-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QbQkLjSYKVVh4JDI77OBpyl3+UyVyTY67IMy9HLNSQz0nbrD6rPJ1reyA5Q/BAa1 XsV/7dqBEbl4slxFWi+RMQ== 0000912057-00-014627.txt : 20000331 0000912057-00-014627.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014627 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN AIRLINES INC/HI CENTRAL INDEX KEY: 0000046205 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 990042880 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08836 FILM NUMBER: 584651 BUSINESS ADDRESS: STREET 1: 3375 KOAPAKA ST STREET 2: STE G350 CITY: HONOLULU STATE: HI ZIP: 96819 BUSINESS PHONE: 8088353700 FORMER COMPANY: FORMER CONFORMED NAME: HAL INC /HI/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN AIRLINES INC DATE OF NAME CHANGE: 19850314 FORMER COMPANY: FORMER CONFORMED NAME: INTER ISLAND AIRWAYS LTD DATE OF NAME CHANGE: 19670920 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8836 HAWAIIAN AIRLINES, INC. (Exact name of registrant as specified in its charter) HAWAII 99-0042880 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 3375 Koapaka Street, Suite G-350 Honolulu, Hawaii 96819 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (808) 835-3700 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which Registered ------------------- ----------------------------------------- Preferred Stock Purchase Rights American Stock Exchange, Inc. Common Stock ($.01 par value) Pacific Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ( ) No (X ) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes ( X ) No ( ) As of March 1, 2000, 40,997,335 shares of Common Stock of the Registrant were outstanding. The aggregate market value of voting stock held by non-affiliates (22,536,187 shares) of the Registrant is $42,255,351. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference in Part III of this Form 10-K. EXHIBIT INDEX ON PAGE 30 2 TABLE OF CONTENTS PAGE COVER PAGE 1 PART I ITEM 1. BUSINESS. 4 ITEM 2. PROPERTIES. 11 ITEM 3. LEGAL PROCEEDINGS. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. 11 ITEM 6. SELECTED FINANCIAL DATA. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 24 ITEM 11. EXECUTIVE COMPENSATION. 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. 26 EXHIBIT INDEX. 30 SIGNATURES. 31 TABLE INDEX REPORT OF INDEPENDENT AUDITORS. F-1a INDEPENDENT AUDITORS' REPORT. F-1b BALANCE SHEETS. F-2 STATEMENTS OF OPERATIONS. F-4 STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME. F-6 STATEMENTS OF CASH FLOWS. F-7 NOTES TO FINANCIAL STATEMENTS. F-9 SUPPLEMENTAL FINANCIAL INFORMATION. F-26 SELECTED FINANCIAL AND STATISTICAL DATA. F-27 REPORT OF INDEPENDENT AUDITORS. S-1a INDEPENDENT AUDITORS' REPORT ON SCHEDULE. S-1b FINANCIAL STATEMENT SCHEDULE. S-2 3 PART I ITEM 1. BUSINESS. THE COMPANY Hawaiian Airlines, Inc. ("Hawaiian Airlines" or the "Company") is the largest airline headquartered in Hawaii, based on operating revenues of $488.9 million for 1999. The Company is engaged primarily in the scheduled transportation of passengers, cargo and mail. The Company was incorporated in January 1929 under the laws of the Territory of Hawaii. The Common Stock of the Company trades on the American Stock Exchange and the Pacific Exchange under the symbol "HA." The Company's principal offices are located at 3375 Koapaka Street, Suite G-350, Honolulu, Hawaii 96819. Its telephone and facsimile numbers are (808) 835-3700 and (808) 835-3690, respectively. Its website address is www.hawaiianair.com. OPERATIONS PASSENGER SERVICE The Company's chief source of revenue is scheduled passenger airline service. Scheduled passenger service consists of, on average and depending on seasonality, approximately 175 flights per day with (1) daily service between Hawaii and Las Vegas, Nevada and the four key United States ("U.S.") West Coast gateway cities of Los Angeles and San Francisco, California, Seattle, Washington and Portland, Oregon ("Transpac"); (2) daily service among the six major islands of the State of Hawaii ("Interisland"); and (3) twice weekly service from Hawaii to each of Pago Pago, American Samoa and Papeete, Tahiti in the South Pacific ("Southpac"). The Company also provides charter service from Honolulu to Las Vegas and to Anchorage, Alaska and from Los Angeles to Papeete, Tahiti ("Overseas Charter"). As discussed below, the Company operates a fleet of DC-9 and DC-10 aircraft to service these routes. During 1999, the Company's Transpac operations served Honolulu, Kahului, Maui and Kona, Hawaii and Las Vegas and the U.S. West Coast gateway cities of Los Angeles, San Francisco, Seattle and Portland. DC-10 aircraft are used to service Transpac routes. In 1999, the Transpac market represented approximately 52.7% of the Company's total operating revenues. Management estimates that the entire Interisland market averages approximately nine to ten million passengers annually. Approximately two-thirds of Interisland travelers are visitors to Hawaii while the balance are Hawaii residents. The Company's Interisland operations provide service to seven airports on the six major Hawaiian islands of Oahu, Hawaii, Maui, Kauai, Molokai and Lanai. The Company's Interisland routes are serviced with DC-9 aircraft. During 1999, the Interisland market represented approximately 33.1 % of the Company's total operating revenues. Hawaiian Airlines currently is the sole carrier providing scheduled air service between Honolulu and American Samoa and Tahiti. Fares are relatively stable throughout the year. These Southpac routes are serviced with DC-10 aircraft. During 1999, the Southpac market represented approximately 4.6% of the Company's total operating revenues. In addition to its scheduled service, the Company operated, on average, six weekly charter flights between Honolulu and Las Vegas, two charter rotations per week between Honolulu and Anchorage and commencing August 1999, approximately 20 round-trips per month between Los Angeles and Papeete, Tahiti. The Company's Overseas Charter operation utilized DC-10 aircraft and produced 9.6% of the Company's total operating revenues in 1999. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's passenger service routes. 4 FUEL Aircraft fuel is a significant expense for any air carrier and even marginal changes in fuel prices can greatly impact a carrier's profitability. The following table sets forth statistics about Hawaiian Airlines' aircraft fuel consumption and cost for each of the last three years: Gallons Total cost, Average % of consumed including taxes cost per operating Year (in thousands) (in thousands) gallon expenses -------------------------------------------------------------------------- 1999 120,894 $ 76,148 63.0(cents) 14.4% 1998 107,260 $ 66,387 61.9(cents) 16.2% 1997 103,271 $ 77,948 75.5(cents) 19.4% The single most important factor affecting petroleum product prices, including the price of aircraft fuel, continues to be the actions of the major oil producing countries in setting targets for the production and pricing of crude oil. In addition, the markets for heating oil, diesel fuel, automotive gasoline and natural gas affect aircraft fuel prices. All petroleum product prices continue to be subject to unpredictable economic, political and market factors. Also, the balance among supply, demand and price has become more reactive to world market conditions. Accordingly, the price and availability of aviation fuel, as well as other petroleum products, continues to be unpredictable. A fuel supply shortage resulting from a disruption of oil imports or otherwise could result in higher fuel prices or curtailment of scheduled service which could have a material adverse effect on the Company. The cost of aircraft fuel increased throughout 1999 and continues to increase in the year 2000. A one-cent change in the cost per gallon of fuel has an impact on the Company's operating expenses of approximately $101,000 per month (based on 1999 consumption). For the two month period ended February 29, 2000, the Company's average cost per gallon was 80.2(cent) versus the 1999 average of 63.0 (cent) listed above and 50.4(cent) for the comparable period in 1999. Changes in fuel prices may have a greater impact on the Company than certain of its competitors with more modern, fuel-efficient aircraft. Significant changes in fuel costs or continuation of high current fuel prices would materially affect the Company's operating results. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on aircraft fuel expense and the financial instruments used by the Company to manage market risks and hedge its financial exposure resulting from fluctuations in its aircraft fuel costs. AIRCRAFT In 1999, the Company increased its flying and capacity systemwide. As a result, three DC-10s and two DC-9s were placed into revenue service. A fourth DC-10 will be added to the fleet and placed into revenue service in April 2000. At December 31, 1999, the Company's fleet consisted of 13 DC-10 and 15 DC-9 aircraft of which two DC-10s and four DC-9s were owned by the Company. One DC-10 is leased from Continental Micronesia, Inc. until January 2002. The remaining ten DC-10s are leased under long-term operating leases with American Airlines, Inc. ("American"), which expire in 2003. Of the 11 leased DC-9s (including related flight equipment), five are under operating leases and six are under capital leases. The DC-9 leases expire at various times between 2000 and 2004. The average age of the Company's DC-10 and DC-9 aircraft is 26 years and 23 years, respectively. In September 1999, the Company announced its intention to replace its existing DC-9 fleet with The Boeing Company's ("Boeing") 717-200 aircraft, consistent with its plans to replace some or all of its existing aircraft with replacement aircraft in the next decade in order to reduce maintenance costs and achieve other operating efficiencies. On December 31, 1999, the Company signed, subject to approval by the Company's Board of Directors, a definitive purchase agreement with Boeing to acquire 13 new Boeing 717-200 aircraft, with rights to purchase an additional seven aircraft. On March 2, 2000, the Company announced that the Company's Board of Directors had approved the definitive purchase agreement with Boeing. The agreement provides for monthly 5 deliveries of the thirteen 717-200 aircraft between February and December 2001, with two units to be delivered in June and September 2001. In the event one or more of the Company's aircraft were to be out of service, the Company may have difficulty completing its scheduled or chartered service. Any interruption of service caused by the unavailability of aircraft due to unscheduled servicing or repair or otherwise, or lack of availability of substitute aircraft, could have a material adverse effect on the Company's service, reputation and profitability. As is customary in the airline industry, the Company does not have business interruption insurance. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's intended narrow-body fleet transition and aircraft fleet and the maintenance thereof. SEGMENT INFORMATION Principally all operations of the Company either originate or end in the State of Hawaii. The management of such operations is based on a system-wide approach due to the interdependence of the Company's route structure in its various markets. The Company operates as a matrix form of organization as it has overlapping sets of components for which managers are held responsible. Managers report to the Company's chief operating decision-maker on both the Company's geographic components and the Company's product and service components, resulting in the components based on products and services constituting the operating segment. As the Company offers only one service (i.e., Air Transportation), management has concluded that it has only one segment. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for discussion on scheduled and chartered passenger revenues. SEASONALITY The airline industry is a highly cyclical business with substantial volatility. Airlines frequently experience short-term cash requirements caused by both seasonal fluctuations in traffic that often deplete cash during off-peak periods and other factors that are not necessarily seasonal, including the extent and nature of fare changes and other competition from other airlines, changing levels of operations, national and international events, fuel prices and general economic conditions, including inflation. Because a substantial portion of airline travel, both personal and to a lesser extent business, is discretionary, the industry tends to experience adverse financial results in general economic downturns. Accordingly, airlines require substantial liquidity to sustain continued operations under most conditions. Working capital deficits are not uncommon in the airline industry since airlines typically have no product inventories and sales of tickets not yet flown are reflected as current liabilities. The Company's results are sensitive to seasonal and cyclical volatility primarily due to seasonal leisure and holiday travel. Hawaii is a popular destination for passengers flying on frequent flyer travel awards and is in general a popular spot for vacation travelers. Thus, traffic levels are typically lowest in the first quarter of the year and strong travel periods occur during June, July, August and December. Aggressive fare pricing strategies that increase the availability and size of ticket discounts are utilized during weaker travel periods. Because certain of the Company's costs do not vary significantly regardless of traffic levels, such seasonality substantially affects the Company's profitability and liquidity. DEPENDENCE ON TOURISM Since the Company's base of operations principally resides in Hawaii, the Company's profitability is linked primarily to the number of travelers to, from and among the Hawaiian Islands. Tourists constitute a majority of the travelers to and from Hawaii with tourism levels being affected by, among other things, the strength of the local Hawaii economy, the popularity of Hawaii as a tourist destination in general and other global factors, including the political and economic climate in the areas from which tourists to Hawaii typically originate. In 1999, the number of visitors to Hawaii totaled approximately 6.8 million a 1.6% increase when compared to the previous year. Preliminary statistics from the Hawaii Visitors and Convention Bureau (the "HVCB") estimate that westbound arrivals, primarily from the U.S. mainland and European markets, increased by 6.1%, while Eastbound traffic, primarily from Japan, decreased by 5.9%. Year over year, the islands of Oahu and Kauai experienced increased visitor counts of 0.3% and 4.9%, respectively. Maui, the Big Island of Hawaii, Lanai and Molokai experienced decreased visitor counts of 1.8%, 0.8%, 3.9% and 6.2%, respectively. 6 No assurance can be given that the level of passenger traffic to Hawaii will not decline in the future. A decline in the level of Hawaii passenger traffic could have a material adverse effect on the Company's operations and profitability. COMPETITION The airline industry is highly competitive, primarily due to the effects of the Airline Deregulation Act of 1978, recodified into the Transportation Act, which has substantially eliminated government authority to regulate domestic routes and fares and has increased the ability of airlines to compete with respect to destination, flight frequencies and fares. Airline profit levels are highly sensitive to and can be severely impacted by, among other things, adverse changes in fuel costs, average yield and passenger demand. The U.S. airline industry has consolidated in recent years as a result of mergers and liquidations, and further consolidation may occur in the future. The consolidations have, among other things, enabled certain carriers to expand their international operations and increase their presence in the U.S. domestic market. In addition, the airline industry has experienced in recent years alliances among U.S. carriers and between large U.S. and foreign carriers, allowing those carriers within such alliances to strengthen their overall operations. Conversely, the industry has also seen in recent years the emergence and growth of low cost, low fare domestic carriers who have further intensified competitive pressures. Aircraft, skilled labor and gates at most airports continue to be available to start-up carriers. In some cases, the new entrants have initiated or triggered price discounting. Many of the Company's competitors are larger and have substantially greater resources. In addition, the commencement of service by new carriers on the Company's routes could negatively impact the Company's operating results. Competing airlines (including the Company) have, from time to time, reduced fare levels and increased capacity beyond market demand on routes served by the Company in order to maintain or generate additional revenues. Such activity, which may occur in the future, by competing airlines could reduce fares or passenger traffic to levels where profitable operations could not be achieved. Due to its relative smaller size, the Company may be less able to withstand aggressive marketing tactics or a prolonged fare war initiated by its competitors. Vigorous price competition exists, with competitors frequently offering reduced discount fares and other promotions to stimulate traffic during normally slack travel periods, generate cash flow or increase relative market share in selected markets. The introduction of broadly available, deeply discounted fares by a U.S. airline could result in lower yields for the entire industry and could have a material adverse effect on the Company's operating results. The nature of the airline industry requires substantial financial and operating leverage. Due to high fixed costs, the expenses of each flight do not vary proportionately with the number of passengers carried, but the revenues generated from a particular flight are directly related to the number of passengers carried. Accordingly, while a decrease in the number of passengers carried would cause a corresponding decrease in revenue (if not offset by higher fares), it may result in a disproportionately greater decrease in profits. However, an increase in the number of passengers carried would have the opposite effect. TRANSPAC On its Transpac routes, the Company currently competes with major carriers such as United Airlines, Inc. ("United"), Delta Airlines, Inc., Northwest Airlines, Inc. ("Northwest") and, to a lesser extent, Continental Airlines, Inc. ("Continental") and American. In addition, the Company competes against charter carriers in the Transpac market. The Company believes that Transpac competition is primarily based on fare levels, flight frequency, on-time performance and reliability, name recognition, affiliations, frequent flyer programs, customer service, aircraft type and in-flight service. 7 INTERISLAND While there are several small commuter and air taxi companies which provide air transportation to Hawaii airports that cannot be served by large aircraft, the Interisland market is serviced primarily by the Company and its primary competitor in the Interisland market, Aloha Airlines, Inc. ("Aloha"). Aloha's competitive position is strengthened through its marketing affiliation with United, the largest carrier of passengers to Hawaii. Aloha participates in United's frequent flyer program and also has a code sharing agreement with United. Aloha principally utilizes 19 Boeing 737 aircraft with a schedule that averages approximately, depending on seasonality, 180 daily flights, which service the same basic Interisland routes as the Company. The Company has approximately, depending on seasonality, 160 Interisland flights per day. Also, refer to the discussion below regarding the Company's major marketing affiliations, including code sharing arrangements. The Company believes that Interisland competition is primarily based on fare levels, flight frequency, on-time performance and reliability, name recognition, affiliations, frequent flyer programs, customer service and aircraft type. RELIANCE ON THIRD PARTIES The Company has entered into agreements with contractors, including American, Northwest, Continental and certain other airlines, to provide certain facilities and services required for its operations, including aircraft leasing and maintenance, code sharing, reservations, computer services, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling and personnel training. This reliance on third parties to provide services subjects the Company to the risk that such services could be discontinued without adequate replacement services being available. The Company leases ten DC-10 aircraft from American. In 1999, the Company and American agreed to extend lease terms on the ten DC-10 aircraft leased by the Company from American from September 11, 2001 to December 31, 2003. In recognition of the extended lease terms, basic rents for the aircraft will continue at their lower, pre-February 1, 1999 levels. Maintenance performed by American on applicable leased and owned DC-10 aircraft of the Company will continue during the extended lease term, subject to American's right to terminate such services at any time with 180 days prior notice. As of December 31, 1999, American is responsible for maintenance on all but one of the Company's fleet of DC-10 aircraft with the Company having access through American to spare parts, engines and rotables for the maintenance of these aircraft. As such, the Company does not maintain large inventories of spare engines or parts to support the operation of the DC-10 aircraft. The Company pays a minimum monthly charge for maintenance services, monthly in arrears. During 1999, the Company incurred approximately $78.5 million of lease and maintenance expenses under the American leases and aircraft maintenance agreements. If American terminated the maintenance arrangement, the Company would have to seek an alternate source of maintenance service or undertake to maintain its DC-10s internally. No assurance can be given that the Company would be able to do so on a basis that is as cost-effective as the American maintenance arrangement. Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for further discussion on the Company's DC-10 aircraft fleet. The Company has code sharing agreements with American, American Eagle carrier Wings West Airlines, Inc., Northwest and Continental. The Company also participates in the frequent flyer programs of American, Northwest and Continental. These programs and services make the Company more competitive, but increase its reliance on third parties. In 1999, 1998 and 1997, a majority of the Company's ticket sales were made by travel agents, including approximately 35%, 40% and 30% by nine large wholesalers. In 1999, a particular Hawaii-based wholesaler, Panda Travel Inc., constituted approximately 13% of the Company's total ticket sales. Travel agents generally have a choice between one or more airlines when booking a customer's flight. Accordingly, any effort by travel agencies to favor another airline or to disfavor the Company could adversely affect the Company. Although management intends to continue to offer an attractive and competitive product to travel agencies and to maintain favorable relations with travel agencies, there can be no assurance that travel agencies will not disfavor the Company or favor other airlines in the future, either of which could have an adverse effect on the Company's operations and profitability. 8 REGULATION GENERAL As a certificated air carrier, Hawaiian Airlines is subject to the regulatory jurisdiction of the U.S. Department of Transportation (the "DOT") and the Federal Aviation Administration (the "FAA"). The DOT has jurisdiction over certain aviation matters such as the carrier's certificate of public convenience and necessity, international routes and fares, consumer protection policies including baggage liability and denied-boarding compensation and unfair competitive practices as set forth in the Transportation Act. Hawaiian Airlines and all other domestic airlines are subject to regulation by the FAA under the Transportation Act. The FAA has regulatory jurisdiction over flight operations generally, including equipment, ground facilities, security systems, maintenance and other safety matters. To assure compliance with its operational standards, the FAA requires air carriers to obtain operations, air worthiness and other certificates, which may be suspended or revoked for cause. The FAA also conducts safety audits and has the power to impose fines and other sanctions for violations of aviation safety and security regulations. As are other carriers, Hawaiian Airlines is subject to inspections by the FAA in the normal course of its business on a routine ongoing basis. Hawaiian Airlines operates under a Certificate of Public Convenience and Necessity issued by the DOT (authorizing it to provide commercial aircraft service) as well as a Part 121 Scheduled Carrier Operating Certificate issued by the FAA. MAINTENANCE DIRECTIVES AND OTHER REGULATIONS Hawaiian Airlines has developed extensive maintenance programs, which consist of a series of phased checks of each aircraft type. These checks are performed at specified intervals measured either by time flown or by the number of takeoffs and landings ("cycles") performed. Checks range from daily "walk around" inspections, to more involved overnight maintenance checks, to exhaustive and time consuming overhauls. Aircraft engines are subject to phased, or continuous, maintenance programs designed to detect and remedy potential problems before they occur. The service lives of certain parts and components of both airframe and engines are time or cycle controlled. Parts and other components are replaced or overhauled prior to the expiration of their time or cycle limits. The FAA approves all airline maintenance programs, including changes to the programs. In addition, the FAA licenses the mechanics who perform the inspections and repairs, as well as the inspectors who monitor the work. The FAA frequently issues airworthiness directives, often in response to specific incidents or reports by operators or manufacturers, requiring operators of specified equipment to perform prescribed inspections, repairs or modifications within stated time periods or numbers of cycles. In the last several years, the FAA has issued a number of maintenance directives and other regulations relating to, among other things, cargo compartment fire detection/suppression systems, collision avoidance systems, airborne windshear avoidance systems, noise abatement and increased inspection requirements. The Company expects to continue to incur substantial expenditures for the purpose of complying with these new regulations. In 1990, Congress passed legislation (the Airport Noise and Capacity Act of 1990) which provided for a reduction in commercial aircraft noise levels. Carriers were permitted to comply with the transitional requirements either by 1) phasing out, or retrofitting with noise abatement equipment, certain older aircraft known as Stage 2 aircraft, or 2) phasing in quieter aircraft, known as Stage 3 aircraft by December 31, 1999, with the possibility of certain waivers until December 31, 2003, when full phase out is required. Congress provided an exemption for air carriers operating turnaround service in Hawaii, or between a place in Hawaii and a place outside the 48 contiguous states, to operate as many Stage 2 aircraft of a certain weight as they operated on November 5, 1990. Air carriers that provided flights only within Hawaii on November 5, 1990 may include in the number of Stage 2 aircraft under the exemption all Stage 2 aircraft owned or leased on November 5, 1990, whether or not the aircraft were operated by the carrier on that date. However, an air carrier may provide flights between places only in Hawaii using Stage 2 aircraft only if the carrier provided the service on November 5, 1990. The Company believes these exemptions restrict air carriers other than the Company and Aloha from operating Stage 2 aircraft in Hawaii. Because Stage 2 aircraft are less expensive to acquire than Stage 3 aircraft, this exemption might provide limited protection against the entry of another carrier, which would be required to operate an all Stage 3 fleet. This advantage is partially offset by the fact that Stage 3 aircraft are generally less expensive to operate and maintain, as well as the fact that in any event over time, carriers will move toward having an all Stage 3 fleet. 