Frontier Airlines 2004 Annual Report Download - page 34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a holding company that operates Chautauqua Airlines, Inc. and Republic Airline Inc. Chautauqua is a regional airline offering, as of December 31, 2004, scheduled passenger
service on approximately 700 flights daily to 73 cities in 31 states, and the Bahamas pursuant to code - share agreements with American, US Airways, Delta and United. Currently, all of
Chautauqua's flights are operated as US Airways Express, AmericanConnection, Delta Connection or United Express, providing US Airways, American, Delta and United with portions of their
regional service, including service out of their hubs and focus cities in Boston, Chicago, Fort Lauderdale, Indianapolis, New York, Orlando, Philadelphia, Pittsburgh, Washington, D.C. and St.
Louis. We have established Republic Airline as our regional platform for the ERJ - 170 aircraft family. In February 2004, Republic Airline entered into a code - share agreement with United Air
Lines, Inc. pursuant to which Republic Airline is required to place into service for United by June 2005, subject to delivery of aircraft from the manufacturer, 23 70 - seat regional jets. These jets
will fly, as United Express flights, the routes that United designates. Currently, as Republic Airline is not yet certified to fly aircraft, Chautauqua is operating 11 ERJ - 170s for United. These
aircraft will be flown by Republic Airline after its certification, which is expected to be received in June 2005. In January 2005, we, Delta and Republic Airline entered into a code - share
agreement whereby Republic Airline will operate 16 ERJ - 170s for Delta, subject to Republic Airline's receipt of its certification. From 2000 to 2004, our ASMs have grown at a compounded
annual growth rate of 50.2%. As of December 31, 2004, our fleet consisted of 111 Embraer regional jets, 100 of which range in capacity from 37 to 50 seats and are operated by Chautauqua,
as well as 11 70 - seat regional jets temporarily being operated by Chautauqua for Republic Airline.
We have long - term, fixed - fee code - share agreements with each of our partners that are subject to our maintaining specified performance levels. Pursuant to these fixed - fee agreements,
which provide for minimum aircraft utilization at fixed rates, we are authorized to use our partners' two - letter flight designation codes to identify our flights and fares in our partners' computer
reservation systems, to paint our aircraft in the style of our partners, to use their service marks and to market ourselves as a carrier for our partners. In addition, 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. We believe that fixed - fee agreements reduce our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple
major airlines has enabled us to reduce our dependence on any single airline and allocate our overhead more efficiently, allowing us to reduce the cost of our services to our major airline partners.
For the years ended December 31, 2004 and 2003, respectively, US Airways accounted for 41% and 40% of our passenger revenues, Delta accounted for 35% and 29% of our
passenger revenues, American accounted for 17% and 23% of our passenger revenues, United accounted for 7% and 0% of our passenger revenues and America West accounted for 0% and
8% of our passenger revenues. In February 2003, we and America West mutually agreed to terminate our code - share agreement and we concurrently agreed with Delta to allocate the aircraft
previously designated for America West to Delta.
We have a long operating history as a regional airline, having operated as a code - share partner of US Airways or its predecessors for more than 30 years. We became a TWA code -
share partner in April 2000, which became a code - share relationship with American following its acquisition of TWA, an America West code - share partner in August 2001 until June 2003, a
Delta code - share partner in June 2002 and a United code - share partner in February 2004. We have worked proactively with our code - share partners to adapt to the new airline environment by
renegotiating our code - share agreements. For example, in October 2003, in exchange for agreeing to extend the date of their early termination right, we granted American certain economic
concessions in the form of a monthly rebate. In December 2004, in exchange for, among other things, Delta extending the term of its code - share agreement and canceling previously issued
warrants to purchase 2,025,000 shares of our common stock, we agreed to reduce our compensation level on the ERJ - 145 fleet by 3% for the remainder of the term of the agreement.
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