Frontier Airlines 2004 Annual Report Download - page 18

United has a call option to assume Chautauqua's ownership or leasehold interest in certain aircraft if Chautauqua wrongfully terminates the code - share agreement or if United terminates
the agreement for Chautauqua's breach for any one of the following reasons:
•
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 12 - month period regarding controllable
flight completion and on - time performance;
•
Chautauqua enters into a new code - share with another airline in breach of the United code - share agreement; or
•
Chautauqua's operating certificate is revoked or suspended by the FAA, for safety issues or concerns, for a period of four consecutive months.
The call option is governed by certain limitations relating to the number of aircraft for which the call option is exercised, notice requirements, indemnification in the event of a lease
assumption, calculation of the purchase price in the event of a sale, payment of aircraft ownership costs, delivery of spare parts and reimbursement of prepaid rent.
If Chautauqua, Republic Airline or we enter into certain corporate transactions, including a merger, sale of substantially all of their respective or our assets, or issuance or sale of stock of
Chautauqua, Republic Airline or us representing 20% beneficial ownership or voting control, then Chautauqua, Republic Airline or we, as the case may be, must grant United a right of first
refusal to enter into the proposed transaction on the same or comparable terms. If Chautauqua, Republic Airline or we and United cannot agree on the terms, then Chautauqua, Republic Airline
or we can enter into the transaction with a third party, but not on terms more beneficial to the third party than those that were offered to United.
In general, Chautauqua has agreed to indemnify United and United has agreed to indemnify Chautauqua for any damages caused by any breaches of each party's respective obligations
under the code - share agreement or caused by each party's respective actions or inactions under the code - share agreement.
If Chautauqua is unable to deliver any aircraft on or before the last day of the month after the month that such aircraft is scheduled to be delivered, United has the option, upon giving
notice to Chautauqua, to delete such aircraft from the code - share agreement.
Republic Airline
Republic Airline has entered into a fixed - fee code - share agreement with United to operate 23 ERJ - 170 aircraft on terms substantially similar to those of the code - share agreement
between Chautauqua and United. Currently, these aircraft are being operated by Chautauqua. They will be transferred to Republic Airline after Republic Airline obtains its certification.
United will pay aircraft ownership costs and reserves the right to finance any aircraft allocated for United Express services, subject to certain limitations. In addition, United will have the
right to recall furloughed pilots required to be hired by Republic Airline. However, except for certain exceptions, United does not have a right to early termination of the code - share agreement.
Also, United may not delete from the code - share agreement an aircraft that Republic is unable to timely deliver.
Competition and Economic Conditions
The airline industry is highly competitive. We not only compete with other regional airlines, some of which are owned by or are operated as code - share partners of major airlines, but also
face competition from low - fare airlines and major airlines on some of our routes.
The principal competitive factors in the regional airline industry are fare pricing, customer service, routes served, flight schedules, aircraft types and code - share relationships. 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.
Generally, the airline industry is highly sensitive to general economic conditions, in large part due to the discretionary nature of a substantial percentage of both business and pleasure
travel. In the past, many airlines have reported decreased earnings or substantial losses resulting from periods of economic recession, heavy fare discounting and other factors. Economic
downturns combined with competitive pressures have contributed to a number of bankruptcies and liquidations among major and regional carriers. The effect of economic downturns is
somewhat mitigated by our fixed - fee arrangements with respect to our flights. Nonetheless, the per passenger component in such fee structure would be affected by an economic downturn. In
addition, if our major airline code - share partners experience longer - term decline in passenger load or are injured by low ticket prices or high fuel prices, they will likely seek to reduce our fixed -
fees or cancel a number of flights in order to reduce their costs.
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