9 Additional laws and regulations have been proposed from time to time that could significantly increase the cost of airline operations by, for example, imposing additional requirements or restrictions on operations. Laws and regulations also have been considered from time to time that would prohibit or restrict the ownership and/or transfer of airline routes or takeoff and landing slots. Also, the award of international routes to U.S. carriers (and their retention) is regulated by treaties and related agreements between the U.S. and foreign governments, which are amended from time to time. The Company cannot predict what laws and regulations will be adopted or what changes to international air transportation treaties will be effected, if any, or how they will affect the Company. The Company believes that it is in compliance with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension or revocation of any of the Company's DOT or FAA authorizations or certificates would have a material adverse effect upon the Company. Several aspects of airlines' operations are subject to regulation or oversight by Federal agencies other than the FAA and DOT. The U.S. Department of Defense regulates Civil Reserve Air Fleet and government charters. The antitrust laws are enforced by the U.S. Department of Justice. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services provided by the Company's cargo services. Labor relations in the air transportation industry are generally regulated under the Railway Labor Act. The Company and other airlines certificated prior to October 24, 1978 are also subject to preferential hiring rights granted by the Transportation Act to certain airline employees who have been furloughed or terminated (other than for cause). LIMITATION ON FOREIGN OWNERSHIP OF SHARES The Transportation Act prohibits non-U.S. citizens from owning more than 25% of the voting interest of a U.S. air carrier. The Company's Restated Articles of Incorporation prohibit the ownership or control of more than 25% (to be increased or decreased from time to time to that percentage permissible under the laws of the U.S.) of issued and outstanding voting capital stock of the Company by persons who are not "citizens of the U.S.". As of December 31, 1999, less than 25% of the Common Stock of the Company was held by non-U.S. citizens. INSURANCE The Company is exposed to potential losses that may be incurred in the event of an aircraft accident. Any such accident could involve not only the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss of service, but also significant potential claims of injured passengers and others. The Company is required by the DOT to carry liability insurance on each of its aircraft. The Company currently maintains public liability insurance which management believes is adequate and consistent with current industry practice. However, there can be no assurance that the amount of such coverage will not be changed or that the Company will not bear substantial losses from accidents. Substantial claims resulting from an accident in excess of related insurance coverage could have a material adverse effect on the Company. LANDING FEES AND TICKET TAXES Refer to MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS contained in Part II, Item 7 of this Form 10-K for discussion on landing fees in the State of Hawaii and Federal taxes on tickets. EMPLOYEES As of December 31, 1999, Hawaiian Airlines had 3,091 active employees, of which 2,569 were employed on a full-time basis. The majority of Hawaiian Airlines' employees are covered by labor agreements with the International Association of Machinists and Aerospace Workers (AFL-CIO) ("IAM"), the Air Line Pilots Association International ("ALPA"), the Association of Flight Attendants ("AFA"), the Transport Workers Union ("TWU") and the Communications Section Employees Union ("CSE"). The amendable date of all five contracts is February 28, 2000. As of the date of this report, the Company had commenced discussions with the IAM, ALPA and AFA. Management cannot currently estimate the timeframe or results of the ensuing discussions. There can be no assurance that the discussions will result in favorable agreement and ratification between the Company and each labor group. Should the Company and the labor groups reach an impasse, the Company could be adversely affected. 10 ITEM 2. PROPERTIES. Information provided in Notes 4, 5, 6 And 10 to the Financial Statements contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. Information provided in Note 10 to the Financial Statements contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Registrant's Common Stock is traded on the American Stock Exchange and Pacific Exchange under the symbol HA. The following table sets forth the reported high and low sales prices for the Common Stock for the quarters indicated, as reported by the American Stock Exchange: First Second Third Fourth 1999 Quarter Quarter Quarter Quarter ------------------------------------------------------ High 3-3/16 3 2-7/8 2-1/2 Low 2-3/8 2-1/2 2-3/16 2 First Second Third Fourth 1998 Quarter Quarter Quarter Quarter ------------------------------------------------------ High 3-13/16 3-1/2 3 3-1/2 Low 2-5/8 2-13/16 1-1/2 1-3/4 As of March 1, 2000, there were approximately 1,061 holders of record of the Company's Common Stock. Under the terms of the financing arrangement with CIT Group/Business Credit, Inc., the Company is restricted from paying any cash or stock dividends. No dividends were paid by the Company in 1999 or 1998. In March 2000, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to buy up to 5 million shares of its Common Stock. Under the approved stock repurchase plan, the Company may repurchase Common Stock from time to time in the open market and in private transactions. The amount and timing of any repurchases will be subject to a number of factors, including the price and availability of the Company's stock and general market conditions. ITEM 6. SELECTED FINANCIAL DATA. Information under the caption "Selected Financial and Statistical Data" on pages F-27 to F-29 contained in Part IV, Item 14 of this Form 10-K is incorporated herein by reference. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Certain statements contained here and throughout, that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Part I, Item I, BUSINESS and heretofore, as well as those discussed elsewhere in this Form 10-K. All forward-looking statements contained in this Form 10-K are qualified in their entirety by this cautionary statement. It is not reasonably possible to itemize all of the many factors and specific events that could affect the outlook of an airline operating in the global economy. Some factors that could significantly impact capacity, load factors, revenues, expenses and cash flows include the airline pricing environment, fuel costs, labor union situations both at the Company and other carriers, low-fare carrier expansion, capacity decisions of other carriers, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation, the general economic environment and other factors discussed herein. Developments in any of these areas, as well as other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings, could cause the Company's results to differ from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 For the year ended December 31, 1999, the Company incurred operating and net losses of $40.5 million and $29.3 million, respectively. As discussed below, in 1999 the Company recorded a $47 million pretax impairment loss in conjunction with its intent to replace its narrow-body Interisland fleet and a $772,000 net charge for the cumulative effect of a change in accounting principle related to the sale of mileage credits under its frequent flyer program. Excluding the effects of the impairment loss and the cumulative effect of a change in accounting principle, the Company generated operating and net income of $6.4 million and $3.0 million, respectively. While total operating revenues increased by $62.5 million, primarily as a result of increased passenger and charter revenues, operating expenses, net of impairment loss, also increased by $73.4 million. In response to the Company's increased flight operations and investments in infrastructure to support the Company's growth strategies, operational cost increases were incurred in wages and benefits, maintenance, aircraft fuel and certain general and administrative expense categories. 12 OPERATING REVENUES Operating revenues totaled $488.9 million in 1999 compared to $426.4 million in 1998, an increase of $62.5 million or 14.7%. PASSENGER AND CHARTER The following table compares operating passenger revenues and statistics, in thousands, except as otherwise indicated, for the years ended 1999 and 1998:
Operating Passenger Increase Revenues and Statistics 1999 1998 (Decrease) % - -------------------------------------------------------------------------------------------------------------- Scheduled: Passenger revenues .... $ 400,251 $ 354,245 46,006 13.0 Revenue passengers .... 5,425 5,010 415 8.3 Revenue passenger miles 4,076,576 3,649,024 427,552 11.7 Available seat miles .. 5,468,589 4,940,001 528,588 10.7 Passenger load factor . 74.5% 73.9% 0.6 0.8 Yield ................. 9.8(cent) 9.7(cent) 0.1(cent) 1.2 Overseas Charter: Charter revenues ...... $ 46,570 $ 35,742 10,828 30.3 Revenue passengers .... 283 250 33 13.2 Revenue passenger miles 803,524 689,578 113,946 16.5 Available seat miles .. 852,155 733,735 118,420 16.1 Total Operations: Passenger revenues .... $ 446,821 $ 389,987 56,833 14.6 Revenue passengers .... 5,708 5,260 448 8.5 Revenue passenger miles 4,880,100 4,338,602 541,498 12.5 Available seat miles .. 6,320,744 5,673,736 647,008 11.4
Significant year to year variances were as follows: The introduction of additional DC-9 and DC-10 capacity, efforts to improve fare and passenger mix and initiation and maintenance of general price increases resulted in increased scheduled passenger revenues of $46 million or 13%. Year over year, the Company experienced $5.5 million and $40 million increases in its Interisland and Transpac passenger revenues, respectively. These increases were principally a result of (1) the Company carrying approximately 7% and 13% more Interisland and Transpacific revenue passengers and (2) a 7% increase in its Transpac yield. Overseas charter revenues increased by $10.8 million or 30.3% in 1999. The increase is primarily associated with the Company commencing charters between Los Angeles and Tahiti and the flying of additional ad hoc charters year over year. CARGO AND OTHER Cargo and other operating revenues in 1999 totaled $42.1 million, an increase of $5.6 million or 15.4% over cargo and other operating revenues in 1998. The increase is primarily due to (1) additional Transpac capacity resulting in increased cargo revenues; (2) general increases in the Company's service charges related to tickets; and (3) continued promotion of the Company's frequent flyer program. 13 OPERATING EXPENSES Operating expenses totaled $529.4 million in 1999, an increase of $120.4 million or 29.4% from total operating expenses of $409.0 million in 1998. The following table compares operating expenses per Available Seat Mile ("ASM") by major category for 1999 with 1998:
Operating Increase Expenses Per ASM 1999 1998 (Decrease) % - ----------------------------------------------------------------------------------------------- Wages and benefits ................... 2.19(cent) 2.10(cent) 0.09(cent) 4.3 Maintenance materials and repairs .... 1.61 1.48 0.13 8.8 Aircraft fuel, including taxes and oil 1.21 1.17 0.04 3.4 Rentals and landing fees ............. 0.50 0.54 (0.04) (7.4) Depreciation and amortization ........ 0.27 0.22 0.05 22.7 Sales commissions .................... 0.20 0.21 (0.01) (4.8) Other ................................ 1.65 1.49 0.16 10.7 ---- ---- ---- ---- 7.63 7.21 0.42 5.8 Impairment loss ...................... 0.74 -- 0.74 100.0 ---- ---- ---- ---- Total ..................... 8.37(cent) 7.21(cent) 1.16(cent) 16.1 ==== ==== ==== ====
All fluctuations in operating expenses per ASM were affected by an overall increase in ASM of approximately 11.4% in 1999 from 1998. Significant year to year variances were as follows: Wages and benefits totaled $138.4 million in 1999 versus $118.9 million in 1998, an increase of $19.5 million or 16.4%. A majority of the increase is attributable to (1) a 3% wage increase effective December 1, 1998 and (2) additional wages and benefits from implementation of the Company's growth strategies which resulted in increased flying operations. Additional labor costs related to flight and inflight crews and ground personnel, including airport, maintenance and administrative locations approximated $8.7 million and $7.7 million, respectively. The additional labor costs also resulted in increased taxes and benefits of $3.7 million. Maintenance materials and repairs increased by $17.8 million or 21.2%. The Company incurred $11.9 million more DC-10 maintenance expense in 1999 than 1998, the result of increases in the maintenance rates charged by American and the number of DC-10 aircraft used and hours flown. The Company also incurred additional DC-9 airframe and engine maintenance of $5.6 million in 1999. Aircraft fuel, including taxes and oil ("Aircraft Fuel") totaled $76.4 million in 1999 versus $66.6 million in 1998. Year over year, Aircraft Fuel expense increased by $9.8 million or 14.7%, primarily due to a 12.7% increase in gallons consumed and a 1.8% increase in the net average cost of aircraft fuel per gallon. The cost of aircraft fuel increased throughout 1999 and continues to increase in the year 2000. A one-cent change in the cost per gallon of fuel has an impact on the Company's operating expenses of approximately $101,000 per month (based on 1999 consumption). For the two month period ended February 29, 2000, the Company's average cost per gallon was 80.2(cent) versus the 1999 average of 63.0(cent) listed above and 50.4(cent) for the comparable period in 1999. Significant changes in fuel costs or continuation of high current fuel prices would materially affect the Company's operating results. Rentals and landing fees in 1999 increased by $1.1 million or 3.6% when compared to 1998. The increase is a net of (1) $2.9 million less in aircraft rental expense as the Company renegotiated its leases of American DC-10 aircraft in second quarter 1999; (2) $1.4 million of additional space and parking rentals; and (3) $2.6 million of additional landing fees as the two-year moratorium placed on landing fees at all airports in the State of Hawaii ended on September 1, 1999. Depreciation and amortization totaled $17.1 million in 1999 compared to $12.6 million in 1998. A majority of the $4.5 million or 35.9% increase is due to additional depreciation incurred from owned DC-9 and DC-10 aircraft and related rotable parts placed into service in 1999. 14 Other operating expenses increased by $19.9 million or 23.5% in 1999 as compared to 1998. The increase is due to a combination of additional expenses incurred in 1999 including (1) $5.4 million of aircraft service related expenses; (2) $2.4 million in passenger food and beverage; (3) $2.5 million of personnel expense; (4) $1.6 million in advertising and promotion costs; and (5) $7.0 million in general and administrative expenses, including professional and legal fees. In September 1999, the Company announced that, subject to the negotiation and execution of a definitive agreement, it intended to replace its present Interisland DC-9 fleet. On December 31, 1999, the Company signed, subject to approval by the Company's Board of Directors, a definitive purchase agreement with Boeing to acquire 13 new Boeing 717-200 aircraft, with rights to purchase an additional seven aircraft. On March 2, 2000, the Company announced that the Board of Directors had approved the definitive purchase agreement with Boeing. In connection with its decision to replace these aircraft, the Company performed an evaluation to determine, in accordance with the Financial Accounting Standards Board (the "FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," whether future cash flows (undiscounted and without interest charges) expected to result from the use and eventual disposition of these aircraft would be less than the aggregate carrying amounts of these aircraft and the related assets. As a result of the evaluation, management determined that the estimated future cash flows expected to be generated by these aircraft would be less than their carrying amount, and therefore these aircraft are impaired as defined by SFAS No. 121. Consequently, the original cost basis of these aircraft and related items was reduced to reflect the fair market value as of December 31, 1999. In determining the fair market value of these assets, the Company considered recent transactions involving sales of similar aircraft and market trends in aircraft dispositions. The evaluation performed under the guidelines of SFAS No . 121 resulted in a $47 million pre-tax, non-cash impairment loss being recorded in fourth quarter 1999. The Company may incur restructuring charges throughout the year 2000 as it proceeds with its narrow-body fleet transition plan. The Company at this time cannot accurately determine the total restructuring charges, if any, that may be incurred. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Under the Company's HawaiianMiles frequent flyer program described below, the Company sells mileage credits to participating partners such as hotels, car rental agencies and credit card companies. During 1999, as promulgated by the Securities and Exchange Commissions' Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," the Company changed the method it uses to account for the sale of these mileage credits. This change, applied retroactively to January 1, 1999, totaled approximately $772,000, net of income tax benefit of approximately $515,000 and is reflected as a cumulative effect of change in accounting principle in the accompanying statements of operations. Under the new accounting method, revenue from the sale of mileage credits is deferred and recognized when transportation is provided. Previously, the resulting revenue was recorded in the period in which the credits were sold. The Company believes the new method is preferable as it results in a better matching of revenues with the period in which services are provided. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133, as amended by SFAS No. 137, are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 on January 1, 2001 but has not yet determined the impact of its adoption. In March 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" which requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal-use computer software development project be expensed as incurred. 15 In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. Adoption of the provisions of SOP 98-1 and SOP 98-5 by the Company as of January 1, 1999 did not have a material impact on the Company's financial position or results of operations. 1998 COMPARED TO 1997 For the year ended December 31, 1998, the Company generated operating income of $17.4 million, a $14.9 million improvement from 1997 operating income of $2.5 million. The Company also generated net income of $8.2 million, a $9.2 million improvement from the $1.0 million net loss experienced in 1997. The improvement is associated with the Company's generation of $22.2 million more of operating revenues. Decreases of $11.5 million and $3.9 million in overall fuel and landing fee expenses, respectively, were offset by other operating expense increases as a result of increased flight activity in 1998. Included in the 1998 and 1997 results of operations are provisions for income taxes of $7.8 million and $1.7 million, respectively. While generally accepted accounting principles require that the provisions for income taxes be recorded, most of the amounts recorded will not require cash outlay as the amounts will be offset by net operating loss carryforwards available to the Company. As noted in note 7 in notes to financial statements contained in Part IV, Item 14 of this Form 10-K, the estimated income tax benefit from the expected utilization of these net operating loss carryforwards has been applied as a reduction to reorganization value in excess of amounts allocable to identifiable assets. 16 OPERATING REVENUES Operating revenues totaled $426.4 million in 1998 compared to $404.2 million in 1997, an increase of $22.2 million or 5.5%, driven principally by a $22.1 million or 6.7% increase in passenger revenues. PASSENGER AND CHARTER The following table compares operating passenger revenues and statistics, in thousands, except as otherwise indicated, for the years ended 1998 and 1997:
Operating Passenger Increase Revenues and Statistics 1998 1997 (Decrease) % - ---------------------------------------------------------------------------------------------------------------------------- Scheduled: Passenger revenues .... $ 354,245 $ 332,154 22,091 6.7 Revenue passengers .... 5,010 4,964 46 0.9 Revenue passenger miles 3,649,024 3,479,056 169,968 4.9 Available seat miles .. 4,940,001 4,699,609 240,392 5.1 Passenger load factor . 73.9% 74.0% (0.1) (0.1) Yield ................. 9.7(cent) 9.5(cent) 0.2(cent) 2.1 Overseas Charter: Charter revenues ...... $ 35,742 $ 37,172 (1,430) (3.8) Revenue passengers .... 250 253 (3) (1.2) Revenue passenger miles 689,578 683,384 6,194 0.9 Available seat miles .. 733,735 739,619 (5,884) (0.8) Total Operations: Passenger revenues .... $ 389,987 $ 369,326 20,661 5.6 Revenue passengers .... 5,260 5,217 43 0.8 Revenue passenger miles 4,338,602 4,162,440 176,162 4.2 Available seat miles .. 5,673,736 5,439,228 234,508 4.3
Significant year to year variances were as follows: Through general price increases initiated by the Company throughout 1998 and improved fare and inventory management through use of its yield management system, the Company experienced a $22.1 million or 6.7% increase in its scheduled passenger revenues. Interisland passenger revenues totaled $138.6 million in 1998 compared to $132.6 million in 1997. The $6.0 million or 4.5% increase is in direct correlation to a 1.3(cent) or 4.9% increase in yield. Transpac passenger revenues totaled $196.7 million in 1998, an increase of $16.3 million or 9.0% over 1997 Transpac passenger revenues of $180.4 million. The Company experienced increases of 3.9% and 6.0% in its passengers carried and revenue passenger miles, respectively. These increases were complemented by a 0.2(cent) or 3.1% increase in yield. Overseas charter revenues decreased by $1.4 million or 3.8% in 1998. The decrease is primarily due to, during the first half of 1998, the Company flying on average, two fewer charters per week to Las Vegas and general price decreases charged for both its Las Vegas and Anchorage charter flights. OTHER Other operating revenues in 1998 totaled $14.7 million, an increase of $1.1 million or 8.2%, primarily due to additional revenues related to the promotion of the Company's frequent flyer program. 17 OPERATING EXPENSES Operating expenses totaled $409.0 million in 1998, an increase of $7.3 million or 1.8% from total operating expenses of $401.7 million in 1997. The following table compares operating expenses per Available Seat Mile ("ASM") by major category for 1998 with 1997:
Operating Increase Expenses Per ASM 1999 1998 (Decrease) % - ----------------------------------------------------------------------------------------------------------- Wages and benefits ................... 2.10(cent) 2.11(cent) (0.01)(cent) (0.5) Maintenance materials and repairs .... 1.48 1.40 0.08 5.7 Aircraft fuel, including taxes and oil 1.17 1.44 (0.27) (18.8) Rentals and landing fees ............. 0.54 0.60 (0.06) (10.0) Depreciation and amortization ........ 0.22 0.20 0.02 10.0 Sales commissions .................... 0.21 0.24 (0.03) (12.5) Other ................................ 1.49 1.40 0.09 6.4 ---- ---- ----- ----- Total ..................... 7.21(cent) 7.39(cent) (0.18)(cent) (2.4) ==== ==== ===== ====
