligations of the parties hereto under this Agreement, United shall be entitled to to remove any aircraft from the capacity purchase provisions of this Agreement to facilitate the Transition of such aircraft to a Transition Operator by providing Contractor at least 120 days prior notice. Upon receiving such notice, Contractor shall, at Contractors sole cost and expense, (x) maintain the ability to comply with the return conditions set forth in Section 2.09 hereof and Annex B to Exhibit B hereto, and (y) Contractor shall so comply, in each case, with respect to the removal from the capacity purchase provisions of this Agreement of at least *** aircraft during any calendar month with respect to any calendar month in calendar years *** and ***. In the case of an applicable transfer pursuant to Section 2.07 , the obligations of Contractor shall be assumed by the applicable Affiliate of Contractor (and such Covered Aircraft Sublease shall thereafter constitute an ancillary agreement for purposes of the applicable Affiliate CPA). Other than in the case of a transfer described in Section 2.07(b) , upon satisfaction of the foregoing return conditions and those specified in the applicable Covered Aircraft Sublease (or, in the event of a termination pursuant to Section 8.02(b)(x) , promptly after the end of any grounding that would prevent a ferrying of the aircraft), Contractor shall ferry the applicable Covered Aircraft at Uniteds expense to a location within the continental United States selected by United. Promptly after the delivery of any termination notice under this Agreement by any party hereto to another party, but in no event more than five days after such delivery (and immediately in connection with a termination pursuant to Section 8.02(a) ) or 180 days prior to the end of the Term, Contractor shall deliver to United a reasonably detailed current summary and forecast of the maintenance and repair status and condition of each aircraft and each Engine, and a list detailing the location of each such engine (by aircraft or, if appropriate, maintenance facility). In addition, Contractor shall update such summary from time to time promptly upon Uniteds request.
(b) So long as this Agreement has not been terminated pursuant to Section 8.02(c) , with respect to (i) any aircraft being returned to United by Contractor, (ii) any Parked Aircraft or (iii) any Other Subleased Aircraft, such aircraft shall remain, or be placed, as the case may be, on Contractors operators certificate until the expiration of the head lease covering the aircraft and, at Uniteds request and cost, Contractor shall (A) enter into a Storage Sublease with respect to such aircraft for such duration as may be necessary to permit such aircraft to remain on Contractors operators certificate until the expiration of the head lease covering the aircraft, (B) perform such maintenance on such aircraft, consistent with
Contractors maintenance program, as and when requested by United, including maintenance for destorage and servicing such aircraft to prepare it for returning to passenger service, and (C) at the direction of United, use commercially reasonable efforts to make arrangements for the storage of any aircraft upon its return to United by Contractor, together with the Engines relating thereto, at a location selected by United, and for its continued maintenance in accordance with Contractors maintenance program (including, without limitation, the Flight Hour Agreements and all other maintenance cost per hour agreements and arrangements). Subject to Section 4.18(c) and the terms of the Storage Sublease, no rent shall be payable under any Storage Sublease. Contractor shall reasonably assist United with the return of the aircraft to head lessor on or around the scheduled expiration date of the head lease, and, provided that Contractor satisfies all conditions set forth in the applicable Covered Aircraft Sublease and/or Storage Sublease, including any return conditions, the cost of such assistance shall be borne by United. At Uniteds option, Contractor will provide United (or its designee) with all manuals and other detailed information relating to Contractors maintenance program, for use by United (or such designee) until United (or such designee) has successfully transitioned maintenance on all aircraft returned to United pursuant to this Section 2.09 , or any Parked Aircraft or Other Subleased Aircraft, to the maintenance program of United (or such designee), and Contractor shall provide reasonable assistance to United (or such designee) during such transition period in connection with Contractors maintenance program and the transition to such other maintenance program.
(c) In lieu of terminating any Covered Aircraft Sublease and replacing such Covered Aircraft Sublease with a Storage Sublease pursuant to Section 2.09(a) , at the request of United, such Covered Aircraft Sublease shall remain in effect for such duration as may be necessary to permit the aircraft covered thereby to remain on Contractors operators certificate until the expiration of the head lease covering the aircraft; provided that Contractor shall have no further rights or obligations under such Covered Aircraft Sublease other than (i) placing the aircraft in return condition as if such aircraft were being returned to United under the Covered Aircraft Sublease as of the applicable date of withdrawal and assisting United with the return of such aircraft to the head lessor as provided in the penultimate sentence of Section 2.09(b) , (ii) complying with Section 18.12 of such Covered Aircraft Sublease and (iii) those that survive the termination of such Covered Aircraft Sublease pursuant to its terms. Notwithstanding anything to the contrary in this Agreement, a Covered Aircraft Sublease that remains in effect at the election of United pursuant to this Section 2.09(c) shall be deemed (A) to have been terminated in accordance with its terms solely for the purposes of Section 4.18(d) and (B) to have become a Storage Sublease for the purposes of this Agreement.
(d) Notwithstanding the foregoing, in no event shall Contractors obligation under this Section 2.09 (i) require Contractor to use Contractors facilities (or the facilities of any Affiliate of Contractor) for any storage pursuant to this Section 2.09 or (ii) require Contractor to enter into any lease (or other similar agreement) of any facility for such storage.
(e) Return Protocol . In order to facilitate the timely removal of aircraft from the capacity purchase provisions of this Agreement and, if applicable, the transition by United of any such aircraft to another operator providing regional airline services to United (any such transition, a Transition and any such operator, a Transition Operator ), United and Contractor agree to the following provisions:
(i) If, in connection with any removal of a Covered Aircraft pursuant to this Article II, United shall notify Contractor in writing of Uniteds desire to conduct a Transition, then upon receipt of any such notice, Contractor hereby agrees to use commercially reasonable efforts to cooperate with United and any Transition Operator to facilitate such Transition, including but not limited to:
(A) Upon Uniteds request, making available for purchase by United or Transition Operator of any surplus spare parts for such Covered Aircraft and offering to United or Transition Operator a reasonable purchase price for such surplus spare parts (which in no event shall exceed the fair market value of such surplus spare parts);
(B) Providing reasonable accommodations and access to the Transition Operator with respect to such aircraft, including but not limited to allowing the Transition Operator to inspect such aircraft and the records of such aircraft;
(C) If Contractors assistance is requested, assisting United and the Transition Operator in any necessary licensing of maintenance programs, manuals and other documents; provided, in no event shall Contractor be obligated to incur any third-party costs associated with such assistance; and
(D) If Contractors assistance is requested, assisting United and the Transition Operator in connection with any necessary assignment of third-party maintenance agreements applicable to the Covered Aircraft; provided, in no event shall Contractor be obligated to incur any third-party costs associated with such assistance.
Section 2.10 Separate Withdrawal Rights . Each withdrawal right contained in this Article II , as well as those contained in Section 4.18 and Article VIII , shall constitute a separate and distinct right, and shall not limit or supersede any other right (including any other withdrawal right) contained in this Agreement.
Section 2.11 Intentionally Omitted .
Section 2.12 Additional Replacement Rights of United . Covered Aircraft Numbers ***, as identified on Schedule 1 hereto, together with any Engines on such aircraft (the Replaceable Aircraft ) shall be withdrawn pursuant to one or more irrevocable Wind-Down Schedule(s) provided by United to Contractor 60 days prior to the commencement of the removal of the Replaceable Aircraft identified on such schedule (the Replacement Wind-Down Schedule ); provided that such Replacement Wind-Down Schedule(s) shall not provide for an average per-aircraft term of Replaceable Aircraft (calculated only in respect of Replaceable Aircraft) which exceeds ***; provided, further , that such Replacement Wind-Down Schedule shall not specify dates for withdrawal of any such aircraft to the extent that such designation would cause Contractor to be required to remove from the capacity purchase provisions of this Agreement more than, collectively, *** Covered Aircraft in any calendar month in calendar year ***, taking into account scheduled sublease expiration dates as provided in Schedule 1 hereto,
Section 2.07(a) , Section 2.07(g) and the Replacement Wind-Down Schedule; and provided further , that United retains the right to swap any or all such aircraft with any other Covered Aircraft of the ERJ-145XR aircraft type and its Engines on a one-for-one basis and withdraw such ERJ-145XR aircraft and its Engines instead. In connection with the delivery of the Replacement Wind-Down Schedule, United shall provide Contractor with the identification of any swapped aircraft. The parties acknowledge and agree that this Section 2.12 is not intended to constitute, and shall not constitute, a limitation on the rights of United set forth in Section 2.05 . In connection with any such swap, the term of the applicable Covered Aircraft Subleases will be amended, if necessary, to accommodate the foregoing swap.
Section 2.13 Extension Rights of United . Effective as of January 1, 2018 and subject to the Head Lease Expiration Dates set forth on Schedule 1 , at any time and from time to time, and at its sole option, United may extend the Term of this Agreement with respect to any or all Covered Aircraft with a sublease expiration date as set forth on Schedule 1 of December 31, 2017 by providing Contractor with 180 days prior irrevocable written notice prior to the scheduled expiration of the Term identifying the Covered Aircraft to be extended (which shall extend the provisions of this Agreement with respect to such Covered Aircraft to such later exit date) (any such extension, an Extension and any such Covered Aircraft subject to an Extension, an Extension Aircraft ); provided , that (x) Extensions shall be made only in increments of twelve (12) months and (y) no Extension notice may be delivered after June 30, 2018; provided further , that United shall not be permitted to exercise more than *** Extensions; provided further , that, in the event of an Extension, the per block hour rates set forth on Schedule 2 as of the date hereof in respect of each Extension Aircraft shall be increased (I) by $*** for the period commencing January 1, 2018 and ending on December 31, 2018 and (II) by an additional $*** for the period commencing January 1, 2019 and ending on December 31, 2019.
ARTICLE III
CONTRACTOR COMPENSATION
Section 3.01 Base and Incentive Compensation . For and in consideration of the transportation services, facilities and other services to be provided by Contractor hereunder, United shall pay Contractor the base and incentive compensation as provided in Paragraph A of Schedule 3 hereto, subject to the terms and conditions set forth in this Article III .
Section 3.02 Periodic Adjustment of Base and Incentive Compensation and Commodity Prices .
(a) Subject to Section 8.04 , the rates under this Agreement set forth in Appendix 1 and Appendix 6 to Schedule 3 hereto and the Controllable Completion Factor Incentive Rate set forth in Appendix 2 to Schedule 3 hereto shall remain in effect until ***, and shall be adjusted on the first day of the immediately following month and each anniversary of such date (each, an Adjustment Date ), as follows: the new rates, applicable beginning on such Adjustment Date, shall equal the rates in effect on the date immediately preceding such Adjustment Date multiplied by ***.
(b) The Commodity Price references in the definitions of First Commodity Replacement Event, First Commodity Withdrawal Event, Second Commodity Replacement Event and Second Commodity Withdrawal Event shall remain in effect through the last day of the month in which the first anniversary of this Agreement falls, and shall be adjusted on each Adjustment Date, as follows: the new Commodity Price, applicable beginning on such Adjustment Date, shall equal the Commodity Price for such definition in effect on the date immediately preceding such Adjustment Date multiplied by the Annual Commodity CPI Change.
Section 3.03 Contractor Expenses . Except as provided otherwise in Section 3.04 , Contractor shall pay in accordance with commercially reasonable practices all expenses or costs incurred in connection with Contractors provision of Regional Airline Services. For the avoidance of doubt, Contractor agrees that, in connection with its provision of Regional Airline Services to United hereunder and the provision of the other services contemplated to be performed by Contractor under the Ancillary Agreements, it shall use commercially reasonable efforts to minimize costs incurred by it if such costs would be reimbursable by United to Contractor in accordance with the terms of this Agreement or any Ancillary Agreement (it being understood that the payment of any amount owed pursuant to Appendix 1 to Schedule 3 shall not constitute costs that are reimbursable by United for purposes of the foregoing sentence). Further, with respect to any service or item at substantially similar quality or service level and the cost of which United is required to reimburse Contractor hereunder or under any Ancillary Agreement, if (x) United can provide or arrange to provide such service or item at a lower cost than the reimbursement cost that United would otherwise be charged, and (y) the provision of or arrangement to provide such service or item by Contractor would not materially adversely affect Contractor under any contracts or agreements, then Contractor shall allow United to provide or arrange to provide such service or item in order to permit United to lower its costs; provided, however , that United shall bear the costs of any termination, cancellation or similar fee payable by Contractor in connection therewith. Subject to the foregoing, including the conditions set forth in clauses (x) and (y) , United may elect to contract directly with third parties for the replacement of Engine LLP associated only with Engines, the cost of which United shall be responsible for in accordance with Schedule 3 .
Section 3.04 United Expenses .
(a) Certain Expenses . United shall incur directly those expenses relating to the Regional Airlines Services that are described in Paragraph B(1) of Schedule 3 ( United Expenses ). United shall pay all United Expenses in accordance with commercially reasonable practices.
(b) Design Changes . United shall be responsible for any reasonable out-of-pocket expenses incurred by Contractor relating to interior and exterior design changes to the Covered Aircraft and other product-related changes required by United, including facility-related design changes and the cost of changes in uniforms and other livery, in each case that occur outside of Contractors normal aircraft and facility refurbishment program.
Section 3.05 Audit Rights; Financial Information . Contractor shall make available for inspection by United and its outside auditors and advisors during normal business hours, within a reasonable period of time after United makes a written request therefor, all of Contractors books
and records relating to the Covered Aircraft or Charter Aircraft and this Agreement or any Ancillary Agreement, in each case for the preceding 24-month period and, with respect to books and records related to an ongoing good faith dispute arising during such 24-month period (or, with regard to any Reconciled Expenses or any dispute involving Reconciled Expenses, the 24-month period following the date such Reconciled Expenses (or documentation thereof) were presented to United by Contractor or a third party), for any additional period until the final resolution of such dispute (each such period, an Audit Period ) as necessary to audit (a) any reimbursement of expenses set forth on Appendix 3 of Schedule 3 hereto and/or incentive or rebate, (b) any agreement or arrangement upon which the block hour rates and other terms of a separate capacity purchase agreement are based pursuant to Section 2.05(a) or 2.08(h) , or (c) any calculations pursuant to Section 3.07 (all such books and records collectively, CPA Records ). In connection with such audit, United and its outside auditors and advisors shall be entitled to make copies and notes of such CPA Records as they deem necessary and to discuss such CPA Records with Contractors Chief Financial Officer or such other employees or agents of Contractor knowledgeable about such records. Notwithstanding the foregoing, Contractor shall not be required to provide United or its outside auditors and advisors access to (x) any agreement or arrangement upon which the block hour rates and other terms of a separate capacity purchase agreement are based pursuant to Section 2.05(a) or 2.08(h) or (y) any CPA Records in connection with an audit of the matters described in clauses (c) or (d) of this Section 3.05 , in each case to the extent that Contractor is prohibited from doing so by any confidentiality agreement; provided, that Contractor shall (i) upon the request of United, use its commercially reasonable efforts to allow, at Uniteds cost, an independent third party selected by United to review such CPA Records and provide United with a summary setting forth (A) in connection with an audit of the matters described in clause (b) of this Section 3.05 , the block hour rates and other economic terms of the Similar Economic Term Transaction, and, if applicable, acquisition costs and (B) in connection with an audit of the matters described in clauses (c) or (d) of this Section 3.05 , a summary of any costs, expenses or revenues used to calculate amounts pursuant to Section 3.07 , and (ii) to the extent that Contractor, after using its commercially reasonable efforts, is unable to comply with the preceding clause (i) , Contractor shall provide United with a certificate signed by an authorized officer of Contractor setting forth (A) in connection with an audit of the matters described in clause (b) of this Section 3.05 , the block hour rates and other economic terms of the Similar Economic Term Transaction, and, if applicable, acquisition costs and (B) in connection with an audit of the matters described in clauses (c) or (d) of this Section 3.05 , a summary of any costs, expenses or revenues used to calculate amounts pursuant to Section 3.07 . Following the termination of each respective Audit Period, Uniteds right to audit the CPA Records for such Audit Period shall terminate.
Section 3.06 Billing and Payment; Reconciliation .
(a) Billing and Payment . Within two Business Days after Contractor receives the Final Monthly Schedule from United pursuant to Section 2.01(b) , Contractor shall present a reasonably detailed written invoice for amounts due under this Agreement in respect of the Base Compensation for the Scheduled Flights during the month to which such Final Monthly Schedule pertains. United shall pay Contractor the amount due under such invoice (the Invoiced Amount ), subject to Uniteds right to dispute any calculations set forth on such invoice that do not comply with the terms of this Agreement or any Ancillary Agreement, net of amounts due
and owing by Contractor to United under this Agreement or any Ancillary Agreement, as follows:
(i) One-quarter of the balance of the Invoiced Amount shall be due and payable by United to Contractor, by electronic transfer of funds to a bank account designated by Contractor, available on or before the first day of the month (or if such day is not a Business Day, the next Business Day) to which such invoice relates;
(ii) One-quarter of the balance of the Invoiced Amount shall be due and payable by United to Contractor, by electronic transfer of funds to a bank account designated by Contractor, available on or before the 8th day of the month (or if such day is not a Business Day, the next Business Day) to which the invoice relates;
(iii) One-quarter of the balance of the Invoiced Amount shall be due and payable by United to Contractor, by electronic transfer of funds to a bank account designated by Contractor, available on or before the 15th day of the month (or if such day is not a Business Day, the next Business Day) to which the invoice relates; and
(iv) One-quarter of the balance of the Invoiced Amount shall be due and payable by United to Contractor, by electronic transfer of funds to a bank account designated by Contractor, available on or before the 22nd day of the month (or if such day is not a Business Day, the next Business Day) to which the invoice relates.
(b) Reconciliation . Not later than 14 days following the end of each month, Contractor and United shall reconcile actual amounts due in respect of such month with the estimated amounts included in the Invoiced Amount for such items for such month in accordance with the terms and conditions set forth in Schedule 3 (including incentive compensation, if any, for such month and payments in respect of United-directed cancellations for such month, if any, in each case determined as provided in Schedule 3 ). On or before the 15th day following the end of such month (or if such day is not a Business Day, the next Business Day), such reconciled amounts for such month to the extent applicable: (i) shall be paid by United to Contractor, together with the payment to be made by United pursuant to Section 3.06(a)(iii) above for the applicable month, or (ii) shall be paid by Contractor to United or set off by United against any other amounts owing to Contractor under this Agreement or any Ancillary Agreement. Further reconciliations shall be made on or prior to the 22nd day following the end of such month (or if such day is not a Business Day, the next Business Day) to the extent necessary as a result of Uniteds review of financial information provided by Contractor in respect of such month. Such further reconciled amounts for such month to the extent applicable (x) shall be paid by United to Contractor, together with any other payment to be made by United pursuant to Section 3.06(a)(iv) above for the applicable month, or (y) shall be paid by Contractor to United or set off by United against any other amounts owing to Contractor under this Agreement or any Ancillary Agreement.
(c) Notwithstanding anything to the contrary in this Agreement or any Ancillary Agreement, neither United nor Contractor shall have any obligation to make any payment required under this Agreement or any Ancillary Agreement that is subject to a good faith dispute or any right to set off any amount that has been disputed in good faith by the other
party; provided , that within five Business Days following the resolution of any such dispute in accordance with the terms of this Agreement, United or Contractor, as applicable, shall make any payments required by such resolution. All payments made by Contractor or United as provided in this Agreement or any Ancillary Agreement shall be deemed final and not subject to further review, audit or reconciliation after the later to occur of (I) the date that is *** months after the date of the applicable payment and (II) the date of final resolution of any good faith dispute regarding the applicable payment arising during the *** months following the date of the applicable payment.
Section 3.07 Synergy Savings . Immediately following the Original Execution Date, Contractor and United will jointly determine the reasonably anticipated annually recurring pre-tax cost savings expected with respect to Regional Airline Service attributable to the SkyWest Merger (the Savings ). The Savings shall be calculated on a run-rate basis (i.e. the calculation is not intended to capture non-recurring costs or savings), assuming that all such Savings have been fully realized and that all commercially reasonable steps or circumstances necessary to implement, create or realize such Savings shall have been taken or occurred, regardless of whether or when such steps or circumstances are actually taken or occur. For purposes of these calculations, the amount of Savings reasonably anticipated to be necessary for Contractor to achieve a GAAP net income of $*** million ( CPA Target Income ) shall be referred to as the Target Savings . In connection with making such a determination, Contractor will provide United with information pursuant to Section 3.05 . After determining such Savings, if Contractor and United reasonably determine that the Base Compensation, together with anticipated Savings, are projected to result in Parent achieving the CPA Target Income or more annually on a run-rate basis, based on the number of Covered Aircraft as of the Original Execution Date, then Contractor and United agree that the Base Compensation rate for each Covered Aircraft for each month in the Term set forth in Appendix 1 to Schedule 3 hereto will be adjusted to provide United with an aggregate annual reduction in Base Compensation, in an amount equal to (i) if the excess of the Savings over the Target Savings is equal to or less than $*** million, the amount of such excess or (ii) if the excess of the Savings over the Target Savings is greater than $*** million, the sum of $*** million plus ***% of such excess over $*** million. The foregoing rate reduction will begin immediately after the first anniversary of the Original Execution Date and will end, with respect to any Covered Aircraft, on the date such Covered Aircraft becomes a Rate Reset Aircraft. This rate reduction shall be without regard to whether the amount of such GAAP net income is actually realized subsequent to the time at which such anticipated Savings are originally estimated, and there shall be no subsequent readjustment to the rate of Base Compensation as a result of any discrepancy between the amount of GAAP net income actually realized by Contractor and the GAAP net income anticipated in connection with the determination of the Savings. For the avoidance of doubt, the rate reduction contemplated herein shall be on a one-time basis only and no further reduction in the Base Compensation shall occur following the reduction, if any, occurring as of the first anniversary of the Original Execution Date attributable to the Savings as provided herein.
Section 3.08 One-Time Payment for Short Schedule Change Notice in *** . On a one-time basis, United shall pay to Contractor $*** to resolve the short schedule change notice which occurred in *** with respect to *** (the *** Issue ), which amount shall be deemed to satisfy in full, and, upon payment by United to Contractor, shall constitute a waiver by Contractor and Parent of, and a final settlement among United, Contractor and Parent with respect to, all claims
against United and its successors, assigns, employees, agents, directors and affiliates relating to the *** Issue (such payment, the One-Time Payment ), it being understood that Uniteds payment to Contractor of the One-Time Payment shall in no circumstance be interpreted to establish any precedent, course of dealing or course of conduct among United, Contractor and/or Parent.
ARTICLE IV
CONTRACTOR OPERATIONS AND AGREEMENTS WITH UNITED
Section 4.01 Crews, Etc.
(a) Contractor shall be responsible for providing all crews (flight and cabin, maintenance personnel, gate agents and other ground personnel), necessary to operate the Scheduled Flights and for all aspects (personnel and other) of dispatch control, in each case except as such persons are provided by United pursuant to the Master Facility and Ground Handling Agreement. With respect to ground handling services, Contractor agrees that it will not subcontract the performance of any such services to any party that is not an Affiliate of Contractor without Uniteds prior approval; provided that any party utilized to perform similar services at the applicable airport by United for flights operated by United shall be deemed approved by United for use by Contractor in performing such services for Scheduled Flights.
