Frontier Airlines 2004 Annual Report Download - page 17

Republic Airline
In January 2005, Republic Airline entered into a fixed - fee code - share agreement with Delta to operate 16 ERJ - 170 aircraft on terms substantially similar to those of the code - share
agreement between Chautauqua and Delta. Eight of these aircraft are scheduled to be delivered and placed in service in each of 2005 and 2006, on such routes as Delta may designate. The first
ERJ - 170 is scheduled to be delivered in June 2005 and to be placed in service in July 2005. If Republic Airline has not received its required certification, it will be unable to place the aircraft into
service in accordance with this schedule. We expect that Republic Airline will receive its required certification by the end of June 2005.
The initial term of the code - share agreement is until January 13, 2019. Delta may terminate the code - share agreement at any time, with or without cause, if it provides us 180 days written
notice, provided that such notice shall not be given prior to July 2012. Republic Airline's code - share agreement with Delta provides for a partial termination right similar to the partial termination
right under Delta's code - share agreement with Chautauqua, as described under " — Chautauqua" above.
The United Code
- Share Agreements
Chautauqua and Republic Airline have entered into separate code - share agreements with United.
Chautauqua
Chautauqua has entered into a fixed - fee code - share agreement with United to operate 9 ERJ - 145 aircraft to provide United Express Service in markets to be determined by United.
United provides reservation, check - in, ground - support and other passenger services and also controls seat inventories. Under the code - share agreement, United retains all air fares,
cargo rates, mail charges and other revenues associated with each flight, and is responsible for revenue - related expenses. In exchange for providing the designated number of flights and
performing Chautauqua's obligations under the code - share agreement, Chautauqua receives from United compensation of a fixed - fee per completed block hour, fixed - fee per completed
departure, fixed - fee per passenger, fixed - fee for overhead and aircraft costs, and one - time start - up costs. Chautauqua will receive incentives based upon its performance, including controllable
flight completion percentage rates, on - time percentage rates, mishandled bags percentage rates, and customer responses to surveys about their intent to reuse United Express.
The fixed rates that Chautauqua receives from United under the code - share agreement are annually adjusted in accordance with an agreed escalation formula. Additionally, certain of its
operating costs are considered "pass through" costs whereby United has agreed to reimburse Chautauqua the actual amount of costs it incurs for these items. Fuel and oil, landing fees, war risk
insurance, liability insurance and aircraft property taxes are pass through costs.
The agreement terminates on June 30, 2014. United has the option of extending the agreement for five (5) years or less; however, the code - share agreement may be terminated by United
upon 18 months prior written notice provided that such notice shall not be delivered prior to December 31, 2007. In addition, the code - share agreement may be terminated under the following
conditions:
•
if either party becomes insolvent, is not regularly paying its bills when due without just cause, takes any step leading to its cessation as a going concern, makes an assignment of
substantially all of its assets for the benefit of creditors or a similar disposition of the assets of the business, or either ceases or suspends operations; or
•
if either party fails to fulfill an obligation under the code - share agreement for a period of thirty days after written notice to cure.
United also may terminate the code - share agreement upon at least thirty days notice and subject to Chautauqua's right to cure under the following conditions:
•
Chautauqua's operations fall below a certain performance level for a period of three consecutive months or for a period of six months within a twelve - month period regarding
controllable flight completion, mishandled bags and on - time performance; or
•
Chautauqua knowingly maintains falsified books or records or submits false reports of a material nature.
United may immediately terminate the code - share agreement if Chautauqua operates, except pursuant to preexisting agreements with US Airways and Delta, any additional regional jets
or turboprop aircraft pursuant to a marketing or code - share relationship with any party other than United to provide hub service at United's hubs in Denver, Los Angeles, San Francisco,
Chicago, Washington, D.C. or Seattle. Chautauqua also cannot engage or attempt to engage, on its behalf or on behalf of a third party, in the business of providing air transportation at any of
United's hubs or for any carrier that has or attempts to have hub operations at any of United's hubs, or operate any additional regional jets or turboprops with any party other than United to
provide hub service at United's hubs.
In addition, the code - share agreement will be terminated if:
•
United's plan of reorganization in its Chapter 11 bankruptcy case is not confirmed by the bankruptcy court and United discontinues all or substantially all flight operations; or
•
the case is dismissed or converted to a case under Chapter 7 of the Bankruptcy Code and United suspends or discontinues flight operations.
In the event of such termination, United will have breached the code - share agreement and Chautauqua will have certain claims for (i) administrative expenses, (ii) monies owed to
(a) passengers, (b) employees and (c) third parties in connection with the manufacture, purchase, lease or financing of aircraft and maintenance equipment or services or spare parts associated
with the aircraft, (iii) two year's aircraft ownership costs for each delivered aircraft and (iv) reasonable startup costs, subject to United's rights to object to the amount of the claim. In addition,
Chautauqua must refund to United certain amounts it prepaid for services.
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