All fluctuations in operating expenses per ASM were affected by an overall increase in ASM of approximately 4.3% in 1998 from 1997. Significant year to year variances were as follows: Wages and benefits per ASM remained relatively consistent from year to year. The dilutive effect of increased ASMs was offset by increased wages and benefits in 1998 of $4.3 million or 3.8% over 1997. Wages and benefits totaled $118.9 million in 1998 versus $114.6 million in 1997. A majority of the increase is attributable to additional wages and benefits from increased flying operations and the accrual for the Company's profit sharing program. Maintenance materials and repairs per ASM increased by 0.08(cent) or 5.7% in 1998 from 1997. The Company experienced $7.7 million or 10.1% in additional maintenance principally due to 1) $5.3 million more in DC-10 maintenance expense from increased utilization of DC-10 aircraft for long-haul flying and 2) $2.3 million more in DC-9 engine repairs. Aircraft fuel per ASM decreased year over year by 0.27(cent) or 18.8%. The Company incurred $11.5 million or 14.8% less Aircraft Fuel cost in 1998, the combination of a 3.9% increase in gallons consumed, a 19.8% decrease in the average cost of aircraft fuel per gallon and $2.3 million in aggregate realized and unrealized losses on the Company's Aircraft Fuel derivative financial instruments. Rentals and landing fees per ASM decreased by 0.06(cent) or 10.0%. Commencing September 1, 1997, a two-year moratorium was placed on landing fees at all airports in the State of Hawaii. The Governor of the State of Hawaii reserved the right, however, to reinstate the landing fee charges before the two-year period ends. Under the current moratorium, the Company incurred approximately $3.9 million less for landing fees in 1998 than in 1997. Depreciation and amortization per ASM increased by 0.02(cent) or 10.0%. Depreciation and amortization totaled $12.6 million in 1998 versus $10.7 million in 1997. A majority of the $1.9 million or 18.2% increase is due to $1.1 million and $700,000 in additional depreciation and amortization on ground equipment and DC-9 overhauls in 1998. Sales commissions per ASM decreased by 0.03(cent) or 12.5%. Sales commissions decreased by $1.4 million or 10.6% in 1998, principally due to a decrease in the interline commission rate and an increase in the volume of non-commissionable tickets sold year over year. Other operating expenses per ASM increased by 0.09(cent) or 6.4% between 1998 and 1997. The Company incurred approximately $8.4 million or 11.0% of additional other operating expenses in 1998 over 1997, primarily as a result of additional aircraft service, advertising and promotion and general and administrative expenses, including professional and legal fees. 18 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE As promulgated by the FASB's Emerging Issues Task Force, in fourth quarter 1997, the Company wrote off business process reengineering costs it had previously capitalized. The write-off totaled approximately $450,000, net of income tax benefit of approximately $300,000. 19 AIRCRAFT, ROUTES AND ALLIANCES In September 1999, the Company announced that, subject to the negotiation and execution of a definitive agreement, it had accepted an offer from Boeing to purchase up to 20 Boeing 717-200 aircraft to replace its present Interisland fleet. On December 31, 1999, the Company signed, subject to approval by the Company's Board of Directors, a definitive purchase agreement with Boeing to acquire 13 new Boeing 717-200 aircraft, with rights to purchase an additional seven aircraft. On March 2, 2000, the Company announced that the Board of Directors had approved the definitive purchase agreement with Boeing. The firm order is valued at approximately $430 million at Boeing's list price for the 717-200. The agreement provides for monthly deliveries of the thirteen 717-200 aircraft between February and December 2001, with two units to be delivered in June and September 2001. The agreement also requires the Company to fund through June 2001, a total of $20 million toward the acquisition of the aircraft. As of December 31, 1999, the Company had made approximately $7.2 million of these progress payments. The Company intends to use lease financing provided through Boeing upon delivery of each aircraft. The Company currently utilizes 15 DC-9-50 aircraft to service its Interisland routes. The 717s (1) have the same Type Rating as the DC-9, allowing easier maintenance and crew training transitioning; (2) seat eight passengers in first class and 115 in coach; (3) utilize twin BMW Rolls-Royce BR715 engines that generate emissions 60% below existing federal standards; and (4) meet federal Stage 3 and proposed Stage 4, as currently defined, requirements. The 717s are reported to be 25% more fuel-efficient and less costly to maintain than the Company's current DC-9-50 fleet. In an effort to build infrastructure and implement its present growth strategies, the Company also concluded the following transactions in 1999 related to its aircraft fleet: (1) took delivery of a used DC-9-50 aircraft in May 1999, the second and final respective delivery of DC-9 aircraft under a purchase agreement entered into by the Company in fourth quarter 1998; (2) took delivery of one used DC-10-30 aircraft during first quarter 1999, the second and final respective delivery under a purchase agreement entered into by the Company in fourth quarter 1998; (3) extended lease terms on the ten DC-10 aircraft leased by the Company from American from September 11, 2001 to December 31, 2003 in April 1999. In recognition of the extended lease terms, basic rents for the aircraft will continue at their lower, pre-February 1, 1999 levels. Maintenance performed by American on applicable leased and owned DC-10 aircraft of the Company will continue during the extended lease term, subject to American's right to terminate such services at any time with 180 days prior notice; (4) entered into agreements to sublease two DC-10-30 aircraft from Continental Micronesia, Inc. The Company took delivery of one of the DC-10-30 aircraft in fourth quarter 1999 and expects the second DC-10-30 aircraft to be added to the fleet and placed into revenue service in April 2000. The subleases expire in January 2002. It also commenced the following to increase its passenger base and revenues: (1) expanded its Transpac operations by adding four weekly nonstop flights between Los Angeles and Maui and three weekly flights from Los Angeles to Maui to Kona on the Big Island of Hawaii in first quarter 1999; (2) started a formal code share arrangement with Continental in August 1999, which allows passengers to book connecting travel between points in the domestic U.S. mainland and any of the islands in the State of Hawaii; (3) began a two-year agreement providing for approximately 20 round-trip charter flights per month between Los Angeles and Tahiti; (4) added a weekly second roundtrip between Honolulu and Papeete, Tahiti in December 1999; (5) announced plans to add a second daily roundtrip between Honolulu and San Francisco starting June 1, 2000. In line with the Company's strategies, in March 1999, the Company was awarded by the U.S. Department of Transportation authority to commence nonstop flight operations between Tokyo and Maui in January 2000. This authority has been extended until January 2001. A decision by the Company to progress on operation of the route remains subject to a number of future events, the outcome of which cannot be predicted at this time, including obtaining takeoff and landing slots at the Narita International Airport and given the recent decision by the State of Hawaii not to extend the runway at the Maui airport, the feasibility of servicing the route based on the current and anticipated makeup of the Company's fleet. 20 LIQUIDITY AND CAPITAL RESOURCES The Company believes that it has various options available to meet its capital, debt and operating commitments, including cash and liquid short-term investment securities on hand at December 31, 1999 of $63.6 million, internally generated funds and a credit facility with total availability of $8.8 million as of December 31, 1999, with aggregate loans and letters of credit outstanding in the amounts of $5.5 million and $3.2 million, respectively. The Company believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund its capital expenditure programs and to cover debt and other cash requirements in the foreseeable future. Cash and cash equivalents for the year ended December 31, 1999 increased by $32.6 million from December 31, 1998. Operating activities for the year ended December 31, 1999 provided $69.3 million in cash and cash equivalents, primarily due to, (1) disregarding the non-cash effects of the impairment loss, the Company generating $6.4 million in operating income; (2) the transition of $6.4 million from restricted to unrestricted cash as the Company, while still required to maintain defined levels of cash, renegotiated its collateral holdback requirements with its primary credit card processor in fourth quarter 1999; and (3) a $45.7 million increase in certain current liabilities, including a $27.1 million increase in air traffic liability. Investing activities for the year ended December 31, 1999 used $41.7 million of cash and cash equivalents. The Company incurred $41.9 million in capital expenditures and progress payments of flight equipment, approximately $29.1 million of which is associated with the acquisition of additional DC-9 and DC-10 aircraft. Capitalized portions of aircraft improvements and continued investments in improved software, related hardware and ground equipment and other assets represent a majority of the remaining capital expenditures. The Company had estimated its capital expenditures in 1999 to approximate $49.8 million. Financing activities for the year ended December 31, 1999 provided $5.0 million in cash and cash equivalents, principally the result of net borrowings related to its debt and capital lease obligations. As discussed above, the Company signed a definitive purchase agreement with Boeing to acquire 13 new Boeing 717-200 aircraft, with rights to purchase an additional seven aircraft, valued at approximately $430 million. The Company is required to fund through June 2001, a total of $20.0 million toward the acquisition of these Boeing 717-200 aircraft of which approximately $7.2 million had been made as of December 31, 1999. The agreement provides for monthly deliveries of the 717-200 aircraft throughout 2001, with the Company intending to use lease financing provided through Boeing upon delivery of each aircraft. In addition to the commitments required for acquisition of the Boeing 717-200 aircraft, the Company estimates that its capital expenditures in 2000 will approximate $27.8 million. Approximately, $7.1 million is associated with improvements to the Company's DC-10 aircraft. The remaining $20.7 million principally represents (1) improvements in software and related hardware and airport and office facilities and (2) purchase of ground equipment and other assets. These authorized expenditures will be funded through use of available cash and cash equivalents and internally generated funds. In March 2000, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to buy up to 5 million shares of its Common Stock. Under the approved stock repurchase plan, the Company may repurchase Common Stock from time to time in the open market and in private transactions. The amount and timing of any repurchases will be subject to a number of factors, including the price and availability of the Company's stock and general market conditions. EMPLOYEES The majority of Hawaiian Airlines' employees are covered by labor agreements with the IAM, ALPA, AFA, TWU and CSE with the amendable date of all five contracts being February 28, 2000. As of the date of this report, the Company had commenced discussions with the IAM, ALPA and AFA. Management cannot currently estimate the timeframe or results of the ensuing discussions. There can be no assurance that the discussions will result in favorable agreement and ratification between the Company and each labor group. Should the Company and the labor groups reach an impasse, the Company could be adversely affected. 21 DEFERRED TAX ASSETS As of December 31, 1999, the Company had net deferred tax assets aggregating $22.0 million, based on gross deferred tax assets of $52.5 million less a valuation allowance of $18 million and deferred tax liablities of $12.6 million. Utilization of these deferred tax assets are predicated on the Company being profitable in future years. The Company will continually assess the adequacy of its financial performance in determination of its valuation allowance which, should there be an adjustment required, may result in an adverse effect on the Company's income tax provision. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes heating oil forward contracts to manage market risks and hedge its financial exposure resulting from fluctuations in its aircraft fuel costs. When fully implemented, the Company plans to employ a strategy whereby heating oil contracts are used to cover approximately 50% of the Company's anticipated aircraft fuel needs on a rolling six-month basis. At December 31, 1999, the Company held petroleum forward contracts to purchase 384,000 barrels of heating oil in the aggregate amount of $9.2 million through July 2000. These forward contracts represented approximately 25% of the Company's anticipated aircraft fuel needs for the next six months. A realized net gain on liquidated contracts amounting to $673,000 is included as a component of Aircraft Fuel Cost for the year ended December 31, 1999. LANDING FEES AND TICKET TAXES On September 1, 1999, a two-year moratorium placed on landing fees at all airports in the State of Hawaii ended. In 1997, legislation was enacted to, among other things, gradually reduce the federal passenger excise tax from 10% to 7.5% and phase-in a $3 "head tax" per domestic flight segment by the year 2002. On October 1, 1999, the passenger excise tax decreased from 8% to 7.5%, with a correspondent increase in the "head tax" from $2 to $2.25 per domestic flight segment. On January 1, 2000, the "head tax" further increased from $2.25 per domestic flight segment to $2.50 per domestic flight segment. On March 3, 2000, it was also announced that the U.S. House and Senate agreed to increase the $3.00 per head passenger facility charge somewhere between $1.00 to $1.50. FREQUENT FLYER PROGRAM The Company's HawaiianMiles frequent flyer program was initiated in 1983. As of December 31, 1999 and 1998, HawaiianMiles had more than 796,000 and 693,000 members, respectively, including approximately 620,000 and 518,000 active members, respectively. The HawaiianMiles program allows passengers to earn mileage credits by flying Hawaiian Airlines and other carriers, particularly Continental and Northwest. Members may also receive mileage credits pursuant to exchange agreements maintained by Hawaiian with a variety of entities, including hotels, car rental firms, credit card issuers and long distance telephone service companies. The Company also sells mileage credits to other companies participating in the program. HawaiianMiles members are entitled to a choice of various awards based on accumulated mileage, with a majority of the awards being certain free air travel at a later date. Travel awards available in the HawaiianMiles program range from a 5,000 mile award, which offers a one-way Interisland flight, to 60,000 and 75,000 mile awards, which offer a round trip first-class Transpac flight and a round trip first-class Southpac flight, respectively. Miles traveled under the HawaiianMiles program are accounted for as revenue passenger miles, which, in turn, are used in the calculation of the Company's yield. Non-travel awards are valued at the incremental cost of tickets exchanged for such awards. The Company recognizes a liability in the period in which members have accumulated sufficient mileage points to qualify for award redemption. The liability is adjusted based on net mileage earned and utilized for award redemption on a monthly basis. The incremental cost method is used, computed primarily on the basis of fuel and catering costs, exclusive of any overhead or profit margin. In estimating the amount of such incremental costs to be accrued in the liability for potential future HawaiianMiles free travel, a current average cost per award mile is determined. Incremental fuel expended per passenger is based on engineering formulas to determine the quantity used for the weight of each added passenger and baggage. Such incremental quantity of fuel is priced at current levels. Catering is based on average cost data per passenger for the most recent 12-month period. 22 As of December 31, 1999 and 1998, HawaiianMiles members had accumulated approximately 3.9 billion and 3.7 billion miles representing liabilities totaling approximately $1.4 million and $1.1 million, respectively. The Company's accruals assume full redemption of mileage points. During the years ended December 31, 1999, 1998 and 1997, 1.7 billion, 1.2 billion and 736 million award miles were redeemed, respectively. The Company believes that the usage of free travel awards will not result in the displacement of revenue customers and, therefore, such usage will not materially affect the Company's liquidity or operating results. The use of free travel awards is subject to review by the Company to limit the possibility of displacing revenue passengers. HawaiianMiles travel redemption accounted for approximately 4.8%, 4.1% and 2.4% of Interisland traffic and a negligible percentage of Transpac and Southpac traffic in 1999, 1998 and 1997, respectively. INFORMATION TECHNOLOGY SYSTEMS AND IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its efforts to be Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $1 million in connection with remediating its systems. This was in addition to the approximate $8 million spent by the Company to either replace or enhance existing systems, including local and wide area networks, yield management and all or portions of revenue and financial accounting. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is subject to certain market risks, including commodity price risk (i.e., aircraft fuel prices) and price changes related to investments in equity securities. The adverse effects of potential changes in these market risks are discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity nor do they consider additional actions management may take to mitigate the Company's exposure to such changes. Actual results may differ. See the notes to the financial statements for a description of the Company's accounting policies and other information related to these financial instruments. AIRCRAFT FUEL Refer to BUSINESS, OPERATIONS, FUEL Contained in Part I, Item 1 of This Form 10-K and DERIVATIVE FINANCIAL INSTRUMENTS, as described above for further discussion on aircraft fuel and related financial instruments. INVESTMENTS IN EQUITY SECURITIES At December 31, 1999, the Company owned approximately 51,000 depository certificates convertible, subject to certain restrictions, into the common stock of Equant, which completed an initial public offering in July 1998. As of December 31, 1999, the estimated fair value of these depository certificates was approximately $5.7 million, based upon the publicly traded market value of Equant common stock. Since the fair value of the Company's investment in the depository certificates is not readily determinable (i.e., the depository certificates are not traded on a securities exchange), the investment is carried at cost, which was not material as of December 31, 1999 or 1998. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's financial statements, accompanying notes Report of Independent Auditors, Independent Auditors' Report and Selected Financial and Statistical Data are contained in Part IV, Item 14 of this Form 10-K and are incorporated herein by reference. INTEREST OF NAMED DIRECTORS The following supplements the description of named experts for the purpose of updating such descriptions and registration statements filed by Hawaiian Airlines under the Securities Act of 1933. In order to obtain the consent of KPMG LLP ("KPMG") to include KPMG's reports on the Company's 1998 financial statements, included in the December 31, 1999 annual report on Form 10-K and to be incorporated by reference in certain of the Company's registration statements on Form S-8, the Company was required to provide KPMG with an indemnification. The Company has indemnified KPMG for the payment of legal costs and expenses incurred in KPMG's successful defense of a legal action or proceeding that arises as a result of the consent of KPMG to the inclusion of their reports in such registration statements. Under no circumstances shall KPMG be indemnified in the event there is a court adjudication that KPMG is guilty of professional malpractice, or in the event that KPMG becomes liable for any part of the plaintiff's damages by virtue of settlement. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information provided in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference other than the following, which comprise the Executive Officers of the Company. JOHN W. ADAMS has been Chairman of the Board of Directors since February 2, 1996 and he is also Chairman of the Executive Committee. He has been the President since 1984 of Smith Management LLC, a private investment firm. He was a member of the Board of Directors of Harvard Industries, Inc. from October 1994 until November 1998, and was Chairman of the Board and Chief Executive Officer of Harvard Industries from February 1997 until November 1998. He served on the Board of Directors of Servico, Inc., a lodging owner and management company, from April 1994 until August 1997, being Chairman of the Board from December 1995 until he resigned from the Board. Mr. Adams was Chairman of the Board of Directors of Regency Health Services, Inc., a health care services company, from July 1994 until October 1997. Age 56. PAUL J. CASEY has been President and Chief Executive Officer since April 1997. He has also been a director and a member of the Executive Committee of Hawaiian Airlines since April 1997. He was the President and Chief Executive Officer of the Hawaii Visitors and Convention Bureau from 1995 until March 1997. He was Managing Director-Asia/Pacific of the Thomas Cook Group during 1994. He was Vice President-International Division of Continental Airlines from 1991 until 1994, and Vice President-Asia/Pacific of Continental Airlines from 1985 until 1991. In 1999, he became a director of Outrigger Hotels, Inc., a Hawaii based company with hotel and resort properties throughout the Pacific area. Age 54. JOHN L. GARIBALDI has been Executive Vice President and Chief Financial Officer since May 1996. He was Vice President and Chief Financial Officer of the Queen's Health Systems from 1992 until 1996 and Senior Vice President-Finance and Planning and Chief Financial Officer of Aloha Airgroup, Inc./Aloha Airlines, Inc. from 1985 until 1992. Age 47. ROBERT W. ZOLLER, JR. was appointed Executive Vice President - Operations and Service effective December 1, 1999. He held Vice President positions at AirTran from 1996 to 1999, including most recently Senior Vice President of Maintenance and Engineering. From 1991 to 1996, he was Vice President of Operations for AMR Eagle, Inc. and Managing Director of Eagle Aviation Services, Inc. Age 53. JOHN B. HAPP has been Senior Vice President-Marketing & Sales since December 1997. He served dual roles of Vice President Market Planning for LTU Airlines and Vice President Marketing for their subsidiary, Go America, from 1996 to 1997. From 1989 to 1996, he held various senior marketing and business development positions at Continental Airlines, Inc., including most recently Managing Director of the Newark Business Unit. Age 44. 