(b) Contractor agrees to give United pilots who remain on Uniteds relevant seniority list preferential interview status for any pilot openings that may occur at Contractor, unless such status is in conflict with Contractors commitments concerning employees of other carriers in effect as of the date hereof. Any furloughed United pilot hired by Contractor shall be required to comply with all standard terms and conditions of employment applicable to employees of Contractor, but will not be required by Contractor to resign his or her seniority position with United as a condition for applying or being employed by Contractor.
(c) United shall confer with Parent prior to offering any flow through agreement to pilots of Parents subsidiaries.
Section 4.02 Governmental Regulations . Contractor has and shall maintain all certifications, permits, licenses, certificates, exemptions, approvals, plans, and insurance required by governmental authorities, including, without limitation, FAA, DOT and TSA, to enable Contractor to perform the services required by this Agreement. All flight operations, dispatch operations and all other operations and services undertaken by Contractor pursuant to this Agreement shall be conducted, operated and provided by Contractor in compliance with all U.S. and foreign governmental laws, regulations and requirements, including, without limitation, those relating to airport security, the use and transportation of hazardous materials and dangerous goods, crew qualifications, crew training and crew hours, the carriage of persons with disabilities and without any violation of U.S. or foreign laws, regulations or governmental prohibitions. Without limiting Contractors obligations under any Covered Aircraft Sublease, all Covered Aircraft shall be operated and maintained by Contractor in compliance with all laws, regulations and governmental requirements, Contractors own operations manuals and maintenance manuals and procedures, and all applicable equipment manufacturers manuals and instructions. United shall control the use and substitution of any and all slots, operating authorizations and similar or
successor authority issued by the FAA or any airport operator for the operation of each flight under this Agreement to enable United to manage the priority of each such flight among all flights in Uniteds network system. In connection with any capital improvements to any Covered Aircraft required by an airworthiness directive, Contractor (taken together with its Affiliates) shall not discriminate against such Covered Aircraft with regard to efforts to satisfy the requirements of the airworthiness directives including the method and date of compliance, and shall use its reasonable commercial efforts to satisfy such requirements, including any efforts used or applied by Contractor or its Affiliates with regard to any similar aircraft type owned or operated by Contractor or its Affiliates. In connection with any grounding of any of the Covered Aircraft, Contractor shall not discriminate against such Covered Aircraft with regard to efforts to satisfy the applicable requirements to lift such grounding order, and shall use its reasonable commercial efforts to satisfy such requirements, including any efforts used or applied by Contractor or its Affiliates with regard to any similar aircraft type owned or operated by Contractor or its Affiliates. Without limiting the foregoing, Contractor and its subcontractors performing services for United on behalf of Contractor hereunder shall abide by the requirements of 41 CFR §§ 60-1.4(a), 60-300.5(a) and 60-741.5(a).
Section 4.03 Quality of Service . At all times, Contractor shall provide Regional Airline Services with appropriate standards of care, but in no event lower than such standards utilized by Contractor in 2009. United procedures, performance standards and means of measurement thereof concerning the provision of air passenger and air cargo services shall be applicable to all Regional Airline Services provided by Contractor; provided that all such procedures and means of measurement shall be no more stringent than those used by United with respect to the performance of all other operators of regional jet aircraft for United. Contractor shall achieve at least the comparable quality of airline service as provided by United, subject to limitations imposed by the type of aircraft used by Contractor and its route network. Contractor shall comply with all airline customer service commitments and policies of United as of the Effective Date, including without limitation the CustomerFirst commitments, and employee conduct, appearance and training policies in place as of the Effective Date, and shall handle customer-related services in a professional, businesslike and courteous manner. In connection therewith, Contractor shall maintain aircraft cleaning cycles and policies, and shall maintain adequate staffing levels, to ensure at least a comparable level of customer service and operational efficiency that United achieves, including without limitation in respect of customer complaint response, ticketing and boarding timing, oversales, baggage services and handling of irregular operations. In addition, at the request of United, Contractor shall comply with all such airline customer service commitments, policies and standards of care of United as adopted, amended or supplemented after the Effective Date. Contractor shall ensure that all Covered Aircraft are equipped with an ARINC aircraft communications addressing and reporting system (or such other system as is designated by United), the cost of which will be borne by United. Contractor shall make such interior and exterior design and product-related changes as may be required by United from time to time, including both those for which the cost is borne by United pursuant to Section 3.04(b) , and those that occur within Contractors normal aircraft and facility refurbishment program. Contractor shall provide United with timely communication regarding the status of all Scheduled Flights, and shall perform closeout procedures, in both cases, at service levels at least as high as those of United at comparably-sized airports. Contractor shall maintain the capability of performing ACARS-based automated weight and balance procedures for each Scheduled Flight, and shall accurately and timely perform such procedures. Contractor
shall maintain and utilize Contractors passenger and bag weight program approved by the FAA and existing on the Effective Date (unless and until otherwise directed by the FAA). Contractor shall ensure that all Scheduled Flights are capable of operating in Category 2 conditions. Contractor will use Uniteds standard procedures for processing and adjudicating all claims for which Contractor is responsible in an effort to avoid such matters becoming the subject of claims, litigation or an investigation by a governmental agency or authority. At either partys request, Contractor and United will meet to discuss and review Contractors customer service and handling procedures and policies and its employees conduct, appearance and training standards and policies. United shall give Contractor written notice of any non-safety-related alleged breach of this Section 4.03 , identifying with reasonable specificity such alleged breach, not less than 15 days prior to exercising any remedy regarding such alleged breach.
Section 4.04 Incidents or Accidents . Contractor shall promptly notify United of all irregularities involving a Scheduled Flight or Covered Aircraft operated by Contractor (including, without limitation, aircraft accidents and incidents) which result in any damage to persons and/or property or may otherwise result in a complaint or claim by passengers or an investigation by a governmental agency or authority. Contractor shall furnish to United as much detail as practicable concerning such irregularities and shall cooperate with United at Contractors own expense in any appropriate investigation.
Section 4.05 Emergency Response . Contractor shall follow Uniteds Emergency Response Plan for aircraft accidents or incidents and shall be responsible for Uniteds direct costs resulting from Contractors participation in such plan. In the event of an accident or incident involving a Covered Aircraft or Scheduled Flight, United will have the right, but not the obligation, to manage the emergency response efforts on behalf of Contractor with full cooperation from Contractor.
Section 4.06 Safety Matters . At any time, United shall have the right, but not the obligation, at its own cost, to inspect, review, and observe Contractors operations of Scheduled Flights. Notwithstanding the conduct or absence of any such review, Contractor is and shall remain solely responsible for the safe operation of its aircraft and the safe provision of Regional Airline Services, including all Scheduled Flights, and nothing in this Section 4.06 or otherwise in this Agreement is intended or shall be interpreted to make United responsible for such safety matters. Contractor shall maintain its membership in the IATA Operational Safety Audit registry and shall not be suspended from such registry.
Section 4.07 Master Facility and Ground Handling Agreement . Contractor and United have entered into a Second Amended and Restated Master Facility and Ground Handling Agreement in the form attached hereto as Exhibit C . The parties agree that, in the event of a conflict between the provisions of Article VII hereof and the indemnification provisions of the Second Amended and Restated Master Facility and Ground Handling Agreement, the latter shall control.
Section 4.08 Codeshare Terms . Contractor agrees to operate all Scheduled Flights using the United flight code and flight numbers assigned by United, or such other flight codes and flight numbers as may be assigned by United (to accommodate, for example, a United alliance partner), and otherwise under the codeshare terms set forth in Exhibit D .
Section 4.09 Administrative Support and Information Services . In connection with Regional Airline Services provided pursuant to this Agreement, United and Contractor shall provide the administrative and information services set forth on Exhibit N , for so long as provided therein.
Section 4.10 Fuel Procurement and Fuel Services .
(a) The parties will cooperate in identifying (i) Fuel savings opportunities, (ii) providers of Fuel and (iii) providers of Fuel Services. Contractor shall enter into agreements with any such providers as shall be directed by United. Contractor shall use its best efforts to document Fuel Services agreements using substantially the form attached hereto as Exhibit F (which form may be replaced, amended, or otherwise modified by United from time to time). Contractor shall provide any data or analysis of its fuel procurement and Fuel Services as reasonably requested by United.
(b) Notwithstanding the foregoing, United, by or through its subsidiaries, agents, or affiliates, shall have the option (but shall not have any obligation) in its sole discretion (i) to procure or arrange for the procurement of Fuel and/or (ii) procure or arrange for the procurement of Fuel Services for or on behalf of Contractor.
(c) If United elects to procure, or arrange for the procurement of, Fuel for or on behalf of Contractor pursuant to clause (i) of Section 4.10(b) above, then the costs of such procurement, or such arranging for procurement, as applicable (in each case including without limitation the cost of procuring the Fuel, including any administration fees, taxes or other charges of any supplier of Fuel and/or charges for Fuel Services, as applicable) shall be incurred directly by United pursuant to Paragraph B(1)(j) of Schedule 3 . If United does not so elect, then Contractor shall procure, or arrange for the procurement of Fuel, and such costs shall be incurred directly by Contractor and reconciled pursuant Paragraph B(5)(a)(xiv) of Schedule 3 .
(d) If United elects to procure, or arrange for the procurement of, Fuel Services for or on behalf of Contractor pursuant to clause (ii) of Section 4.10(b) above, then the costs of such procurement, or such arranging for procurement, as applicable shall be incurred directly by United pursuant to Paragraph B(1)(j) of Schedule 3 . If United does not so elect, then Contractor shall procure, or arrange for the procurement of Fuel Services, and such costs shall be incurred directly by Contractor and reconciled pursuant to Paragraph B(5)(a)(xiv) of Schedule 3 .
Section 4.11 Slots and Route Authorities . At the request of United made during the Term or upon termination of this Agreement, Contractor shall use its commercially reasonable efforts to transfer to United or its designee, to the extent permitted by law, any airport takeoff or landing slots, route authorities or other similar regulatory or airport authorizations previously transferred to Contractor by United for use in connection with Scheduled Flights, or held or acquired by Contractor and used for Scheduled Flights, in consideration of the payment to Contractor of the net book value on Contractors books, if any, of such slot, authority or authorization. Contractors obligations pursuant to the immediately preceding sentence shall survive the termination of this Agreement for so long as any transfer requested pursuant to this Section 4.11 shall not have been completed. Contractor hereby agrees that all of Contractors contacts or communications with any applicable regulatory authority concerning any airport takeoff or landing slots, route authorities or other similar regulatory authorizations used for Scheduled Flights will be coordinated through United. If any airport takeoff or landing slot,
route authority or other similar regulatory authorization transferred to Contractor by United for use in connection with Scheduled Flights, or held or acquired by Contractor and used for Scheduled Flights is withdrawn or otherwise forfeited as a result of Controllable Cancellations or any other reason within Contractors reasonable control, then Contractor agrees to pay to United promptly upon demand an amount equal to the fair market value of such withdrawn or forfeited slot, authority or authorization.
Section 4.12 Use of United Marks . United hereby grants to Contractor the non-exclusive and non-transferable rights to use the United Marks and other Identification as provided in, and Contractor shall use the United Marks and other Identification in accordance with the terms and conditions of, Exhibit G . In addition, upon notice to Contractor, United may also grant to Contractor, and Contractor shall be deemed to accept, a non-exclusive and non-transferable right and license to adopt and use, the trademarks of any Affiliate of United ( Affiliate Marks ), subject to terms and conditions consistent with the terms set forth on Exhibit G , and Contractor hereby agrees and acknowledges that the Affiliate identified in such notice, rather than United, is the owner of such Affiliate Marks and such Affiliate may enforce the terms of such license.
Section 4.13 Use of Contractor Marks . Contractor hereby grants to United the non-exclusive and non-transferable rights to use the Contractor Marks as provided in, and United shall use the Contractor Marks in accordance with the terms and conditions of, Exhibit H .
Section 4.14 Catering Standards . United and Contractor shall comply with the catering requirements set forth on Exhibit I hereto. The parties agree that, in the event of a conflict between the provisions of Exhibit I and the Contractor Ground Handling Agreement, the provisions of Exhibit I shall control.
Section 4.15 Ticket Handling Terms . United and Contractor shall comply with the ticket handling requirements set forth in Exhibit K hereto. The parties agree that, in the event of a conflict between the provisions of Exhibit K and the Contractor Ground Handling Agreement, the provisions of Exhibit K shall control.
Section 4.16 Fuel Efficiency and Revenue Programs . Contractor shall use commercially reasonable efforts to promptly adopt and adhere to a Fuel efficiency program as described on Exhibit L hereto. Contractor shall implement any incentive program that United requests to be implemented and for which United agrees in writing to pay the Incentive Program Costs.
Section 4.17 Reasonable Operating Constraints and Conditions . Contractor and United shall comply with the operating parameters and requirements set forth on Exhibit J hereto.
Section 4.18 Covered Aircraft Subleases .
(a) As soon as practicable after the execution and delivery of this Agreement for each Covered Aircraft then subject to the terms hereof, and contemporaneous with the entry of any other aircraft into service as a Covered Aircraft hereunder (other than aircraft that Contractor acquires from other than United), United and Contractor shall enter into a Covered
Aircraft Sublease for each Covered Aircraft in the form attached hereto as Exhibit B . Until Contractor and United enter into a Covered Aircraft Sublease, the currently applicable lease or sublease for a Covered Aircraft shall be deemed amended to conform to the form of Covered Aircraft Sublease attached hereto as Exhibit B together with such changes thereto as necessary to conform to the applicable head lease, including without limitation the identity of the owner trustee, owner participant, financing parties, amount of basic rent and stipulated loss value; provided, that any such conforming changes shall not increase the obligations of Contractor under such Covered Aircraft Sublease as otherwise provided in the form of agreement attached hereto as Exhibit B . In connection with the entry into each Covered Aircraft Sublease for a Covered Aircraft, United shall use commercially reasonable efforts to assign to Contractor the warranties of the aircraft and engine manufacturers available to United with respect to such Covered Aircraft. If United is unable to assign the foregoing warranties and is not otherwise able to provide for an agreement directly between Contractor and the applicable manufacturer providing for warranty coverage of such Covered Aircraft, then United shall act on behalf of Contractor in dealing with the applicable manufacturer to enable Contractor to obtain the benefit of such warranties as if United had been able to make such assignment. United further covenants and agrees not to accelerate the Head Lease Expiration Date as provided on Schedule 1 hereto with respect to any aircraft being operated by Contractor pursuant to this Agreement as of the time of determination without the prior written consent of Contractor if such acceleration would result in the Head Lease Expiration Date occurring prior to the end of the Term or the sublease expiration date for such Covered Aircraft as set forth in Schedule 1 .
(b) Basic Rent payable under each Covered Aircraft Sublease shall be entirely abated unless and until (A) such Covered Aircraft has been withdrawn from this Agreement and no longer constitutes a Covered Aircraft, or (B) the occurrence of a Labor Strike, in which case such Basic Rent shall be payable until (x) such aircraft, and all other items required to be returned pursuant to such Covered Aircraft Sublease and this Agreement pertaining to such Covered Aircraft, shall have been returned to United in accordance with the terms of such Covered Aircraft Sublease and this Agreement, or (y) such Labor Strike shall have ended, as the case may be. In addition, in connection with the return of aircraft to United pursuant to Sections 2.08 , 8.02(b)(x) or 8.02(c)(i) , or in connection with the repossession of a Covered Aircraft by a lessor, lender or other financing party under a head lease for or mortgage of such aircraft (other than a repossession resulting from a breach of the Covered Aircraft Sublease by Contractor), Basic Rent shall continue to be entirely abated for the following period:
(i) for the return of aircraft pursuant to Section 8.02(b)(x) , with respect to any such aircraft, (A) the duration (if any) of the grounding applicable to such aircraft (but only if such grounding is a complete grounding, as opposed to a grounding for passenger service only), plus (B) such period as is reasonably necessary for Contractor to return such aircraft in compliance with the provisions of the applicable Covered Aircraft Sublease, but in any event for not more than a period of four weeks after the later of the applicable Termination Date or the end of the Wind Down Period for such aircraft, if any, for the first *** such Covered Aircraft being returned, eight weeks after such date for the next *** such Covered Aircraft being returned, *** weeks after such date for the next *** such Covered Aircraft being returned, and *** weeks after such date for the remaining such Covered Aircraft being returned (such periods to run concurrently); and
(ii) for the return of aircraft pursuant to Sections 2.08 or 8.02(c)(i) or in connection with the repossession of a Covered Aircraft by a lessor, lender or other financing party under a head lease for or mortgage of such aircraft (other than a repossession resulting from a breach of the Covered Aircraft Sublease by Contractor), such period as is reasonably necessary for Contractor to return such aircraft in compliance with the provisions of the applicable Covered Aircraft Sublease, but in any event for not more than a period of *** weeks after the applicable Termination Date for the first *** such Covered Aircraft being returned, *** weeks after such date for the next such *** Covered Aircraft being returned, *** weeks after such date for the next such *** Covered Aircraft being returned, and *** weeks after such date for the remaining such Covered Aircraft being returned (such periods to run concurrently);
provided , that Basic Rent shall in each case cease to be abated with respect to any aircraft to be returned on the day following the day, if any, on which United waives any unsatisfied return conditions with respect to such aircraft. In addition, the provisions of Section 2.09 shall apply to the Covered Aircraft subject to a Covered Aircraft Sublease being returned to United.
(c) No periodic rent shall be payable under any Storage Sublease; provided that, with respect to any Deferred Obligations (as defined in the applicable Covered Aircraft Sublease), if Contractor (for all purposes of this proviso, as Sublessee in such Storage Aircraft Lease and the applicable Covered Aircraft Sublease) does not perform one or more of such Deferred Obligations, then United (for all purposes of this proviso, as Sublessor in such Storage Sublease and the applicable Covered Aircraft Sublease) shall be entitled to seek damages arising under this Agreement and/or the Covered Aircraft Sublease (but not under the Storage Sublease), including without limitation Basic Rent (but excluding Basic Rent for any period for which the Deferred Obligations have been deferred), against Contractor in an amount and type equivalent to the damages (arising under this Agreement and/or the Covered Aircraft Sublease) it would have been entitled to seek against Contractor had such obligations arisen under, and such non-performance occurred with respect to, the Covered Aircraft Sublease rather than the Storage Sublease .
(d) Neither Contractor nor any of Contractors Affiliates shall lease, sublease or otherwise obtain the use of any aircraft formerly subject to a Covered Aircraft Sublease for the six months following the termination of such sublease, unless Contractor has received prior written notice from United that United is not attempting to lease, sublease or otherwise obtain or retain the use of such aircraft (which notice, if true, shall be given by United upon Contractors request).
(e) Notwithstanding anything else contained herein to the contrary, if and when a Covered Aircraft Sublease terminates in accordance with its terms, then the aircraft subject to such sublease shall no longer constitute a Covered Aircraft effective on the date on which the term of such Covered Aircraft Sublease ends, regardless of whether the event giving rise to such sublease termination also constitutes an independent termination or withdrawal event hereunder. Any withdrawal occurring upon such a termination of a Covered Aircraft Sublease shall be separate and distinct from, and shall not limit or supersede, any other withdrawal rights of United contained in this Agreement.
Section 4.19 Unauthorized Payments .
(a) In connection with any performance under this Agreement, neither Contractor, nor any officer, employee, or agent of Contractor, will make any payment, or offer, promise, give or authorize any payment, of any money or other article of value, to any official, employee, or representative of United or any government official or representative, or to any person or entity doing business with United, in order either to obtain business under this Agreement or to retain Uniteds business under this Agreement, or to direct Uniteds business under this Agreement to a third party, or to influence any act or decision of any employee or representative of United as pertaining to this Agreement or any government official or representative to perform or to fail to perform his or her duties, in each case, under this Agreement, or to enlist the aid of any third party to do any of the foregoing. The parties agree that (i) payments by Contractor to former employees of United in the ordinary course of Contractors business, together with matters relating to contractual relationships between United and any former employee of United employed by Contractor and (ii) incidental expenses incurred for business meetings, meals and other minor business related expenses shall not, in each case, violate this paragraph (clause (i) and (ii), Permitted Actions ).
(b) In connection with any performance under this Agreement, neither Contractor, nor any officer, employee, or agent of Contractor, will solicit or receive any amount of cash or negotiable paper, or any item, service or favor of value (a gift) from United. Contractor will refuse to accept all such gifts and, if received, will return such gifts to the donor. In all such cases Contractor will notify United promptly of such gift or offer thereof. If United deems it necessary, Contractor will turn over such gifts to United for further handling. The parties agree that Permitted Actions shall not violate this paragraph.
(c) In connection with any performance under this Agreement, Contractor will at all times comply fully with all of the terms and provisions of the Foreign Corrupt Practices Act and any related or successor statute, regulation, or governmental directive regarding payments to foreign nationals or other persons or entities.
(d) Contractor hereby certifies and represents that no inducements of monetary or other value were offered or given to any United officer, employee or agent, except as is stated in writing to the United official designated to sign this Agreement or except as otherwise stated in this Agreement, prior to execution of this Agreement. Contractor further certifies and represents no official, employee or agent of Contractor shall receive or has received any inducement of monetary or other value from any vendor or contractor of United or has a significant ownership or other interest in a vendor or contractor of United which is or could be perceived by a reasonable person as a conflict of interest, except as is stated in writing to the United official designated to sign this Agreement, prior to execution. The parties agree that Permitted Actions shall not violate this paragraph.
ARTICLE V
CERTAIN RIGHTS OF UNITED
Section 5.01 Use of Covered Aircraft . Contractor agrees that, except as otherwise directed or approved in writing by United in its sole discretion, the Covered Aircraft may be used
only to provide Regional Airline Services. Without the written consent of United, the Covered Aircraft may not be used by Contractor for any other purpose, including without limitation flying for any other airline or on Contractors own behalf.
Section 5.02 Change of Control . Upon the occurrence of a Change of Control, at any time during the Term, to which Change of Control United shall not have consented in writing in advance, the provisions of Section 8.02(b) shall apply.
Section 5.03 Limitation on Transfers of Interest . Upon the occurrence of any offer, issuance, delivery, distribution, assignment, pledge, grant, sale or other transfer of the capital stock or other equity interest of Contractor as a result of which Contractor is no longer a direct, wholly-owned subsidiary of Guarantor (any such event, a Prohibited Transfer ), then the provisions of Section 8.02(b) shall apply. Notwithstanding the foregoing, a Prohibited Transfer shall not include any liquidation or merger of Contractor so long as the successor to Contractor is Parent.
