Frontier Airlines 2004 Annual Report Download - page 15

The Delta Code - Share Agreements
Chautauqua and Republic Airline have entered into separate code - share agreements with Delta.
Chautauqua
As of December 31, 2004, Chautauqua operates 15 ERJ - 135 aircraft, including one spare, and 24 ERJ - 145 aircraft, including one spare, for Delta under a fixed - fee code - share
agreement. As of December 31, 2004, Chautauqua provided 250 flights per day as Delta Connection between Orlando, Fort Lauderdale and designated outlying cities. In connection with a
marketing agreement among Delta, Continental Airlines and Northwest Airlines, certain of the routes that we fly using Delta's flight designator code are also flown under Continental's or
Northwest's designator codes.
Delta provides us with reservation services, baggage handling and other ground support, tickets and similar items with respect to the flights we operate for them and Delta 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 Delta monthly compensation made up of a fixed - fee per block hour, a fixed - fee per flight hour, a fixed - fee per departure, a fixed - fee per scheduled aircraft per day
and a fixed - fee per day. The fixed rates that we receive from Delta for a given month may be increased if we achieve a specified flight completion rate in that month. We are eligible to receive
additional compensation based upon our actual completion rate and on - time arrival rate for each month. Further, for each semi - annual period during the term of the agreement, we are eligible to
receive additional compensation from Delta.
Certain of our operating costs are considered "pass through" costs, whereby Delta has agreed to reimburse us the actual amount of costs we incur for these items. Fuel, engine
maintenance expenses, landing fees, passenger liability insurance, hull insurance, war risk insurance, de - icing costs, and property taxes are some of the pass through costs. Aircraft rent/ownership
expenses are also considered a pass through cost, but are limited to a specified amount for each type of aircraft.
The fixed rates payable to us by Delta under the code - share agreement have been determined through the term of the code - share agreement and are subject to annual revision. Certain
costs, including fuel costs, aircraft ownership and financing costs (subject to limitation), landing fees, property and liability insurance, aircraft property taxes and de - icing costs, are adjusted on a
monthly basis for differences between the actual costs and the assumed costs. In the event we are unable to operate the aircraft due to a strike, labor dispute, work stoppage or similar event, that
is substantially within our control, or caused by some action or inaction by us or relates to the aircraft we operate for Delta, Delta is not obligated to pay us pursuant to the code - share agreement.
However, if we cannot operate the aircraft due to a strike, labor dispute, work stoppage or similar event that is substantially within the control of Delta, or caused by some action or inaction by
Delta, Delta shall still be obligated to pay us the fixed amounts due under the agreement, plus monthly and semi - annual incentive payments if we achieve certain milestones. If we cannot operate
the aircraft due to an event that is not substantially within the control of either us or Delta, or caused by some action or inaction of either us or Delta, Delta is only obligated to pay us our fixed
costs and our pass through costs during the period in which we cannot operate the flights for Delta.
Under the terms of the code - share agreement, except for (1) the aircraft Chautauqua currently operates for US Airways and American, (2) the additional aircraft allocated to US
Airways and American under Chautauqua's existing code - share agreements and (3) other limited exceptions, Chautauqua has agreed to list its flights only under Delta's code during the term of
our code - share agreement with them unless it obtains prior written approval from Delta. Delta granted written approval of Chautauqua's entry into a code - share agreement with United in
February 2004. If Chautauqua does enter into a new code - share agreement with Delta's permission, Chautauqua remains prohibited from operating any aircraft for the new code - share partner
into or out of several major metropolitan airports. During the term of the code - share agreement, Chautauqua may not operate any flights under its own flight designator code into or out of several
major metropolitan airports unless that flight is flown under its code for one of our existing code - share partners and that partner remains obligated to compensate us for operating that flight.
Pursuant to the terms of the code - share agreement, Delta has the right, prior to the entrance by Chautauqua into an agreement with a third party to operate aircraft that Chautauqua
previously operated for another existing code - share party for that third party or for Chautauqua, to purchase, lease or code - share (or any combination thereof) such repositioned aircraft on terms
no less favorable than those offered to the third party. If Delta does not exercise this right within a specified amount of time, Chautauqua will be permitted to enter into the arrangement with the
third party, but Chautauqua will be prohibited during the term of the code - share agreement with Delta from flying more than a specified number of flights per day with such repositioned aircraft
into each of several major metropolitan airports without Delta's prior written consent.
For each additional aircraft put into service for Delta beyond the initial 22, Delta will receive a warrant to purchase 60,000 shares of our common stock. In accordance with this
provision, on February 3, 2003 we granted Delta a warrant to purchase 720,000 shares of common stock, on October 1, 2003 we granted Delta a warrant to purchase an additional 300,000
shares of common stock and on March 10, 2004 we granted Delta a warrant to purchase an additional 480,000 shares of common stock. In December 2004, the parties agreed to reduce the
amount of such warrants by 45%. In addition, in December 2004, we issued Delta a warrant for 960,000 shares in connection with Delta entering into a code - share agreement with Republic
Airline.
For illustrative purposes only, we estimate that, should Delta acquire all of the common stock they are entitled to acquire under their warrants and assuming the warrant shares are 100%
vested, Delta will own approximately 9.6% of our common stock.
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