24 RUTHANN S. YAMANAKA has been Senior Vice President-People Services Group since March 1998. She was Senior Vice President-Assistant Director, Human Resources for Bank of Hawaii from July 1994 through February 1998 and Manager, Quality Assurance Administration from 1988 to 1994. Age 46. LYN F. ANZAI has been Vice President-General Counsel and Corporate Secretary since July 1997. She was Senior Counsel in the Corporate/Investment Legal Division of Kamehameha Schools Bishop Estate from November 1990 until July 1997. Age 57. DAVID M. BOAZ was Vice President-Flight Operations from June 1997 until his retirement and resignation effective December 15, 1999. He was Managing Director of Delta Airlines, Inc. in the People's Republic of China from 1996 to 1997. He was Chief Pilot in Los Angeles for Delta Airlines, Inc. from 1991 until 1996. Age 63. H. NORMAN DAVIES JR. has been Vice President-Safety and Security since January 6, 1997. He was Chief Pilot in New York for Delta Airlines, Inc. from November 1991 until June 1996. Age 63. MICHAEL P. LOO has been Vice President-Controller since 1996. He was Staff Vice President-Controller of Hawaiian Airlines from 1994 until 1995. He was previously with KPMG LLP until 1993. Age 35. CLARENCE K. LYMAN has been Vice President-Finance, Treasurer and Assistant Corporate Secretary since 1991. Age 54. BLAINE J. MIYASATO was Vice President-In-Flight, Catering and Product Development from February 1, 1999 until he was appointed to an expanded position of Vice President-Customer Services effective January 16, 2000. From 1993 to 1998 he held various senior positions at the Company including Senior Director-In-Flight, Product Development & Catering. Age 37. EDWARD W. PINION was appointed Vice President-Purchasing of Hawaiian Airlines on March 1, 1999. He was manager of aviation fuels for BHP/Tesoro from March 1996 until 1999. From 1994 to 1996, he was Commander of the Defense Fuel Region, Pacific, and Commander of the Defense Logistics Agency, Pacific, at Camp H.M. Smith. Age 49. GLEN L. STEWART was Vice President-Transpacific and Southpacific Marketing from 1993 until his retirement effective December 31, 1999. He was Senior Vice President-Transpacific of Hawaiian Airlines from 1991 to 1993. Age 57. GLENN G. TANIGUCHI has been Vice President-Schedule Planning and Reservations since 1995. He was Staff Vice President-Schedule Planning and Reservations of Hawaiian Airlines from 1991 until 1995. Age 57. All officers are appointed annually by the Board of Directors at their first meeting after the annual meeting of stockholders at which the Board of Directors is elected. No executive officer of the Company bears any relationship by blood, marriage or adoption to any other executive officer or director, except that John W. Adams' sister is married to director Robert G. Coo. Information provided in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference for Part III, Items 11 through 13 of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 25 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements. (1) Report of Independent Auditors of Ernst & Young LLP. (2) Independent Auditors' Report of KPMG LLP. (3) Balance Sheets, December 31, 1999 and 1998. (4) Statements of Operations for the Years ended December 31, 1999, 1998 and 1997. (5) Statements of Shareholders' Equity and Comprehensive Income for the Years ended December 31, 1999, 1998 and 1997. (6) Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997. (7) Notes to Financial Statements. (8) Quarterly Financial Information (Unaudited). (9) Selected Financial and Statistical Data. Financial Statement Schedule. (1) Report of Independent Auditors of Ernst & Young LLP on Financial Statement Schedule for the Year Ended December 31, 1999. (2) Independent Auditors' Report of KPMG LLP on Financial Statement Schedule for the Years Ended December 31, 1998 and 1997. (3) Schedule of Valuation and Qualifying Accounts. Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. (b) Reports on Form 8-K. (1) Current Report on Form 8-K dated October 5, 1999 (date of event September 28, 1999) reporting Item 4, "Changes in Registrant's Certifying Accountant." (2) Current Report on Form 8-K/A dated October 12, 1999 (date of event September 28, 1999) reporting Item 4, "Changes in Registrant's Certifying Accountant" and Item 7, "Financial Statements, Proforma Financial Information and Exhibits." (c) Exhibits. Exhibit 3 Articles of Incorporation, Bylaws. (1) Restated Articles of Incorporation of the Company filed as Exhibit 3(a) to the Company's Registration Statement on Form S-3 as filed December 31, 1998 is incorporated herein by reference. (2) Amended and Restated Bylaws of the Company filed as Exhibit 3.1 to the Company's Current Report on Form 8-K as filed September 14, 1998 is incorporated herein by reference. Exhibit 4 Instruments Defining the Rights of Security Holders Including Indentures. (1) Rights Agreement dated December 23, 1994 filed as Exhibit (1) to the Company's current report on Form 8-K during the fourth quarter of 1994 (date of report - December 23, 1994) is incorporated herein by reference. (2) The following Agreements filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 are incorporated herein by reference: 26 (a) Amendment No. 1 dated as of May 4, 1995 to Rights Agreement dated as of December 23, 1994 by and between Hawaiian Airlines, Inc. and Chemical Trust Company of California; (b) Amendment No. 1 to 1994 Stock Option Plan dated as of May 4, 1995; (c) Amendment No. 1 dated as of May 4, 1995 to Warrants Nos. 1-10. (3) 1994 Stock Option Plan, as amended, filed as Exhibit 4 to the Company's Registration Statement on Form S-8 as filed November 15, 1995 is incorporated herein by reference. (4) The following Agreements filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 are incorporated herein by reference: (a) Rightsholders Agreement dated as of January 31, 1996, by and among Hawaiian Airlines, Inc., Airline Investors Partnership, L.P., AMR Corporation, Martin Anderson and Robert Midkiff; (b) Amendment No. 2 to the Rights Agreement, as amended, dated as of January 31, 1996 by and between Hawaiian Airlines, Inc. and Chemical Trust Company of California; (c) Amendment No. 2 to 1994 Stock Option Plan, as amended, dated as of December 8, 1995. (5) 1996 Stock Incentive Plan, as amended, filed as Exhibit 4 to the Company's Amendment No. 1 to Registration Statement on Form S-2 as filed July 12, 1996 is incorporated herein by reference. (6) Amendment No. 3 to the Rights Agreement, as amended, dated as of May 21, 1998, by and between Hawaiian Airlines, Inc. and ChaseMellon Shareholder Services, L.L., C., as successor to Chemical Trust Company of California, filed as Exhibit 4 to the Company's Amendment No. 2 to Registration Statement on Form 8-A as filed May 22, 1998 in incorporated herein by reference. (7) Amendment No. 4 to the Rights Agreement, as amended, dated as of August 28, 1998, by and between Hawaiian Airlines, Inc. and ChaseMellon Shareholder Services, L.L., C., as successor to Chemical Trust Company of California, filed as Exhibit 5 to the Company's Amendment No. 3 to Registration Statement on Form 8-A as filed September 14, 1998 in incorporated herein by reference. The Company agrees to provide the Securities and Exchange Commission, upon request, copies of instruments defining the rights of security holders of long-term debt of the Company. Exhibit 10 Material Contracts. (1) The following contracts filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 are incorporated herein by reference: (a) Code Share Agreement, dated January 6, 1997, between the Company and Wings West Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof; (b) Amendment No. 1 to Code Share Agreement, dated as of January 21, 1997, between the Company and Wings West Airlines, Inc.; (c) Aircraft Lease Agreement, dated as of January 3, 1997, between the Company and American Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof; (d) Separation Agreement and Complete Settlement and Release of All claims, dated as of February, 1997, between the Company and Bruce R. Nobles; 27 (e) Employment Agreement, effective as of April 14, 1997, between the Company and Paul John Casey. (2) Code Share Agreement, dated July 15, 1997, between the Company and American Airlines, Inc. filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 are incorporated herein by reference. (3) The following contracts filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 are incorporated herein by reference: (a) Employment Agreement, effective as of December 15, 1997, between the Company and John B. Happ; (b) Employment Agreement, effective as of March 1, 1998, between the Company and Ruthann S. Yamanaka; (c) Form of warrant for the Purchase of 25,696 shares of Class A Common Stock issued to AMR Corporation; (d) Form of Addendum to Warrant for the Purchase of Shares of Common Stock; (e) Form of Amendment No. 1 to Warrant Certificate No. 12 for the Purchase of Shares of Common Stock; (f) Form of Amendment No. 2 to Warrant Certificate No. 12 for the Purchase of Shares of Common Stock; (g) Form of Amendment No. 1 to Warrant Certificate No. 23 for the Purchase of Shares of Common Stock; (h) Form of Amendment No. 2 to Warrant Certificate No. 23 for the Purchase of Shares of Common Stock; (i) Aircraft Lease Agreement dated as of May 9, 1997, between American Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof; (j) Aircraft Lease Agreement dated as of December 12, 1997, between American Airlines, Inc. and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof. (4) The following contracts filed as Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 are incorporated herein by reference: (a) Aircraft Loan Agreement dated December 29, 1998, between Bank of Hawaii and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof; (b) Aircraft Sale and Purchase Agreement dated November 18, 1998, between Fin 3 Limited and Hawaiian Airlines, Inc. filed in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof; (c) Form of Passenger Aircraft Charter Agreement dated November 9, 1997, effective February 1, 1998 between Hawaiian Vacations, Inc. and Hawaiian Airlines, Inc; (d) Form of Passenger Aircraft Charter Agreement dated November 2, 1998 between Renaissance Cruises and Hawaiian Airlines, Inc. (5) Aircraft Loan Agreement, dated March 29, 1999, between Bank of Hawaii and Hawaiian Airlines, Inc. filed as Exhibit 99-1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and in redacted form since confidential treatment has been requested pursuant to Rule 24.b-2 for certain portions thereof, are incorporated herein by reference. (6) Sublease Agreement 060 dated as of October 26, 1999 between Continental Micronesia, Inc. and the Company, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. 28 (7) Sublease Agreement 061 dated as of October 26, 1999 between Continental Micronesia, Inc. and the Company, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. (8) Aircraft Maintenance Services Agreement dated as of October 26, 1999 by and between the Company and Continental Airlines, Inc., in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. (9) Agreement between U.S. Bank National Association and the Company, effective date December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. (10) Aircraft General Terms Agreement AGTA-HWI between The Boeing Company and the Company, dated as of December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. (11) Purchase Agreement Number 2252 between McDonnell Douglas Corporation and the Company Relating to Model 717-22A Aircraft and the following Letter Agreements, dated as of December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof: (a) Customer Services Matters; (b) Spares Initial Provisioning; (c) Aircraft Performance Guarantees; (d) Promotional Support; (e) Business Matters; (f) Purchase Rights Aircraft and Aircraft Model Substitution; (g) Liquidated Damages - Non-Excusable Delay; (h) Guarantee Agreement; (i) Other Matters; (j) Financing Matters; (k) Spares Commitments; (l) Board Approval. Exhibit 23 Consent of experts and counsel. (1) Consent of Ernst & Young LLP. (2) Consent of KPMG LLP. Exhibit 24 Power of Attorney. Exhibit 27 Financial data schedule. 29 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10 (6) Sublease Agreement 060 Dated as of October 26, 1999 between Continental Micronesia, Inc. and the Company, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. 10 (7) Sublease Agreement 061 dated as of October 26, 1999 between Continential Micronesia, Inc. and the Company, in redacted form since confidential treatement has been requested pursuant to Rule 24.6-2 for certain portions thereof. 10 (8) Aircraft Maintenance Services Agreement dated as of October 26, 1999 by and between Continental Airlines, Inc. and the Company, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. 10 (9) Agreement between U.S. Bank National Association and the Company, effective dated December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. 10 (10) Aircraft General Terms Agreement AGTA-HWI between The Boeing Company and the Company, dated as of December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof. 10 (11) Purchase Agreement Number 2252 between McDonnell Douglas Corporation and the Company relating to Model 717-22A Aircraft and the following Letter Agreements, dated as of December 31, 1999, in redacted form since confidential treatment has been requested pursuant to Rule 24.6-2 for certain portions thereof: (a) Customer Services Matters; (b) Spares Initial Provisioning; (c) Aircraft Performance Guarantees; (d) Promotional Support; (e) Business Matters; (f) Purchase Rights Aircraft and Aircraft Model Substitution; (g) Liquidated Damages - Non-Excusable Delay; (h) Guarantee Agreement; (i) Other Matters; (j) Financing Matters; (k) Spares Commitments; (l) Board Approval. 23 Consents of experts and counsel. Consent of Ernst & Young LLP. Consent of KPMG LLP. 24 Power of Attorney. 27 Financial data schedule. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HAWAIIAN AIRLINES, INC. March 30, 2000 By /s/ JOHN L. GARIBALDI ---------------------------------- John L. Garibaldi Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 31 REPORT OF INDEPENDENT AUDITORS The Board of Directors Hawaiian Airlines, Inc.: We have audited the accompanying balance sheet of Hawaiian Airlines, Inc. (the "Company") as of December 31, 1999, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Airlines, Inc. as of December 31, 1999, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. As discussed in Note 2 to the financial statements, effective January 1, 1999, the Company changed its method of accounting for the sale of mileage credits to participating partners in its frequent flyer program. /s/ ERNST & YOUNG LLP Honolulu, Hawaii March 21, 2000 F-1a INDEPENDENT AUDITORS' REPORT The Board of Directors Hawaiian Airlines, Inc.: We have audited the accompanying balance sheet of Hawaiian Airlines, Inc. as of December 31, 1998, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hawaiian Airlines, Inc. as of December 31, 1998, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Honolulu, Hawaii March 11, 1999 F-1b Hawaiian Airlines, Inc. Balance Sheets (in thousands) December 31, 1999 and 1998
1999 1998 --------- --------- ASSETS Current Assets: Cash and cash equivalents ............................ $ 63,631 $ 31,011 Restricted cash ...................................... -- 6,432 Accounts receivable, net of allowance for doubtful accounts of $500 in 1999 and 1998 ................ 24,921 29,995 Inventories .......................................... 13,965 8,546 Deferred tax assets, net ............................. 9,625 -- Prepaid expenses and other ........................... 6,521 5,923 --------- --------- Total current assets ............................. 118,663 81,907 --------- --------- Property and Equipment: Flight equipment ..................................... 39,675 86,980 Progress payments on flight equipment ................ 7,158 -- Ground equipment, buildings and leasehold improvements 30,980 23,526 --------- --------- Total ............................................ 77,813 110,506 Accumulated depreciation and amortization ............ (12,541) (25,584) --------- --------- Property and equipment, net ...................... 65,272 84,922 --------- --------- Other Assets: Long-term prepayments and other ...................... 8,930 8,232 Deferred tax assets, net ............................. 12,375 -- Reorganization value in excess of amounts allocable to identifiable assets, net ......................... 33,897 46,850 --------- --------- Total other assets ................................... 55,202 55,082 --------- --------- Total Assets ......................................... $ 239,137 $ 221,911 ========= =========
See accompanying Notes to Financial Statements F-2 Hawaiian Airlines, Inc. Balance Sheets (in thousands, except share data) December 31, 1999 and 1998
1999 1998 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt ....................................... $ 3,853 $ 3,532 Current portion of capital lease obligations ............................ 3,379 4,614 Accounts payable ........................................................ 41,864 28,883 Air traffic liability ................................................... 50,426 23,350 Other accrued liabilities ............................................... 20,920 15,298 --------- --------- Total current liabilities ........................................... 120,442 75,677 --------- --------- Long-Term Debt ............................................................... 23,858 14,454 --------- --------- Capital Lease Obligations .................................................... 2,790 5,966 --------- --------- Other Liabilities and Deferred Credits: Accumulated pension and other postretirement benefit obligations ........ 16,397 25,968 Other ................................................................... 9,524 8,959 --------- --------- Total other liabilities and deferred credits ........................ 25,921 34,927 --------- --------- Shareholders' Equity Common Stock - $.01 par value, 60,000,000 shares authorized, 40,997,335 and 40,624,586 shares issued and outstanding in 1999 and 1998, respectively ........................................ 410 410 Special Preferred Stock - $.01 par value, 2,000,000 shares authorized, seven shares issued and outstanding ....................... -- -- Capital inexcess of par value ........................................... 99,418 99,418 Warrants ................................................................ 3,153 3,153 Notes receivable from Common Stock sales ................................ (1,581) (1,581) Accumulated deficit ..................................................... (35,274) (6,007) Accumulated other comprehensive income (loss) - minimum pension liability adjustment ................................................ -- (4,506) --------- --------- Shareholders' Equity ................................................ 66,126 90,887 --------- --------- Commitments and Contingent Liabilities (Notes 3, 4, 5, 6, 8, 9, 10 and 11) Total Liabilities and Shareholders' Equity .......................... $ 239,137 $ 221,911 ========= =========
See accompanying Notes to Financial Statements F-3 Hawaiian Airlines, Inc. Statements of Operations (in thousands) For the Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ------------------------------------------------------------------------------------------------ Operating Revenues: Passenger ........................................... $ 400,251 $ 354,245 $ 332,154 Charter ............................................. 46,570 35,742 37,172 Cargo ............................................... 22,836 21,682 21,272 Other ............................................... 19,220 14,746 13,618 --------- --------- --------- Total ........................................... 488,877 426,415 404,216 --------- --------- --------- Operating Expenses: Wages and benefits .................................. 138,418 118,885 114,571 Maintenance materials and repairs ................... 101,801 84,004 76,267 Aircraft fuel, including taxes and oil .............. 76,382 66,601 78,137 Rentals and landing fees ............................ 31,640 30,541 32,707 Depreciation and amortization ....................... 17,139 12,607 10,665 Sales commissions ................................... 12,471 11,655 13,033 Impairment loss ..................................... 46,958 -- -- Other ............................................... 104,605 84,717 76,334 --------- --------- --------- Total ........................................... 529,414 409,010 401,714 --------- --------- --------- Operating Income (Loss) .................................. (40,537) 17,405 2,502 --------- --------- --------- Nonoperating Income (Expense) Interest and amortization of debt expense ........... (3,448) (2,042) (2,439) Interest income ..................................... 2,377 1,639 2,045 Loss on disposition of equipment .................... (1,013) (831) (140) Other, net .......................................... 2,708 (163) (820) --------- --------- --------- Total ........................................... 624 (1,397) (1,354) --------- --------- --------- Income (Loss) Before Income Taxes and Cumulative Effect of Change in Accounting Principle ...................... (39,913) 16,008 1,148 Income Tax Benefit (Provision) ........................... 11,418 (7,803) (1,720) --------- --------- --------- Net Income (Loss) Before Cumulative Effect of Change in Accounting Principle ................................ (28,495) 8,205 (572) Cumulative Effect of Change in Accounting Principle, Net of Income Taxes ................................. (772) -- (450) --------- --------- --------- Net Income (Loss) ........................................ $ (29,267) $ 8,205 $ (1,022) ========= ========= =========
See accompanying Notes to Financial Statements F-4 Hawaiian Airlines, Inc. Statements of Operations (in thousands, except per share data) For the Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Net Income (Loss) Per Common Stock Share: Basic Before cumulative effect of change in accounting principle $ (0.70) $ 0.20 $ (0.02) Cumulative effect of change in accounting principle, net of income taxes .......................................... (0.02) -- (0.01) --------- --------- --------- Net Income (Loss) Per Common Stock Share ....................... $ (0.72) $ 0.20 $ (0.03) ========= ========= ========= Diluted Before cumulative effect of change in accounting principle $ (0.70) $ 0.19 $ (0.02) Cumulative effect of change in accounting principle, net of income taxes .......................................... (0.02) -- (0.01) --------- --------- --------- Net Income (Loss) Per Common Stock Share ....................... $ (0.72) $ 0.19 $ (0.03) ========= ========= ========= Weighted Average Number of Common Shares Outstanding: Basic ..................................................... 40,997 40,921* 40,361* ========= ========= ========= Diluted ................................................... 40,997 42,205* 40,361* ========= ========= ========= The following table shows a reconciliation of the weighted average shares outstanding used in computing basic and diluted net income (loss) per Common Stock share: Weighted average Common Stock shares outstanding 40,997 40,921* 40,361* Incremental Common Stock shares issuable upon exercise of outstanding warrants and stock options (treasury stock method) -- 1,284 -- --------- --------- --------- Weighted average Common Stock shares and Common Stock share equivalents 40,997 42,205* 40,361* ========= ========= =========
* Includes shares reserved for issuance under the Consolidated Plan of Reorganization dated September 21, 1993 as amended F-5 Hawaiian Airlines, Inc. Statements of Shareholders' Equity and Comprehensive Income (in thousands) For the Years ended December 31, 1999, 1998 and 1997
Special Capital in Common Preferred excess of Stock Stock par value Warrants - ----------------------------------------------------------------------------------------------------- Balance at December 31, 1996 ...................... $ 393 $ -- $ 95,827 $ 1,557 Net loss .......................................... -- -- -- -- Issuance of warrants to acquire 974,669 shares of Common Stock ................................. -- -- -- 2,328 Exercise of options to acquire 307,500 shares of Common Stock ................................. 3 -- 495 -- Exercise of warrants to acquire 1,318,972 shares of Common Stock ................................. 13 -- 2,915 (732) -------- -------- -------- -------- Balance at December 31, 1997 ...................... 409 -- 99,237 3,153 Net income ........................................ -- -- -- -- Minimum pension liability adjustment .............. -- -- -- -- Comprehensive income .............................. Exercise of options to acquire 112,500 shares of Common Stock ................................. 1 -- 181 -- -------- -------- -------- -------- Balance at December 31, 1998 ...................... 410 -- 99,418 3,153 Net income ........................................ -- -- -- -- Minimum pension liability adjustment .............. -- -- -- -- Comprehensive income .............................. -------- -------- -------- -------- Balance at December 31, 1999 ...................... $ 410 $ -- $ 99,418 $ 3,153 ======== ======== ======== ======== Notes receivable from Accumulated Common Stock Accumulated comprehensive sales deficit income (loss) Total --------------------------------------------------------------- Balance at December 31, 1996 ...................... $ (1,714) $(13,190) -- $ 82,873 Net loss .......................................... -- (1,022) -- (1,022) Issuance of warrants to acquire 974,669 shares of Common Stock ................................. -- -- -- 2,328 Exercise of options to acquire 307,500 shares of Common Stock ................................. -- -- -- 498 Exercise of warrants to acquire 1,318,972 shares of Common Stock ................................. -- -- -- 2,196 -------- -------- ------- -------- Balance at December 31, 1997 ...................... (1,714) (14,212) -- 86,873 Net income ........................................ -- 8,205 -- 8,205 Minimum pension liability adjustment .............. -- -- (4,506) (4,506) -------- Comprehensive income .............................. 3,699 -------- Exercise of options to acquire 112,500 shares of Common Stock ................................. 133 -- -- 315 -------- -------- ------- -------- Balance at December 31, 1998 ...................... (1,581) (6,007) (4,506) 90,887 Net loss .......................................... -- (29,267) -- (29,267) Minimum pension liability adjustment .............. -- -- 4,506 4,506 -------- Comprehensive loss ................................ (24,761) -------- -------- ------- -------- Balance at December 31, 1999 ...................... $ (1,581) $(35,274) -- $ 66,126 ======== ======== ======= ========