ARTICLE VI
INSURANCE
Section 6.01 Minimum Insurance Coverages . During the Term, in addition to any insurance required to be maintained by Contractor pursuant to the terms of any aircraft lease (including any Covered Aircraft Sublease or Storage Sublease), or by any applicable governmental or airport authority, Contractor shall maintain, or cause to be maintained, in full force and effect policies of insurance with insurers of recognized reputation and responsibility, in each case to the extent available on a commercially reasonable basis, as follows:
(a) Comprehensive aircraft hull and liability insurance, including aircraft third party, passenger liability (including passengers baggage and personal effects), cargo and mail legal liability, and all-risk ground and flight physical damage, with a combined single limit of not less than the greater of (i) $*** million per occurrence and (ii) the highest single limit per occurrence of any aircraft hull and liability insurance maintained by Contractor under any other Capacity Purchase Arrangement, and a minimum limit in respect of personal injury (per clause AVN 60 or its equivalent) of $*** million per occurrence and in the aggregate, and war risk hull and liability insurance as provided by the FAA program or by commercial providers of such insurance with a combined single limit no less than the greater of (i) $*** million per occurrence and (ii) the highest single limit per occurrence of any war risk hull and liability insurance maintained by Contractor under any other Capacity Purchase Arrangement; provided that the parties agree to increase or decrease the foregoing limit set forth in clause (i) above from time to time as necessary to match market conditions;
(b) Workers compensation as required by the appropriate jurisdiction and employers liability with a limit of not less than $*** million combined single limit; and
(c) Other property and liability insurance coverages of the types and in the amounts that would be considered reasonably prudent for a business organization of Contractors size and nature, under the insurance market conditions in effect at the time of placement. All coverages described in this Section 6.01 shall be placed with deductibles reasonably prudent for
a business organization of Contractors size and nature, under the insurance market conditions in effect at the time of placement.
Section 6.02 Endorsements . Unless Contractor and United are participating in a combined policy placement, Contractor shall cause the policies described in Section 6.01 to be duly and properly endorsed by Contractors insurance underwriters with respect to Contractors flights and operations as follows:
(a) To provide that the underwriters shall waive subrogation rights against United, its directors, officers, agents, employees and other authorized representatives, except for their gross negligence or willful misconduct;
(b) To provide that United, its directors, officers, agents, employees and other authorized representatives shall be endorsed as additional insured parties, except for their gross negligence or willful misconduct;
(c) To provide that insurance shall be primary to and without right of contribution from any other insurance which may be available to the additional insureds;
(d) To include a breach of warranty provision in favor of the additional insureds;
(e) To accept and insure Contractors hold harmless and indemnity undertakings set forth in this Agreement, but only to the extent of the coverage afforded by the policy or policies; and
(f) To provide that such policies shall not be canceled, terminated or materially altered, changed or amended until 30 days (but seven days or such lesser period as may be available in respect of hull, war and allied perils) after written notice shall have been sent to United.
Section 6.03 Evidence of Insurance Coverage . At the commencement of this Agreement, and thereafter at Uniteds request, Contractor shall furnish to United evidence reasonably satisfactory to United of such insurance coverage and endorsements (other than any insurance coverage obtained pursuant to Section 6.04 ), including certificates certifying that such insurance and endorsements are in full force and effect. Initially, this evidence shall be a certificate of insurance. If Contractor fails to acquire or maintain insurance as herein provided, United may at its option secure such insurance on Contractors behalf at Contractors expense.
Section 6.04 Insurance Through Combined Placement .
(a) Combined Placement . Subject to Section 6.05 , United and Contractor shall continue to seek to obtain bids from insurance providers with respect to Aviation Insurance, based on Uniteds and Contractors combined exposures, until such time, if ever, as United determines that it no longer desires to seek or maintain such combined placement. If United makes such a determination, it shall provide Contractor written notice at least 120 days prior to the date for renewal of any existing insurance policy that covers both Contractor and United.
(b) Allocation of Costs . The parties hereto shall allocate the costs of combined placements as provided in Paragraph B(6) of Schedule 3 .
(c) Adjustment for Major Loss . If there is a Major Loss under a combined placement insurance policy, United and Contractor will adjust the premium amounts paid by each party in accordance with the provisions set forth in Paragraph B(6) of Schedule 3 .
Section 6.05 Insurance Through Other Than Combined Placement . Contractor shall have the right, in its sole discretion, to elect not to participate in a combined placement with United for a particular insurance policy; provided that United will not bear any increased insurance costs resulting from Contractors election not to participate in such a combined placement. In no event shall an Affiliate of Contractor be obligated to enter into a combined placement of insurance with United.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Contractor Indemnification of United . Contractor shall be liable for and hereby agrees to fully defend, release, discharge, indemnify and hold harmless United, its directors, officers, employees and agents from and against any and all claims, demands, damages, liabilities, suits, judgments, actions, causes of action, losses, costs and expenses of any kind, character or nature whatsoever, including reasonable attorneys fees, costs and expenses in connection therewith and expenses of investigation and litigation thereof, which may be suffered by, accrued against, charged to, or recoverable from United or its directors, officers, employees or agents, including but not limited to, any such losses, costs and expenses involving (i) death or injury (including claims of emotional distress and other non-physical injury by passengers) to any person including any of Contractors or Uniteds directors, officers, employees or agents, (ii) loss of, damage to, or destruction of property (including real, tangible and intangible property, and specifically including regulatory property such as route authorities, slots and other landing rights), including any loss of use of such property, and (iii) damages due to delays in any manner, in each case arising out of, connected with, or attributable to (w) any act or omission by Contractor or any of its directors, officers, employees or agents relating to the provision of Regional Airline Services, (x) the performance, improper performance, or non-performance of any and all obligations to be undertaken by Contractor or any of its directors, officers, employees or agents pursuant to this Agreement or any Ancillary Agreement, or (y) the operation, non-operation, or improper operation of the Covered Aircraft, Storage Aircraft or Other Subleased Aircraft or Contractors equipment or facilities at any location, in each case excluding only claims, demands, damages, liabilities, suits, judgments, actions, causes of action, losses, costs and expenses (A) to the extent resulting from the negligence or willful misconduct of United or its directors, officers, agents or employees (other than negligence or willful misconduct imputed to such indemnified person by reason of its interest in a Covered Aircraft, Storage Aircraft or Other Subleased Aircraft or a Covered Aircraft Sublease or Storage Sublease), (B) for which United is obligated to indemnify or otherwise reimburse Contractor pursuant to this Agreement or any Ancillary Agreement or (C) directly caused by a breach by United of this Agreement or any Ancillary Agreement. Contractor will use commercially reasonable efforts to cause and assure that Contractor will at all times be and remain in custody and control of all aircraft, equipment, and facilities of, or operated by, Contractor, and United and its directors, officers,
employees and agents shall not, for any reason, be deemed to be in custody or control, or a bailee, of such aircraft, equipment or facilities, until such time (if any) that such aircraft, equipment or facilities, pursuant to the terms of this Agreement and the Ancillary Agreements, are required or intended to be, and are, in the actual possession of United or any of the above listed parties and no longer in the control of Contractor.
Section 7.02 United Indemnification of Contractor . United shall be liable for and hereby agrees to fully defend, release, discharge, indemnify, and hold harmless Contractor, its directors, officers, employees, and agents from and against any and all claims, demands, damages, liabilities, suits, judgments, actions, causes of action, losses, costs and expenses of any kind, character or nature whatsoever, including reasonable attorneys fees, costs and expenses in connection therewith and expenses of investigation and litigation thereof, which may be suffered by, accrued against, charged to, or recoverable from Contractor, or its directors, officers, employees or agents, including but not limited to, any such losses, costs and expenses involving (i) death or injury (including claims of emotional distress and other non-physical injury by passengers) to any person including any of Contractors or Uniteds directors, officers, employees or agents, (ii) loss of, damage to, or destruction of property (including real, tangible and intangible property, and specifically including regulatory property such as route authorities, slots and other landing rights), including any loss of use of such property, and (iii) damages due to delays in any manner, in each case arising out of, connected with, or attributable to, (x) the performance, improper performance, or non-performance of any and all obligations to be undertaken by United or any of its directors, officers, employees or agents pursuant to this Agreement, any Ancillary Agreement or any head lease or other financing agreement relating to any Covered Aircraft, United Aircraft or Charter Aircraft, or (y) the operation, non-operation or improper operation of Uniteds aircraft, equipment or facilities (excluding, for the avoidance of doubt, Covered Aircraft and any equipment or facilities leased or subleased by United to Contractor) at any location, in each case excluding only claims, demands, damages, liabilities, suits judgments, actions, causes of action, losses, costs and expenses (A) to the extent resulting from the negligence or willful misconduct of Contractor or its directors, officers, agents or employees, or (B) for which Contractor is obligated to indemnify or otherwise reimburse United pursuant to this Agreement or any Ancillary Agreement or (C) directly caused by a breach by Contractor of this Agreement or any Ancillary Agreement. United will use commercially reasonable efforts to cause and assure that United will at all times be and remain in custody and control of any aircraft, equipment and facilities of, or operated by, United, and Contractor and its directors, officers, employees and agents shall not, for any reason, be deemed to be in the custody or control, or a bailee, of such aircraft, equipment or facilities, until such time (if any) that such aircraft, equipment or facilities, pursuant to the terms of this Agreement and the Ancillary Agreements, are required or intended to be, and are, in the actual possession of Contractor or any of the above listed parties and no longer in the control of United.
Section 7.03 Indemnification Claims . A party (the Indemnified Party ) that may be entitled to indemnification from another party under the terms of this Agreement (the Indemnifying Party ) shall provide the Indemnifying Party with prompt written notice (an Indemnity Notice ) of any third-party claim which the Indemnified Party believes may give rise to a claim for indemnity against the Indemnifying Party hereunder. Notwithstanding the foregoing, the failure of an Indemnified Party to promptly provide an Indemnity Notice shall not constitute a waiver by the Indemnified Party of any right to indemnification or otherwise relieve
such Indemnifying Party from any liability hereunder unless and only to the extent that the Indemnifying Party is materially prejudiced as a result thereof, and in any event shall not relieve such Indemnifying Party from any liability which it may have otherwise than on account of this Article VII . The Indemnifying Party shall be entitled, if it accepts financial responsibility for the third-party claim, to control the defense of or to settle any such third-party claim at its own expense and by its own counsel; provided , that the Indemnified Partys prior written consent (which may not be unreasonably withheld or delayed) must be obtained prior to settling any such third-party claim. The Indemnified Party shall promptly provide the Indemnifying Party with such information as the Indemnifying Party shall reasonably request to defend any such third-party claim and shall otherwise cooperate with the Indemnifying Party in the defense of any such third-party claim. Except as set forth in this Section 7.03 , the Indemnified Party shall not enter into any settlement or other compromise or consent to a judgment with respect to a third-party claim as to which the Indemnifying Party has an indemnity obligation hereunder without the prior written consent of the Indemnifying Party (which may not be unreasonably withheld or delayed), and the entering into of any settlement or compromise or the consent to any judgment in violation of the foregoing shall constitute a waiver by the Indemnified Party of its right to indemnity hereunder to the extent the Indemnifying Party was prejudiced thereby. Any Indemnifying Party shall be subrogated to the rights of the Indemnified Party to the extent that the Indemnifying Party pays for any loss, damage or expense suffered by the Indemnified Party hereunder. If the Indemnifying Party does not accept financial responsibility for the third-party claim or fails to defend against the third-party claim that is the subject of an Indemnity Notice within 30 days of receiving such notice (or sooner if the nature of the third-party claim so requires), or otherwise contests its obligation to indemnify the Indemnified Party in connection therewith, the Indemnified Party may, upon providing written notice to the Indemnifying Party, pay, compromise or defend such third-party claim without the prior consent of the (otherwise) Indemnifying Party. In the latter event, the Indemnified Party, by proceeding to defend itself or settle the matter, does not waive any of its rights hereunder to later seek reimbursement from the Indemnifying Party.
Section 7.04 Employers Liability; Independent Contractors; Waiver of Control .
(a) Employers Liability and Workers Compensation . Each party hereto assumes full responsibility for its employers and workers compensation liability to its respective officers, directors, employees or agents on account of injury or death resulting from or sustained in the performance of their respective service under this Agreement. Each party, with respect to its own employees, accepts full and exclusive liability for the payment of workers compensation and employers liability insurance premiums with respect to such employees, and for the payment of all taxes, contributions or other payments for unemployment compensation or old age or retirement benefits, pensions or annuities now or hereafter imposed upon employers by the government of the United States or any other governmental body, including state, local or foreign, with respect to such employees measured by the wages, salaries, compensation or other remuneration paid to such employees, or otherwise.
(b) Employees, etc., of Contractor . The employees, agents, and independent contractors of Contractor engaged in performing any of the services Contractor is to perform pursuant to this Agreement are employees, agents, and independent contractors of Contractor for all purposes, and under no circumstances will be deemed to be employees, agents or independent
contractors of United. In its performance under this Agreement, Contractor will act, for all purposes, as an independent contractor and not as an agent for United. Notwithstanding the fact that Contractor has agreed to follow certain procedures, instructions and standards of service of United pursuant to this Agreement, United will have no supervisory power or control over any employees, agents or independent contractors engaged by Contractor in connection with its performance hereunder, and all complaints or requested changes in procedures made by United will, in all events, be transmitted by United to Contractors designated representative. Nothing contained in this Agreement is intended to limit or condition Contractors control over its operations or the conduct of its business as an air carrier.
(c) Employees, etc., of United . The employees, agents, and independent contractors of United engaged in performing any of the services United is to perform pursuant to this Agreement are employees, agents, and independent contractors of United for all purposes, and under no circumstances will be deemed to be employees, agents, or independent contractors of Contractor. Contractor will have no supervision or control over any such United employees, agents and independent contractors and any complaint or requested change in procedure made by Contractor will be transmitted by Contractor to Uniteds designated representative. In its performance under this Agreement, United will act, for all purposes, as an independent contractor and not as an agent for Contractor.
(d) Contractor Flights . The fact that Contractors operations are conducted under Uniteds Marks and listed under the UA designator code will not affect their status as flights operated by Contractor for purposes of this Agreement or any other agreement between the parties, and Contractor and United agree to advise all third parties, including passengers, of this fact.
Section 7.05 Survival . The provisions of this Article VII shall survive the termination of this Agreement for a period of seven years.
ARTICLE VIII
TERM, TERMINATION AND DISPOSITION OF AIRCRAFT
Section 8.01 Term . The Term of this Agreement shall commence on and shall be effective as of the Original Execution Date and, unless earlier terminated or extended as provided herein, shall continue until December 31, 2017 (the Term ).
Section 8.02 Early Termination .
(a) By United for Cause . United shall have the right to terminate this Agreement, immediately upon written notice (but without any prior notice) following the occurrence of any event that constitutes Cause. Any termination pursuant to this Section 8.02(a) shall supersede any other termination pursuant to any other provision of this Agreement (even if such other right of termination shall already have been exercised), and the date of such notification of termination for Cause shall be the Termination Date for purposes of this Agreement (and such Termination Date pursuant to this Section 8.02(a) shall supersede any other Termination Date that may have been previously established pursuant to another termination). In the event that United shall not have delivered written notice of termination pursuant to this
Section 8.02(a) within four months after the later of (x) United receives written notice from Contractor of the occurrence of any event that constitutes Cause and (y) such event is no longer continuing, then United shall be conclusively deemed to have waived any right to terminate this Agreement based upon such event; provided , that such waiver shall not apply to any subsequent or continuing event that constitutes Cause.
(b) By United for Breach . United may terminate this Agreement, by providing written notice to Contractor (with or without any prior notice), upon the occurrence of a material breach of this Agreement by Contractor as described in clause (ii) below. United may terminate this Agreement, by providing written notice to Contractor, upon the occurrence of any other material breach of this Agreement by Contractor, which breach shall not have been cured within 60 days (or 15 days in the case of clause (x) below) after written notice of such breach is delivered by United to Contractor (which notice period may run concurrently with the 15-day notice period, if any, provided pursuant to Section 4.03 for non-safety-related breaches). Any such written notice delivered pursuant to the foregoing sentences shall specify the Termination Date (subject to the provisions of this Article VIII ). The parties hereto agree that, without limiting the circumstances or events that may constitute a material breach, each of the following shall constitute a material breach of this Agreement by Contractor: (i) the occurrence of a System Flight Disruption, (ii) a reasonable and good faith determination by United, using recognized standards of safety, that there is a material safety concern with the operation of any Scheduled Flights, (iii) the grounding of any Contractor Fleet by regulatory or court order or other governmental action, other than a non-carrier specific grounding, (iv) a Controllable Cancellation Factor for any two consecutive calendar months of ***% or below, (v) a Controllable On-Time Departure Rate for any two consecutive calendar months of ***% or below, (vi) concurrent material defaults by Contractor under ten or more Covered Aircraft Subleases or a material default under any other Ancillary Agreement that, in either case, materially adversely affects Contractors performance of its obligations under this Agreement or any Ancillary Agreement and is not cured during any applicable cure period, (vii) a material default by Contractor under any Flight Hour Agreement that adversely affects the maintenance of any Covered Aircraft, Charter Aircraft or United Aircraft, any material maintenance reserve provided for under such agreement, or the maintenance costs under such agreement, which default is not cured during any applicable cure period, (viii) a Change of Control shall occur to which United shall not have consented in writing in advance, (ix) a Prohibited Transfer shall occur or (x) the non-carrier specific grounding of any Contractor Fleet by regulatory or court order or other governmental action. In the event that United shall not have delivered written notice of termination pursuant to this Section 8.02(b) within four months after the later of (A) the date upon which United receives written notice from Contractor of any material breach of this Agreement by Contractor and (B) such event is no longer continuing, then United shall be conclusively deemed to have waived any right to terminate this Agreement based upon such breach; provided that such waiver shall not apply to any subsequent or continuing breach. Notwithstanding the foregoing, the termination right attributable to an event described in clause (x) above shall be limited to the termination of this Agreement as it relates solely to the particular Contractor Fleet subject to such grounding.
(c) By Contractor for Breach . Contractor may terminate this Agreement, by providing written notice to United, upon (i) Uniteds failure to make any payment of $*** or more due to Contractor under Article III or Section 10.01 of this Agreement, including without
limitation, payments which become due during any Wind-Down Period, which payment is not subject to any ongoing good faith dispute and which failure shall not have been cured within five Business Days after receipt of written notice from Contractor of such failure, or (ii) upon the occurrence of any other material breach of this Agreement by United, which breach shall not have been cured within 60 days after written notice of such material breach is delivered by Contractor to United. Such written notice of termination shall specify the Termination Date (subject to the provisions of this Article VIII ). In the event that Contractor shall not have delivered written notice of termination pursuant to this Section 8.02(c) within four months after the later of (x) the date upon which Contractor receives written notice from United of any material breach under this Agreement by United and (y) such material breach is no longer continuing, then Contractor shall be conclusively deemed to have waived any right to terminate this Agreement based upon such breach; provided , that such waiver shall not apply to any subsequent or continuing breach.
(d) By United for Breach of Affiliate CPA . United may terminate this Agreement, by providing written notice to Contractor (with or without prior notice) upon the early termination by United of any Affiliate CPA or other Capacity Purchase Arrangement between United and Contractor; provided , that the foregoing termination right in this Section 8.02(d) shall not apply in the event the Affiliate CPA or Capacity Purchase Arrangement is terminated solely as a result of events or actions similar to those described in clauses (i) , (ii) or (iii) of the definition of Cause herein. Such written notice of termination shall specify the Termination Date (subject to the provisions of this Article VIII ).
(e) By Contractor for Breach by United of Affiliate CPA . Contractor may terminate this Agreement by providing written notice to United (with or without prior notice) upon the early termination by Contractor of any Affiliate CPA or other Capacity Purchase Arrangement between United and Contractor as a result of any uncured default by United thereunder. Such written notice of termination shall specify the Termination Date (subject to the provisions of this Article VIII ).
(f) Survival During Wind-Down Period . Upon any termination hereunder, the Term shall continue, and this Agreement shall survive in full force and effect, beyond the Termination Date until the end of the Wind-Down Period, if any, and the rights and obligations of the parties under this Agreement, including without limitation remedies available upon the occurrence of events constituting Cause or material breach, shall continue with respect to each Covered Aircraft until it is withdrawn from this Agreement and otherwise until the later of the Termination Date and the end of the Wind-Down Period, if any.
Section 8.03 Disposition of Aircraft during Wind-Down Period .
(a) Termination by United for Cause . If this Agreement is terminated pursuant to Section 8.02(a) , then the Covered Aircraft shall be withdrawn from the capacity purchase provisions of this Agreement in accordance with the following terms and conditions. Within 90 days of delivery of any notice of termination, United shall deliver to Contractor a revocable written Wind-Down Schedule, providing for the withdrawal of such Covered Aircraft from the capacity purchase provisions of this Agreement, delineating the number of each aircraft type to be withdrawn by month. United may amend or modify such Wind-Down Schedule in its
sole discretion by providing two weeks written notice to Contractor of such amendment or modification. The Wind-Down Schedule may begin immediately upon its delivery, and may not provide for the withdrawal of any Covered Aircraft beyond the earlier of (i) the date 60 months after the date of delivery of the Wind-Down Schedule, and (ii) the date on which the head lease applicable to the Covered Aircraft terminates. The provisions of this Section 8.03(a) shall supersede any Wind Down Schedule delivered pursuant to any other provision of this Agreement in accordance with a Wind-Down Schedule to be delivered by United to Contractor on the Termination Date.
(b) Termination by United for Breach, Change of Control or Transfer of Interest . If this Agreement is terminated by United under Section 8.02(b) or 8.02(d) , then the Covered Aircraft (or in the event of a termination under Section 8.02(b)(x) , only the Covered Aircraft that are included within the grounded Contractor Fleets) shall be withdrawn from the capacity purchase provisions of this Agreement in accordance with the following terms and conditions. The notice of termination delivered by United to Contractor pursuant to Section 8.02(b) or 8.02(d) shall contain a Termination Date that is determined in the discretion of United provided that it does not conflict with the provisions of this Section 8.03(b) governing the Wind-Down Schedule. Within 90 days of delivery of any notice of termination, United shall deliver to Contractor an irrevocable written Wind-Down Schedule, providing for the withdrawal of such Covered Aircraft from the capacity purchase provisions of this Agreement, and delineating the number of each aircraft type to be withdrawn by month. The Wind-Down Schedule may not commence until the Termination Date and may not provide for the withdrawal of any Covered Aircraft beyond the earlier of (i) the date 60 months after the date of delivery of the Wind-Down Schedule, and (ii) the date on which the head lease applicable to the Covered Aircraft terminates.
(c) Termination by Contractor for Breach . If this Agreement is terminated by Contractor under Section 8.02(c) or 8.02(e) , then the Covered Aircraft shall be withdrawn from the capacity purchase provisions of this Agreement in accordance with the following terms and conditions:
(i) The notice of termination delivered by Contractor to United pursuant to Section 8.02(c)(i) shall be irrevocable by Contractor and shall contain a Termination Date that is not more than 60 days after the date of such notice; provided , that such termination notice shall be void and of no further effect automatically upon the payment by United prior to the Termination Date of all unpaid amounts giving rise to the default under Section 8.02(c)(i) . As of the Termination Date set forth in a notice of termination delivered pursuant to Section 8.02(c)(i) , all of the Covered Aircraft shall automatically be withdrawn from the capacity purchase provisions of this Agreement and shall cease to be Covered Aircraft as of such date and this Agreement shall terminate.
(ii) The notice of termination delivered by Contractor to United pursuant to Section 8.02(c)(ii) or Section 8.02(e) shall be irrevocable by Contractor and shall contain a Termination Date that is at least 180 days after the date of such notice. Prior to the 90th day after receipt of such termination notice, United shall deliver to Contractor a Wind-Down Schedule beginning on such Termination Date. The Wind-Down Schedule may not provide for the withdrawal of more than 15 Covered Aircraft per
month (excluding the withdrawal of any Covered Aircraft upon the termination of the head lease related to such Covered Aircraft), and may not provide for the withdrawal of any Covered Aircraft on any date more than 60 months after the Termination Date.
