Frontier Airlines 2004 Annual Report Download - page 13

The American Code - Share Agreemen t
As of December 31, 2004, Chautauqua operated 15 ERJ - 140 regional jets for American under a fixed - fee code - share agreement. As of December 31, 2004, Chautauqua provided 85
flights per day as AmericanConnection between St. Louis and designated outlying cities.
American provides reservation services, tickets, baggage handling, ticket jackets and similar items with respect to such flights and also controls scheduling, ticket prices and seat
inventories with respect to such flights. In exchange for providing the designated number of flights and performing our other obligations under the code - share agreement, we receive from
American a fixed - fee per block hour flown in revenue service and an additional amount per passenger. We are also eligible to receive semi - annual per passenger incentives based upon on - time
performance, flight completion rates, lack of complaints and correct baggage handling. Conversely, we must pay semi - annual per passenger penalties should our performance not meet minimum
standards for on - time performance, flight completion rates, complaints and correct baggage handling. Under the code - share agreement, American retains all passenger, certain cargo and other
revenues associated with each flight, and is responsible for all revenue - related expenses. We share revenue with American for certain cargo shipments. Additionally, certain operating costs are
considered "pass through" costs and American has agreed to reimburse us the actual amount of costs we incur for these items. Fuel, landing fees, passenger catering, property and liability
insurance and aircraft property costs are pass through costs. Aircraft lease payments are also considered a pass through cost, but are limited to a specified limit with respect to the first 20 aircraft
put into service for American. American pays us periodically throughout the month on an agreed schedule, subject to American's right to offset amounts we owe them under the code - share
agreement.
The fixed rates for each scheduled block hour that we receive from American under the code - share agreement have been determined through the term of the code - share agreement,
subject to certain revisions and an agreed annual escalation rate. In March 2003, we agreed to a one - time waiver of certain escalations in exchange for American's termination of a warrant to
purchase shares of our common stock that we had previously issued to American. In addition, in October 2003, we agreed to grant American a one - time waiver of certain escalations and
economic concessions in the form of a monthly rebate in exchange for an extension of the date of American's early termination right. Certain costs, including fuel costs, aircraft ownership and
financing costs (subject to a limitation), landing fees, property and liability insurance, aircraft property taxes and de - icing costs, are "trued - up" for differences between actual costs and the
assumed costs included in our fixed rates. In addition, a reconciliation payment will be made by American to us if uncontrollable cancellations exceed a specified level of scheduled block hours
during any calendar quarter. We are reimbursed for all third party ground handling costs at certain airport locations, and there is a reconciliation for shared ground services between us and
American. We are responsible for certain training, automation and other charges and costs.
The block hour rate we are paid varies based on the number of scheduled block hours per day to be flown in revenue service, subject to a minimum rate without regard to actual number
of hours flown. This means that even if we fly less than the specified minimum number of scheduled block hours a day, we are paid as if we had flown the minimum number of block hours. The
block hour rate can only be adjusted in connection with schedule changes that change the scheduled block hour utilization, but the minimum number of scheduled block hours cannot be changed.
American has agreed to schedule the aircraft under the code - share agreement for no less than the specified minimum number of block hours per aircraft per day on average.
Under the terms of the code - share agreement, we are required at specified locations to provide ground support and other passenger services at our expense, and American is required to
provide those services at their expense at other locations. At the hub in St. Louis, we are responsible for providing gate operations, security and leasing facilities (which are leased from
American), and American is responsible for providing ticketing services and de - icing for the aircraft. Certain costs of personnel training are shared with American.
The code - share agreement provides that, during its term, we will provide regional airline services exclusively for American at the St. Louis hub and within 50 statute miles of that hub, and
we are prohibited from providing competing regional hub services at Memphis, Nashville and Kansas City. This means that, without American's consent, we are prohibited from operating flights
under our own code or on behalf of any other air carrier providing hub services in or out of these airports. In addition, during the term of the agreement, we are prohibited from operating any of
our aircraft subject to the code - share agreement on behalf of any other carrier. Otherwise, the agreement does not prohibit us from flying aircraft on behalf of other airlines utilizing the airport
facilities of those airlines or other airport facilities that we may obtain in the future.
At any time that Chautauqua enters into an agreement with a third party for code - share using ERJ - 140 aircraft, Chautauqua must offer American the right, on an all or nothing basis, to
amend the code - share agreement to incorporate the terms of the agreement with the third party. However, this provision does not apply to our existing arrangements with US Airways to supply
additional aircraft. If American elects to incorporate the terms of the agreement with the third party, those terms will govern all of the aircraft covered by the code - share agreement. If Chautauqua
reaches an agreement in principle with a third party to provide service using an aircraft other than an ERJ - 140 aircraft, Chautauqua is required to offer the right of first refusal to American on a
one time basis to enter into that agreement. American can only exercise their right of first refusal on an all or nothing basis, and American must have previously exercised, or agree to exercise, all
of its outstanding options for aircraft under the terms of the existing code - share agreement.
Should Chautauqua have aircraft in excess of our operational needs, Chautauqua has granted American a right of first refusal to use those aircraft pursuant to the terms of the code - share
agreement. In addition, should American require more than 25 regional jets to fly under its AmericanConnection code out of St. Louis, American has agreed to grant us a right of first refusal to
supply up to five ERJ - 140 aircraft.
Under the code - share agreement, we are required to have specified terms in the leases of our aircraft. These terms include a limit on the minimum term of the lease, a clause permitting
assignment to American without penalty and under identical terms, certain return conditions and a purchase option on terms acceptable to American. We also cannot amend any of the leases
without American's prior consent, such consent not to be unreasonably withheld.
If American terminates the code - share agreement for cause, American has a call option to require that Chautauqua assign to American all of its rights under the leases of aircraft, and to
lease to American the aircraft to the extent Chautauqua owns them, used at that time under the code - share agreement. If American exercises their call option, Chautauqua is required to pay
certain maintenance costs in transferring the aircraft to American's maintenance program.
If American terminates the code - share agreement without cause, Chautauqua has the right to put the leases of the aircraft, or to lease the aircraft to them to the extent owned by
Chautauqua, used under the code - share agreement to American. American also has a call option to require Chautauqua to assign to American these leases. If Chautauqua exercises its put or
American exercises their call, both parties are obligated to implement a schedule to terminate the code - share agreement in an orderly fashion and transition the aircraft from us to American. With
the exception of performance incentives, which are deemed inapplicable during such transition, the term of the code - share agreement is deemed to continue during the transition period.
Moreover, Chautauqua would be entitled to receive payments of fixed costs and reimbursement of pass - through costs during such period.
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