See accompanying Notes to Financial Statements F-6 Hawaiian Airlines, Inc. Statements of Cash Flows (in thousands) For the Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities: Net income (loss) .................................. $ (29,267) $ 8,205 $ (1,022) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ....................................... 12,591 7,663 5,533 Amortization ....................................... 4,548 4,944 5,132 Net periodic postretirement benefit cost ........... 752 915 935 Impairment loss .................................... 46,958 -- -- Loss on disposition of equipment ................... 1,013 831 140 Decrease (increase) in restricted cash ............. 6,432 (1,738) -- Decrease (increase) in accounts receivable ......... 5,074 (5,040) (3,365) Decrease (increase) in inventories ................. (5,419) 804 (2,300) Decrease (increase) in prepaid expenses and other .. (598) (234) 501 Increase in deferred taxes, net .................... (22,000) -- -- Increase in accounts payable ....................... 12,981 1,296 788 Increase (decrease) in air traffic liability ....... 27,076 962 (4,355) Increase (decrease) in other accrued liabilities ... 5,622 1,583 2,311 Other, net ......................................... 3,567 10,002 (211) -------- -------- -------- Net cash provided by operating activities ...... 69,330 30,193 4,087 -------- -------- -------- Cash Flows From Investing Activities: Additions to property and equipment ................ (34,776) (27,946) (18,468) Progress payments on flight equipment .............. (7,158) -- -- Net proceeds from disposition of equipment ......... 260 1,153 1,422 Sale of investment securities ...................... -- 4,001 -- Purchase of investment securities .................. -- -- (4,003) -------- -------- -------- Net cash used in investing activities .......... (41,674) (22,792) (21,049) -------- -------- -------- Cash Flows From Financing Activities: Issuance of long-term debt ......................... 12,704 13,359 792 Repayment of long-term debt ........................ (2,979) (1,533) (3,141) Repayment of capital lease obligations ............. (4,761) (4,244) (4,907) Issuance of Common Stock ........................... -- 182 2,694 Proceeds on notes receivable from Common Stock sales -- 133 -- -------- -------- -------- Net cash provided by (used in) financing activities ................................ 4,964 7,897 (4,562) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ............................... 32,620 15,298 (21,524) Cash and cash equivalents - Beginning of Year ........... 31,011 15,713 37,237 -------- -------- -------- Cash and cash equivalents - End of Year ................. $ 63,631 $ 31,011 $ 15,713 ======== ======== ========
See accompanying Notes to Financial Statements F-7 Hawaiian Airlines, Inc. Statements of Cash Flows (in thousands) For the Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 - ----------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid .......................................... $3,197 $1,864 $2,267 Income taxes paid ...................................... 163 761 -- SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Minimum pension liability adjustment ................... 4,506 (4,506) -- Property and equipment financed through capital lease .. 350 -- 9,432 Issuance of warrants to acquire 974,669 shares of Common Stock .............................................. -- -- 2,328
See accompanying Notes to Financial Statements F-8 Hawaiian Airlines, Inc. Notes to Financial Statements 1. BUSINESS AND ORGANIZATION Hawaiian Airlines, Inc. ("Hawaiian Airlines" or the "Company") was incorporated in January 1929 under the laws of the Territory of Hawaii and is the largest airline headquartered in Hawaii, based on operating revenues of $488.9 million for 1999. The Company is engaged primarily in the scheduled transportation of passengers, cargo and mail. The Company's passenger airline business is its chief source of revenue. Scheduled passenger service consists of, on average and depending on seasonality, approximately 175 flights per day with daily service from Hawaii, principally Honolulu to Las Vegas, Nevada and the four key United States ("U.S.") West Coast gateway cities of Los Angeles and San Francisco, California, Seattle, Washington and Portland, Oregon ("Transpac"), daily service among the six major islands of the State of Hawaii ("Interisland") and twice weekly service to Pago Pago, American Samoa and Papeete, Tahiti in the South Pacific ("Southpac"). The Company also provides charter service from Honolulu to Las Vegas and Anchorage, Alaska and from Los Angeles to Papeete, Tahiti ("Overseas Charter"). The Company operates a fleet consisting of DC-9 aircraft and DC-10 aircraft. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH, CASH EQUIVALENTS AND RESTRICTED CASH The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Short-term cash equivalent investments at December 31, 1999 and 1998 were valued at cost and amounted to $41.0 million and $27.0 million, respectively. As of December 31, 1999, the Company had no cash restricted to withdrawal as in fourth quarter 1999, the Company renegotiated its collateral holdback requirements with its primary credit card processor. Under the new agreement, the Company is required to maintain defined levels of cash in lieu of providing defined collateral holdbacks. In prior years, certain funds served as collateral to support a credit card holdback for advance ticket sales and was classified as restricted cash in the accompanying balance sheets. Funds were made available as air travel was provided. As of December 31, 1998, approximately $6.4 million of cash was restricted as to withdrawal. INVENTORIES Inventories consists primarily of expendable parts for flight equipment and supplies which are stated at average cost, less an allowance for obsolescence. PROPERTY AND EQUIPMENT Owned property and equipment are stated at cost, except for assets determined to be impaired which are stated at fair market value. Costs of major improvements are capitalized. Depreciation and amortization are provided on a straight-line basis over the following estimated useful lives: Flight equipment............................. 2-15 years, 15% residual value Ground equipment............................. 5-15 years Airport terminal facility.................... 30 years Buildings.................................... 15-20 years Leasehold improvements....................... Shorter of lease term or useful life Maintenance and repairs are charged to operations as incurred, except that (1) costs of overhauling engines are charged to operations in the year the engines are removed for overhaul and (2) scheduled heavy airframe overhauls and major structural modifications on DC-9 aircraft are recorded under the deferral method whereby the cost of overhaul is capitalized and amortized over the shorter of the period benefited or the lease term. Additionally, provision is made for the estimated cost of scheduled heavy airframe overhauls required to be performed on leased DC-9 aircraft prior to their return to lessors. Commencing January 1, 2000, due to the Company's intentions to replace its DC-9 fleet in 2001 and the resultant reduction of DC-9 flight equipment and related assets to fair market value as of December 31, 1999, heavy airframe overhauls and major structural modifications on DC-9 aircraft will be expensed. See Note 10. Maintenance and repairs on DC-10 aircraft are charged to operations on a flight hour basis. See Notes 5 and 11. F-9 REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS The Company emerged from Chapter 11 bankruptcy on September 12, 1994 (the "Effective Date") with Hawaiian Airlines being the sole surviving corporation. Under fresh start reporting, the reorganization value of the entity was allocated to the Company's assets and liabilities on a basis substantially consistent with the purchase method of accounting. The portion of reorganization value not attributable to specific tangible or identifiable intangible assets of the Company is reflected as reorganization value in excess of amounts allocable to identifiable assets ("Excess Reorganization Value") in the accompanying balance sheets. Excess Reorganization Value is amortized on a straight-line basis over 20 years. Accumulated amortization at December 31, 1999 and 1998 totaled approximately $17.8 million and $15.0 million, respectively. The estimated income tax benefit from the expected utilization of net operating loss carryforwards arising prior to the Effective Date has also been applied as a reduction to Excess Reorganization Value. The Company will continue to assess and evaluate whether the remaining useful life of the asset requires revision or, through the use of estimated future undiscounted cash flows over the remaining life of the asset, whether the remaining balance of the asset is recoverable. The assessment of the recoverability of the unamortized amount will be impacted if estimated future operating cash flows are not achieved. AIR TRAFFIC LIABILITY Passenger fares are recorded as operating revenues when the transportation is provided. The value of unused passenger tickets is included as air traffic liability. The Company performs periodic evaluations of this estimated liability, and any adjustments resulting therefrom, which can be significant, are included in results of operations for the periods in which the evaluations are completed. FREQUENT FLYER PROGRAM The Company sponsors a frequent flyer program and records an estimated liability for the incremental cost associated with providing the related free transportation during the period a free travel award is earned. Incremental costs primarily include fuel and catering. The Company also sells mileage credits to participating partners such as hotels, car rental agencies and credit card companies. During 1999, as promulgated by the Securities and Exchange Commissions' Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," the Company changed the method it uses to account for the sale of these mileage credits. This change, applied retroactively to January 1, 1999, totaled approximately $772,000, net of income tax benefit of approximately $515,000 and is reflected as a cumulative effect of change in accounting principle in the accompanying statements of operations. This change also increased the Company's net loss for the year ended December 31, 1999 by $1.0 million, pre-tax. The amounts resulting from the change being applied retroactively to January 1, 1998 and 1997 were not material. Under the new accounting method, revenue from the sale of mileage credits is deferred and recognized when transportation is provided. Previously, the resulting revenue was recorded in the period in which the credits were sold. The Company believes the new method is preferable as it results in a better matching of revenues with the period in which services are provided. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes derivative financial instruments principally comprised of heating oil forward contracts to manage market risks and hedge its exposure to fluctuations in its aircraft fuel costs. These contracts qualify for hedge accounting treatment as they manage risk, identify firm commitments for set time periods and meet correlation criteria for effectiveness. The Company accounts for its derivative contracts on a deferral basis. Initial and subsequent margin deposit requirements are reflected in prepaid expenses and other assets. Realized and unrealized gains and losses, fees and commissions are deferred and recognized upon settlement of the underlying contract. The Company's practice is to not hold or issue financial instruments for trading purposes. SALES COMMISSIONS Commissions from the sale of passenger traffic are recognized as expense when the transportation is provided and the related revenue is recognized. The amount of sales commissions not yet recognized as expense is included in prepaid expenses and other current assets in the accompanying balance sheets. F-10 ADVERTISING COSTS The Company expenses the costs of advertising as incurred. Advertising expense was $5.7 million, $4.5 million and $4.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. IMPAIRMENT In accordance with the Financial Accounting Standards Board (the "FASB") Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. BUSINESS PROCESS REENGINEERING COSTS The Company adopted the guidelines promulgated by the Financial Accounting Standards Board's (the "FASB") Emerging Issues Task Force in fourth quarter 1997 and wrote off business process reengineering costs which had been incurred and capitalized in the implementation of information technology projects. The write-off totaled approximately $450,000, net of income tax benefit of approximately $300,000 and is reflected as a cumulative effect of change in accounting principle in the accompanying statements of operations. STOCK OPTION PLANS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (the "APB") No. 25, "Accounting for Stock Issued to Employees," in accounting for its fixed stock options. As such, compensation cost is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. EARNINGS (LOSS) PER SHARE Basic earnings per share represents income available to common shareholders divided by the weighted average number of Common Stock shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock shares were exercised or converted into Common Stock shares or resulted in the issuance of Common Stock shares that then shared in the earnings of the Company. Outstanding rights, warrants and options to purchase shares of the Company's Common Stock are not included in the computation of diluted earnings per share if inclusion of these rights, warrants and options is antidilutive. Options and warrants to purchase approximately 3.6 million, 1.4 million and 2.5 million shares of Common Stock in 1999, 1998 and 1997, respectively, were outstanding, but not included in the computation of diluted earnings per share as inclusion of these options and warrants would be antidilutive. See Note 9. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of air traffic liability, accruals for loss contingencies and the amounts reported for accumulated pension and other postretirement benefit obligations. Management believes that such estimates have been appropriately established in accordance with generally accepted accounting principles. F-11 SEGMENT INFORMATION Principally all operations of the Company either originate or end in the State of Hawaii. The management of such operations is based on a system-wide approach due to the interdependence of the Company's route structure in its various markets. The Company operates as a matrix form of organization as it has overlapping sets of components for which managers are held responsible. Managers report to the Company's chief operating decision-maker on both the Company's geographic components and the Company's product and service components, resulting in the components based on products and services constituting the operating segment. As the Company offers only one service (i.e., air transportation), management has concluded that it has only one segment. RECLASSIFICATIONS Certain prior year amounts were reclassified to conform to the 1999 presentation. Such reclassifications had no effect on previously reported financial condition and/or results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, "which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133, as amended by SFAS No. 137, are effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 on January 1, 2001 but has not yet determined the impact of its adoption. In March 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" which requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal-use computer software development project be expensed as incurred. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. Adoption of the provisions of SOP 98-1 and SOP 98-5 by the Company as of January 1, 1999 did not have a material impact on the Company's financial position or results of operations. 3. FINANCIAL INSTRUMENTS AND FAIR VALUES The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate fair value due to the short maturity of those instruments. The carrying amount of notes receivable from Common Stock sales approximates fair value as the terms of such instruments are reflective of terms offered for similar instruments of comparable maturities. The estimated fair values of long-term debt amounted to $26.5 million and $17.6 million at December 31, 1999 and 1998, respectively. These fair values were estimated by discounting the future cash flow requirements of each instrument at rates currently offered at the respective year-end dates to the Company for similar debt instruments of comparable maturities. The Company utilizes heating oil forward contracts to manage market risks and hedge its financial exposure resulting from fluctuations in its aircraft fuel costs. When fully implemented, the Company plans to employ a strategy whereby heating oil contracts are used to cover approximately 50% of the Company's anticipated aircraft fuel needs on a rolling six-month basis. At December 31, 1999, the Company held petroleum forward contracts to purchase 384,000 barrels of heating oil in the aggregate amount of $9.2 million through July 2000. These forward contracts represented approximately 25% of the Company's anticipated aircraft fuel needs for the next six months. A realized net gain on liquidated contracts amounting to $673,000 is included as a component of aircraft fuel expense for the year ended December 31, 1999. The contracts generally have maturities of one year or less and are either exchanged or traded with counterparties of high credit quality; therefore, the risk of non-performance by the counterparties is considered to be negligible. F-12 At December 31, 1999, the Company owned approximately 51,000 depository certificates convertible, subject to certain restrictions, into the common stock of Equant, which completed an initial public offering in July 1998. As of December 31, 1999, the estimated fair value of these depository certificates was approximately $5.7 million, based upon the publicly traded market value of Equant common stock. Since the fair value of the Company's investment in the depository certificates is not readily determinable (i.e., the depository certificates are not traded on a securities exchange), the investment is carried at cost, which was not material as of December 31, 1999 or 1998. 4. FLIGHT EQUIPMENT All of the Company's aircraft are leased except for two DC-10s and four DC-9s. At December 31, 1999 and 1998, the composition of the Company's aircraft fleet is as follows: 1999 1998 Aircraft Type Leased Owned Leased Owned ------------- -------- ---------- -------- --------- DC-10 11 2 10 1 DC-9 11 4 11 3 -------------------------------------------- Total 22 6 21 4 ============================================ The Company intends to replace its Interisland DC-9 fleet in 2001. See Note 10. The Company also anticipates delivery of a DC-10-30 in April 2000. See Note 5. 5. LEASES AIRCRAFT LEASES Ten DC-10 aircraft are leased from American Airlines, Inc. ("American") under operating leases. In 1999, the Company and American agreed to extend lease terms on the ten DC-10 aircraft leased by the Company from American from September 11, 2001 to December 31, 2003. In recognition of the extended lease terms, basic rents for the aircraft will continue at their lower, pre-February 1, 1999 levels. Rent has been expensed under the straight line method. In third quarter 1999, the Company entered into agreements to sublease two used DC-10-30 aircraft from Continental Micronesia, Inc. The Company took delivery of one of the DC-10-30 aircraft in fourth quarter 1999 and expects the second DC-10-30 aircraft to be added to the fleet and placed into revenue service in April 2000. The subleases expire in January 2002. Five and six DC-9 aircraft and related flight equipment are leased under operating and capital leases, respectively, for various periods through the year 2004. Most of the operating leases for DC-9 aircraft include renewal options and fair market value purchase options at the end of the lease period. OTHER LEASES The Company leases office space for its headquarters, airport facilities, ticket offices and certain ground equipment in varying terms to 2008. GENERAL Rent expense for aircraft, office space, real property and other equipment during 1999, 1998 and 1997 was $26.9 million, $28.4 million and $26.6 million, respectively, net of sublease rental income. Scheduled future minimum lease commitments under operating and capital leases for the Company as of December 31, 1999, in thousands, are as follows: F-13
Operating Capital Leases Leases ------------------------------------------------------------------------------------- 2000................................................ $ 17,552 $ 3,704 2001................................................ 15,586 928 2002................................................ 13,428 842 2003................................................ 13,228 242 2004................................................ 1,848 242 Thereafter.......................................... 6,548 1,562 ---------- ---------- Total minimum lease payments................. $ 68,190 $ 7,520 Less amount representing interest (rates ranging from 8.0% to 10.25%) 1,351 ---------- Present value of capital lease obligations... 6,169 Less current portion of capital lease obligations 3,379 ---------- Capital lease obligations, excluding current portions..................................... $ 2,790 ==========
In addition to scheduled future minimum lease payments, the Company is required to pay for, under agreement with American, monthly DC-10 maintenance charges. These charges are based on flight hours for the month and are expensed as incurred. See Note 11. For the years ended December 31, 1999, 1998 and 1997, the Company incurred $66.3 million, $55.4 million and $50.9 million, respectively, in maintenance charges under such agreement. The net book value of property held under capital leases as of December 31, 1999 and 1998 totaled $6.8 million and $19.8 million, respectively. Amortization of property held under capital leases is included in depreciation and amortization expense in the accompanying statements of operations. 6. DEBT At December 31, 1999 and 1998, the Company's long-term debt consists of the following, in thousands:
1999 1998 - ---------------------------------------------------------------------------------------------------- Secured obligations due 2000-2006........................ $ 27,711 $ 17,986 Current portion.......................................... (3,853) (3,532) ---------- ---------- Long-term debt obligations, excluding current portion $ 23,858 $ 14,454 ========== ==========
F-14 Secured obligations due 2000-2006 are as follows: (1) A promissory note executed in 1999 for the acquisition of a used DC-10-30 aircraft. The note is secured by lien on the aircraft, as described in the security agreement. The note is due in 2006 and is payable in monthly installments of principal and interest of $132,436. Interest accrues at 8.56% per annum. As of December 31, 1999, $7.7 million was outstanding; (2) A promissory note executed in 1999 for the acquisition of a used DC-9-50 aircraft. The note is secured by first priority liens on the aircraft, other collateral as described in the security agreement and a $2.1 million letter of credit issued under the Credit Facility defined below. The note is due in 2005 and is payable in monthly installments of principal and interest ranging from $70,000 to $61,857. Interest accrues at 9.95% per annum. At December 31, 1999, $3.3 million was outstanding; (3) A promissory note executed in 1998 for the acquisition of a used DC-10-30 aircraft. The note is secured by lien on the aircraft, as described in the security agreement. The note is due in 2005 and is payable in monthly installments of principal and interest of $131,553. Interest accrues at 8.15% per annum. As of December 31, 1999 and 1998, $7.5 million and $8.4 million was outstanding, respectively; (4) A promissory note executed in 1998 for the acquisition of a used DC-9-50 aircraft. The note is secured by first priority liens on the aircraft, other collateral as described in the security agreement and a $1.0 million letter of credit issued under the Credit Facility defined below. The note is due in 2005 and is payable in monthly installments of principal and interest ranging from $78,039 to $34,673. Interest accrues at 8.95% per annum. At December 31, 1999 and 1998, $3.7 million and $4.3 million was outstanding, respectively; (5) The Company maintains a Credit Facility with CIT Group/Business Credit, Inc. (the "Credit Facility"). The Credit Facility consists of two secured term loans and a secured revolving line of credit including up to $6.0 million of letters of credit. The term loans will amortize in equal installments over periods of 48 and 60 months, respectively. The outstanding principal amounts of the term loans will become due and payable upon termination of the Credit Facility. Available credit is subject to change determined by recalculation of the borrowing base, repayments due under the term loans and repayments arising from the disposition and other changes in the related collateral securing the Credit Facility. The Credit Facility has an initial term of three years from April 29, 1996 and renews automatically for successive terms of two years each, unless terminated by either party on at least 60 days notice prior to the end of the then-current term. Interest accrues at prime (8.50% at December 31, 1999) plus 2.0%. The Company may terminate the Credit Facility at any time, on 30 days notice. As of December 31, 1999, the total availability under the Credit Facility was $8.8 million with aggregate loans and letters of credit outstanding in the amounts of $5.5 million and $3.2 million, respectively. As of December 31, 1998, the total availability under the Credit Facility was $11.1 million with aggregate loans and letters of credit outstanding in the amounts of $4.9 million and $1.1 million, respectively. The Credit Facility is secured by a first lien on substantially all of the Company's property, excluding the Company's owned and leased aircraft, the Company's aircraft engines while installed on an aircraft and certain security deposits. In addition, terms of the Credit Facility restrict the Company from paying any cash or stock dividends on its Common Stock. Maturities of long-term debt for the Company, including those estimated for the Credit Facility, as of December 31, 1999, in thousands, are as follows: 2000................... $ 3,853 2001................... 3,513 2002................... 3,680 2003................... 3,970 2004................... 3,788 Thereafter............. 8,907 F-15 7. INCOME TAXES Income tax expense is based on an estimated annual effective tax rate, which differs from the federal statutory rate of 35% in 1999 and 1998 and 34% in 1997, primarily due to state income taxes and certain nondeductible expenses. The Company's reorganization and the associated implementation of fresh start reporting gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes.