(d) Termination at End of Term . If the Agreement is terminated at the end of the Term (other than pursuant to Section 8.02 ), then each Covered Aircraft shall immediately be withdrawn from the capacity purchase provisions of this Agreement.
(e) Return Conditions . Upon the date for withdrawal from the capacity purchase provisions of this Agreement of a Covered Aircraft as provided in Sections 8.03(a) , 8.03(b) , 8.03(c) or 8.03(d) , the provisions of Section 2.09 shall apply.
(f) Fleet Hour Program Balances . In connection with the return of any aircraft by Contractor to United, Contractor shall use its commercially reasonable efforts to facilitate the participation by United or its designee in any Flight Hour Agreement or any other similar program for components relating to Covered Aircraft. Any reserve balances held by a flight hour contractor in respect of any such Engines or components of Covered Aircraft shall be deemed to be held for Uniteds account, and Contractor shall execute an assignment, if any, required by United or such flight hour contractor in connection therewith.
(g) Other Remedies for Labor Strike and Other Circumstances . In the event of (i) the occurrence of a Labor Strike or (ii) the mandatory grounding of any of the Contractor Fleets by the FAA due to any action or inaction of Contractor, then for so long as such Labor Strike or grounding shall continue and thereafter until the number of Scheduled Flights that are Controllable On-Time Departures (including giving effect to any delays resulting from a Labor Strike or grounding) on any day of the week equals or exceeds the number of Scheduled Flights that were Controllable On-Time Departures on the same day of the week prior to such Labor Strike or grounding, United shall not be required to pay any of the amounts set forth on Appendix 1 to Schedule 3 as being required for each Covered Aircraft for each month in the Term. The rights set forth in this Section 8.03(g) are in addition to, and not in limitation of, any other right of United arising hereunder.
(h) Material Breach by United . Upon a payment breach of this Agreement described in Section 8.02(c)(i) by United, which breach shall not have been cured within 30 days after written notice delivered by Contractor to United, then for the period from such 30th day until such breach is cured or the Agreement is otherwise terminated, in addition to, and not in limitation of, any recourse or remedy available to Contractor at law or in equity, Contractor shall be entitled to obtain the payments due to it hereunder directly from Airline Clearing House, Inc. for the duration of such default.
(i) Punitive Damages . No party to this Agreement or any of its Affiliates shall be liable to any other party hereto or any of its Affiliates for claims for incidental, indirect, consequential, punitive, special or exemplary damages, including lost revenues, lost profits or lost prospective economic advantage, arising out of or relating to this Agreement or the transactions contemplated hereby, regardless of whether a claim is based on contract, tort (including negligence), strict liability, violation of any applicable deceptive trade practices act or similar law or any other legal or equitable principle, and each party releases the others and their
respective Affiliates from liability for any such damages. No party shall be entitled to rescission of this Agreement as a result of breach of any other partys representations, warranties, covenants or agreements, or for any other matter; provided , that nothing in this Section 8.03(i) shall restrict the right of any party to exercise any right to terminate this Agreement pursuant to the terms hereof.
(j) Automatic Withdrawal Schedule . If, at any time upon or following the termination of this Agreement by United under Section 8.02(a) , 8.02(b) or 8.02(d) , or any termination of this Agreement at the end of the Term, and prior to the delivery of a notice or Wind-Down Schedule to be delivered pursuant to Section 8.03(a) , (b) or (d) , United is enjoined or stayed from delivering any such notice or Wind-Down Schedule, then, without any further action required by any party hereto, the Wind-Down Schedule in effect in connection with such termination shall be deemed to be as follows: five Covered Aircraft shall be withdrawn from the capacity purchase provisions of this Agreement at 12:01 a.m., central time, on each Monday, beginning on the first Monday following the Termination Date or the end of the Term, as the case may be, and continuing until all such aircraft are withdrawn, and the Covered Aircraft shall be withdrawn in order of Covered Aircraft Sublease termination dates, with the Covered Aircraft with the latest scheduled termination date withdrawn first, and the Covered Aircraft with the soonest scheduled termination date withdrawn last; provided that each Covered Aircraft whose head lease termination date occurs prior to the date on which such aircraft would otherwise be withdrawn pursuant to the foregoing shall instead be withdrawn on such head lease termination date.
Section 8.04 Adjustments for Uncured Event of Default . United and Contractor acknowledge and agree that, if (x) any circumstance exists which provides United a right of termination pursuant to Section 8.02(a) , 8.02(b) (but only as to material defaults described in clauses (i) through (x) of such Section 8.02(b) ) or 8.02(d) of this Agreement (any such circumstance, an Event of Default ) and (y) United has provided Contractor written notice of such Event of Default (a Default Notice ), then, for the period commencing on Contractors receipt of the Default Notice and continuing until such Event of Default no longer exists (the Default Modification Period ) or any longer period as provided below, the following provisions shall apply (it being understood that, if United has been enjoined from providing a Default Notice, then the Default Modification Period shall commence on the earliest date on which United could have delivered a Default Notice had United not been so enjoined):
(a) Section 2.01(b)(ii) shall be disregarded in their entirety.
(b) Section 3.02(a) shall be disregarded in its entirety, and shall be replaced by the following:
(a) The rates under this Agreement set forth in Appendix 1 and Appendix 6 to Schedule 3 hereto and the Controllable Completion Factor Incentive Rate set forth in Appendix 2 to Schedule 3 hereto shall, in the case of Appendix 1 and Appendix 6 to Schedule 3 , be replaced during the Default Modification Period with the rates set forth on Appendix 1A and Appendix 6A to Schedule 3 , and all such rates shall be adjusted on the first day of the immediately following month after the Default Notice and
each December 1 after the Default Notice and continuing until such Event of Default no longer exists (each, an Adjustment Date ), as follows: the new rates, applicable beginning on such Adjustment Date, shall equal the rates set forth in Appendix 1A and Appendix 6A , as applicable, multiplied by the higher of (x) *** and (y) the lower of (i) the Annual CPI Change and (ii) ***.
(c) At Uniteds election at its sole discretion, with respect to aircraft that have not been withdrawn from the capacity purchase provisions of this Agreement (regardless of whether any notice of withdrawal has been submitted in respect of such aircraft), Schedule 1 shall be disregarded in its entirety, and shall be replaced by a new Schedule 1A , it being understood that such Schedule 1A shall not (i) not modify any scheduled sublease expiration date occurring in the month in which the Default Notice is received or in the following calendar month, (ii) provide for the re-entry into Regional Airline Services of (x) aircraft subject to a Storage Sublease at the time of the Default Notice, and/or (y) aircraft removed from service pursuant to Annex B to a Covered Aircraft Sublease but not yet returned to United in compliance with the provisions thereof, (iii) provide for the withdrawal of any aircraft on a date later than the latest date for withdrawal set forth on the version of Schedule 1 in effect on the date immediately prior to the execution date of this Agreement or (iv) accelerate the requirement of Contractor, as Sublessee, to comply with the provisions of Annex B to any Covered Aircraft Sublease. For the avoidance of doubt, in respect of an Event of Default, if Contractor has cured the applicable Event of Default such that it no longer exists (the date of any such cure, the Cure Date ), then the Schedule 1A in effect during the Default Modification Period shall immediately be replaced by the Schedule 1 in effect immediately prior to such Event of Default (the Original Schedule ); provided that the Original Schedule shall not apply with respect to aircraft for which the Original Schedule provided for removal from the capacity purchase provisions of this Agreement either (a) during the Default Modification Period or (b) within 90 days following the Cure Date (such aircraft referenced in the foregoing clauses (a) and (b) , Excepted Aircraft ); provided further that, at Uniteds election, the Excepted Aircraft shall be removed from the capacity purchase provisions of this Agreement as soon as Contractor can reasonably comply with the applicable return conditions set forth in Annex B to each of the applicable Covered Aircraft Subleases.
(d) Paragraph A(3) of Schedule 3 shall be disregarded in its entirety.
(e) The second and third provisos in Paragraph C of Appendix 4 to Schedule 3 shall be disregarded in their entirety.
(f) Appendix 7 to Schedule 3 shall be disregarded in its entirety.
(g) Solely with respect to the allocation of expenses (to be borne by either United, as Sublessor, or Contractor, as Sublessee) relating to repairs required as a result of borescope inspections, Annex B to Exhibit B attached to this Agreement and to each Covered Aircraft Sublease shall be deemed to have been amended, mutatis mutandis , with no further action of the parties, so that such expenses shall be allocated as provided by Annex B to Exhibit B to the Existing CPA, it being understood, for the avoidance of doubt, that such amended version of Annex B shall in no circumstance include the fourth sentence of Paragraph F in the form of Annex B to Exhibit B attached to this Agreement.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 9.01 Representations and Warranties of Contractor . Contractor represents, warrants and covenants to United as of the Effective Date as follows:
(a) Organization and Qualification . Contractor is a duly organized and validly existing corporation in good standing under the laws of its state of incorporation and has the corporate power and authority to own, operate and use its assets and to provide the Regional Airline Services. Contractor is duly qualified to do business as a foreign corporation under the laws of each jurisdiction that requires such qualification except where failure to be so qualified would not have a material adverse effect on the business or assets of Contractor.
(b) Authority Relative to this Agreement . Contractor has the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Contractor. This Agreement has been duly and validly executed and delivered by Contractor and is, assuming due execution and delivery thereof by United and that United has legal power and right to enter into this Agreement, a valid and binding obligation of Contractor, enforceable against Contractor in accordance with its terms, except as enforcement hereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors rights generally and legal principles of general applicability governing the availability of equitable remedies (whether considered in a proceeding in equity or at law or otherwise under applicable law).
(c) Broker . Except for the fees and expenses payable to Raymond James Financial Inc. (which amounts shall be paid by Contractor), no broker, investment banker, or other person is entitled to any brokers, finders or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Contractor.
(d) Permits . Contractor possesses all material certificates, authorizations and permits issued by FAA and other applicable federal, state or foreign regulatory authorities necessary to conduct its business, to provide Regional Airlines Services and otherwise to perform its obligations hereunder, and Contractor has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse effect on Contractor or on its ability to conduct its business, to provide Regional Airlines Services and otherwise to perform its obligations hereunder.
Section 9.02 Representations and Warranties of United . United represents and warrants to Contractor as of the Effective Date as follows:
(a) Organization and Qualification . United is a duly incorporated and validly existing corporation in good standing under the laws of the State of Delaware.
(b) Authority Relative to this Agreement . United has the corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby in accordance with the terms hereof. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of United. This Agreement has been duly and validly executed and delivered by United and is, assuming due execution and delivery thereof by Contractor and that Contractor has legal power and right to enter into this Agreement, a valid and binding obligation of United, enforceable against United in accordance with its terms, except as enforcement hereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors rights generally and legal principles of general applicability governing the availability of equitable remedies (whether considered in a proceeding in equity or at law or otherwise under applicable law).
(c) Conflicts; Defaults . Neither the execution or delivery of this Agreement nor the performance by United of the transactions contemplated hereby will (i) violate, conflict with, or constitute a default under any of the terms of Uniteds certificate of incorporation, by-laws, or any provision of, or result in the acceleration of any obligation under, any material contract, sales commitment, license, purchase order, security agreement, mortgage, note, deed, lien, lease or other agreement to which United is a party or by which it or its properties or assets may be bound, (ii) result in the creation or imposition of any lien, charge or encumbrance in favor of any third person or entity, (iii) violate any law, statute, judgment, decree, order, rule or regulation of any governmental authority or body, or (iv) constitute any event which, after notice or lapse of time or both, would result in such violation, conflict, default, acceleration or creation or imposition of liens, charges or encumbrances.
(d) Broker . No broker, investment banker, or other person is entitled to any brokers, finders or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of United.
(e) No Proceedings . There are no legal or governmental proceedings pending, or investigations commenced of which United has received notice, in each case to which United is a party or of which any property or assets of United is the subject which, if determined adversely to United, would individually or in the aggregate have a material adverse effect on United or on its ability to perform its obligations hereunder; and to the best knowledge of United, no such proceedings are threatened or contemplated by governmental authorities or threatened by others.
(f) No Default Under this Agreement . To the knowledge of United, there is not occurring any continuing event that would constitute a default by Contractor under this Agreement following the Effective Date.
ARTICLE X
MISCELLANEOUS
Section 10.01 Conversion of Covered Aircraft Livery . For each aircraft currently subject to a sublease or lease between United and Contractor, at such time (if ever) as such aircraft enters
service as a Covered Aircraft, if such aircraft is not already prepared in the livery required by Paragraph 8 of Exhibit G and otherwise appropriately configured, then United shall be responsible for Contractors reasonable out-of-pocket costs of preparing each Covered Aircraft in such livery and appropriate configuration prior to its being placed into service hereunder, up to $*** for each such Covered Aircraft.
Section 10.02 Notices . All notices made pursuant to this Agreement shall be in writing and shall be deemed given upon (a) a transmitters confirmation of a receipt of a facsimile transmission (but only if followed by confirmed delivery by a standard overnight courier the following Business Day or if delivered by hand the following Business Day), or (b) confirmed delivery by a standard overnight courier or delivered by hand, to the parties at the following addresses:
if to United:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Senior Vice President United Express
Facsimile No.: (872) 825-0030
and to:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Vice President Fleet
Facsimile No.: (872) 825-8113
and to:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Vice President Procurement
Facsimile No.: (872) 825-0308
with a copy to:
United Airlines, Inc.
Willis Tower
233 S. Wacker Drive
Chicago, IL 60606
Attention: Vice President and Deputy General Counsel
Facsimile No.: (872) 825-0081
if to Contractor:
ExpressJet Airlines, Inc.
100 Hartsfield Centre Parkway, Suite 700
Atlanta, Georgia 30354
Attn: Chief Operating Officer
Facsimile No.:
with a copy to:
SkyWest, Inc.
444 River Road
St. George, UT 84790
Attn: Chief Financial Officer
Facsimile No: (435) 634 3305
Telephone No: (435) 634-3200
if to Parent or any other Guarantor:
SkyWest, Inc.
444 River Road
St. George, UT 84790
Attn: President and COO
Facsimile No: (435) 634 3305
Telephone No: (435) (634-3200)
or to such other address as any party hereto may have furnished to the other parties by a notice in writing in accordance with this Section 10.02 .
Section 10.03 Binding Effect; Assignment . This Agreement and all of the provisions hereof shall be binding upon the parties hereto and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except with respect to a merger or other consolidation of either party with another Person or the transfer of all or substantially all of the assets of either party to another Person (in which event the surviving Person or the Person acquiring the assets shall be deemed a successor and permitted assign) (and without limiting Uniteds rights pursuant to Section 5.02 or 5.03 hereof), neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other parties. In connection with any assignment of this Agreement by Contractor or merger, consolidation or other similar transaction that results in a successor to Contractor, Contractor shall bear the cost of any payments or fees associated with such assignment, merger, consolidation or other similar transaction, including without limitation, any fees paid to secure route authorities, operating certificates, permits and any similar costs for Contractors assignee, but excluding any costs incurred by United in connection with providing notice to head lessors of such assignment, merger, consolidation or other similar transaction.
Section 10.04 Amendment and Modification . This Agreement may not be amended or modified in any respect except by a written agreement signed by the parties hereto that specifically states that it is intended to amend or modify this Agreement.
Section 10.05 Waiver . The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term, but such waiver shall be effective only if it is in writing signed by the party against which such waiver is to be asserted that specifically states that it is intended to waive such term. Unless otherwise expressly provided in this Agreement, no delay or omission on the part of any party in exercising any right or privilege under this Agreement shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right or privilege under this Agreement operate as a waiver of any other right or privilege under this Agreement nor shall any single or partial exercise of any right or privilege preclude any other or further exercise thereof or the exercise of any other right or privilege under this Agreement. No failure by any party to take any action or assert any right or privilege hereunder shall be deemed to be a waiver of such right or privilege in the event of the continuation or repetition of the circumstances giving rise to such right unless expressly waived in writing by each party against whom the existence of such waiver is asserted.
Section 10.06 Interpretation . The table of contents and the section and other headings and subheadings contained in this Agreement and in the exhibits and schedules hereto are solely for the purpose of reference, are not part of the agreement of the parties hereto, and shall not in any way affect the meaning or interpretation of this Agreement or any exhibit or schedule hereto. All references to days (but not Business Days) or months shall be deemed references to calendar days or months. All references to $ shall be deemed references to United States dollars and, unless otherwise specified, shall be deemed references to then-current United States dollar amounts and are not intended to be adjusted for inflation or otherwise. Unless the context otherwise requires, any reference to an Article, a Section, an Exhibit, or a Schedule shall be deemed to refer to a section of this Agreement or an exhibit or schedule to this Agreement, as applicable. The words hereof, herein and hereunder and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Whenever the words include, includes or including are used in this Agreement, unless otherwise specifically provided, they shall be deemed to be followed by the words without limitation. All references in this Agreement to the past practices of Contractor, including the practices of Contractor during any historical period (whether under this Agreement or the Existing CPA), shall be deemed to refer to the performance or practices of the entity that operated substantially all of the Covered Aircraft during such historical period. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing the document to be drafted.
Section 10.07 Confidentiality . Except as required by law or stock exchange or other regulation or in any proceeding to enforce the provisions of this Agreement, or as otherwise provided below, each party to this Agreement hereby agrees not to publicize or disclose to any third party the terms or conditions of this Agreement or any of the Ancillary Agreements, or any exhibit, schedule or appendix hereto or thereto, or any CPA Records, without the prior written consent of the other parties thereto (except that a party may disclose such information to its third-party consultants, advisors and representatives, in each case who are themselves bound to keep such information confidential). Except as required by law or stock exchange or other regulation or in any proceeding to enforce the provisions of this Agreement or any of the Ancillary Agreements, or as otherwise provided below, each party hereby agrees not to disclose to any third party any confidential information or data, both oral and written, received from the other,
whether pursuant to or in connection with this Agreement or any of the Ancillary Agreements, without the prior written consent of the party providing such confidential information or data (except that a party may disclose such information to its third-party consultants, advisors and representatives, in each case who are themselves bound to keep such information confidential). Each party hereby agrees not to use any such confidential information or data of the other party other than in connection with performing their respective obligations or enforcing their respective rights under this Agreement or any of the Ancillary Agreements, or as otherwise expressly permitted or contemplated by this Agreement or any of the Ancillary Agreements. If either party is served with a subpoena or other process requiring the production or disclosure of any of such agreements or information, then the party receiving such subpoena or other process, before complying with such subpoena or other process, shall immediately notify the other parties hereto of the same and permit said other parties a reasonable period of time to intervene and contest disclosure or production. Upon termination of this Agreement, each party must return to each other any confidential information or data received from the other which is still in the recipients possession or control. Without limiting the foregoing, no party shall be prevented from disclosing the following terms of this Agreement: the number of aircraft subject hereto, the periods for which such aircraft are subject hereto, and any termination provisions contained herein. The provisions of this Section 10.07 shall survive the termination of this Agreement for a period of ten years.
Section 10.08 Survival . The obligations of the parties under Section 2.02 , Section 2.08 , Section 2.09 , Article III , Article IV , Article VII , Section 8.03(f) , Section 8.03(i) , Section 10.02 , Section 10.07 , Section 10.08 , Section 10.11 , Section 10.12 , Section 10.13 , Section 10.14 , Section 10.15 , Section 10.16 , Exhibit G , Exhibit H and Exhibit M (to the extent of any surviving obligations of Contractor) shall survive the expiration or termination of this Agreement.
Section 10.09 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The Agreement may be executed by facsimile signature.
Section 10.10 Severability . Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
Section 10.11 Equitable Remedies; Limitation on Damages .
(a) Equitable Remedies . Each party acknowledges and agrees that, under certain circumstances, the breach by a party of a term or provision of this Agreement will materially and irreparably harm the other party, that money damages will accordingly not be an adequate remedy for such breach and that the non-defaulting party, in its sole discretion and in addition to its rights under this Agreement and any other remedies it may have at law or in equity, may apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any breach of the provisions of this Agreement.
(b) Other Limitations on Seeking Damages . Neither the right of any party to terminate this Agreement, nor the exercise of such right, shall constitute a limitation on such partys right to seek damages or such other legal redress to which to which such party may otherwise be entitled; provided , that absent the occurrence of another breach of this Agreement by Contractor and without limiting the effect of the provisions of Sections 2.07 and 4.18 , United shall not be entitled to seek damages solely for the occurrence of (i) an event of Cause of the type described in clause (iii) of the definition thereof, (ii) a material breach of the type described in clauses (viii) or (x) of Section 8.02(b) , or (iii) any other breach of this Agreement directly attributable to the matters described in clauses (i) or (ii) above.
Section 10.12 Relationship of Parties . Nothing in this Agreement shall be interpreted or construed as establishing between the parties a partnership, joint venture or other similar arrangement.
Section 10.13 Entire Agreement; No Third-Party Beneficiaries . This Agreement (including the exhibits and schedules hereto) and the Ancillary Agreements are intended by the parties as a complete statement of the entire agreement and understanding of the parties with respect to the subject matter hereof and all matters between the parties related to the subject matter herein or therein set forth. Specifically, this Agreement and each Ancillary Agreement shall constitute a single, integrated agreement. This Agreement is made among, and for the benefit of, the parties hereto, and the parties do not intend to create any third-party beneficiaries hereby, and no other Person shall have any rights arising under, or interests in or to, this Agreement.
Section 10.14 Governing Law . This Agreement is subject to, and will be governed by and interpreted in accordance with, the laws of the State of New York, excluding conflicts of laws principles, and of the United States of America. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may only be brought in the United States District Court for the Southern District of New York (or, if such court does not accept jurisdiction, such action or proceeding may only be brought in any New York state court sitting in the County of New York, New York) and each of the parties hereto irrevocably consents to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives, to the fullest extent permitted by law, any objection to venue laid therein. Notwithstanding the preceding sentence, process in any action or proceeding referred to therein may be served by appropriate means on the other party outside of the Southern District of New York (or the County of New York, New York, as applicable). Each party further agrees to waive any right to a trial by jury. Because a breach of the provisions of this Agreement could not adequately be compensated by money damages, any party shall be entitled to an injunction restraining such breach or threatened breach and to specific performance of any provision of this Agreement and, in either case, no bond or other security shall be required in connection therewith, and the parties hereby consent to the issuance of such injunction and to the ordering of specific performance.
Section 10.15 Guaranty . Contemporaneous with the execution and delivery of this Agreement, Guarantor shall execute a guaranty in favor of United in the form of Exhibit M .
