Frontier Airlines 2008 Annual Report Download - page 66

REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
(Dollars in thousands, except share and per share amounts)
1. ORGANIZATION & BUSINESS
We are a Delaware holding company organized in 1996 that owns three regional airlines: Chautauqua Airlines, Inc.,
(“Chautauqua Airlines”), our operator of 44 to 50 seat aircraft; Shuttle America Corporation (“Shuttle America”), our operator of 70
to 76 seat aircraft; and Republic Airline Inc. (“Republic Airline”), our operator of 76 to 86 seat aircraft. As of December 31, 2008,
our subsidiaries offered scheduled passenger service on approximately 1,250 flights daily to 109 cities in 35 states, Canada, Mexico,
and Jamaica pursuant to code-share agreements with AMR Corp., the parent of American Airlines, Inc. (“American”), Continental
Airlines, Inc. (“Continental”), Delta Air Lines, Inc. (“Delta”), Midwest Airlines, Inc. (“Midwest”), Mokulele Flight Service, Inc.
(“Mokulele”), United Air Lines, Inc. (“United”), and US Airways, Inc. (“US Airways”) (collectively referred to as our “Partners”).
We began flying for Midwest and Mokulele in October and November 2008, respectively. Currently, we provide our Partners with
regional jet service, operating as AmericanConnection, Continental Express, Delta Connection, Midwest Connect, Mokulele Airlines,
United Express, or US Airways Express, including service out of their hubs and focus cities.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and include the accounts of Republic Airways Holdings Inc., and its wholly-owned operating
subsidiaries.
In April 2008, Frontier Airlines, Inc. (“Frontier”) rejected its air services agreement, which provided for the Company’s
operation of 17 E170 aircraft. The first aircraft was placed into service in March 2007 and the last aircraft was expected to be placed
into service in December 2008. Frontier’s rejection of the agreement was prompted by its filing for Chapter 11 bankruptcy protection
on April 11, 2008. As of the bankruptcy date, the Company was operating 12 of the 17 E170 aircraft. All 12 aircraft were removed
during the second quarter of 2008 and transitioned to Midwest in the third and fourth quarter of 2008. The Company filed a damage
claim of approximately $215,000 arising out of Frontier’s rejection of the code-share agreement (see subsequent events at Note
16). The ultimate amount of the Company’s claim will be determined in the future by the Court. At this time the Company cannot
estimate the recovery value, if any, of the ultimate allowable claim. As of December 31, 2008, the Company fully reserved all
pre-petition amounts due from Frontier, which totaled $676. Additionally, the Company had removed all 12 E170 aircraft from
service with Frontier and transitioned these aircraft to the Company’s Midwest code-share agreement.
The US Airways Code-Share Agreements
Under the Company’s fixed-fee code-share agreements with US Airways, it operates, as of December 31, 2008, nine E145
aircraft, 20 E170 aircraft and 38 E175 aircraft. The Company’s code-share agreements with US Airways to operate E145 aircraft
terminates in March 2013. The code-share agreement for the E170 aircraft and the E175 aircraft terminates in September 2015 with
respect to the E170 aircraft and eight of the E175 aircraft. The remaining 30 E175 aircraft terminate 12 years from the in-service date
for each aircraft’s in service date. US Airways may terminate the code-share agreements at any time for cause upon not less than 90
days notice and subject to the Company’s right to cure.
The American Code-Share Agreement
The Company has a fixed-fee code-share agreement with American to operate E140 aircraft. As of December 31, 2008, the
Company operated 15 E140 aircraft for American. If American terminates the code-share agreement for cause, American has a call
option to require that the Company assign to American all of its rights under the leases of aircraft, and to lease to American the aircraft
to the extent the Company owns them, used at that time under the code-share agreement. If American exercises its call option, the
Company 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, the Company has the right to put the leases of the aircraft, or
to sell the aircraft to American to the extent owned by the Company, used under the code-share agreement to American. American
also has a call option to require the Company to assign to American these leases. If the Company exercises its put or American
exercises its call right, both parties are obligated to implement a schedule to terminate the code-share agreement in an orderly fashion
and transition the aircraft from the Company to American.
In October 2008, the Company amended the code-share agreement to remove two E140 aircraft from service in June
2009. American will reimburse the Company for the monthly rental fees until the removed aircraft are sold, subleased or otherwise
transferred as long as the Company is using commercially reasonable efforts to dispose of the removed aircraft. The amendment also
provided for a two year extension on American’s early termination option so that American may not early terminate the agreement
prior to March 2012, and a rate reduction on the remaining aircraft in service with American, which will be effective in April 2009.
The term of the American code-share agreement continues until February 1, 2013. American may reduce the term by one
year each time that the Company fails to achieve an agreed performance level. American may only exercise this right three times
during the term of the code-share agreement. Under certain circumstances, the agreement may be subject to termination for cause prior
Source: REPUBLIC AIRWAYS HOLDINGS INC, 10-K, March 16, 2009 Powered by Morningstar® Document Research℠