1999 1998 1997 ---------------------------------------- --------- --------- --------- Deferred taxes Federal............................ $ (9,249) $ 6,005 $ 1,322 State.............................. (2,169) 1,408 320 --------- --------- --------- $ (11,418) $ 7,413 $ 1,642 Current payable Federal............................ - 316 63 State.............................. - 74 15 --------- --------- --------- - 390 78 --------- --------- --------- Provision (benefit) for income taxes $ (11,418) $ 7,803 $ 1,720 ========= ========= =========
The estimated income tax benefit from the expected utilization of net operating loss carryforwards arising prior to the Effective Date has been, and will continue to be, applied as a reduction to Excess Reorganization Value, not as a reduction to income tax expense. While generally accepted accounting principles require that a provision for income tax be recorded, a majority of the provision for 1998 and 1997 did not require cash outlay as it was offset by net operating loss carryforwards available to the Company. In 1999, 1998 and 1997, approximately $1.3 million, $7.4 million and $1.6 million, respectively, of estimated income tax benefit from the expected utilization of these net operating loss carryforwards has been applied as a reduction to Excess Reorganization Value. Income tax expense in 1999, 1998 and 1997 differs from the "expected" tax expense (benefit) for that year computed by applying the respective year's U.S. federal corporate income tax rate to income (loss) before income taxes and cumulative effect of change in accounting principle as follows:
1999 1998 1997 - ------------------------------------------------------ ----------- --------- --------- Computed "expected" tax expense (benefit)....... $ (13,969) $ 5,600 $ 400 Amortization of Excess Reorganization Value..... 983 1,200 1,200 State income taxes, net of federal income tax benefit................................. (2,096) 800 20 Change in deferred tax valuation allowance...... 3,569 - - Other........................................... 95 203 100 ----------- --------- --------- $ (11,418) $ 7,803 $ 1,720 =========== ========= =========
F-16 The tax effects of temporary differences that give rise to significant portions of the Company's deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below, in thousands:
1999 1998 ------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards................... $ 15,062 $ 16,402 Impairment loss.................................... 18,783 - Accumulated pension and other postretirement benefit obligations.................................... 8,159 10,185 Provision for loss on devalued assets.............. 2,805 2,724 Accrued vacation................................... 2,638 2,263 Airframe return provision.......................... 2,437 1,271 Accounts receivable, principally due to allowance for doubtful accounts.......................... 200 200 Alternative minimum tax credit..................... 446 Other.............................................. 2,049 1,027 ---------- ------------ Total gross deferred tax assets................ 52,579 34,072 Less valuation allowance allocated to pre-reorganization deferred tax assets...... (14,047) (24,114) ---------- ------------ 38,532 9,958 Less valuation allowance allocated to post-reorganization deferred tax assets (3,970) (401) ---------- ------------ Net deferred tax assets........................ 34,562 9,557 Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation.................... (12,562) (9,557) ---------- ------------ Net deferred taxes............................. $ 22,000 $ - ========== =============
As of December 31, 1999, the Company had net deferred tax assets aggregating $22.0 million based on gross deferred tax assets of $52.5 million less a valuation allowance of $18 million and deferred tax liabilities of $12.5 million. The valuation allowance for deferred tax assets as of December 31, 1999, 1998 and 1997 was $18 million, $24.5 million and $34.1 million, respectively. The net change in the total valuation allowance was a decrease of $6.5 million, $9.6 million and $1.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Any reduction to the pre-reorganization valuation allowance presented above will result in a reduction of Excess Reorganization Value. Utilization of the Company's deferred tax assets are predicated on the Company being profitable in future years. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company will continually assess the adequacy of its financial performance in determination of its valuation allowance which, should there be an adjustment required, may result in an adverse effect on the Company's income tax provision. The Company underwent an ownership change in January 1996, as defined under Section 382 of the Internal Revenue Code ("IRC Section 382"). IRC Section 382 places an annual limitation on the amount of income that can be offset by net operating loss carryforwards generated in pre-ownership change years. The ownership change resulted in an IRC Section 382 limitation of approximately $1.7 million plus certain "built-in" income items. This new limitation applies to all net operating losses incurred prior to the ownership change. As of December 31, 1999, the Company has total net operating loss carryovers of approximately $37.6 million to offset future taxable income. If not utilized to offset future taxable income, the net operating loss carryforwards will expire between the years 2003 and 2009. Utilization of approximately $25 million of net operating loss carryforwards will first result in a $10 million reduction of deferred tax assets. Utilization of the remaining $12 million of net operating loss carryforwards will result in a $5 million reduction in Excess Reorganization Value. F-17 8. BENEFIT PLANS DEFINED BENEFIT PENSION PLANS The Company sponsors three defined benefit pension plans covering its Air Line Pilots Association, International ("ALPA"), International Association of Machinists and Aerospace Workers (AFL-CIO) ("IAM") and salaried personnel. The plans for the IAM and salaried employees were frozen effective October 1, 1993. As a result of the freeze, there will be no further benefit accruals and no additional participants in those plans. Pension cost for the pilots plan is funded on a current basis based on the amortization of prior service cost over 20 years. Funding for the ground personnel plans is based on minimum Employee Retirement Income Security Act of 1974 requirements. Plan assets consist primarily of common stocks, government and convertible securities, insurance contract deposits and cash management and mutual funds. In addition to providing pension benefits, the Company sponsors two unfunded defined benefit postretirement medical and life insurance plans. Employees in the Company's pilot group are eligible for certain medical and life insurance benefits under one plan if they become disabled or reach normal retirement age while working for the Company. Employees in the Company's non-pilot group are eligible for certain medical benefits under another plan if they meet specified age and service requirements at the time of retirement. F-18 The following tables summarize changes to benefit obligations, plan assets, funded status and amounts included in the accompanying balance sheets as of December 31, 1999 and 1998, in thousands:
Pension Benefits Other Benefits Change in benefit obligation 1999 1998 1999 1998 - ----------------------------------------------------- --------- --------- --------- --------- Benefit obligation at beginning of year ......... $ 183,014 $ 163,792 $ 14,139 $ 13,909 Service cost..................................... 4,172 4,047 730 739 Interest cost.................................... 12,656 12,078 950 1,037 Actuarial (gain) loss............................ (8,023) 11,857 (639) (901) Benefits paid.................................... (9,246) (8,760) (632) (645) --------- --------- --------- --------- Benefit obligation at end of year................ 182,573 183,014 14,548 14,139 --------- --------- --------- --------- Change in plan assets - ----------------------------------------------------- Fair value of assets at beginning of year........ 158,684 160,770 - - Actual return on plan assets..................... 20,981 1,869 - - Employer contribution............................ 8,221 4,805 632 645 Benefits paid.................................... (9,246) (8,760) (632) (645) --------- --------- --------- --------- Fair value of assets at end of year.............. 178,640 158,684 - - --------- --------- --------- --------- Funded status.................................... (3,933) (24,330) (14,548) (14,139) Unrecognized actuarial net (gain) loss........... 10,228 25,435 (12,145) (12,434) --------- --------- --------- --------- Prepaid accrued benefit cost at end of year...... $ 6,295 $ 1,105 $ (26,693) $ (26,573) ========= ========= ========= ========= Amounts recognized in the accompanying balance sheets - ----------------------------------------------------- Prepaid benefit cost............................. $ 17,642 $ 14,120 $ - $ - Accrued benefit liability........................ (11,347) (17,521) (26,693) (26,573) Intangible asset................................. - - - Accumulated other comprehensive loss............. - 4,506 - - --------- --------- --------- --------- Prepaid (accrued benefit cost at end of year..... $ 6,295 $ 1,105 $ (26,693) $ (26,573) ========= ========= ========= ========= Weighted average assumptions at end of year - ----------------------------------------------------- Discount rate.................................... 7.5% 7.0% 7.0% 7.0% Expected return on plan assets................... 9.0% 9.0% Not applicable Not applicable Rate of compensation increase.................... 4.5% 4.5% 4.5% 4.5%
At December 31, 1997, the discount rate, expected return on plan assets and rate of compensation increase for pension benefits was 7.5%, 9.0% and 4.5%, respectively. At December 31, 1997, the discount rate and rate of compensation increase for other benefits was 7.0% and 4.5%, respectively. The rate of compensation increase is not applicable to the frozen plans. At December 31, 1999, the health care cost trend rate was assumed to increase by 7.3% for 2000 and decrease gradually to 4.0% over 7 years and remain level thereafter. At December 31, 1998, the health care cost trend rate was assumed to increase by 7.3% for 1999 and decrease gradually to 4.0% over 8 years and remain level thereafter. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for plans with accumulated benefit obligations in excess of plan assets were $124.8 million, $114.7 million and $106.7 million, respectively, as of December 31, 1999 and $136.1 million, $122.7 million and $105.2 million, respectively, as of December 31, 1998. F-19 The following table sets forth the net periodic benefit cost for the years ended December 31, 1999, 1998 and 1997:
Pension Benefits Other Benefits ---------------- -------------- Components of Net Periodic Benefit Cost 1999 1998 1997 1999 1998 1997 - ------------------------------------- -------- -------- -------- -------- -------- -------- Service cost..................... $ 4,172 $ 4,047 $ 3,609 $ 730 $ 739 $ 714 Interest cost.................... 12,656 12,078 11,506 950 1,037 1,044 Expected return on plan assets... (14,342) (13,473) (12,607) - - - Recognized net actuarial (gain) loss 544 - - (928) (861) (823) -------- -------- -------- -------- -------- -------- Net periodic benefit cost... $ 3,030 $ 2,652 $ 2,508 $ 752 $ 915 $ 935 ======== ======== ======== ======== ======== ========
Assumed health care cost trend rates have a significant impact on the amounts reported for other benefits. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- --------------- Effect on total of service and interest cost components................................... $ 251,000 $ (206,000) Effect on postretirement benefit obligation...... $ 1,859,000 $ (1,558,000)
OTHER BENEFIT PLANS The Company sponsors separate deferred compensation plans (401(k)) for its pilots, flight attendants and ground and salaried personnel. Participating employer cash contributions are not required under the terms of the pilots' plan. The Company is required to contribute up to 7.0% of defined compensation pursuant to the terms of the flight attendants' plan. Contributions to the flight attendants' plan are funded currently and totaled approximately $1.4 million, $1.3 million and $1.1 million in 1999, 1998 and 1997, respectively. The Company is also required to contribute 4.0% of eligible earnings to the ground and salaried plan for eligible employees as defined by the plan. Contributions to the ground and salaried 401(k) plan totaled $2.1 million, $2.0 million and $1.8 million in 1999, 1998 and 1997, respectively. The Company further sponsors a profit sharing plan, which provides all employees (other than senior management) with cash bonuses if the Company achieves certain pre-tax profit levels. At December 31, 1998, the Company had provided for approximately $760,000 under the provisions of the profit sharing plan, with distribution of the amounts, as defined by the plan, made in first quarter 1999. 9. CAPITAL STOCK, WARRANTS, RIGHTS AND OPTIONS AUTHORIZED CAPITAL STOCK As of December 31, 1999 and 1998, the authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, par value $.01 per share, and 2,000,000 shares of Special Preferred Stock, par value $.01 per share. Under the terms of the Credit Facility, the Company is restricted from paying any cash or stock dividends. No dividends were paid by the Company in 1999 or 1998. In March 2000, the Company announced that its Board of Directors approved a stock repurchase program authorizing the Company to buy up to 5 million shares of its Common Stock. Under the approved stock repurchase plan, the Company may repurchase Common Stock from time to time in the open market and in private transactions. The amount and timing of any repurchases will be subject to a number of factors, including the price and availability of the Company's stock and general market conditions. F-20 SPECIAL PREFERRED STOCK Four shares of Series B Special Preferred Stock are owned by Airline Investors Partnership, L.P. ("AIP") with such shares entitling AIP to nominate directors. The Association of Flight Attendants ("AFA"), IAM and ALPA each hold one share of Series C Special Preferred Stock, Series D Special Preferred Stock and Series E Special Preferred Stock, respectively, (collectively the "Special Preferred Stock") which entitle each union to nominate one director. The holders of each series of the Special Preferred Stock are entitled to fill a vacancy on the Board of Directors caused by the removal, resignation or death of a director nominated by that series if the Board fails to fill such vacancy within 30 days. AIP has agreed with each of IAM, ALPA and AFA that so long as the right to have a representative on the Board is in its respective collective bargaining agreement, AIP will vote its shares in favor of such union's nominee for the Board of Directors. In addition to the rights described above, the Special Preferred Stock (1) is senior to Common Stock and each series is pari passu with each other with respect to rights on liquidation, dissolution and winding up and will be entitled to receive $.01 per share, and no more, before any payments are made to holders of any stock ranking junior to the Special Preferred Stock; (2) has no dividend rights other than at any time that a dividend is declared and paid on the Common Stock dividends in an amount per share equal to twice the dividend per share paid on the Common Stock will be paid on the Special Preferred Stock; (3) is entitled to one vote per share and votes with the Common Stock as a single class on all matters submitted to the shareholders of the Company; (4) automatically converts into one share of Common Stock upon the transfer of such share from the person to whom originally issued to any person that is not an affiliate of such person; and (5) does not have preemptive rights in connection with future issuances of the Company's capital stock. SHAREHOLDER RIGHTS PLAN In December 1994, the Board of Directors of the Company authorized adoption of a shareholder rights plan (the "Rights Plan") pursuant to which there would be attached to each share of Common Stock of the Company one preferred stock purchase right (a "PSP Right"). The Rights Plan, as amended, provides that in the event any person (with certain exceptions) becomes the beneficial owner of 15.0% or more of the outstanding common shares, each PSP Right (other than a PSP Right held by the 15.0% shareholder) will be exercisable, on and after the close of business on the tenth business day following such event, to purchase Hawaiian Airlines Common Stock at 50% of the market value of such stock. The Rights Plan further provides that if, on or after the occurrence of such event, the Company is merged into any other corporation or 50.0% or more of the Company's assets or earning power are sold, each PSP Right (other than a PSP Right held by the 15.0% shareholder) will be exercisable to purchase common shares of the acquiring corporation at 50% of the market value of such stock. The PSP Rights expire on December 1, 2004 (unless previously triggered) and are subject to redemption by the Company at $0.01 per PSP Right at any time prior to the first date upon which they become exercisable. WARRANTS In January 1996, due to its participation in certain recapitalization efforts of the Company, American's parent company, AMR Corporation ("AMR"), received, among other things, warrants (the "AMR Warrants") which, subject to certain conditions, entitled AMR to purchase up to 1,949,338 shares of the Company's Common Stock at $1.07 per share, as adjusted pursuant to applicable anti-dilution provisions. One-half of the warrants were exercisable immediately and the remaining one-half were to become exercisable only if American and the Company entered into a code sharing arrangement. In July 1997, the Company consummated the code share marketing agreement with American. All of the warrants became exercisable upon implementation of the code share agreement with American on March 2, 1998. If not exercised, the warrants expire on September 11, 2001. The estimated fair value of the codeshare agreement and the underlying warrants approximated $2.3 million and has been reflected in the accompanying balance sheets as warrants and other assets. The amount included in other assets is being amortized on a straight-line basis over five years from the implementation date of the code share agreement. STOCK OPTION PLANS Under the 1994 Stock Option Plan, 600,000 shares of Common Stock were reserved for grants of options to officers and key employees of the Company. Under the 1996 Stock Incentive Plan, as amended, 4,500,000 shares of Common Stock were reserved for issuance of discretionary grants of options to the Company's employees. The Company also has a 1996 Nonemployee Director Stock Option Plan which reserves 500,000 shares of Common Stock for issuance and grants of options to members of the Board of Directors. Stock options are granted with an exercise price equal to the Common Stock's fair market value at the date of grant, generally vest over a period of four years and expire, if not previously exercised, 10 years from the date of grant. F-21 Stock option activity during the periods indicated is as follows:
Weighted average of exercise Shares of Common Stock price of Available for Under shares under options Plan plan ------------------------------ --------------- Balance at December 31, 1996 1,618,500 774,000 $ 2.36 ========= Granted 1996 Stock Incentive Plan (150,000) 150,000 4.06 Exercised 1994 Stock Option Plan - (307,500) 1.62 Forfeited 1996 Stock Incentive Plan 72,000 (72,000) 3.56 --------- -------- Balance at December 31, 1997 1,540,500 544,500 $ 3.09 ========= Authorized 1996 Stock Incentive Plan 2,500,000 - - Granted 1996 Stock Incentive Plan (1,035,000) 1,035,000 3.50 1996 Nonemployee Director Stock Option Plan (56,000) 56,000 3.50 Exercised 1994 Stock Option Plan - (112,500) 1.62 Forfeited 1996 Stock Incentive Plan 28,000 (28,000) 3.56 --------- --------- Balance at December 31, 1998 2,977,500 1,495,000 $ 3.49 ========= Granted 1996 Stock Incentive Plan (200,000) 200,000 2.34 1996 Nonemployee Director Stock Option Plan (32,000) 32,000 2.31 Forfeited 1996 Stock Incentive Plan 45,000 (45,000) 3.50 1996 Nonemployee Director Stock Option Plan 25,000 (25,000) 3.69 --------- --------- Balance at December 31, 1999 2,815,500 1,657,000 $ 3.33 ========= ========= =========
As of December 31, 1999, vesting requirements and exercise periods under each respective plan are as follows: Vesting Exercise Period ------- --------------- 1994 Stock Option Plan Fully vested Through 2005 1996 Stock Incentive Plan Various from Various from 2000 through 2003 2000 through 2009 1996 Nonemployee Director Through 2000 Various from Stock Option Plan 2000 through 2009 At December 31, 1999, the range of exercise prices and weighted-average remaining contractual lives of outstanding options was $1.62 to $4.06 and 7.3 years, respectively. At December 31, 1999, 1998 and 1997, the number of options exercisable was 646,500, 316,000 and 322,500, respectively, with weighted-average exercise prices of $3.42, $3.14 and $2.53, respectively. F-22 The Company applies APB Opinion No. 25 in accounting for stock options. Had the Company determined compensation cost based on the fair value at the grant date of the respective options under SFAS No. 123, the Company's net income (loss) would have been reduced or increased to the pro forma amounts indicated below: 1999 1998 1997 ------------------------------------- Net Income (Loss) As reported $(29,267) $ 8,205 $(1,022) Pro forma $(29,933) $ 7,146 $(1,322) Basic earnings per share As reported $ (0.72) $ 0.20 $ (0.03) Pro forma $ (0.73) $ 0.17 $ (0.03) Diluted earnings per share As reported $ (0.72) $ 0.19 $ (0.03) Pro forma $ (0.73) $ 0.17 $ (0.03) The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 was $1.22, $1.78 and $1.81, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 1997 ----------------------------------------------------- Expected dividend yield 0.0% 0.0% 0.0% Expected volatility 34.0% 40.0% 40.0% Risk-free interest rate 5.38% to 6.36% 5.76% 6.30% to 6.40% Expected life Up to 7 years Up to 7 years Up to 6 years Pro forma net income (loss) reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the various options' vesting periods and compensation cost for options granted prior to January 1, 1997 is not considered. 10. COMMITMENTS AND CONTINGENT LIABILITIES AIRCRAFT COMMITMENTS As discussed in Note 4, in September 1999, the Company announced that, subject to the negotiation and execution of a definitive agreement, it had accepted an offer from The Boeing Company ("Boeing") to purchase up to 20 Boeing 717-200 aircraft to replace its present Interisland DC-9 fleet. On December 31, 1999, the Company signed, subject to approval by the Company's Board of Directors, a definitive purchase agreement with Boeing to acquire 13 new Boeing 717-200 aircraft, with rights to purchase an additional seven aircraft. On March 2, 2000, the Company announced that the Board of Directors had approved the definitive purchase agreement with Boeing. The firm order is valued at approximately $430 million at Boeing's list price for the 717-200. The agreement provides for monthly deliveries of the thirteen 717-200 aircraft between February and December 2001, with two units to be delivered in June and September 2001. The agreement also requires the Company to fund through June 2001, a total of $20.0 million toward the acquisition of the aircraft. As of December 31, 1999, the Company had made approximately $7.2 million of these progress payments. The Company intends to use lease financing provided through Boeing upon delivery of each aircraft. In connection with its decision to replace these aircraft, the Company performed an evaluation to determine, in accordance with SFAS No. 121, whether future cash flows (undiscounted and without interest charges) expected to result from the use and eventual disposition of these aircraft would be less than the aggregate carrying amounts of these aircraft and the related assets. As a result of the evaluation, management determined that the estimated future cash flows expected to be generated by these aircraft would be less than their carrying amount, and therefore these aircraft are impaired as defined by SFAS No. 121. Consequently, the original cost basis of these aircraft and related items was reduced to reflect the fair market value as of December 31, 1999. In determining the fair market value of these assets, the Company considered recent transactions involving sales of similar aircraft and market trends in aircraft dispositions. The evaluation performed under the guidelines of SFAS No. 121 resulted in a $47 million pre-tax, non-cash impairment loss being recorded in fourth quarter 1999. The Company may incur restructuring charges throughout the year 2000 as it proceeds with its narrow-body fleet transition plan. The Company at this time cannot determine the total restructuring charges, if any, that may be incurred. F-23 LITIGATION AND CONTINGENCIES All claims asserted against the Company for alleged prepetition and/or administrative claims on or before the Effective Date of the Company's reorganization have been resolved utilizing reserved Common Stock shares and the Company's Chapter 11 Bankruptcy proceeding has been closed. The Company is party to several other claims and legal actions. In 1999, the Department of Taxation of the State of Hawaii informally advised the Company that it was prepared to issue proposed tax assessment notices to the Company's lessors of DC-9 aircraft under operating leases for general excise tax liability on the lease rent paid to such lessors. Pursuant to the leases, the Company would, subject to certain defenses, including but not limited to the Company's prior discharge in bankruptcy of certain obligations, be liable to the lessors for such taxes and possibly interest and penalties thereon. In the opinion of management, an adequate reserve for this contingency has been established in the accompanying balance sheets and, after consultation with legal counsel, management believes that the ultimate disposition of this matter will not have a material adverse effect on the Company's operations or financial condition. LOS ANGELES AIRPORT OPERATING TERMINAL On December 1, 1985, the Company entered into an interline agreement with other airlines, which agreement was amended and restated as of September 1, 1989 for, among other things, the sharing of costs, expenses and certain liabilities related to the acquisition, construction and renovation of certain passenger terminal facilities at the Los Angeles International Airport ("Facilities"). Current tenants and participating members of LAX Two Corporation (the "Corporation"), a mutual benefit corporation, are jointly and severally obligated to pay their share of debt service payments related to Facilities Sublease Revenue Bonds issued to finance the acquisition, construction and renovation of the Facilities which totaled $111.9 million at completion. The Corporation leases the Facilities from the Regional Airports Improvement Corporation under a lease agreement. In addition, the Corporation is also obligated to make annual payments to the city of Los Angeles for charges related to its terminal ground rental. All leases of the Corporation are accounted for as operating leases with related future commitments as of December 31, 1999 amounting to approximately $232.9 million. Rent expense relating to these operating leases totaled $4.7 million, $4.9 million and $5.0 million in 1999, 1998 and 1997, respectively. Member airlines pay the expenses associated with the Facilities on a prorata share basis calculated primarily upon their respective numbers of passengers utilizing the Facilities. The Company accounts for its obligation under this agreement as an operating lease and incurred $605,000, $592,000 and $338,000 of rent expense in 1999, 1998 and 1997, respectively. 