Section 10.16 Right of Set-Off . Subject to Section 3.06(c) , if any party hereto shall be in default hereunder or under any Ancillary Agreement to any other party hereto, then in any such case the non defaulting party shall be entitled to set off from any payment owed by such non defaulting party to the defaulting party hereunder any amount due and owing by the defaulting party to the non defaulting party thereunder and not subject to dispute in good faith; provided , that contemporaneously with any such set off, the non-defaulting party shall, unless legally enjoined or otherwise stayed from doing so, give written notice of such action to the defaulting party; provided further , that the failure to give such notice shall not affect the validity of the set off. It is specifically agreed that (i) for purposes of the set off by any non defaulting party, mutuality shall be deemed to exist between United and Contractor; (ii) reciprocity between United and Contractor exists with respect to their relative rights and obligations in respect of any such set off; and (iii) the right of set off is given as additional security to induce the parties to enter into the transactions contemplated hereby and by the Ancillary Agreements. Upon completion of any such set off, the obligation of the defaulting party to the non defaulting party shall be extinguished to the extent of the amount so set-off. Each party hereto further waives any right to assert as a defense to any attempted set off the requirements of liquidation or mutuality. This set-off provision shall be without prejudice, and in addition, to any right of set off, combination of accounts, lien or other right to which any non defaulting party is at any time otherwise entitled (either by operation of law, contract or otherwise), including without limitation pursuant to Section 3.06(b)(ii) hereof.
Section 10.17 Cooperation with Respect to Reporting . Each of the parties hereto agrees to use its commercially reasonable efforts to cooperate with each other party in providing necessary data, to the extent in the possession of the first party, required by such other party in order to meet any reporting requirements to, or otherwise in connection with any filing with or provision of information to be made to, any regulatory agency or other governmental authority.
Section 10.18 Amendment of Certain Contracts . Without Uniteds express prior written consent, (and such consent shall not be unreasonably withheld) Contractor shall not amend, supplement, grant a waiver or extension under, or otherwise modify or enter into a replacement contract for, the Embraer Contract or any Flight Hour Agreement. In addition, Contractor shall use its reasonable commercial efforts to assist United in the negotiation of any Flight Hour Agreement or any amendment thereto.
Section 10.19 Additional Provisions Relating to Labor Strike .
(a) Contractor shall use commercially reasonable efforts to prevent a Labor Strike. However, in the event of any Labor Strike (or during or after any cooling off period prior to such Labor Strike), then Contractor shall use commercially reasonable efforts to seek a third party airline to operate, should a Labor Strike occur, either CRJ-200 aircraft or ERJ-145 aircraft in place of the Covered Aircraft operated by Contractor under this Agreement immediately prior to such Labor Strike ( Third Party Replacement Aircraft ), subject to Uniteds consent in Uniteds sole but good faith discretion (a Third Party Consent ). If (v) a Labor Strike occurs, and (w) a third party operates Third Party Replacement Aircraft in Regional Airline Services sufficient to cover all the flying performed by the Covered Aircraft immediately prior to such Labor Strike without material interruption in the provision of Regional Airline Services and without material deviation from the provisions and standards set forth in this Agreement, then,
absent the occurrence of another breach of this Agreement by Contractor and without limiting the effect of the provisions of Sections 2.07 and 4.18 , United shall not be entitled to seek damages solely for the occurrence of an event of Cause of the type described in clause (iii) of the definition thereof in respect of such Labor Strike. However, if (x) a Labor Strike occurs, and (y) either (I) a third party cannot or does not operate Third Party Replacement Aircraft in Regional Airline Services sufficient to cover all the flying performed by the Covered Aircraft immediately prior to such Labor Strike without material interruption in the provision of Regional Airline Services and without material deviation from the provisions and standards set forth in this Agreement or (II) United does not provide a Third Party Consent, then, in respect of such Labor Strike, United shall be entitled to all remedies (including any direct damages) available under this Agreement notwithstanding anything to the contrary in Section 10.11(b) ; provided that Contractor and Guarantor shall not be liable, collectively, for any damages or payment obligations relating to this Agreement and the Ancillary Agreements directly attributable to any such Labor Strike exceeding the greater of (aa) $*** and (bb) (A) the product of (I) $*** and (II) the number of Covered Aircraft at the relevant time of application (which shall be the beginning of the cooling off period less any aircraft naturally expiring during such period), minus (B) an amount equal to the product of (III) the number of Third Party Replacement Aircraft that provide Regional Airline Services in lieu of Contractor providing such Regional Airline Services without material interruption and without material deviation from the provisions and standards set forth in this Agreement and (IV) $***.
(b) In addition to and without limiting Uniteds rights in Section 10.19(a) , upon the occurrence of any Labor Strike or any cooling off period prior to a Labor Strike, in each case, notwithstanding anything to the contrary in this Agreement, United shall have the right to suspend indefinitely any or all space available standby business and personal use travel privileges provided hereunder, effective immediately upon delivery of written notice to Contractor or Parent; provided that, if both (x) United suspends any such travel privileges pursuant to this Section 10.19(b) and (y) as a result thereof, Contractor can demonstrate to Uniteds reasonable satisfaction that a Scheduled Flight that was to occur during either such a cooling off period or after the cessation of the Labor Strike was cancelled directly as a result of such suspension, then such cancelled flight shall be considered an Uncontrollable Cancellation under this Agreement.
Section 10.20 Customer Satisfaction Goal . Contractor acknowledges and agrees that a Customer Satisfaction goal based on Uniteds flight survey responses shall be added to this Agreement effective as of June 30, 2015, the final methodology of which is subject to further discussion and the mutual agreement of United and Contractor.
Section 10.21 Additional Agreements Relating to *** .
(a) Contractor shall become a signatory carrier at *** through the execution of the *** Airport Amended and Restated Airport Use Agreement and Terminal Facilities Lease (the ULA ). With respect to any costs and expenses incurred by Contractor under the terms of the ULA as a result of becoming a signatory carrier at *** as provided herein with no space lease obligation, Contractor shall pass such costs and expenses through to United for reimbursement by United.
(b) As and when directed in writing by United, Contractor shall vote as directed in writing by United, on any matters submitted to carriers for a vote if such matters concern, or may result in, any costs, direct or indirect, to be paid for and/or reimbursed by United at ***; provided, however, that the foregoing in this clause (b) shall not apply if both (x) any such matter would result in a direct increase in rates and charges, or a new rate or charge, as imposed by the airport for Contractor, during the Term and (y) either (I) such increase or new rate or charge is not paid for and/or reimbursed by United as required under a written agreement, or (II) United does not otherwise agree at such time to pay for or reimburse such rate or charge when due.
Section 10.22 Effective Amendment . The parties acknowledge and agree that, immediately upon the execution of this Agreement and without any further action of any of the parties, each of the Ancillary Agreements (other than pursuant to Exhibits B , M and P , each of which the parties shall execute separately in the applicable form of such respective Ancillary Agreement attached to this Agreement as of the Effective Date) shall be deemed to have been executed by each of United and Contractor in the applicable form of each such respective Ancillary Agreement attached to this Agreement as of the Effective Date.
IN WITNESS WHEREOF , the parties hereto have caused this Amended and Restated Capacity Purchase Agreement to be duly executed and delivered as of November 7, 2014.
|
UNITED AIRLINES, INC. |
|
|
|
|
|
|
|
|
By: |
|
|
Name: |
|
|
Title: |
|
|
|
|
|
|
|
|
EXPRESSJET AIRLINES, INC. |
|
|
|
|
|
|
|
|
By: |
|
|
Name: |
|
|
Title: |
|
SIGNATURE PAGE TO AMENDED AND RESTATED CAPACITY PURCHASE AGREEMENT
SCHEDULE 1
Covered Aircraft
***
SCHEDULE 1 - 1
SCHEDULE 1A
Replacement Schedule Applicable in an Event of Default
[UNITED TO PROVIDE AS APPLICABLE]
SCHEDULE 1A - 1
SCHEDULE 2
Transition Aircraft and Spare Engines
***
SCHEDULE 2 - 1
SCHEDULE 3(1)
Compensation for Capacity Purchase
A. Base and Incentive Compensation.
1. Base Compensation . United will pay to Contractor, in respect of block hours, departures and each month of the Term for each Covered Aircraft, an amount calculated for each of the foregoing measurements and aggregated, as follows for each calendar month:
a. ***% of the number of block hours set forth on the Final Monthly Schedule for such month, multiplied by the for each block hour rate as set forth in Appendix 1 hereto; plus
b. the weighted average number of Covered Aircraft during such month, multiplied by the rate for each Covered Aircraft for each month in the Term as set forth in Appendix 1 hereto; plus
c. ***% of the number of departures set forth on the Final Monthly Schedule for such month, multiplied by the for each departure rate as set forth in Appendix 1 hereto.
For purposes of this Paragraph 1, the weighted average number of Covered Aircraft during any month shall be calculated by determining, for each Covered Aircraft, the number of days during such month during which such aircraft was a Covered Aircraft, and then aggregating such number of days for all Covered Aircraft, and then dividing such aggregate number of days by the number of days in such month. For the avoidance of doubt, for the purposes of this Agreement, an aircraft shall be included in the foregoing calculation only for the period beginning on the date on which such aircraft actually enters service as a Covered Aircraft and ending on the date on which such aircraft is withdrawn from the capacity purchase provisions of this Agreement and is no longer a Covered Aircraft hereunder (including without limitation any withdrawal pursuant to Article II and Article VIII of this Agreement). In addition, United will pay Contractor an allocation for Reconciled Expenses set forth in Appendix 3, and as reconciled and further described in Paragraph B(5)(a) below:
d. for Reconciled Expenses constituting payments described in clauses (i), (ii), (v), (viii), (ix), (xi) and (xii) of Paragraph B(5)(a) of this Schedule 3, Base Compensation shall include the amount set forth for such Reconciled Expenses on Appendix 3; and
e. for Reconciled Expenses described in clauses (iii), (iv), (vi), (vii), (x), (xiii) and (xiv) of Paragraph B(5)(a) of this Schedule 3, Base
(1) For the avoidance of doubt, the parties acknowledge and agree that, in the event of an Event of Default, during the Default Modification Period, all references in the Agreement to Schedule 1 shall be deemed to be references to such schedule as replaced or modified pursuant to the terms and conditions of Section 8.04 of the Agreement.
SCHEDULE 3 - 1
Compensation shall include an allocation based on the statistical drivers set forth for such Reconciled Expenses on Appendix 3 and calculated in accordance with Paragraph B(5)(b).
The aggregate Base Compensation shall be invoiced as provided in Section 3.06(a).
2. Incentive Compensation . With respect to each calendar month, incentive compensation shall be calculated as follows:
a. On-Time Bonus/Rebate . The reconciliation for any calendar month shall include, as applicable, a bonus (represented by a payment by United to Contractor) or a rebate (represented by a payment by Contractor to United), in each case in respect of on-time performance, as determined pursuant to paragraph 1 of Appendix 4 to this Schedule 3 .
b. Fuel Efficiency Bonus . The reconciliation shall include, when and as applicable, a bonus (represented by a payment by United to Contractor) as determined pursuant to paragraph 2 of Appendix 4 to this Schedule 3 .
The aggregate Incentive Compensation shall be invoiced as provided in Section 3.06(b) .
3. United-Directed Cancellations . Subject to Section 8.04 , effective as of July 1, 2014 and for each calendar month thereafter, if United, following delivery of a Final Monthly Schedule, directs the cancellation of flights (each, a United Cancelled Flight and collectively, the United Cancelled Flights ) and that flight cancellation is coded in Uniteds systems as a United initiated cancel then United shall pay Contractor in accordance with the rates set forth for on Appendix 7 to Schedule 3 for each United Cancelled Flight, as if each such United Cancelled Flight had been operated as contemplated in the Final Monthly Schedule as the sole compensation for such flight. Any Scheduled Flight canceled at Uniteds direction shall be coded in accordance with Uniteds standard practices as an Uncontrollable Cancellation. All payments will be based upon the scheduled block hours and departures for such Scheduled Flight cancellations directed by United. No payments will be made for Reconciled Expenses with the statistical categories of departures or block hours. The United directed cancellations will not affect payments relating to the rate For each Covered Aircraft for each month in the term or for other Reconciled Expenses. For avoidance of doubt, the foregoing payment shall be paid for all United Cancelled Flights even if the Base Compensation Rates for the applicable Covered Aircraft subject to such cancellation as set forth in Appendix 1 to this Schedule 3 do not provide for a departure payment with respect to the applicable Covered Aircraft.
B. Expenses and Reconciliation.
1. With respect to Scheduled Flights, in consideration of the provision by Contractor of Regional Airline Services and its compliance with the other terms and conditions of this Agreement, the following expenses listed within Paragraph (B)(1) of this Schedule 3 shall be incurred directly by United:
a. passenger and cargo revenue-related expenses, including but not limited to commissions, ticket and airway bill taxes and fees related to the transportation of passengers or cargo, food, beverage costs and catering, charges for fare or tariff filings, sales and advertising costs, computer reservation system fees, credit card fees, interline fees, revenue taxes, GDS fees, airport collateral materials, reservation costs, revenue accounting costs, including costs associated with ticket sales reporting and unreported sales, usage, maintenance and replacement costs related to equipment relevant to onboard sales and payment transaction processes as outlined in Uniteds policies and procedures in quantities consistent with standards used by United, MileagePlus participation costs and United Currencies;
b. glycol, de-icing and snow removal costs at United Airports;
c. denied boarding amenities and related travel certificates in respect of delayed or cancelled flights distributed in a manner consistent with Uniteds policies and procedures (regardless of whether attributable to Contractors operations in the normal course of business);
d. passenger-related interrupted trip costs (including hotel, meal and calling cards vouchers) and baggage handling claims, baggage repairs, baggage delivery costs and oversales distributed or made in a manner consistent with Uniteds policies and procedures (regardless of whether attributable to Contractors operations in the normal course of business);
e. as provided by and in consideration of Contractors compliance with its obligations under the Fuel Purchasing Agreement, Fuel, Fuel taxes and Fuel into plane charges, including administration fees, if any;
f. rent for Terminal Facilities at United Airports;
g. ground handling costs at United Airports, for which costs United is responsible pursuant to the United Ground Handling Agreement;
h. technology services related to all passenger services processes;
i. TSA fees or charges and any other passenger security fees or charges for security at all United Airports, but without limiting the parties respective obligations relating to regulatory and other fines pursuant to Article VII; and
j. if United elects to procure, or arrange for the procurement of, aircraft fuel and/or Fuel Services, as the case may be, pursuant to Section 4.10(b) , and in consideration of Contractors compliance with its obligations under such Section 4.10 , (I) the cost of such fuel procurement, including any administration fees, taxes or other charges of any fuel supplier, and/or (II) charges for such Fuel Services, as applicable.
2. Flight Reconciliation .
a. With respect to Scheduled Flights, for any calendar month in which Contractors actual block hours flown exceeds the block hours invoiced pursuant to Paragraph A(1)(a) for such calendar month, then the reconciliation for such period shall include a payment by United to Contractor in an amount equal to the product of (i) the difference between the actual block hours flown for Scheduled Flights and such invoiced block hours, multiplied by (ii) the for each block hour rate as set forth in Appendix 1 hereto.
b. With respect to Scheduled Flights, for any calendar month for which the block hours invoiced pursuant to Paragraph A(1)(a) exceeds Contractors actual block hours flown in such calendar month, then the reconciliation for such period shall include a payment by Contractor to United in an amount equal to the product of (i) the difference between such invoiced block hours and the actual block hours flown for Scheduled Flights, multiplied by (ii) the for each block hour rate as set forth in Appendix 1 hereto.
c. To the extent consistent with past practice under the capacity purchase agreement between Contractor and United in place immediately prior to the date of this Agreement, Contractors actual block hours flown shall include block hours operated for all completed Scheduled Flights, including those resulting from any unscheduled stop required prior to the completion of a Scheduled Flight, however, actual block hours flown shall not include any block hours resulting from or attributable to ground returns or air returns.
d. With respect to Scheduled Flights, for any calendar month in which the number of departures actually flown by Contractor for Scheduled Flights in such calendar month exceeds the number of departures for which United is invoiced by Contractor for Scheduled Flights for such calendar month pursuant to Paragraph A(1)(c), then the reconciliation for such calendar month shall include a payment by United to Contractor in an amount equal to the product of (i) the difference between the number of departures actually flown by Contractor for Scheduled Flights in such calendar month and the number of departures for which United is invoiced by Contractor for Scheduled Flights in such calendar month and (ii) the
for each departure rate set forth in Appendix 1 hereto for the applicable Covered Aircraft.
e. With respect to Scheduled Flights, for any calendar month in which the number of departures for which United is invoiced by Contractor for Scheduled Flights in such calendar month pursuant to Paragraph A(1)(c) exceeds the number of departures actually flown by Contractor for Scheduled Flights in such calendar month, then the reconciliation for such calendar month shall include a payment by Contractor to United in an amount equal to the product of (i) the difference between the number of departures for which United is invoiced by Contractor for Scheduled Flights for such calendar month and the number of departures actually flown by Contractor for Scheduled Flights in such calendar month and (ii) the for each departure rate as set forth in Appendix 1 hereto for the applicable Covered Aircraft.
3. Flight Cancellation Reconciliation/Controllable Completion Bonus and Rebate .
a. United and Contractor have developed a monthly incentive program (the Controllable Completion Incentive Program ) under which Contractor shall either earn monthly incentive payments or pay United rebates for such month, all as more fully set forth below:
i. Under the Controllable Completion Incentive Program, an operating performance goal for Contractors operation of Scheduled Flights shall be set with respect to Controllable Completion Factor (the Controllable Completion Operating Goal ). The Controllable Completion Operating Goal and adjustments used to create this goal will be calculated using two (2) decimal points. The Controllable Completion Operating Goal for the first period shall be effective as of July 1, 2014 and shall continue through and including the next December 31, and shall be reestablished for each succeeding calendar year, using the applicable predetermined methodology as set forth below:
a. If the level of performance with respect to Controllable Completion Factor achieved by Uniteds domestic mainline operations for the most recent calendar year completed prior to the beginning of such period Domestic Mainline Operations Performance Level (the Domestic Mainline Operations Performance Level ) is greater than the United Express Best Practice Operating Performance (as defined below), then Controllable Completion Operating Goal for the upcoming period shall be equal to Uniteds aggregate Controllable Completion Factor for its domestic mainline operations for the measured period, adjusted downward by *** percentage points. United Express Best Practice Operating Performance means the simple arithmetic average of twelve levels of performance, representing
the highest level of performance with regard to such measure achieved for each calendar month during the most recent calendar year completed prior to the beginning of such period (determined separately for each such month), by any contractor of regional airline services under the United Express brand; it being understood that the highest level of performance may be achieved by different contractors or service providers in different months, and pursuant to this Agreement or other agreements with United.
b. If the United Express Best Practice Operating Performance (measured for the prior calendar year) is greater than the Domestic Mainline Operations Performance Level (measured for the prior calendar year), then the Controllable Completion Operating Goal for the upcoming period shall be equal to the Controllable Completion Factor constituting part of the United Express Best Practice Operating Performance (measured for the prior year), adjusted downward by *** percentage points.
ii. Performance Levels. The Controllable Completion Operating Goal shall be used to determine four performance levels, A, B, C and D (each a Performance Level ) as follows:
a. Effective July 1, 2014 and continuing until December 31, 2014, Performance Levels shall be as follows:
i. A Performance Level = ***
ii. B Performance Level = ***
iii. C Performance Level = ***
iv. D Performance Level = ***
b. Effective as of January 1, 2015 and continuing thereafter, the Performance Levels shall be as follows:
i. A Performance Level = Above Controllable Completion Operating Goal + *** points
ii. B Performance Level = Controllable Completion Operating Goal
iii. C Performance Level = Controllable Completion Operating Goal *** points
iv. D Performance Level = Below C Performance Level
iii. For each calendar month during the Term during which Scheduled Flights shall have been flown, Contractors level of performance under this Agreement with respect to the Controllable Completion Operating Goal ( Contractors Performance ) shall be measured against the Performance Levels, and a Contractor Grade shall be determined with respect to the Controllable Completion Operating Goal.
iv. Following the determination of each Contractor Grade for each month, any applicable bonus payment or rebate payment shall be determined as follows, and such bonus or rebate for the applicable month shall be incorporated into the reconciliation process set forth in B.2 of this Schedule 3 (any payment owed to Contractor by United associated with such determination, a CCF Bonus and any payment owed to United by Contractor associated with such determination, a CCF Rebate ):
Contractor Grade |
|
CCF Bonus or CCF Rebate |
|
Amount to be Paid |
A |
|
CCF Bonus |
|
(Controllable Completion Factor Incentive Rate) * (Number of cancellations associated with lowest end of the range for the A Performance Level minus Number of Controllable Cancellations in such Month) |
B |
|
None |
|
N/A |
C |
|
CCF Rebate |
|
(Controllable Completion Factor Incentive Rate) * (***) * (Number of Controllable Cancellations in such Month minus Number of cancellations associated with the lowest end of the range for the B Performance Level) |
D |
|
CCF Rebate |
|
(Controllable Completion Factor Incentive Rate) * (Number of Controllable Cancellations in such |
|
|
|
|
Month minus Number of cancellations associated with the lowest end of the range for the B Performance Level) |
b. For all purposes of this Agreement, the following provisions shall apply:
i. After presentation of the Final Monthly Schedule pursuant to Section 2.01(b) of the Agreement, if United makes any changes to such schedule (whether through a schedule modification or other communication) that result in a cancellation of a Scheduled Flight, then such cancellation shall constitute an Uncontrollable Cancellation.
ii. If any proposed Scheduled Flight on a planned flight schedule involves a flight to a new airport which will be a Contractor Airport, and Contractor experiences a delay in preparing the required facilities and making all necessary arrangements to complete a flight to such airport, which delay either (i) is caused by the Environmental Protection Agency, airport or any other governmental authority, or (ii) occurs after Contractor received less than 90 days advance notice of such Scheduled Flight to a new airport and used its commercially reasonable efforts to prepare the required facilities and make all necessary arrangements (all in accordance with the Master Facility and Ground Handling Agreement), and in either case such Scheduled Flight is cancelled, then such cancellation shall constitute an Uncontrollable Cancellation; it being understood that any airport to which Contractor flies on the Effective Date or has previously flown pursuant to this Agreement shall not constitute a new airport.
c. [Reserved].
d. Without limiting Contractors right to submit a Schedule Reduction Request, any cancellation due to Contractors inability to operate a Scheduled Flight due to Contractors inability to hire pilots, or any pilot or other labor group shortage, including, without limitation, as a result of a Labor Strike, shall be considered a Controllable Cancellation; provided that, only if Contractor and SkyWest Airlines are taking commercially reasonable efforts to resolve such shortage, the foregoing shall not apply and such cancellation shall be deemed an Uncontrollable Cancellation to the extent that, and only for such Scheduled Flights for which, Contractor reasonably demonstrates to United that the inability to hire pilots, or any such pilot or other labor group shortage, is due to market conditions proportionately affecting all of the operations of Contractor and SkyWest Airlines.
e. Without limiting Contractors right to submit a Schedule Reduction Request, any cancellation due to Contractors inability to operate a Scheduled Flight due to pilot attrition, shall be considered a Controllable Cancellation; provided that, only if Contractor and SkyWest Airlines are taking commercially reasonable efforts to resolve such shortage, the foregoing shall not apply and such cancellation shall be deemed an Uncontrollable Cancellation to the extent that, and only for such Scheduled Flights for which, Contractor reasonably demonstrates to United that the attrition is substantially caused by increased hiring by United of Contractors and SkyWest Airlines pilots (i.e. over a historical hiring percentage of all Contractors and SkyWest Airlines pilots).
f. Contractor hereby agrees that each cancellation of a Scheduled Flight shall be designated as either a Controllable Cancellation or an Uncontrollable Cancellation on a basis consistent with Uniteds historical experience and practice with operators of its regional jets. The parties shall reconcile any differences in the designation of Scheduled Flights on a monthly basis in connection with the general financial reconciliation for such month.
4. Compensation for Lower Block Hours Scheduled per Covered Aircraft. If, for any calendar quarter, (A) the product of (x) the number of days in such calendar quarter, multiplied by (y) *** hours per day, multiplied by (z) the weighted average number of Covered Aircraft, available each day for such calendar quarter (determined as provided below) exceeds (B) the number of scheduled block hours for all Scheduled Flights during such calendar quarter, then within 60 days after the end of such calendar quarter United shall pay to Contractor an amount equal to the product of such excess number of hours multiplied by the appropriate rate, determined as set forth in the immediately succeeding sentence; provided , that no payment shall be made for any calendar quarter in which (x) a Labor Strike shall have occurred or (y) United reduced the number of scheduled block hours in connection with or in response to Contractors failure to remain in material compliance with its obligations arising under this Agreement or any Ancillary Agreement, or otherwise as a result of a material event outside of Uniteds reasonable control (including without limitation grounding of Covered Aircraft, the imposition of flight caps or other material regulatory action involving Covered Aircraft and/or airports serviced or to be serviced by Covered Aircraft). The appropriate rate to be used for purposes of payment calculation as set forth above shall be determined by using the rate set forth on Appendix 6 to Schedule 3 for the applicable quarter (I) under the column corresponding to the number of consecutive quarters in which the amount described in clause (A) above exceeds the amount described in clause (B) above, and (II) in the row corresponding to the Scheduled Utilization, which shall be calculated by taking the block hours referenced in clause (B) above divided by the product of (x) the weighted average number of Covered Aircraft available each day for such calendar quarter (determined as provided below) multiplied by (y) the number of days during such quarter. For example, if the amount described in clause (A) above exceeds the amount described in clause (B) above for three consecutive quarters and the
Scheduled Utilization was *** for the third such quarter, then the rate for such third quarter pursuant to this Paragraph B(4) would be $*** for each block hour that the amount described in clause (A) above exceeds the amount described in clause (B) above. The weighted average number of Covered Aircraft available each day for such calendar quarter shall be calculated by determining, for each Covered Aircraft other than Spare Aircraft, the number of days during such calendar quarter during which such aircraft was a Covered Aircraft and available for scheduling, and then aggregating such number of days for all Covered Aircraft other than Spare Aircraft, and then dividing such aggregate number of days by the number of days in such calendar quarter.
5. Reconciled Expenses .
a. The following expenses incurred in connection with Scheduled Flights shall be reconciled monthly (except as specifically set forth below) to actual costs ( Reconciled Expenses ):
(i) rent paid by Contractor for Terminal Facilities at Contractor Airports (it being understood, for the avoidance of doubt, that the term rent as used herein shall not be deemed to include indemnity or similar payments, irrespective of its definition under any applicable lease, except to the extent such indemnity or similar payment is attributable to the fault or neglect of United);
(ii) property taxes (but excluding all other taxes including without limitation income, profits, withholding, employment, social security, disability, occupation, severance, excise ad valorem, sales, use and franchise taxes);
(iii) Aviation Insurance premiums, and deductibles payable by United pursuant to Paragraph B(6)(f) below or otherwise payable under Aviation Insurance not part of a combined placement pursuant to Section 6.04 ; provided , that if United and Contractor are not participating in a combined placement pursuant to Section 6.04 , then United shall not pay to Contractor (A) in respect of premiums payable pursuant to this clause (iii) , any amount that is in excess of the amount payable pursuant to Paragraph B(6)(a) or Paragraph B(6)(b) below, as applicable or (B) in respect of deductibles payable pursuant to this clause (iii) , any amount that is in excess of maximum amount reimbursable by United pursuant to Paragraph B(6)(f) below immediately prior to Contractor ceasing to participate in such combined placement;
(iv) landing fees other than deposits or similar payments (irrespective of the definition of landing fees in any applicable airport agreement);
(v) glycol and de-icing costs at Contractor Airports;
(vi) air navigation fees paid to NavCanada (or any Canadian successor thereto) and Servicios a la Navegacion en el Espacio Aereo Mexicano (SENEAM) (or any Mexican successor thereto), in each case in respect of Scheduled Flights, it being understood that any fees paid to secure route authorities (other than in connection with the initiation of routes not previously flown by Contractor), operating certificates, permits and any related costs will not be considered air navigation fees;
(vii) the amount of TSA fees or charges and any other passenger security fees or charges for security at all Contractor Airports, other than such fees and charges for which United is or would be entitled to indemnification under Article VII ;
(viii) Incentive Program Costs;
(ix) costs of operating ARINC aircraft communications addressing and reporting systems;
(x) landing gear overhaul and Landing Gear LLP costs;
(xi) replacement costs for Engine LLPs that reach their life limit;
(xii) replacement costs for Spare Engine LLPs that reach their life limit, subject to the limitations set forth in Paragraph (B)(7) ;
(xiii) payments made by Contractor for power-by-the-hour services under the Engine Maintenance Agreement, or alternate arrangement agreed to by Contractor and United, such agreement not to be unreasonably withheld, conditioned or delayed; and
(xiv) as provided by and in consideration of Contractors compliance with its obligations under Section 4.10, (A) if United shall not have elected to procure fuel pursuant to clause (i) of Section 4.10(b), the cost of such fuel procurement, including any administration fees, taxes or other charges of any fuel supplier, and (B) if United shall not have elected to procure Fuel Services for or on behalf of Contractor pursuant to clause (ii) of Section 4.10(b), charges for Fuel Services;
The Base Compensation includes allocations of the Reconciled Expenses as set forth in Appendix 3 and with respect to certain Reconciled Expenses, as further provided in Paragraph B(5)(b) below. If in any month the Contractors actual Reconciled Expenses exceed the amount of Reconciled Expenses included in the Base Compensation in accordance with Appendix 3 and with respect to certain Reconciled Expenses as further provided in Paragraph B(5)(b) below for such month, United shall pay to Contractor an amount equal to such difference. If in any month the amount of Reconciled Expenses included in the Base Compensation in accordance with Appendix 3 and with respect to certain Reconciled
Expenses as further provided in Paragraph B(5)(b) below for such month exceeds the Contractors actual Reconciled Expenses, Contractor shall pay to United an amount equal to such difference.
b. The allocations included in Base Compensation for Reconciled Expenses of the type set forth in Paragraph A(1)(e) for any particular month shall be calculated as provided below:
I. The amount of Aviation Insurance costs referred to in clause (iii) of Paragraph B(5)(a) and the amount of TSA fees or charges and any other passenger security fees or charges at all Contractor Airports for security referred to in clause (vii) of Paragraph B(5)(a) included in the Base Compensation for any particular month will be equal to the product of (1) the insurance rate and TSA rates set forth on Appendix 3 multiplied by (2) the Forecasted Passengers for such month.
II. The amount of landing fees referred to in clause (iv) of Paragraph B(5)(a) and the amount of Canada and Mexico air navigation fees referred to in clause (vi) of Paragraph B(5)(a) included in the Base Compensation for any particular month will be equal to the aggregate sum of the following products: (1) the landing fee rate and the Canadian and Mexican air navigation rates set forth in Appendix 3 , multiplied by (2) the number of scheduled departures set forth in the Final Monthly Schedule, multiplied by (3) 98%.
III. The amount of landing gear overhaul and Landing Gear LLP costs referred to in clause (x) of Paragraph B(5)(a) included in the Base Compensation for any particular month will be equal to the aggregate sum of the following products: (1) the landing gear overhaul and Landing Gear LLP cost rate set forth in Appendix 3 , multiplied by (2) the weighted average number of Covered Aircraft during such month.
IV. The amount of Engine power-by-the-hour costs referred to in clause (xiii) of Paragraph B(5)(a) included in the Base Compensation for any particular month will be equal to the aggregate sum of the following products: (1) the Engine power-by-the-hour costs rate set forth in Appendix 3 , multiplied by (2) the number of scheduled block hours set forth in the Final Monthly Schedule, multiplied by (3) ***%.
V. The amount of Fuel Services charges referred to in clause (xiv) of Paragraph B(5)(a) , if any, will be equal to the aggregate sum of the following products: (1) the rate set forth in Appendix 3 for Fuel
Services, multiplied by (2) the number of scheduled departures set forth in the Final Monthly Schedule, multiplied by (3) ***%.
VI. The amount of Fuel to be procured by Contractor pursuant to clause (xiv) of Paragraph B(5)(a) , if any, as reasonably determined by United, multiplied by the average per gallon cost of such Fuel used by Contractor in the immediately preceding month the cost of which was incurred directory and/or reimbursed hereunder by United, as the case may be, multiplied by ***%.
6. Insurance Costs
a. If Contractor elects not to participate in a combined placement for a particular Aviation Insurance policy, Contractor shall not be reimbursed or otherwise compensated (through adjustments to block hour rates, reconciliation amounts or otherwise) for any Excess Insurance Costs with respect to such policy or for any costs of such policy that are in excess of the Average Peer Group Rate.
b. If Contractor does not participate in a combined placement for a particular Aviation Insurance policy for any reason other than its election not to participate, United shall pay to Contractor an amount equal to the Excess Insurance Costs with respect to such policy, but only up to an aggregate policy cost equal to the Average Peer Group Rates. Contractor shall not be reimbursed or otherwise compensated (through adjustments to block hour rates or otherwise) to the extent that its insurance costs exceed the Average Peer Group Rates.
c. Subject to Paragraph B(6)(d) and Paragraph B(6)(e) below, Contractor will pay to United its proportionate share of all combined-placement Aviation Insurance premiums not later than the date that United is required under the terms of the applicable policy to pay the policy premiums. The cost allocation for such combined placements shall be as follows:
I. Hull Coverage Rate . To be determined each year; a dollar amount equal to the combined placement programs composite whole rate as set forth in the current group policy, multiplied by Contractors average fleet value for the policy period, as determined by recognized standard industry methods of valuation consistent with prior practice.
II. Liability Rates . To be determined each year; an amount equal to the combined placement programs composite liability rate as set forth in the current group policy, multiplied by revenue passenger miles, as determined by recognized standard industry methods consistent with prior practice.
III. War Risk Rate. To be determined each year; an amount equal to the combined placement programs composite liability war risk rate as set forth in the current group policy, multiplied by revenue passenger miles and onboard passengers, as determined by recognized standard industry methods consistent with prior practice and an amount equal to the combined placement programs composite hull war risk rate as set forth in the current group policy, multiplied by Contractors average fleet value for the policy period, as determined by recognized standard industry methods of valuation consistent with prior practice.
d. In the fiscal quarter subsequent to the next combined policy Aviation Insurance renewal following a Major Loss caused by United (or, if such a Major Loss occurs so close to the combined policy insurance renewal date that the effects are not reflected in the next combined policy Aviation Insurance renewal premium amount, then in the fiscal quarter subsequent to the renewal in which the effects are first included), United and Contractor agree to determine and allocate the amount of increase in the combined policy Aviation Insurance premiums, if any, to be attributed to such Major Loss (as opposed to a general increase in the premiums) as follows:
I. The parties will compare the combined policy premium increase to premium increases experienced by the five Major Carriers closest to United in aggregate revenue passenger miles at the time of such determination, excluding any Major Carrier that experienced a Major Loss within the previous three years.
II. The average annual increase in insurance costs for such Major Carriers shall be calculated by (i) subtracting the expiring rates of each such Major Carrier from its new rates, (ii) adding the total of such differences and (iii) dividing the total by the number of Major Carriers whose rates were included in the calculation.
III. The amount that the increase in the combined premiums for United and Contractor exceeds the average annual increase in insurance costs calculated pursuant to clause (II) above shall be deemed to be the portion of the increase for such year due to such Major Loss (the United Premium Surcharge Amount ).
IV. The portion of the United Premium Surcharge Amount payable by United shall be 100% of the United Premium Surcharge Amount for the first year following the beginning of such fiscal quarter, 50% of the United Premium Surcharge Amount for the second year following the beginning of such fiscal quarter, 25% of the United Premium Surcharge Amount for the third year following the beginning of such fiscal quarter, and $0 thereafter.
V. The portion of the United Premium Surcharge Amount payable pursuant to clause (IV) above shall be borne solely by United and that amount shall be deducted from the aggregate premium amounts included in all cost-sharing calculations between United and Contractor.
e. In the fiscal quarter subsequent to the next combined policy Aviation Insurance renewal following a Major Loss caused by Contractor (or, if such a Major Loss occurs so close to the combined policy insurance renewal date that the effects are not reflected in the next combined policy Aviation Insurance renewal premium amount, then in the fiscal quarter subsequent to the renewal in which the effects are first included), United and Contractor agree to determine and allocate the amount of increase in the combined policy Aviation Insurance premiums, if any, to be attributed to such Major Loss (as opposed to a general increase in the premiums) as follows:
I. The parties will compare the combined policy premium increase to premium increases experienced by the five Major Carriers closest to those of United in aggregate revenue passenger miles at the time of such determination, excluding any Major Carrier that experienced a Major Loss within the previous three years.
II. The average annual increase in insurance costs for such regional airlines shall be calculated by (i) subtracting the expiring rates of each such regional airline from its new rates, (ii) adding the total of such differences and (iii) dividing the total by the number of such regional airlines whose rates were included in the calculation.
III. The parties will also calculate the maximum permitted increase in annual premiums which would be permitted if the policy coverage was limited to the insurance limits required to be maintained by Contractor (the Contractor Premium Surcharge Limit ).
IV. The amount that the Contractor Premium Surcharge Limit exceeds the average annual increase in insurance costs calculated pursuant to clause (II) above shall be deemed to be the portion of the increase for such year due to such Major Loss (the Contractor Premium Surcharge Amount ).
V. The amount that the increase in the combined premiums for United and Contractor exceeds the sum of (x) the average annual increase in insurance costs calculated pursuant to clause (II) above and (y) the Contractor Premium Surcharge Amount shall be deemed to be the portion of the increase for such year due to such Major Loss (the Contractor Premium Surcharge Overflow Amount ).
VI. The portion of the Contractor Premium Surcharge Amount payable by Contractor shall be 100% of the Contractor Premium Surcharge
Amount for the first year following the beginning of such fiscal quarter, 50% of the Contractor Premium Surcharge Amount for the second year following the beginning of such fiscal quarter, 25% of the Contractor Premium Surcharge Amount for the third year following the beginning of such fiscal quarter, and $0 thereafter.
VII. The portion of the Contractor Premium Surcharge Overflow Amount payable by Contractor shall be 100% of the Contractor Premium Surcharge Overflow Amount for the first year following the beginning of such fiscal quarter, 50% of the Contractor Premium Surcharge Overflow Amount for the second year following the beginning of such fiscal quarter, 25% of the Contractor Premium Surcharge Overflow Amount for the third year following the beginning of such fiscal quarter, and $0 thereafter.
VIII. The portion of the Contractor Premium Surcharge Amount payable pursuant to clause (VI) above shall be borne solely by Contractor and that amount shall be deducted from the aggregate premium amounts included in all cost-sharing calculations between United and Contractor.
IX. The portion of the Contractor Premium Surcharge Overflow Amount payable pursuant to clause (VII) shall be borne solely by United and that amount shall be deducted from the aggregate premium amounts included in all cost-sharing calculations between United and Contractor.
f. Contractor shall be reimbursed in full for the aggregate dollar amount of all Aviation Insurance deductibles paid with respect to Regional Airline Services in any calendar year in respect of Aviation Insurance policies placed pursuant to Section 6.04 , up to, for any Aviation Insurance policy, the historical annual average of the aggregate dollar amount of such deductibles paid by Contractor for claims made under such policy during the last five full calendar years for which such calculations are available as of such date of determination.
7. Spare Engine LLPs
a. Intentionally omitted.
b. At Uniteds request, Contractor shall cooperate with United to allow the replacement costs attributable to Spare Engine LLPs associated with the Spare Engines to be included in a cost-per-cycle arrangement (a Spare Engine Cost-Per-Cycle Arrangement ). During the effectiveness of any Spare Engine Cost-Per-Cycle Arrangement, United shall not be liable for any replacement costs attributable to Spare Engine LLPs other than pursuant to such Spare Engine Cost-Per-Cyle Arrangement. The Spare Engines to be included in any Spare Engine Cost-Per-Cycle Arrangement shall consist of equal portions of the Spare Engines with the highest Average Remaining Cycle Life and lowest Average Remaining Cycle Life (or, in the event of an odd number of Spare Engines, as equal as possible with one more Spare Engine with the lowest Average Remaining Cycle
Life). The Average Remaining Cycle Life for a Spare Engine shall be the sum of the remaining cycle life for each Spare Engine LLP installed on such Spare Engine divided by the total number of Spare Engine LLPs installed on such Spare Engine.
c. Intentionally omitted.
d. Intentionally omitted.
8. No Reconciliation for Fines, Etc. Notwithstanding anything to the contrary contained in this Paragraph B , United shall not be required to incur any cost or make any reconciliation payment pursuant to this Paragraph B to the extent that such cost or reconciliation payment is attributable to any costs, expenses or losses (including fines, penalties and any costs and expenses associated with any related investigation or defense) incurred by Contractor as a result of any violation by Contractor of any law, statute, judgment, decree, order, rule or regulation of any governmental or airport authority. United shall be liable for any costs, expenses or losses (including fines, penalties and any costs and expenses associated with any related investigation or defense) incurred by Contractor as a result of any violation by United or its agents of any law, statute, judgment, decree, order, rule or regulation of any governmental or airport authority.
9. With respect to all ERJ-135 aircraft, if Contractor incurs maintenance costs relating to non-pass-through maintenance expenses in connection with repairs on components (other than landing gear and engines), the auxiliary power unit or the airframe of such Aircraft and the benefit of such repair extends beyond the Sublease Expiration Date set forth in Schedule 1 (or, such earlier date as such Covered Aircraft is withdrawn from the capacity purchase provisions of this Agreement at the election of United), then upon the expiration of the sublease for, and the return by Contractor to United in accordance with this Agreement of, such Aircraft (or, if earlier, the withdrawal of such Covered Aircraft from the capacity purchase provisions of this Agreement), United will reimburse Contractor an amount equal to the remaining useful benefit of such maintenance (it being understood that all maintenance costs with respect to such Aircraft relating to landing gear and engines that are not otherwise reimbursed as Reconciled Expenses shall be paid for directly by United or shall otherwise be deemed Reconciled Expenses for all purposes of the Agreement).
The remaining useful benefit of such maintenance shall be determined by multiplying the maintenance expense incurred by Contractor in connection with such repair (less any reimbursement provided by United to Contractor as a Reconciled Expense related to such repair) by a fraction, the numerator of which is the reasonably anticipated useful life of such component, auxiliary power unit or airframe (as applicable) in hours/cycles (as applicable) following such maintenance event minus the number of hours/cycles (as applicable) used by Contractor since such maintenance event until such Aircraft is returned to United by Contractor (or, if earlier, the withdrawal of such Covered Aircraft from the
capacity purchase provisions of this Agreement) and the denominator is the reasonably anticipated useful life of such component, auxiliary power unit or airframe (as applicable) in hours/cycles (as applicable) following such maintenance event.
10. Intentionally omitted .
11. Intentionally omitted .
12. Intentionally omitted .
13. Covered Aircraft Numbers *** (with corresponding Covered Aircraft Tail Numbers of *** ) . With respect to each of the Covered Aircraft Numbers ***, if Contractor incurs C-Check maintenance costs after the Amendment Effective Date, then upon the expiration of the sublease for, and the return by Contractor to United in accordance with this Agreement of, such Aircraft, United will reimburse Contractor for any reasonable actual third party costs associated with C-Check green time remaining on the airframe on a pro-rata basis for any remaining flight hours or cycles, whichever is the more limiting on remaining green time, provided that United has not already compensated Contractor for such time or cycles.
Schedule 3 Appendices
Appendix 1(2) |
|
Base Compensation Rates |
Appendix 1A |
|
Base Compensation Rates During the Default Modification Period |
Appendix 2 |
|
Controllable Completion Factor Incentives Rate |
Appendix 3 |
|
Reconciliation of Expenses |
Appendix 4 |
|
On Time Incentive Bonuses/Rebates |
Appendix 5 |
|
Insurance Rates |
Appendix 6(3) |
|
Low Block Hour Utilization Rates |
Appendix 6A |
|
Low Block Hour Utilization Rates During the Default Modification Period |
Appendix 7 |
|
Payments for Scheduled Flight Cancellations Directed by United |
(2) For the avoidance of doubt, the parties acknowledge and agree that, in the event of an Event of Default, during the Default Modification Period, all references in the Agreement to Schedule 1 shall be deemed to be references to such schedule as replaced or modified pursuant to the terms and conditions of Section 8.04 of the Agreement.
(3) For the avoidance of doubt, the parties acknowledge and agree that, in the event of an Event of Default, during the Default Modification Period, all references in the Agreement to Schedule 1 shall be deemed to be references to such schedule as replaced or modified pursuant to the terms and conditions of Section 8.04 of the Agreement.
Appendix 1 to Schedule 3(4)
Base Compensation Rates
For Schedule 1 Covered Aircraft Numbers ***, Base Compensation Rates are payable in accordance with the following chart:
Covered
|
|
|
|
From and Including July 1 2014 |
*** |
|
For each block hour |
|
*** |
|
|
Supplemental for each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
Supplemental for each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
Supplemental for each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
Supplemental for each block hour |
|
*** |
|
|
For each departure |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
Supplemental for each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
These Base Compensation Rates shall be adjusted to the extent provided pursuant to the terms of Section 3.02 of this Agreement.
(4) For the avoidance of doubt, the parties acknowledge and agree that, in the event of an Event of Default, during the Default Modification Period, all references in the Agreement to Schedule 1 shall be deemed to be references to such schedule as replaced or modified pursuant to the terms and conditions of Section 8.04 of the Agreement.
Appendix 1A to Schedule 3
Base Compensation Rates Applicable During the Default Modification Period
During the Default Modiciation Period, for Schedule 1 Covered Aircraft Numbers ***, Base Compensation Rates are payable in accordance with the following chart:
Covered
|
|
|
|
From and Including July 1 2014 |
*** |
|
For each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
For each departure |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
*** |
|
For each block hour |
|
*** |
|
|
For each Covered Aircraft for each month in the term |
|
*** |
These Base Compensation Rates shall be adjusted to the extent provided pursuant to the terms of Section 3.02 of this Agreement.
Appendix 2 to Schedule 3
Controllable Completion Factor Rate
Controllable Completion Factor Incentive Rate shall be $***, as adjusted pursuant to Section 3.02 of this Agreement.