11. RELIANCE ON THIRD PARTIES The Company has entered into agreements with contractors, including American, Northwest Airlines, Inc. ("Northwest"), Continental Airlines, Inc. ("Continental") and certain other airlines, to provide certain facilities and services required for its operations, including aircraft leasing and maintenance, code sharing, reservations, computer services, frequent flyer programs, passenger processing, ground facilities, baggage and cargo handling and personnel training. This reliance on third parties to provide services subjects the Company to the risk that such services could be discontinued without adequate replacement services being available. The Company leases ten DC-10 aircraft from American. American is responsible for maintenance on all but one of the Company's DC-10 aircraft (leased and owned) with the Company having access to spare parts, engines and rotables for the maintenance of these aircraft. As such, the Company does not maintain large inventories of spare engines or parts to support the operation of the DC-10 aircraft. The Company pays a minimum monthly charge for maintenance services, monthly in arrears. During 1999, the Company incurred approximately $78.5 million of lease and maintenance expenses under the American leases and aircraft maintenance agreements. Maintenance performed by American on applicable leased and owned DC-10 aircraft of the Company is subject to American's right to terminate such services at any time with 180 days prior notice. If American terminated the maintenance arrangement, the Company would have to seek an alternate source of maintenance service or undertake to maintain its DC-10s internally. No assurance can be given that the Company would be able to do so on a basis that is as cost-effective as the American maintenance arrangement. See Notes 4 and 5. F-24 The Company has code sharing agreements with American, American Eagle carrier Wings West Airlines, Inc., Northwest and Continental. The Company also participates in the frequent flyer programs of American, Northwest and Continental. These programs and services make the Company more competitive, but increase its reliance on third parties. In 1999 and 1998, one particular Hawaii-based wholesaler constituted approximately 13% of the Company's total operating revenues. Travel agents generally have a choice between one or more airlines when booking a customer's flight. Accordingly, any effort by travel agencies to favor another airline or to disfavor the Company could adversely affect the Company. Although management intends to continue to offer an attractive and competitive product to travel agencies and to maintain favorable relations with travel agencies, there can be no assurance that travel agencies will not disfavor the Company or favor other airlines in the future, either of which could have an adverse effect on the Company's operations and profitability. 12. CONCENTRATION OF BUSINESS RISK The Company's scheduled service operations are primarily focused on providing air transportation service to, from, or throughout the Hawaiian Islands. Therefore, the Company's operations, including its ability to collect its outstanding receivables, are significantly affected by economic conditions in the State of Hawaii and by other factors affecting the level of tourism in Hawaii. 13. SEGMENT INFORMATION The Company operates as a matrix form of organization and offers only one service (i.e., air transportation), resulting in management concluding that it operates one industry segment. The Company's principal line of business, the scheduled and chartered transportation of passengers, constitutes more than 90% of its operating revenues. The following table delineates scheduled and chartered passenger revenue of the Company, in thousands: 1999 1998 1997 ------------------------------------ Transpac $236,234 $196,670 $180,424 Interisland 144,131 138,614 132,626 Southpac 19,886 18,961 19,104 Overseas Charter 46,570 35,742 37,172 -------- -------- -------- $446,821 $389,987 $369,326 ======== ======== ======== F-25
Hawaiian Airlines, Inc. Supplemental Financial Information Unaudited Quarterly Financial Information (in thousands, except for per share data) First Quarter Second Quarter Third Quarter Fourth Quarter - ----------------------------------------------------------------------------------------------------------------------- 1999:* Operating revenues $109,675 $121,973 $134,826 $122,403 Operating income (loss) 1,139 4,008 6,925 (52,609) Net income (loss) (169) 1,708 3,382 (34,188) Net income (loss) per Common Stock share Basic -- 0.04 0.08 (0.83) Diluted -- 0.04 0.08 (0.83) First Quarter Second Quarter Third Quarter Fourth Quarter - ----------------------------------------------------------------------------------------------------------------------- 1998: Operating revenues $100,245 $109,003 $115,532 $101,635 Operating income (loss) (1,918) 6,063 11,510 1,750 Net income (loss) (1,100) 2,940 6,134 231 Net income (loss) per Common Stock share Basic (0.03) ** 0.07 ** 0.15 ** 0.01 Diluted (0.03) ** 0.07 ** 0.15 ** 0.01
* During fourth quarter of 1999, the Company changed its method of accounting for the sale of mileage credits under its frequent flyer program. Therefore, effective January 1, 1999, the Company recorded a $772,000 cumulative effect of a change in accounting principle, net of tax, and has restated the quarterly information for 1999 presented herein. ** Includes shares reserved for issuance under the consolidated Plan of Reorganization dated September 21, 1993, as amended. F-26 Hawaiian Airlines, Inc. Selected Financial and Statistical Data (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Summary of Operations: Operating revenues ........................................ $ 488,877 $ 426,415 $ 404,216 $ 384,473 $ 346,904 Operating expenses ........................................ 529,414 409,010 401,714 382,446 348,805 --------- --------- --------- --------- --------- Operating income (loss) ................................... (40,537) 17,405 2,502 2,027 (1,901) Interest expense, net ..................................... (1,071) (403) (394) (2,432) (3,579) Gain (loss) on disposition of equipment ................... (1,013) (831) (140) (729) (233) Other, net ................................................ 2,708 (163) (820) (297) 207 --------- --------- --------- --------- --------- Income (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle ... (39,913) 16,008 1,148 (1,431) (5,506) Income taxes .............................................. 11,418 (7,803) (1,720) (868) -- --------- --------- --------- --------- --------- Net income (loss) before extraordinary items and cumulative effect of change in accounting principle .............. (28,495) 8,205 (572) (2,299) (5,506) Extraordinary items, net of income taxes .................. -- -- -- 766 -- --------- --------- --------- --------- --------- Net income (loss) before cumulative effect of change in accounting principle .................................. (28,495) 8,205 (572) (1,533) (5,506) Cumulative effect of change in accounting principle, net of income taxes .......................................... (772) -- (450) -- -- --------- --------- --------- --------- --------- Net income (loss) ......................................... $ (29,267) $ 8,205 $ (1,022) $ (1,533) $ (5,506) ========= ========= ========= ========= =========
F-27
Hawaiian Airlines, Inc. Selected Financial and Statistical Data (in thousands, except per share data) (continued) - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------------------------------------------------------------- Net Income (Loss) per Common Stock Share: Basic Before extraordinary items and cumulative effect of change in accounting principle ..................... $ (0.70) $ 0.20 $ (0.02) $ (0.08) $ (0.59) Extraordinary items, net ............................... -- -- -- 0.03 -- Cumulative effect of change in accounting principle, net (0.02) -- (0.01) -- -- --------- --------- --------- --------- --------- Net income (loss) per Common Stock share ............... $ (0.72) $ 0.20 $ (0.03) $ (0.05) $ (0.59) ========= ========= ========= ========= ========= Diluted Before extraordinary items and cumulative effect of change in accounting principle ..................... $ (0.70) $ 0.19 $ (0.02) $ (0.08) $ (0.59) Extraordinary items, net ............................... -- -- -- 0.03 -- Cumulative effect of change in accounting principle, net (0.02) -- (0.01) -- -- --------- --------- --------- --------- --------- Net income (loss) per Common Stock share ............... $ (0.72) $ 0.19 $ (0.03) $ (0.05) $ (0.59) ========= ========= ========= ========= ========= Weighted Average Shares Outstanding: Basic .................................................. 40,997 40,921* 40,361* 29,032* 9,400* Diluted ................................................ 40,997 42,205* 40,361* 29,032* 9,400* Shareholders' Equity Per Share (Without Dilution) ........... $ 1.61 $ 2.22 $ 2.12 $ 2.11 $ 3.10 Shares Outstanding at End of Period ......................... 40,997 40,997* 40,889* 39,262* 9,400* Balance Sheet Items: Total assets ........................................... $ 239,137 $ 221,911 $ 200,824 $ 196,289 $ 161,640 Property and equipment, net ............................ 65,272 84,922 66,243 45,794 41,391 Long-term debt, excluding current portion .............. 23,858 14,454 3,991 6,353 5,523 Capital lease obligations, excluding current portion ... 2,790 5,966 10,580 7,387 10,102 Shareholders' equity ................................... 66,126 90,887 86,873 82,873 29,178
* Includes shares reserved for issuance under the Consolidated Plan of Reorganization dated September 21, 1993, as amended. F-28
Hawaiian Airlines, Inc. Selected Financial and Statistical Data (in thousands, except as otherwise indicated) (unaudited) (continued) - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Scheduled Operations: Revenue passengers ................. 5,425 5,010 4,964 4,971 4,781 Revenue passenger miles ............ 4,076,576 3,649,024 3,479,056 3,324,005 3,171,366 Available seat miles ............... 5,468,589 4,940,001 4,699,609 4,571,955 4,238,319 Passenger load factor .............. 74.5% 73.9% 74.0% 72.7% 74.8% Passenger revenue per passenger mile 9.8(cent) 9.7(cent) 9.5(cent) 9.8(cent) 9.4(cent) Overseas Charter Operations: Revenue passengers ................. 283 250 253 190 155 Revenue passenger miles ............ 803,524 689,578 683,384 515,982 425,797 Available seat miles ............... 852,155 733,735 739,619 528,787 439,142 Total Operations: Revenue passengers ................. 5,708 5,260 5,217 5,161 4,936 Revenue passenger miles ............ 4,880,100 4,338,602 4,162,440 3,839,987 3,597,163 Available seat miles ............... 6,320,744 5,673,736 5,439,228 5,100,742 4,677,461 Passenger load factor .............. 77.2% 76.5% 76.5% 75.3% 76.9% Revenue Per ASM .................... 7.73(cent) 7.52(cent) 7.43(cent) 7.54(cent) 7.42(cent) Cost Per ASM ....................... 8.38(cent) 7.21(cent) 7.39(cent) 7.50(cent) 7.46(cent)
F-29 REPORT OF INDEPENDENT AUDITORS The Board of Directors Hawaiian Airlines, Inc.: We have audited the financial statements of Hawaiian Airlines, Inc. (the "Company") as of December 31, 1999, and for the year ended December 31, 1999, and have issued our report thereon dated March 21, 2000 (included elsewhere in this Form 10-K). Our audit also included the financial statement schedule for the year ended December 31, 1999 listed in item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Honolulu, Hawaii March 21, 2000 S-1a Independent Auditors' Report On Schedule The Board of Directors Hawaiian Airlines, Inc.: Under date of March 11, 1999, we reported on the balance sheet of Hawaiian Airlines, Inc. as of December 31, 1998, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 1998, which are included herein. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule of Hawaiian Airlines, Inc. for the two-year period ended December 31, 1998. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Honolulu, Hawaii March 11, 1999 S-1b Hawaiian Airlines, Inc. Valuation and Qualifying Accounts (in thousands) Years Ended December 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ------------------------------ (1) (2) Balance at Charged to Charged to Balance Beginning Costs and Other at End Description of Year Expenses Accounts Deductions of Year - ---------------------------------------------------------------------------------------------------------------------------- Allowance for Doubtful Accounts: 1999 $ 500 1,060 - 1,060 (a) $ 500 ==================================================================== 1998 $ 500 350 - 350 (a) $ 500 ==================================================================== 1997 $ 500 456 - 456 (a) $ 500 ==================================================================== Allowance for Obsolescence of Flight Equipment Expendable Parts and Supplies: 1999 $ 120 - - - $ 120 ==================================================================== 1998 $ 120 - - - $ 120 ==================================================================== 1997 $ 315 - - 195 (b) $ 120 ====================================================================
(a) Doubtful accounts written off, net of recoveries (b) Obsolete parts and supplies written off S-2 EX-10.6 2 EXHIBIT 10.6 EXECUTION COPY SUBLEASE AGREEMENT 060 Dated as of October 26, 1999 between CONTINENTAL MICRONESIA, INC. Sublessor and HAWAIIAN AIRLINES, INC. Sublessee One McDonnell Douglas DC-10-30 Aircraft N68060 ---------------------------------------------- TO THE EXTENT THAT THIS SUBLEASE AND ANY SUBLEASE SUPPLEMENT CONSTITUTE CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED IN THIS SUBLEASE THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". TABLE OF CONTENTS Section Page Article 1. Definitions and Accounting Terms.................................1 1.1 Definitions......................................................1 1.2 Accounting Terms.................................................6 Article 2. Delivery and Acceptance..........................................6 2.1 Agreement to Sublease ...........................................6 2.2 Conditions Precedent to Sublease of Aircraft by Sublessee........7 2.3 Conditions Precedent to Sublease of Aircraft by Sublessor........7 2.4 Aircraft Delivery Condition; Inspection..........................8 2.5 Reconfiguration and Painting Costs...............................9 2.6 Reimbursement of Costs...........................................9 Article 3. Term and Rent...................................................10 3.1 Term............................................................10 3.2 Basic Rent and Maintenance Reserves.............................10 3.3 Payments on Business Days.......................................11 3.4 Supplemental Rent...............................................11 3.5 Place of Payments...............................................12 3.6 No Set-off, Counterclaim, etc...................................12 Article 4. Representations, Warranties; Disclaimers........................13 4.1 Of Sublessee....................................................13 4.2 Of Sublessor....................................................14 4.3 Subordination of Sublease to Head Lease.........................16 Article 5. Registration, Possession, Maintenance, Operation................17 5.1 Registration and Insignia.......................................17 5.2 Possession......................................................17 5.3 Maintenance.....................................................18 5.4 Operation.......................................................19 Article 6. Replacement and Pooling of Parts, Alterations, Modifications and Additions.......................................................20 6.1 Replacement of Parts............................................20 6.2 Title to Parts..................................................21 6.3 Alterations, Modifications and Additions........................21 Article 7. Loss, Destruction, Requisition..................................22 7.1 Event of Loss with Respect to Airframe..........................22 7.2 Event of Loss with Respect to an Engine.........................23 7.3 Documents Required in Connection with Substitution..............23 7.4 Application of Payments from Governmental Authorities for Requisition of Title............................24 7.5 Requisition of Aircraft for Use by the Government...............25 7.6 Application of Payments During Existence of Event of Default....25 7.7 Replacement of Engines..........................................25 Article 8. Insurance.......................................................26 8.1. Public Liability and Property Damage Insurance..................26 8.2 Insurance Against Loss or Damage to Aircraft....................27 8.3 Government Indemnity............................................28 8.4 Application of Insurance Proceeds...............................28 8.5 Application of Insurance Proceeds for Other Than Event of Loss..29 8.6 Application in Default..........................................29 8.7 Certificates of Insurance.......................................29 8.8 Insurance of Sublessee's Interest...............................30 Article 9. .............................................Liens and Indemnities 30 9.1 Liens...........................................................30 9.2 General Indemnity...............................................31 9.3 General Tax Indemnity...........................................33 9.4 Survival........................................................36 Article 10. Inspection; Financial Statements and Other Information.....................................................36 10.1 Inspection......................................................36 10.2 Financial Statements and Other Information......................36 Article 11. Recordation and Further Assurances..............................37 Article 12. Return of Aircraft..............................................37 12.1. Return..........................................................37 12.2 Records.........................................................38 12.3 Condition.......................................................38 Article 13. Events of Default...............................................38 Article 14. Remedies........................................................39 14.1 Default; Remedies...............................................39 14.2 No Waiver, Etc..................................................41 Article 15. Miscellaneous...................................................41 15.1 Notices.........................................................41 15.2 Right to Perform for Sublessee..................................42 15.3 Assignment by Sublessee.........................................42 15.4 Assignment by Sublessor.........................................44 15.5 Quiet Enjoyment.................................................44 15.6 Investment of Funds.............................................45 15.7 Confidentiality.................................................45 15.8 Applicable Law..................................................45 Exhibit A Sublease Supplement Schedule 1 Certain Financial Terms SUBLEASE AGREEMENT 060, dated as of October 26, 1999, between CONTINENTAL MICRONESIA, INC., a Delaware corporation ("Sublessor"), and HAWAIIAN AIRLINES, INC., a Hawaii corporation ("Sublessee"). ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS Section 1.1. Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Sublease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time. The word "including" means "including without limitation". "Act" means that portion of the United States Code comprising the provisions formerly referred to as the Federal Aviation Act of 1958, as amended from time to time. "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Aircraft" means the Airframe which is Subleased hereunder, together with each Engine initially installed on the Airframe when delivered and Subleased hereunder and described on the Sublease Supplement for the Airframe (or any engine substituted for any of such Engines pursuant to Section 7.1, 7.2, 7.7 or 12.2 hereof), whether or not any of such initial or substituted Engines may from time to time be installed on the Airframe. "Airframe" means (a) the McDonnell Douglas Model DC-10-30 aircraft (excluding Engines or engines from time to time installed thereon but including quick engine change kits, which shall be deemed to be part of the Airframe) described on the Sublease Supplement executed on the Delivery Date and Subleased hereunder by Sublessor to Sublessee, and (b) any and all Parts so long as the same shall be incorporated in such airframe and any and all Parts removed from such airframe so long as title to such Parts shall remain vested in Sublessor in accordance with the terms of Section 6. "Basic Rent" means the rent payable for the Aircraft pursuant to Section 3.2 hereof. "Basic Rent Payment Date" means the second day of each calendar month, commencing December 2, 1999 and concluding on January 2, 2002. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banking institutions are required or authorized to close in New York, New York or Honolulu, Hawaii. Any reference herein to "days" shall mean calendar days unless Business Days are specified. 1 "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Code. "Continental" means Continental Airlines, Inc., a Delaware corporation, and its successors and assigns. "Continental Indemnitee" means Sublessor and its successors, assigns, affiliates, directors, officers, employees, agents and servants. "Default" means any event or condition which, with notice or lapse of time or both, would constitute an Event of Default. "Delivery Date" means the date of the Sublease Supplement for the Aircraft, which date shall be the date on which the Aircraft is delivered to and accepted by Sublessee and Subleased to Sublessee hereunder, and which date shall be no later than November 15, 1999 or such later date as the parties may mutually agree. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (a) each of the three General Electric model CF6-50C2 engines listed by manufacturer's serial number in a Sublease Supplement subjecting such Engine to this Sublease, whether or not from time to time installed on such Airframe or installed on any other airframe or on any other aircraft, (b) any engine which may from time to time be substituted for an Engine pursuant to Section 7.1, 7.2, 7.7 or 12.2 hereof, whether or not from time to time installed on the Airframe or any other airframe or on any other aircraft, and (c) any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title to such Parts shall remain vested in Sublessor in accordance with the terms of Section 6; provided, however, that the term "Engine" shall not include any Engine after this Sublease shall have terminated with respect thereto. At such time as a replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means as of any date of determination, all Engines then subleased hereunder. "Equipment" means, as of any date of determination and as the context may require, any or all of the Aircraft, Airframe and Engines subleased to the Sublessee hereunder on such date. An "item of Equipment" means the Airframe or any or all of the Engines, as the context may require. "Escrow Agreement" means the escrow agreement referred to in Section 3.2(c) that shall be entered into by Sublessor, Sublessee and an escrow agent to be chosen by both of them for the deposit and withdrawal of Maintenance Reserves. "Event of Default" is defined in Section 13. 2 "Event of Loss" means, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such item of Equipment: (a) loss of such item of Equipment due to destruction, damage beyond repair or rendition of such item of Equipment unfit for normal use for any reason whatsoever; (b) any loss of or damage to such item of Equipment which results in an insurance settlement with respect to such item of Equipment on the basis of a total loss or constructive total loss; (c) the requisition of title to or condemnation of such item of Equipment; or (d) the theft, disappearance, confiscation or seizure of, or requisition of use of, such item of Equipment (other than a requisition for use by the Government or any instrumentality or agency thereof (except a requisition that (i) is determined at the time of requisition or at any time thereafter prior to the end of the Term to be for a period that will continue for more than six months beyond the end of the Term or (ii) is a requisition of any Engine or Engines, but not of the Airframe) unless and until such item of Equipment shall have been modified or adapted in such manner as would render reconversion of such item of Equipment for use in normal commercial service impractical or uneconomical)) which shall have resulted in the loss of possession of such item of Equipment by the Sublessee for 30 consecutive days, in the case of a theft or disappearance, or 90 consecutive days, in the case of a confiscation, seizure or requisition for use, or, at the request of the Sublessee, as the Owner in its absolute discretion may agree, up to 180 consecutive days. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe which constitutes a part of the Aircraft. "FAA" means the Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "Facility Lien" means any Lien on the Aircraft or any Engine granted by a Head Lessor or Owner in favor of a Lender. "Government" means the federal government of the United States of America or any instrumentality or agency thereof whose obligations are backed by the full faith and credit of the United States of America. "Head Lease" means (a) in the case of the Airframe, Lease Agreement No. I dated as of August 20, 1980 between Sublessor, as lessee, and First Security Bank, National Association, as owner trustee and lessor, and (b) in the case of any Engine leased by Sublessor but not covered by such Lease Agreement No. I, the lease agreement covering such Engine. "Head Lessor Lien" means (i) a Facility Lien, (ii) the Liens on the Airframe and Engines arising under the Head Leases, (iii) any Lien on the Airframe or any Engine created by a Head Lessor or Owner or resulting from the affirmative act of the Head Lessor or Owner that is not related to or expressly permitted by the Sublease or consented to by Sublessee, (iv) any Lien on the Airframe or any Engine resulting from claims against a Head Lessor or Owner not related to the transactions contemplated by this Sublease, and (v) any Lien resulting from Taxes imposed against a Head Lessor or Owner which are not indemnified against by Sublessee. 