Appendix 3 to Schedule 3
Reconciled |
|
Schedule 3 |
|
Statistical |
|
|
|
Expense |
|
Reference |
|
Driver |
|
Rate |
|
|
|
|
|
|
|
|
|
Terminal Facility Rent at Contractor Airports |
|
Sched3.B.5(a)(i) |
|
Fixed |
|
*** |
|
Property Taxes |
|
Sched3.B.5(a)(ii) |
|
Fixed |
|
*** |
|
Aviation Insurance |
|
Sched3.B.5(a)(iii) |
|
Passengers |
|
*** |
|
Landing Fees |
|
Sched3.B.5(a)(iv) |
|
Departures |
|
*** |
|
Glycol and De-icing at Contractor Airports |
|
Sched3.B.5(a)(v) |
|
Fixed |
|
*** |
|
Canadian and Mexican Air Navigation |
|
Sched3.B.5(a)(vi) |
|
Departures |
|
*** |
|
TSA Fees or Charges and any Other Passenger Security Fees or Charges for Security at all Contractor Airports |
|
Sched 3.B.5(a)(vii) |
|
Passengers |
|
*** |
|
Incentive Programs |
|
Sched 3.B.5(a)(viii) |
|
Fixed |
|
$ |
* |
ARINC System Costs |
|
Sched 3.B.5(a)(ix) |
|
Fixed |
|
*** |
|
Landing Gear Overhaul and Landing Gear LLP Costs |
|
Sched 3.B.5(a)(x) |
|
Aircraft |
|
*** |
|
Engine LLP Costs |
|
Sched 3.B.5(a)(xi) |
|
Fixed |
|
*** |
|
Spare Engine LLP Costs |
|
Sched. 3.B.5(a)(xii) |
|
Fixed |
|
*** |
|
Engine Power-by-the-Hour Costs |
|
Sched 3.B.5(a)(xiii) |
|
Block Hours |
|
*** |
|
Fuel Services |
|
Sched 3.B.5(a)(xiv) |
|
Departures |
|
** |
|
Fuel |
|
Sched 3.B.5(a)(xiv) |
|
Prior Month |
|
*** |
* To be based upon the terms of any Incentive Program entered into pursuant to Section 4.16 of this Agreement.
** The rate shall be determined annually by the parties and may be confirmed by e-mail exchange or other writing by the parties and may otherwise be adjusted from time to time, upon mutual agreement of the parties (and confirmed by e-mail exchange or other writing), to reflect a closer approximation of the actual reconciled amounts.
*** See Schedule 3 at Paragraph B(5)(b)(VI).
The rates in this Appendix 3 shall be adjusted from time to time with the mutual agreement of the parties to reflect the actual rates charged to Contractor.
Appendix 4 to Schedule 3
On-Time Incentive Bonuses/Rebates
1. On Time Bonus/Rebate : For purposes of Paragraph A(2) , the bonus or rebate, as the case may be, for on-time performance shall be determined as follows:
Contractors on-time Scheduled Flight departures to or from each of EWR, CLE, IAH, ORD, and DEN shall be measured monthly. For the purposes of this Appendix 4, a Scheduled Flight departure is an on time departure only if such Scheduled Flight actually departed the gate not later than the scheduled departure time.
A. Excused Departures are cancelled flights and those Scheduled Flight departures that were prevented from departing on time solely because of weather, ATC, late arriving equipment delays, or departures delayed upon Uniteds request or any combination thereof as determined by United in accordance with its systems operations control center delay coding protocol.
As of January 1, 2012, numerical delay codes for weather, ATC, late arriving equipment or Uniteds request were ***. As of June 1, 2012, delay codes for weather, ATC, late arriving equipment or Uniteds request are ***.
B. If Contractors actual percentage of Scheduled Flight on-time departures for any such calendar month to or from any of EWR, CLE, IAH, ORD, or DEN (expressed as a percentage of all of Contractors Scheduled Flight departures for any such calendar month to or from such airport, that are not Excused Departures) is above the Monthly Historical Percentage set forth below for such airport, then the reconciliation payment for such month shall include a payment by United to Contractor equal to $*** multiplied by the number of Contractors actual Scheduled Flight departures (excluding Excused Departures) for such month at such airport, multiplied by the excess of Contractors actual percentage of Scheduled Flight on-time departures above such Monthly Historical Percentage. If Contractors actual percentage of Scheduled Flight on-time departures for any such calendar month to or from any of EWR, CLE, IAH, ORD, or DEN (expressed as a percentage of all of Contractors Scheduled Flight departures for any such calendar month to or from any of EWR, CLE, IAH, ORD, or DEN respectively, that are not Excused Departures) is below the Monthly Historical Percentage set forth below for such airport, then the reconciliation payment for such month shall include a payment by Contractor to United equal to $*** multiplied by the number of Contractors actual Scheduled Flight departures (excluding Excused Departures) for such month at such airport, multiplied by the excess of such Monthly Historical Percentage above Contractors actual percentage of Scheduled Flight on-time departures.
C. For purposes of this Appendix 4 , the Monthly Historical Percentage for any of EWR, CLE, IAH, ORD, or DEN for-any month shall equal the average of the actual number of Scheduled Flight on-time departures during the respective calendar month during each of the last five full calendar years prior to the month in question (expressed as percentages of Contractors Scheduled Flight departures for any such calendar month to or from any
of EWR, CLE, IAH, ORD, or DEN, respectively, that are not Excused Departures); provided , that for the purposes of calculating the Monthly Historical Percentage, for any month of any prior year during which Contractor did not have operations hereunder at such airport, the performance data for such month shall include data for all regional aircraft flights that month that were operated with aircraft comparably-sized to aircraft operated by Contractor for United and were operated to or from such airport as United Express, to the extent that such historical performance data is available and that United in good faith deems reliable and accurate is available (it being acknowledged, for the avoidance of doubt, that if Contractor had operations hereunder to or from such airport during any month, then only Contractors performance data to or from such airport that month shall be taken into account for purposes of calculating the Monthly Historical Percentage); provided further , that, subject to Section 8.04 , for the purpose of the foregoing calculation, (x) for the period commencing on July 1, 2014 and ending on December 31, 2015, the Monthly Historical Percentages set forth below shall be reduced by by *** percentage points and (y) on and after January 1, 2016, the Monthly Historical Percentages set forth below shall be reduced by *** percentage point; provided further , that, subject to Section 8.04 , if United alters its system-wide practices in a manner that materially reduces the periods between connecting flights in its domestic operations, then United agrees to meet and confer in good faith with Contractor to discuss any appropriate adjustments to the foregoing calculation of Monthly Historical Percentages. Should the processes currently utilized by the air traffic control system in the United States to manage commercial aircraft change in any material way, Contractor and United agree, if requested in writing by either party, to meet and confer within the next thirty (30) days, in good faith to adjust the targets. Additionally, should Uniteds hub flight schedule or ground handling performance materially change from historical performance levels, if requested in writing by either party, Contractor and United agree to meet and confer in good faith to adjust the targets. In either case, should the parties be unable, despite their good faith efforts, to reach an agreement on adjustments to the prospective targets to take into account the effect of such material change, all the on-time incentive provisions (both bonus and rebate) set forth in this Appendix 4 will cease to be of any force or effect from and after the end of such thirty (30) day-period.
D. References to Scheduled Flights in this Appendix 4 shall not include Charter Flights, extra sections, unscheduled flights, Maintenance Flights, ferry flights, or other non-revenue flights.
2. Fuel Efficiency Bonus: At Uniteds expense, Contractor agrees to implement a Fuel efficiency program modeled on Uniteds Fuel program as set forth in Exhibit L following the mutual agreement of Contractor and United with respect to the matters set forth in the last sentence of this paragraph. Contractor acknowledges that such program is the property of United, shall be deemed confidential by Contractor and, for Contractor but not for United, shall be subject to the provisions of Section 10.07 of the Agreement. If Contractor achieves the applicable target Fuel efficiency under such program, then United shall pay Contractor a Fuel efficiency bonus equal to (a) ***% of the annual Fuel savings attributable to the Fuel efficiency program, less (b) any expenses incurred or reimbursable by United under the terms of the program for its development, implementation or management by Contractor. The program shall specify a measurement
period and a Fuel savings measurement mechanism, including target adjustments for stage length, load factor and flight hour to block hour ratio.
Appendix 5 to Schedule 3
Insurance Rates
Insurance Type |
|
Rate |
|
Driver Units |
|
|
|
|
|
|
|
Hull Insurance |
|
$ |
*** |
|
per $100 value |
|
|
|
|
|
|
Liability Insurance |
|
$ |
*** |
|
per 1000 RPMs |
|
|
|
|
|
|
War Risk Insurance |
|
$ |
*** |
|
per 1000 RPMs and |
|
|
$ |
*** |
|
per Passenger |
Appendix 6 to Schedule 3(5)
***
(5) For the avoidance of doubt, the parties acknowledge and agree that, in the event of an Event of Default, during the Default Modification Period, all references in the Agreement to Schedule 1 shall be deemed to be references to such schedule as replaced or modified pursuant to the terms and conditions of Section 8.04 of the Agreement.
Appendix 7 to Schedule 3
Payments for Scheduled Flight Cancellations Directed by United
Payment Category |
|
Rate |
|
per block hour |
|
$ |
*** |
per departure |
|
$ |
*** |
EXHIBIT A
Definitions
13D Person is defined in clause (iii) of Change of Control in this Exhibit A .
Additional Aircraft means (x) any aircraft which United replaces, or continues to operate within Uniteds regional airline service, and for which the Covered Aircraft Sublease terminates on or prior to the end of the Term (other than a termination of such Covered Aircraft Sublease resulting directly from a breach of the applicable Covered Aircraft Sublease by Contractor or pursuant to Section 8.02(a) , 8.02(b) or 8.02(d) ) and (y) regional aircraft which United begins to use in Uniteds regional airline service (other than an aircraft that was previously withdrawn pursuant to Section 2.07(b) .
Adjustment Date is defined in Section 3.02 .
Administrative Support and Information Services Provisioning Agreement means that certain Amended and Restated Administrative Support and Information Services Provisioning Agreement, dated as of November 7, 2014, among United and Contractor and certain of its Affiliates, in the form attached hereto as Exhibit N (or as otherwise agreed or amended).
Affiliate means, with respect to any Person, any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person, and the term control (including the terms controlled by and under common control with) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of voting securities, by contract or otherwise. With respect to any natural person, the term Affiliate shall additionally mean (1) the spouse or children (including those by adoption) and siblings of such Person; and any trust whose primary beneficiary is such Person, such Persons spouse, such Persons siblings and/or one or more of such Persons lineal descendants, (2) the legal representative or guardian of such Person or of any such immediate family member in the event such Person or any such immediate family member becomes mentally incompetent and (3) any Person controlled by or under the common control with any one or more of such Person and the Persons described in clauses (1) or (2) preceding.
Affiliate CPA means a capacity purchase agreement and accompanying ancillary agreements entered into pursuant to Section 2.07 , in each case between United and an Affiliate of Contractor that is in the business of providing passenger air service, with terms and conditions identical to the terms of this Agreement and the Ancillary Agreements; provided , that the identity of the parties, the aircraft and the engines shall be revised appropriately; provided further , that the Capacity Purchase Arrangement shall contain (i) representations and warranties by such Affiliate regarding conflicts and defaults coextensive with the representations in Sections 4(g) and 4(h) of the Guaranty, but without any qualification as to knowledge, (ii) provisions in the Guaranty reflecting the then-existing partial ownership (if applicable) of such Affiliate by Guarantor (but otherwise containing the restrictive provisions set forth in Section 5 of the Guaranty as to
Guarantors then-existing partial ownership) and (iii) cross default provisions similar to Sections 8.02(d) and 8.02(e) but relating to this Agreement, and, unless otherwise agreed by the parties, shall exclude provisions similar to Sections 6.04 , 6.05 and 10.01 of this Agreement and, in any provision substantially similar to Section 6.01(a) , all references to $*** million shall be $*** million with respect to any aircraft with more than 50 passenger seats.
Affiliate Marks is defined in Section 4.12 .
Agreement means this Amended and Restated Capacity Purchase Agreement, originally dated as of the Original Execution Date and effective as amended and restated as of the Effective Date, among United and Contractor, as amended from time to time pursuant to Section 10.04 hereof.
Ancillary Agreements means each of the agreements entered into by United and Contractor substantially in the form of Exhibits B , C , E , F , M, N and P hereto, together with all amendments, exhibits, schedules and annexes thereto (including any ground handling agreements entered into pursuant to Exhibit C ), and any other aircraft lease between United and Contractor.
Annual Commodity CPI Change means, for any Adjustment Date, the fraction (expressed as a number rounded to four decimal places) as determined on the 15th day of the immediately preceding month (or the first Business Day thereafter on which relevant Commodity CPI figures are publicly available) equal to the quotient obtained by dividing the simple average of the sum of the Commodity CPI for each of the last twelve months ending with the penultimate month preceding such Adjustment Date by the simple average of the sum of the Commodity CPI for each of the last twelve months ending with such penultimate month of the preceding year. (As an example, and for illustrative purposes only, the Annual Commodity CPI Change for April 1, 2007 would be equal to 206.827 (the simple average of the sum of the Commodity CPI for the last twelve months ending February 2007) divided by 201.583 (the simple average of the sum of the Commodity CPI for the last twelve months ending February 2006), or 1.0260.)
Annual CPI Change means, for any Adjustment Date, the fraction (expressed as a number rounded to four decimal places) as determined on the 15th day of the immediately preceding month (or the first Business Day thereafter on which relevant CPI figures are publicly available) equal to the quotient obtained by dividing the simple average of the sum of the CPI for each of the last twelve months ending with the penultimate month preceding such Adjustment Date by the simple average of the sum of the CPI for each of the last twelve months ending with such penultimate month of the preceding year. (As an example, and for illustrative purposes only, the Annual CPI Change for April 1, 2007 would be equal to 202.335 (the simple average of the sum of the CPI for the last twelve months ending February 2007) divided by 196.500 (the simple average of the sum of the CPI for the last twelve months ending February 2006), or 1.0297.)
Audit Period is defined in Section 3.05 .
Available Labor Strike Withdrawn Aircraft is defined in Section 2.07(e) .
Average Peer Group Rates means, with respect to any insurance coverage and as of any date of determination, (x) the insurance rates set forth on Appendix 5 to Schedule 3 , multiplied by (y) the average percentage increase or decrease, as appropriate, from January 1, 2010 to such date of determination, in the cost of such insurance coverage for the five regional airlines with annual revenue passenger miles closest to those of Contractor, as determined by available information obtained from public sources or reputable insurance brokers, excluding (i) any such regional airline that experienced a major loss within the previous three years, and (ii) any regional airline whose insurance rates are included with its major airline partner(s).
Average Remaining Cycle Life is defined in Paragraph B(7)(b) of Schedule 3 .
Average Utilization is defined in Section 2.01(b)(iii) .
Aviation Insurance means any airline hull, war risk, or passenger liability insurance.
Base Compensation is defined in Paragraph A(1) of Schedule 3 .
Basic Rent is defined, with respect to any Covered Aircraft, in the Covered Aircraft Sublease for such Covered Aircraft.
Business Day means each Monday, Tuesday, Wednesday, Thursday and Friday unless such day shall be a day when financial institutions in New York, New York or Houston, Texas are authorized by law to close.
Capacity Purchase Arrangement means any capacity purchase agreement or other arrangement whereby one party operates aircraft on behalf of a second party that (i) exercises control over the scheduling of flights for such aircraft and (ii) bears a majority of the financial risk with respect to passenger load on flights for such aircraft. For the avoidance of doubt, a pro-rate arrangement shall not constitute a Capacity Purchase Arrangement for the purposes of this Agreement.
Category 2 Conditions has the meaning contained in Contractors flight operations manual as of the Original Execution Date.
Cause means the following, each of which shall constitute a breach of this Agreement: (i) the suspension or revocation of Contractors authority to operate as a scheduled airline, (ii) the ceasing of Contractors operations as a scheduled airline, other than (A) as a result of a Labor Strike or a non-carrier specific grounding of any of the Contractor Fleets by regulatory or court order or other governmental action or (B) any other temporary cessation for not more than 14 consecutive days, (iii) the occurrence of a Labor Strike that shall have continued for 15 days or (iv) a willful or intentional material breach of this Agreement by Contractor or any Guarantor that substantially deprives United of the benefits of this Agreement, which breach shall have continued for 45 days after written notice thereof is delivered by United to Contractor.
Change of Control means:
(i) Parent consolidates with, or merges with or into, a Prohibited Person or conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to a Prohibited Person, or a Prohibited Person consolidates with, or merges with or into, Parent in any such event pursuant to a transaction in which the voting securities of Parent are converted into or exchanged for cash or securities of a Prohibited Person, except where the holders of voting securities of Parent immediately prior to such transaction own not less than a majority of the voting securities of the surviving or transferee corporation immediately after such transaction, in each case other than any such transaction between Parent on the one hand, and United and/or any of its Subsidiaries on the other;
(ii) the direct or indirect acquisition by a Prohibited Person or any Person directly or indirectly controlling a Prohibited Person of beneficial ownership of 15% or more of the capital stock or voting power of Parent;
(iii) the direct or indirect acquisition by any person or group (as such terms are used in Section 13(d) of the Securities Exchange Act of 1934) not described in clause (ii) above, of beneficial ownership of more than 25% of the capital stock or voting power of Parent, other than (A) United or its Subsidiaries or (B) any person or group that is a Person who has a Schedule 13D on file with the Securities and Exchange Commission pursuant to the requirements of Rule 13d-1 under the Securities Exchange Act of 1934 (the Exchange Act ) with respect to its holdings of Parents voting securities (a 13D Person ), so long as (1) such 13D Person is principally engaged in the business of managing investment funds for unaffiliated securities investors and, as part of such 13D Persons duties as agent for fully managed accounts, holds or exercises voting or dispositive power over Parents voting securities, (2) such 13D Person was a Person who had a Schedule 13G on file with the Securities and Exchange Commission pursuant to the requirements of Rule 13d-1 under the Exchange Act with respect to its holdings of Parents voting securities, and became a 13D Person pursuant to Rule 13d-1(f)(1), and (3) such 13D Person acquires and continues to have beneficial ownership of Parents voting securities pursuant to trading activities undertaken in the ordinary course of such 13D Persons business and not with the purpose nor the effect, either alone or in concert with any 13D Person, of exercising the power to direct or cause the direction of the management and policies of Parent or of otherwise changing or influencing the control of Parent, nor in connection with or as a participant in any transaction having such purpose or effect, including any transaction subject to Rule 13d-3(b) of the Exchange Act; provided , that a Change of Control shall not occur pursuant to this clause (iii) if such person or group reduces its ownership of the capital stock or voting power of Parent, as the case may be, to less than 25% within 30 days of the acquisition of ownership of at least 25% of such capital stock or voting power;
(iv) the liquidation or dissolution of Parent in connection with which Contractor ceases operations as an air carrier;
(v) the sale, transfer or other disposition of all or substantially all of the airline assets of Parent or Contractor on a consolidated basis directly or indirectly to a Prohibited Person or its Affiliate, whether in a single transaction or a series of related transactions; or
(vi) the execution by Parent or Contractor of bona fide definitive agreements, the consummation of the transactions contemplated by which would result in a transaction described in the immediately preceding clauses.
Charter Flight - means any flight by a Covered Aircraft for charter operations at the direction of United that may or may not be not reflected in the Final Monthly Schedule.
*** Issue is defined in Section 3.08 .
Commodity Aircraft Deficit is defined in Section 2.08(h) .
Commodity CPI means (i) the Consumer Price Index for All Urban Consumers U.S. City Average, All Items less food and energy, Not Seasonally Adjusted Base Period: 1982-84 = 100, as published by the Bureau of Labor Statistics, United States Department of Labor, or (at any time when the Bureau of Labor Statistics is no longer publishing such Index) as published by any other agency or instrumentality of the United States of America, or (ii) at any time after the index described in clause (i) shall have been discontinued, any reasonably comparable replacement index or other computation published by the Bureau of Labor Statistics or any other agency or instrumentality of the United States of America. If any such index shall be revised in any material respect (such as to change the base year used for computation purposes), then all relevant determinations under this Agreement shall be made in accordance with the relevant conversion factor or other formula published by the Bureau of Labor Statistics or any other agency or instrumentality of the United States of America, or (if no such conversion factor or other formula shall have been so published) in accordance with the relevant conversion factor or other formula published for that purpose by any nationally recognized publisher of such statistical information.
Commodity Price means, for any Business Day, the spot price per barrel of West Texas Intermediate light sweet crude oil for delivery in Cushing, Oklahoma, stated in U.S. Dollars, as published under the heading Spot Crude Price Assessments: U.S.:WTI in the issue of Platts Oilgram that reports prices effective on such date; provided that if no such price is published on a particular Business Day , then the price for such date shall be the price most recently published prior to such date, and if the above publication ceases to be published during the term hereof, its successor publication shall be used or, if there is no successor, then a comparable published index shall be substituted in replacement thereof.
Commodity Replacement Event means a First Commodity Replacement Event or a Second Commodity Replacement Event.
Commodity Replacement Period is defined in Section 2.08(f) .
Commodity Withdrawal Event means a First Commodity Withdrawal Event or a Second Commodity Withdrawal Event.
Commodity Withdrawal Period is defined in Section 2.08(a) .
Continental has the meaning set forth in the preamble.
Continuing Aircraft is defined in Section 2.01(b)(ii) .
Contractor means ExpressJet and its successors and permitted assigns.
Contractor Airport means (i) any airport at which Contractor provides or arranges for the provision of ground handling services pursuant to the Contractor Ground Handling Agreement, and (ii) any other airport into or out of which Contractor operates any Scheduled Flight and which is not a United Airport.
Contractor Fleet means all or any of the following fleets of Covered Aircraft: (i) ERJ Aircraft if such aircraft constitutes one or more Covered Aircraft, (ii) any other type of regional jet aircraft (whether manufactured by Embraer or another manufacturer) if such aircraft constitutes one or more Covered Aircraft, and (iii) any portion of such group of aircraft consisting of one or more models (for example, ERJ-135s and ERJ-145s, or ERJ-145LRs and ERJ-145XRs), or any subgroup of such aircraft as determined from time to time by regulatory or court order or other governmental action (for example, all such aircraft manufactured within specific time frames), in each case, if such aircraft constitutes one or more Covered Aircraft.
Contractor Ground Handling Agreement means that certain IATA Standard Ground Handling Agreement (April 1993 version) between United and Contractor, together with Annex A thereto (Ground Handling Services, April 1993 version) and Annex B thereto substantially in the form of Exhibit D to the Master Facility and Ground Handling Agreement (or as otherwise agreed or amended) providing for the provision by or on behalf of Contractor to United of ground handling services at the airports specified therein.
Contractor Marks is defined in Exhibit H .
Contractor Premium Surcharge Amount is defined in Paragraph B(6)(e)(IV) of Schedule 3 .
Contractor Premium Surcharge Limit is defined in Paragraph B(6)(e)(III) of Schedule 3 .
Contractor Premium Surcharge Overflow Amount is defined in Paragraph B(6)(e)(V) of Schedule 3 .
Contractor Services is defined in the Master Facility and Ground Handling Agreement.
Controllable Completion Factor Incentive Rate is defined in Appendix 2 to Schedule 3 .
Controllable Cancellation means a cancellation of a Scheduled Flight that is not an Uncontrollable Cancellation.
Controllable Cancellation Factor means, for any period of determination, the percentage of Scheduled Flights completed during such period, excluding Uncontrollable Cancellations.
Controllable On-Time Departure means a flight departing within 15 minutes of scheduled departure time, as determined solely by ACARS, excluding (i) cancelled flights, (ii) flights impacted by ATC or weather-related delays, (iii) flights impacted by Labor Strike, (iv) unscheduled, extra section or diversion departures, or (v) departures delayed upon Uniteds request and not otherwise impacted by weather or ATC.
Controllable On-Time Departure Rate means, for any period of determination, the percentage of Scheduled Flights that are Controllable On-Time Departures.
Covered Aircraft means all of the aircraft listed on Schedule 1 (as amended from time to time pursuant to the provisions of this Agreement) and presented for service by Contractor, as adjusted from time to time for additions and withdrawals pursuant to Article II , Section 4.18 , and Article VIII (it being understood by the parties hereto that Schedule 1 shall be revised from time to time to reflect any such additions and withdrawals).
Covered Aircraft Sublease means the Amended and Restated Covered Aircraft Sublease (or a lease) substantially in the form of the Exhibit B (or as otherwise agreed or amended) between United and Contractor, pursuant to which Contractor subleases (or leases) a Covered Aircraft from United.
CPA Records is defined in Section 3.05 .
CPA Target Income is defined in Section 3.07 .
CPI means (i) the Consumer Price Index for All Urban Consumers U.S. City Average, All Items, Not Seasonally Adjusted Base Period: 1982-84 = 100, as published by the Bureau of Labor Statistics, United States Department of Labor, or (at any time when the Bureau of Labor Statistics is no longer publishing such Index) as published by any other agency or instrumentality of the United States of America, or (ii) at any time after the index described in clause (i) shall have been discontinued, any reasonably comparable replacement index or other computation published by the Bureau of Labor Statistics or any other agency or instrumentality of the United States of America. If any such index shall be revised in any material respect (such as to change the base year used for computation purposes), then all relevant determinations under this Agreement shall be made in accordance with the relevant conversion factor or other formula published by the Bureau of Labor Statistics or any other agency or instrumentality of the United States of America, or (if no such conversion factor or other formula shall have been so published) in accordance with the relevant conversion factor or other formula published for that purpose by any nationally recognized publisher of such statistical information.
Cure Date is defined in Section 8.04(c) .
Default Modification Date is defined in Section 8.04 .
Default Notice is defined in Section 8.04 .
Disposed Aircraft means any aircraft withdrawn from the capacity purchase provisions of this Agreement pursuant to Section 2.08 which, subsequent to such withdrawal, either (a) has been returned (or is subject to a binding commitment to be returned in connection with such withdrawal) to the head lessor, security trustee or any financing party under an applicable head lease, mortgage or security agreement, whether in connection with the end of the term of such lease, or otherwise, (b) has been sold, assigned, leased or otherwise transferred (or is subject to a binding commitment for sale, assignment, lease or transfer in connection with such withdrawal) by United to a third party, or (c) is the subject of an impairment or restructuring charge by United.
DOT means the United States Department of Transportation.
Effective Date means July 1, 2014.
Embraer means Empresa Brasileira de Aeronautica S.A., a Brazilian corporation with its principal place of business in Sao Paulo, Brazil.
Embraer Contract means, collectively, Purchase Agreement No. GPJ-003/96 between Embraer and XJT Holdings, Inc., dated August 5, 1996, Letter of Agreement No. GPJ-004/96 between Embraer and XJT Holdings, Inc., dated August 5, 1996, Letter of Agreement No. PCJ-004A/96 among Embraer, United and XJT Holdings, Inc., dated August 31, 1996, Purchase Agreement No. DCT-054/98, between Embraer and XJT Holdings, Inc., dated December 23, 1998, Letter of Agreement No. DCT-059/2000 between Embraer and XJT Holdings, Inc., dated October 27, 2000, Letter of Agreement No. DCT-055/98 between Embraer and XJT Holdings, Inc., dated December 23, 1998, Letter of Agreement No. DCT-058/2000 between Embraer and XJT Holdings, Inc., dated October 27, 2000, and EMB-135 Financing Letter of Agreement among United, Embraer and XJT Holdings, Inc., dated March 23, 2000, in each case including such amendments and supplements as were incorporated by reference in XJT Holding Inc.s registration statement on Form S-1 (Registration No. 333-64808) as Exhibits 10.12 10.19 thereto.
Engine means any jet aircraft engine that constitutes an Engine, as such term is defined in a Covered Aircraft Sublease for a jet aircraft, under such Covered Aircraft Sublease.
Engine LLP means Engine life-limited parts as defined in the Engine Maintenance Agreement, excluding any Spare Engine LLP.
Engine Maintenance Agreement means the contract entered into between Contractor and Rolls Royce Corporation, dated as of September 28, 2004 for the maintenance of the Engines, as amended and supplemented or replaced from time to time.
ERJ Aircraft means any Embraer ERJ-135 or ERJ-145 aircraft.
Event of Default is defined in Section 8.04 .
Excepted Aircraft is defined in Section 8.04(c) .
Excess Insurance Costs means, in respect of any insurance policy obtained by Contractor, the cost of such insurance coverage, if any, in excess of the amount such insurance coverage would have cost if Contractor and United had participated in a combined placement pursuant to Section 6.04 .
Exchange Act is defined in clause (iii) of Change of Control in this Exhibit A .
Excused Departure is defined in Appendix 4 to Schedule 3 .
Existing CPA is defined in the first whereas clause to this Agreement.
ExpressJet is defined in the preamble.
Extension is defined in Section 2.13 .
Extension Aircraft is defined in Section 2.13 .
FAA means the United States Federal Aviation Administration.
Final Monthly Schedule means the final schedule of Scheduled Flights for the next calendar month delivered by United to Contractor pursuant to Section 2.01(b) .
First Commodity Replacement Event means any date, from time to time, after United shall have exercised its right under Section 2.08(a) and on which, for the 90 days immediately preceding such date, the average Commodity Price shall have been $*** per barrel or lower; provided , that the measurement period for any First Commodity Replacement Event may not overlap with the measurement period for any Commodity Withdrawal Event for which a notice is delivered by United pursuant to Section 2.08(b) (and thus may not begin until the day after the date of any Commodity Withdrawal Event, if any, that may otherwise have occurred during such 90-day period).
First Commodity Withdrawal Event means any date, from time to time, on which, for the 90 days immediately preceding such date, the average Commodity Price shall have been $*** per barrel or higher; provided , that the measurement period for any First Commodity Withdrawal Event may not overlap with the measurement period for any Commodity Replacement Event for which a notice is delivered pursuant by Contractor to Section 2.08(g) (and thus may not begin until the day after the date of any Commodity Replacement Event, if any, that may otherwise have occurred during such 90-day period).
Flight Cancellation Reconciliation is defined in Paragraph B(3) of Schedule 3 .
Flight Hour Agreements means, collectively, (i) the Engine Maintenance Agreement, (ii) that certain agreement relating to Avionics between Contractor and Honeywell, (iii) that certain agreement relating to Starter Control System between Contractor and Honeywell, (iv) that certain agreement relating to Lighting between Contractor and Honeywell, (v) that certain agreement relating to PRSOV between Contractor and Honeywell, (vi) that certain agreement relating to AHRS between Contractor and Honeywell, (vii) that certain agreement relating to Sensors between Contractor and Goodrich, (viii) that certain agreement relating to Access between Contractor and Goodrich, (ix) that certain agreement relating to ECS between Contractor and Hamilton Sundstrand, (x) that certain agreement relating to Wheels and Brakes between Contractor and Goodrich, (xi) that certain agreement relating to Tires between Contractor and Goodyear, (xii) that certain agreement relating to APU between Contractor and Hamilton Sundstrand, in each case in effect as of the Original Execution Date, and (xiii) any replacement of any of the foregoing which has been approved by United pursuant to Section 10.18 .
Flight Related Revenue is defined in Section 2.02 .
Forecasted Passengers means, for any month, the forecasted Revenue Onboards derived from the Final Monthly Schedule for the previous month.
Fuel means any fuel customarily used as aviation fuel.
Fuel Services means the act of putting Fuel product into an aircraft and taking Fuel product out of an aircraft, and any other incidental tasks as are customarily required from time to time in connection therewith; provided that the cost of aircraft Fuel shall not be included as a cost of Fuel Services.
Guarantor means Parent.
Guaranty means that certain Guaranty Agreement, dated as of November 7, 2014, between Guarantor and United in the form of Exhibit M attached to this Agreement.
Identification means the United Marks, the aircraft livery set forth on Exhibit G , the United flight code and other trade names, trademarks, service marks, graphics, logos, employee uniform designs, distinctive color schemes and other identification selected by United in its sole discretion for the Regional Airline Services to be provided by Contractor, whether or not such identification is copyrightable or otherwise protected or protectable under federal law.
Incentive Program Costs means the out-of-pocket costs or expenses arising directly from the implementation of any incentive program implemented pursuant to Section 4.16 , excluding overhead and general operating expenses, including, without limitation, salaries.
Indemnified Party is defined in Section 7.03 .
Indemnifying Party is defined in Section 7.03 .
Indemnity Notice is defined in Section 7.03 .
Invoiced Amount is defined in Section 3.06(a) .
Labor Strike means a labor dispute, as such term is defined in 29 U.S.C. Section 113(c) involving Contractor and some or all of its employees, which dispute results in a union-authorized strike resulting in a work stoppage.
Landing Gear LLP means life-limited parts for landing gear as defined in Contractors maintenance program.
Maintenance Flight is defined in Section 2.01(c) .
Major Carrier means an air carrier (other than United and its successors and any Subsidiary thereof), the consolidated annual revenues of which for the most recently completed fiscal year for which audited financial statements are available are in excess of the Revenue Threshold as of the date of determination (or the U.S. dollar equivalent thereof).
Major Loss means an aviation-related accident or incident that results in the combined policy insurance providers establishing a reserve in an amount greater than the aggregate combined base premium amount for the year in which such accident or incident occurs, net of contribution from or subrogation against any third parties.
Master Facility and Ground Handling Agreement means that certain Second Amended and Restated Master Facility and Ground Handling Agreement, dated November 7, 2014, between United and Contractor, in the form attached hereto as Exhibit C (or as otherwise agreed or amended).
Maximum Utilization Level is defined in Section 2.01(b)(iii) .
Modified Block Hour Rate is defined in Section 2.01(b)(ii) .
Monthly Historical Percentage is defined in Appendix 4 to Schedule 3 .
Non-Revenue Pass Travel Privileges means (i) business-related positive space travel privileges and (ii) standby business and personal use travel privileges.
One-Time Payment is defined in Section 3.08 .
Original Execution Date means November 12, 2010.
Original Schedule is defined in Section 8.04(c) .
Other Subleased Aircraft means all aircraft (i) identified in Section D of Schedule 2 or (ii) listed on Schedule 1 or Schedule 2 (other than Covered Aircraft) that are subleased by United from time to time.
Parent means SkyWest, Inc., a Utah corporation, and its successors and permitted assigns.
Parked Aircraft means all aircraft identified in Section C of Schedule 2 , as adjusted from time to time if and when any such aircraft become Covered Aircraft or Other Subleased Aircraft.
Permitted Actions is defined in Section 4.19(a) .
Person means an individual, partnership, limited liability company, corporation, joint stock company, trust, estate, joint venture, association or unincorporated organization, or any other form of business or professional entity.
Prohibited Person means (i) an air carrier (other than United and its successors and any Subsidiary thereof or Parent or any Guarantor), the consolidated annual revenues of which for the most recently completed fiscal year for which audited financial statements are available are in excess of the Revenue Threshold as of the date of determination (or the U.S. dollar equivalent thereof), and (ii) any executive officer, as of the Effective Date or any date of determination, of an air carrier (other than United and its successors and any Subsidiary thereof), the consolidated annual revenues of which for the most recently completed fiscal year for which audited financial statements are available are in excess of the Revenue Threshold as of the date of determination and any entity in which such current executive officer is an officer or 10% shareholder.
Prohibited Transfer is defined in Section 5.03 .
Proposed Schedule is defined in Section 2.01(b) .
Reasonable Operating Constraints and Conditions means the operating constraints and conditions for Scheduled Flights set forth on Exhibit J .
Reconciled Expenses is defined in Paragraph B(5)(a) of Schedule 3 .
Regional Airline Services means the provisioning by Contractor to United of Scheduled Flights and related ferrying using the Covered Aircraft in accordance with this Agreement.
Replaceable Aircraft is defined in Section 2.12 .
Replacement Aircraft is defined in Section 2.05(a) .
Replacement Date is defined in Section 2.05(b) .
Replaced Wind-Down Schedule is defined in Section 2.12 .
Required Maintenance Records is defined in Section 2.09(e)(ii) .
Return Aircraft Sublease means the sublease (or lease) in effect immediately prior to the Original Execution Date between United and Contractor, pursuant to which Contractor subleases (or leases) a United Aircraft or a Charter Aircraft from United.
Revenue Onboard means one revenue-generating passenger on one flight segment, regardless of whether such flight segment is all or part of such passengers entire one-way flight itinerary.
Revenue Threshold means *** as such amount may be increased based on the amount by which, for any date of determination, the most recently published CPI has increased to such date above the CPI for calendar year 2000. For purposes hereof, the CPI for calendar year 2000 is the monthly average of the CPI for the twelve months ending on December 31, 2000.
Savings is defined in Section 3.07 .
Schedule Reduction Request is defined in Section 2.01(b)(iii) .
Scheduled ASMs means, for any period of calculation, the available seat miles for all Scheduled Flights during such period of calculation.
Scheduled Flight is defined in Section 2.01(b) .
Second Commodity Replacement Event means any date, from time to time, after United shall have exercised its right under Section 2.08(a) and on which, for the 90 days immediately preceding such date, the average Commodity Price shall have been $*** per barrel or lower; provided , that the measurement period for any Second Commodity Replacement Event may not overlap with the measurement period for any Commodity Withdrawal Event for which a notice is delivered by United pursuant to Section 2.08(b) (and thus may not begin until the day after the date of any Commodity Withdrawal Event, if any, that may otherwise have occurred during such 90-day period).
Second Commodity Withdrawal Event means any date, from time to time, on which, for the 90 days immediately preceding such date, the average Commodity Price shall have been $*** per barrel or higher; provided , that the measurement period for any Second Commodity Withdrawal Event may not overlap with the measurement period for any Commodity Replacement Event for which a notice is delivered by Contractor pursuant to Section 2.08(g) (and thus may not begin until the day after the date of any Commodity Replacement Event, if any, that may otherwise have occurred during such 90-day period).
Similar Economic Term Transaction is defined in Section 2.05(a) .
*** Spares is defined in Section 2.01(d) .
SkyWest Airlines means SkyWest Airlines, Inc., a Utah corporation.
SkyWest Merger means the legal merger contemplated by the Agreement and Plan of Merger, dated as of August 3, 2010, by and among Parent, Express Delaware Merger Co.,
an indirect, wholly-owned subsidiary of Parent, and ExpressJet Holdings, Inc., the parent of Contractor.
Spare Aircraft means any Covered Aircraft that is designated by Contractor as spare aircraft pursuant to Section 2.01(d) , which may be used by Contractor to replace another aircraft in the operation of a Scheduled Flight that otherwise would be cancelled or as otherwise provided in Section 2.01(d) .
Spare Engine means all of the engines listed on Section E of Schedule 2 ; provided , that any engine that (i) ceases to be used from time to time in support of Covered Aircraft or (ii) becomes subject to an arrangement pursuant to which it is expected to be used in support of aircraft other than Covered Aircraft, Charter Aircraft or United Aircraft shall cease to be a Spare Engine (it being understood by the parties hereto that Section E of Schedule 2 shall be revised from time to time to remove engines that are no longer Spare Engines and to include engines that are in replacement as agreed by United and Contractor).
Spare Engine Cost-Per-Cycle Arrangement is defined in Paragraph B(7)(b) of Schedule 3 .
Spare Engine LLP means engine life-limited parts as defined in the Engine Maintenance Agreement and installed on Spare Engines.
Storage Sublease means the Storage Sublease (or a lease) substantially in the form of the Exhibit P(6) (or as otherwise agreed or amended) between United and Contractor, pursuant to which Contractor subleases (or leases) a Parked Aircraft, Other Subleased Aircraft or other aircraft from United pursuant to the terms of this Agreement. Storage Sublease shall also include any deemed Storage Sublease as provided in Section 2.09(c) .
Sublessee Excess Spare Engines is defined in Section 2.01(d) .
Subsidiary means, as to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time, any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (b) any partnership, association, joint venture, limited liability company, joint stock company or any other form of business or professional entity, in which such Person directly or indirectly through Subsidiaries has more than 50% equity interest at any time.
System Flight Disruption means the failure by Contractor to complete at least ***% of the aggregate Scheduled ASMs in any three consecutive calendar months, or at least ***% of the aggregate Scheduled ASMs in any consecutive 45-day period, in each case
(6) Form of Storage Sublease to be agreed upon by Contractor and United prior to the Effective Date with both parties acting reasonably and in good faith
excluding the effect of Uncontrollable Cancellations; provided , that if the average number of block hours flown per Covered Aircraft during such period is more than the average number of block hours flown per Covered Aircraft during the three consecutive calendar months (or 45 days, as applicable) immediately preceding the period first measured, then the calculation for purposes of this definition shall disregard that number of Scheduled ASMs for such period as is necessary to reduce the average number of block hours flown per Covered Aircraft during such period to the average number of block hours flown per Covered Aircraft during prior three consecutive calendar month period (or 45 days, as applicable); provided further , that a System Flight Disruption shall be deemed to continue until the next occurrence of a single calendar month in which Contractor completes at least ***% of the aggregate Scheduled ASMs; and provided further , that completions and cancellations of Scheduled Flights on any day during which a Labor Strike is continuing shall not be taken into account in the foregoing calculations.
Target Savings is defined in Section 3.07 .
Term has the meaning set forth in Section 8.01 , as earlier terminated pursuant to Section 8.02 , if applicable, and any Wind-Down Period.
Terminal Facilities means Terminal Facilities as such term is defined in the Master Facility and Ground Handling Agreement.
Termination Date means the date of early termination of this Agreement, as provided in a notice delivered from one party to the other pursuant to Section 8.02 , or, if no such early termination shall have occurred, the date of the end of the Term.
Third Party Consent is defined in Section 10.19(a) .
Third Party Replacement Aircraft is defined in Section 10.19(a) .
Transition is defined in Section 2.09(e) .
Transition Operator is defined in Section 2.09(e) .
TSA means the United States Transportation Security Administration.
UA Spare Flight is defined in Section 2.01(d) .
Uncontrollable Cancellation means a cancellation of a Scheduled Flight that is (A) solely weather-related or air traffic control-related, in each case as coded on Contractors operations reports in accordance with Uniteds standard coding policies and pursuant to Paragraph B(3)(f) of Schedule 3 , it being understood and agreed that if Uniteds operations are subject to the same circumstance giving rise to the cancellation and United does not cancel flights as a result (except where such circumstances apply differently to Contractors aircraft type and Uniteds aircraft type), such cancellation shall be a Controllable Cancellation, (B) flights cancelled due to aircraft damage caused by United or its agents, (C) the result of a non-carrier specific grounding of any Contractor Fleet by regulatory or court order or other governmental action, (D) cancellations on any
day during which a Labor Strike is continuing (except when such cancellations are deemed Controllable Cancellations pursuant to Paragraph (B)(3)(d) of Schedule 3 ), (E) cancellations due to extraordinary events beyond Contractors reasonable control, it being understood and agreed that if Uniteds operations are subject to the same circumstance giving rise to the cancellation and United does not cancel flights as a result, such cancellation shall be a Controllable Cancellation or (F) cancellations that are identified as Uncontrollable Cancellations pursuant to the terms of this Agreement.
ULA is defined in Section 10.21(a) .
United has the meaning set forth in the preamble.
United Airport means any airport at which United provides or arranges for the provision of ground handling services pursuant to the United Ground Handling Agreement.
United Currencies means inflight currency coupons issued by United that may only be purchased at any United eService Center and may only be redeemed for alcoholic beverages or headsets on any United or Contractor flight.
United Expenses is defined in Section 3.04(a) .
United Ground Handling Agreement means that certain IATA Standard Ground Handling Agreement (April 1993 version) between United and Contractor, together with Annex A thereto (Ground Handling Services, April 1993 version) and Annex B thereto substantially in the form of Exhibit C to the Master Facility and Ground Handling Agreement (or as otherwise agreed or amended) providing for the provision by or on behalf of United to Contractor of ground handling services at the airports specified therein.
United Hub Airport means (i) George Bush Intercontinental Airport in Houston, Texas (IAH), Hopkins International Airport in Cleveland, Ohio (CLE) and Liberty International Airport in Newark, New Jersey (EWR), and (ii) as of any date of determination, any other airport at which Contractor operates an average of more than *** Scheduled Flights per day during the *** days prior to such date of determination.
United Marks is defined in Exhibit G .
United Merger means the legal merger contemplated by the Agreement and Plan of Merger, dated as of May 2, 2010, by and among UAL Corporation, Continental and JT Merger Sub Inc.
United Premium Surcharge Amount is defined in Paragraph B(6)(d)(III) of Schedule 3 .
Wind-Down Period means the period after the Termination Date and until the time when the last Covered Aircraft has been withdrawn from the capacity purchase provisions of this Agreement.
Wind-Down Schedule means the schedule for Covered Aircraft to be withdrawn from the capacity purchase provisions of this Agreement, delineating the number of each aircraft type to be withdrawn by month.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-8 No.'s 333-200540, 333-171595, 333-161396, 333-135239, 333-134379, 333-133470, 333-130848, 333-130846, 33-60173 and 333-70408) pertaining to the SkyWest, Inc. 2011 Long-term Incentive Plan. SkyWest, Inc. 2010 Employee Stock Purchase Plan, Atlantic Southeast Airlines, Inc. Investment Savings Plan, SkyWest, Inc. 2006 Long Term Incentive Plan, 2004 Restatement of the SkyWest, Inc. Employees' Retirement Plan, SkyWest, Inc. 2006 Employee Stock Purchase Plan, SkyWest, Inc. 1995 Employee Stock Purchase Plan, SkyWest, Inc. 2001 Allshare Incentive Stock Option Plan and SkyWest, Inc. Executive Stock Incentive Plan, respectively, of SkyWest, Inc. and subsidiaries, of our reports dated February 18, 2015, with respect to the consolidated financial statements and schedule of SkyWest, Inc. and subsidiaries, and the effectiveness of internal control over financial reporting of SkyWest, Inc. and subsidiaries, included in this Annual Report (Form10-K) for the year ended December 31, 2014.
/s/ Ernst & Young LLP
Salt
Lake City, Utah
February 18, 2015
I, Jerry C. Atkin, certify that:
1. I have reviewed this Annual Report on Form 10-K of SkyWest, Inc. for the year ended December 31, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 18, 2015
/s/ JERRY C. ATKIN
Jerry C. Atkin Chief Executive Officer |
I, Eric J. Woodward, certify that:
1. I have reviewed this Annual Report on Form 10-K of SkyWest, Inc. for the year ended December 31, 2014;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with general accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 18, 2015
/s/ ERIC J. WOODWARD
Eric J. Woodward Chief Accounting Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of SkyWest, Inc. (the "Company") for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (the "Report"), I, Jerry C. Atkin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ JERRY C. ATKIN
Jerry C. Atkin Chief Executive Officer February 18, 2015 |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of SkyWest, Inc. (the "Company") for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (the "Report"), I, Eric J. Woodward, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ ERIC J. WOODWARD
Eric J. Woodward Chief Accounting Officer February 18, 2015 |
This certification accompanies the Report Amendment pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.