3 "Head Lessor" means (a) in the case of the Airframe, First Security Bank, National Association, as owner trustee and lessor under the Head Lease referred to clause (a) of the definition of "Head Lease" or any of its successors and assigns in such capacity, and (b) in the case of any Engine leased by Sublessor but not covered by the Head Lease referred to in clause (a) of the definition of "Head Lease", the lessor under the relevant Head Lease referred to in clause (b) of the definition of "Head Lease" covering such Engine. "Heavy Maintenance Reserves" means the monthly payments by Sublessee to be made pursuant to Section 3.2(c). "Indemnitee" means Sublessor, Head Lessor, Owner, Lender, their respective successors, permitted assigns, affiliates, directors, officers, employees, agents and servants. "Lender" means any bank or other financial institution providing debt financing to the Head Lessor or Owner of the Airframe or an Engine. "Lien" means any mortgage, pledge, lien, charge, encumbrance, security interest or lease in the nature thereof (including any conditional sale agreement, equipment trust agreement or other title retention agreement) affecting the title to or any interest in property. "MSA" means the Maintenance Services Agreement dated as of the date hereof between Sublessee and Continental. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Person providing such certificate. "Operative Agreements" means this Agreement and each Sublease Supplement. "Overdue Rate" means the Prime Rate plus 150 basis points. "Owner" means (a) with respect to the Airframe, Castle Harbour-I Limited Liability Company, the beneficial owner of the Aircraft, and its successors and assigns, and (b) with respect to any Engine not covered by the Head Lease referred to in clause (a) of the definition of "Head Lease", the beneficial owner of such Engine. "Parts" means all appliances, parts, instruments, avionics, appurtenances, accessories, furnishings and other equipment or components of whatever nature (other than complete Engines or engines and other than Removable Parts and any items leased by Sublessee from a third party other than Sublessor in accordance with Section 6) so long as the same shall be incorporated or installed in or attached to any item of Equipment or so long as title thereto shall remain vested in Sublessor in accordance with Section 6 hereof after removal from such item of Equipment. 4 "Permitted Lien" means (a) any Facility Lien, (b) the rights of others under agreements or arrangements expressly permitted by the terms of Section 5.2 or 6.2 hereof, (c) Liens created by a Head Lessor or Owner, (d) any Lien referred to in clauses (a) through (i) of Section 9.1 and (e) Sublessor Liens. "Permitted Sublessor/Head Lessor Liens" is defined in Section 4.2(f). "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Prime Rate" means the rate per annum announced by The Chase Manhattan Bank, N.A. as its prime commercial lending rate at its principal office in New York from time to time. "Rent" means Basic Rent and Supplemental Rent. "Rent Payment Date" means the date on which the Aircraft is delivered to Sublessee hereunder and the same day of each month thereafter during the Term. "Securities Act" means the Securities Act of 1933, as amended. "Stipulated Loss Value" as of any Stipulated Loss Value Date (a) for the Aircraft means the amount designated as Aircraft Stipulated Loss Value opposite such Stipulated Loss Value Date on Schedule 1 hereto and (b) for an Engine means the amount designated as Engine Stipulated Loss Value opposite such Stipulated Loss Value Date on Schedule 1 hereto. "Stipulated Loss Value Date" means each date for which a Stipulated Loss Value is listed on Schedule 1 hereto. "Sublease", "this Sublease", "this Agreement", "hereby", "herein", "hereof", "hereunder", or other like words mean this Sublease Agreement 060, including without limitation supplementation hereof by one or more Sublease Supplements. "Sublease Supplement" means a supplement to this Sublease substantially in the form attached as Exhibit A hereto, subjecting the Aircraft or other property to this Sublease. "Sublessor Lien" means (i) any Lien (other than a Facility Lien, a Lien created by the Head Lessor or Owner or the Lien on the Airframe or any Engine arising under the relevant Head Lease) created by Sublessor or resulting from the affirmative act of the Sublessor that is not related to or expressly permitted by the Sublease or consented to by Sublessee, (ii) any Lien resulting from claims against Sublessor not related to transactions contemplated by this Sublease, and (iii) any Lien resulting from Taxes imposed against an Indemnitee which are not indemnified against by Sublessee; but does not include any Lien resulting from Sublessor's exercise of remedies pursuant to Section 14 while an Event of Default has occurred and is continuing. 5 "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Sublessee assumes or agrees to pay to Sublessor or to or on behalf of any Indemnitee under this Sublease directly or otherwise, including (i) Stipulated Loss Value payments and (ii) all amounts required to be paid by Sublessee under the indemnities contained in Article 9 hereof. "Taxes" is defined in Section 9.3(a). "Term" means the term for which the Aircraft is subleased beginning on the date on which the Aircraft is delivered to Sublessee hereunder and continuing until January 2, 2002; provided that if the Sublessee fails to return the Aircraft to Sublessor on the anticipated last day of the Term in the condition required hereunder, the Term shall be extended until the Aircraft is so returned. "Transfer" means, with respect to any Person, to transfer, by bill of sale or otherwise, all such Person's right, title and interest in and to the Aircraft, Airframe or any Engine or Part, as the case may be, to another Person on an "as is, where is" basis, free and clear of any Lien or Sublessor Lien but otherwise without recourse, representation or warranty, express or implied, including an express disclaimer of warranties, representations and guarantees in a manner comparable to that set forth in Section 4.2(h). 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with generally accepted accounting principles applied on a consistent basis, and all financial data required to be submitted pursuant to this Sublease shall be prepared in conformity with such principles except as otherwise provided herein. ARTICLE 2. DELIVERY AND ACCEPTANCE 2.1 Agreement to Sublease. Subject to satisfaction of the applicable conditions contained in Section 2.3 below, Sublessor hereby agrees to tender delivery of the Aircraft on the Delivery Date and simultaneously to sublease to Sublessee hereunder, and subject to satisfaction of the applicable conditions contained in Section 2.2 below, Sublessee hereby agrees to accept such delivery and to Sublease from Sublessor hereunder the Aircraft. By execution and delivery of the Sublease Supplement regarding the Aircraft, (i) Sublessor and Sublessee shall each confirm the satisfaction of the conditions contained in Section 2.3 and 2.2, respectively, below and (ii) Sublessee shall confirm to Sublessor that Sublessee has irrevocably accepted the Aircraft for all purposes hereof. Sublessee shall inspect the Aircraft on or prior to the Delivery Date and will become knowledgeable as to its operating condition. 6 2.2. Conditions Precedent to Sublease of Aircraft by Sublessee. Sublessee's obligation to Sublease the Aircraft under the Sublease shall be subject to the following having been complied with to the satisfaction of or waived by Sublessee on or before the Delivery Date, each document, instrument or opinion referred to below to be reasonably satisfactory in form and substance to Sublessee: 2.2.1 Authorization, Execution and Delivery of Documents. The Sublessor shall have duly authorized, executed and delivered the Operative Agreements and the Escrow Agreement and Continental shall have duly authorized, executed and delivered the MSA and all such agreements shall be in full force and effect on the Delivery Date. 2.2.2 Opinions of Counsel. Sublessee shall have received a favorable opinion of counsel to Sublessor as to the matters referred to in Sections 2.2.1, 4.2(a), 4.2(b) and the first clause of 4.2(c) hereof and the opinion of special FAA counsel referred to in Section 2.3.6 below. 2.2.3 Representations and Warranties. The representations and warranties of Sublessor contained in Section 4.2 hereof shall be true and correct on and as of the Delivery Date as though made on and as of the Delivery Date (except to the extent that such representations and warranties relate solely to an earlier date in which case such representation or warranties shall be true and correct as of such earlier date). 2.2.4 No Loss or Destruction of the Aircraft. Neither the Airframe nor any Engine shall have suffered an Event of Loss. 2.2.5 Delivery Condition of Aircraft. Sublessor shall have complied with, and satisfied, the covenants set forth in Section 2.4 hereof, Sublessee shall have completed its inspection and acceptance flight of the Aircraft as provided in Section 2.4 and the Aircraft shall have met the requirements of the delivery condition set forth in Section 2.4 or Sublessor and Sublessee shall have entered into an agreement to address any failure to satisfy any of the foregoing. 2.2.6 Liens. Sublessor shall have delivered a certificate from an officer of Sublessor stating that there is no Sublessor Lien or, to Sublessor's knowledge, Head Lessor Lien on the Aircraft other than any Permitted Sublessor/Head Lessor Liens. 2.2.7 Filing. On such Delivery Date, the Sublease and the Sublease Supplement for the Aircraft shall have been duly filed with the FAA pursuant to the Act. 7 2.2.8 All Necessary Approvals. All necessary approvals for the transactions set forth in this Sublease have been obtained, including without limitation, the final approvals of Head Lessor and Owner. 2.3. Conditions to Sublease of Aircraft by Sublessor. The obligation of Sublessor to sublease the Aircraft to Sublessee on the Delivery Date is subject to the following conditions having been complied with to the satisfaction of or waived by Sublessor on or before the Delivery Date (each document, instrument, certificate or opinion referred to below to be reasonably satisfactory in form and substance to Sublessor): 2.3.1 Authorization, Execution and Delivery of Documents. The Operative Agreements, the MSA and the Escrow Agreement shall have been duly authorized, executed and delivered by Sublessee and shall be in full force and effect on the Delivery Date. 2.3.2 Representations and Warranties Correct; Event of Default. After giving effect to the Sublease of the Aircraft pursuant to this Agreement, the representations and warranties of Sublessee contained in Section 4.1 hereof shall be true and correct on and as of the Delivery Date as if such representations had been made on and as of the Delivery Date, except to the extent that such representations and warranties relate solely to an earlier date (in which case such representations and warranties shall be correct on and as of such earlier date), and (ii) no Event of Default shall have occurred and be continuing. 2.3.3 Insurance Certificates. Sublessor shall have received a broker's report and insurance certificates signed by Sublessee's regularly retained independent aircraft insurance broker or brokers evidencing Sublessee's due compliance with the insurance provisions of the Sublease. 2.3.4 Filing. On such Delivery Date, the Sublease and the Sublease Supplement for the Aircraft shall have been duly filed with the FAA pursuant to the Act. 2.3.5 Opinion of Counsel for Sublessee. Sublessor shall have received a favorable opinion from counsel to Sublessee as to the matters referred to in Sections 2.3.1, 4.1(a), 4.1(b) and 4.1(d). 2.3.6 Opinion of Oklahoma City Counsel. Sublessor and Sublessee shall have received a favorable written opinion or opinions addressed to them from Lytle, Soule & Curlee, special counsel in Oklahoma City, the cost of which shall be borne equally by Sublessor and Sublessee. 2.3.7 No Loss or Destruction of the Aircraft. Neither the Airframe nor any Engine shall have suffered an Event of Loss. 8 2.3.8 Adoption by Sublessee of Continental's Maintenance Program. Sublessee shall have adopted Continental's "Maintenance Program" with respect to the Airframe (as such term is defined in the MSA), as contemplated by Article 3.G of the MSA. 2.4 Aircraft Delivery Condition; Inspection. Sublessor covenants that prior to the Delivery Date, (a) heavy maintenance of the Aircraft have been recently completed in compliance with the maintenance program of Continental and all requirements for immediate operation under Federal Aviation Regulation 121; (b) Sublessee or its representatives will be entitled to complete a standard ground and test flight inspection of the Aircraft including log books and records and shall not be required to accept the Aircraft unless the condition of the Aircraft is reasonably satisfactory; (c) the Aircraft will be equipped with a 28 first class and 254 coach seating configuration and painted with Sublessee's tail and fuselage logo against Continental's existing white and gray paint scheme, unless mutually agreed to otherwise; (d) Sublessor will provide one shipset of galley equipment, 12 cargo compartment partial load latches (4 forward and 8 aft) part number AWJ7019-501, 8 cargo compartment partial load latches (all forward) part number 225-46787-1 and 26 LD3 containers and in addition, Sublessor will deliver one additional shipset of galley equipment to Sublessee in Los Angeles; and (e) Sublessor will make reasonable best efforts to obtain a letter, satisfactory to Sublessee, from the Head Lessor and Owner of the Airframe agreeing not to disturb Sublessee's possession and use of the Aircraft unless an Event of Default occurs hereunder. For the avoidance of doubt, the standard ground inspection referred to in clause (b) above shall not include borescoping the Engines or auxiliary power unit or the opening of any access panels. 2.5 Reconfiguration and Painting Costs. The start-up costs associated with the reconfiguration and painting of the Aircraft as detailed in Schedule 1 shall be for the account of Sublessee and shall be paid within 30 days after receipt by Sublessee of an invoice for such start-up costs. 2.6 Reimbursement of Costs. (a) If the transactions set forth in this Sublease do not occur or the Aircraft is not otherwise delivered pursuant hereto - - in either case due to the failure of Sublessor to obtain the final approvals set forth in Section 2.2.8, then (1) Sublessor shall reimburse Sublessee for the reasonable actual costs and expenses associated with the documentation of such transactions, including without limitation, attorneys' fees and the costs of preparation and review of documents, (2) this Sublease shall terminate and (3) neither party shall have any further obligation to the other party hereunder. 9 (b) If the transactions set forth in this Sublease do not occur because Sublessee and Sublessor disagree as to whether the Aircraft meets the delivery conditions set forth in Section 2.4(a) and (b), each party acting reasonably, then (1) each party shall bear its own actual costs and expenses associated with the documentation of such transactions, including without limitation, attorneys' fees and the costs of preparation and review of documents, (2) Sublessee shall reimburse Sublessor (or Continental under the MSA) for the start-up costs referenced in Section 2.5, (3) this Sublease shall terminate and (4) neither party shall have any further obligation to the other party hereunder. ARTICLE 3. TERM AND RENT 3.1 Term. Unless otherwise earlier terminated pursuant to the provisions hereof, the Term shall commence on the Delivery Date thereof and shall continue until the end of the Term. 3.2 Basic Rent and Maintenance Reserves. (a) Sublessee hereby agrees to pay to Sublessor Basic Rent in arrears throughout the Term in monthly installments on each Rent Payment Date commencing with the Delivery Date with each such installment of Basic Rent being in an amount equal to the sum of the amounts designated as Monthly Aircraft Basic Rent on Schedule 1 ("Aircraft Basic Rent") and Monthly Entertainment System Basic Rent on Schedule 1 hereto; provided, however, that the first installment of Basic Rent payable on December 2, 1999 shall be pro-rated. (b) Notwithstanding the foregoing, if Sublessee fails to return the Aircraft to Sublessor on or before the anticipated last day of the Term (i.e., January 2, 2002) in the condition required hereunder, Aircraft Basic Rent shall accrue thereafter until the Aircraft is so returned at a monthly amount equal to the amount designated as monthly "Holdover Basic Rent" on Schedule 1 hereto and Entertainment System Basic Rent shall also continue to accrue thereafter until the Aircraft is so returned at the regular monthly rate; provided, however, that notwithstanding the foregoing, (1) Aircraft Basic Rent shall accrue at the regular monthly Aircraft Basic Rent amount and not at the Holdover Basic Rent amount for up to five days after January 2, 2002 for so long as (W) the redelivery location designated by Sublessor pursuant to Article 12 is not Los Angeles International Airport, (X) Sublessee is unable to return the Aircraft as a result of conditions or events that are not within Sublessee's control or power to avoid or prevent, (Y) Sublessee has ceased commercial operation of the Aircraft and (Z) Sublessee makes diligent efforts to return the Aircraft, and (2) no Basic Rent shall accrue whatsoever if Sublessee's failure to return the Aircraft on the date set forth herein is a result of the failure of Continental to perform under the MSA. If the conditions or events mentioned in clause (1)(X) of the preceding sentence continue to prevent Sublessee from returning the Aircraft on January 8, 2002, beginning on that date and continuing until the Aircraft is returned in the condition required hereunder, Aircraft Basic Rent shall accrue at a monthly amount equal to the amount designated as monthly "Holdover Basic Rent" on Schedule 1 hereto. 10 (c) Not later than the fifth day of each calendar month after the commencement of the Term, Sublessee shall deliver to Sublessor a report showing the flight hours flown by the Aircraft for the preceding calendar month and shall make payment in respect of the Maintenance Reserves in an amount equal to the sum of the number of flight hours for the Aircraft for such month multiplied by the applicable amount set forth on Schedule 1 hereto opposite the caption "Heavy Maintenance Reserve"; provided that the number of flight hours used in computing the amount of Heavy Maintenance Reserves for the first four months of the Term, shall not be less than 220 flight hours. Such payment shall be made to an interest-bearing account controlled jointly by Sublessor and Sublessee and identified in the Escrow Agreement. The Heavy Maintenance Reserves shall be used to pay for heavy maintenance work on the Aircraft for the mid-D Check due on the Aircraft in June 2000 and the C Check due on the Aircraft in June 2001. Any fees, costs and expenses payable under the Escrow Agreement shall be deducted from interest earned on the Heavy Maintenance Reserves. Following completion of such heavy maintenance work, Sublessor and Sublessee shall execute a joint instruction under the Escrow Agreement releasing from the escrowed Heavy Maintenance Reserves an amount sufficient to pay for such heavy maintenance work to Continental or as Continental directs so long as the MSA is in effect or, if the MSA is not then in effect, to the facility performing the heavy maintenance work (the "Maintenance Facility") and in either case in accordance with any applicable requirements regarding time and manner of payment of the heavy maintenance provider performing such work. If the amount of Heavy Maintenance Reserves released is not sufficient to pay for the cost of such work, within five days of receipt of an invoice for such deficiency, Sublessee shall make payment to Continental or as Continental directs if the MSA is in effect or, if the MSA is not then in effect, to the Maintenance Facility in an amount equal to any such deficiency. Upon completion of the last regularly scheduled heavy maintenance visit (i.e., "C" Check or mid-"D" Check) prior to the end of the Term and payment of all amounts due with respect thereto, Sublessee shall have no further obligation to make any additional Heavy Maintenance Reserve payments hereunder, and the parties shall execute a joint instruction under the Escrow Agreement to the escrow agent thereunder releasing any remaining balance in the escrow account to Sublessee. 3.3 Payments on Business Days. If any date on which a payment of Rent becomes due and payable is not a Business Day, then such payment need not be made on such scheduled date but may be made on the next Business Day with the same force and effect as if made on such scheduled date, and (provided such payment is made on the next Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date. 11 3.4 Supplemental Rent. Sublessee also agrees to pay to Sublessor, or to the Person entitled thereto, any and all Supplemental Rent with respect to Stipulated Loss Value promptly as the same shall become due and owing and all other amounts of Supplemental Rent that become due and payable hereunder within ten Business Days after demand, and Sublessee will also pay to Sublessor, or to whomsoever shall be entitled thereto as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Rate on any part of any installment of Basic Rent or Supplemental Rent not paid when due for any period from and including the date on which the same was due to but excluding the date of payment in full. 3.5 Place of Payments. Payments of Basic Rent and Supplemental Rent (other than Heavy Maintenance Reserve payments, which shall be paid to the account identified in the Escrow Agreement) shall be paid in funds of the United States of America which shall be immediately available not later than 1:00 P.M. Houston time, at the place of receipt, on the date due by wire transfer to the account of Sublessor, at The Chase Manhattan Bank, ABA 021-000-21, Account No. __________________, Ref: Aircraft 060 Sublease, or to such other financial institution located in the continental United States as directed by Sublessor in writing to Sublessee at least three Business Days prior to the due date of such payment. 3.6 No Set-Off, Counterclaim, Etc. Subject to the provisions set forth below in this Section 3.6, this Sublease is a net Sublease, and Sublessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right (including right of reimbursement) which Sublessee may have against Sublessor or any other Person for any reason whatsoever; (b) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Sublessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Sublessee; (d) any restriction, prevention or curtailment of or interference with any use of the Aircraft or part thereof; 12 (e) any invalidity or unenforceability or disaffirmance of this Sublease or any provision hereof or any of the other Operative Agreements or any provision thereof, in each case whether against or by Sublessee or otherwise; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Sublease shall be terminated in whole or in part by operation of law or otherwise (other than as a result of any act or failure to act by the Sublessor) except as specifically provided herein, if and to the extent that the Sublessee retains the use and possession of the Aircraft on substantially the same terms as those provided in this Sublease, Sublessee nonetheless agrees to pay to the Sublessor an amount equal to each Rent payment at the time such payment would have become due in accordance with the terms hereof had this Sublease not been terminated in whole or in part. Notwithstanding any provision of this Section 3.6 to the contrary, (a) Sublessee reserves such rights as it may have under applicable law with respect to the breach by Sublessor of the covenant set forth in Section 15.5 hereof; (b) if Sublessor becomes subject to a bankruptcy proceeding and Sublessor's trustee in bankruptcy rejects this Sublease, Sublessee shall return the Aircraft to Sublessor in compliance with all the terms and provisions of this Sublease which are applicable to the return of the Aircraft on the last day of the Term and, upon such return and performance of such terms and conditions, this Sublease and Sublessee's obligation to pay any Rent hereunder shall terminate; and (c) nothing contained in this Section 3.6 shall be construed as a waiver of Sublessee's right to seek, or its entitlement to, damages, specific performance, separate recovery of any payment of Rent made by Sublessee which is not due and payable in accordance with the terms of this Sublease, other remedies at law or equity and any combination thereof, as against Sublessor or any other Person as shall be liable therefor, on account of any failure of Sublessor or any other such Person to perform its obligations under this Sublease (including, but not limited to, breach of Section 15.5 hereof) or on account of any act or omission of Sublessor or any other such Person or to enforce any judgment therefor. ARTICLE 4. REPRESENTATIONS, WARRANTIES; DISCLAIMERS 4.1. Of Sublessee. Sublessee hereby makes the following representations, warranties and covenants to Sublessor: (a) Organization, Etc. Sublessee is a corporation duly organized and validly existing in good standing under the laws of the State of Hawaii and has the corporate power and authority to perform its obligations under the Operative Agreements to which it is a party. 13 (b) Authorization, Etc. The Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of Sublessee, do not require any approval of the stockholder of Sublessee (or if such approval is required, such approval has been obtained), and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by Sublessee with any of the terms and provisions hereof will contravene its Certificate of Incorporation or By-Laws or any law or governmental rule or regulation (as in effect on the date this representation is made) applicable to Sublessee or result in any breach of, or constitute any default under, or result in the creation of any Lien (other than Permitted Liens) upon any property of Sublessee under any material indenture, mortgage or other agreement to which Sublessee is a party or by which Sublessee or its properties or assets may be bound. (c) Consents. Sublessee has received or has complied with every necessary consent, approval, order, or authorization of, or registration with, or the giving of prior notice to, any federal or state governmental authority having jurisdiction over Sublessee required to be received or complied with on or prior to the Delivery Date to the extent required for the Sublessee to execute and deliver the Operative Agreements to which it is a party currently in effect and to perform any of the transactions contemplated hereby and thereby. (d) Enforceability, Etc. The Operative Agreements to which it is a party have been (or, upon execution thereof by Sublessee, will be) duly executed and delivered by Sublessee, and the Operative Agreements to which it is a party will, upon execution and delivery by the other party or parties thereto, constitute (or, upon execution thereof by Sublessee, shall constitute) legal, valid, and binding obligations of Sublessee, enforceable in accordance with their respective terms except as enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws and general principles of equity. (e) No Liens. On the Delivery Date, the Aircraft shall be free and clear of all Liens (other than Permitted Liens) attributable to Sublessee. (f) No Defaults. No Event of Default or event which, with the giving of notice or lapse of time or both, would become such Event of Default has occurred and is continuing. 4.2 Of Sublessor. Sublessor hereby makes the following representations, warranties and covenants to Sublessee: (a) Organization, Etc. Sublessor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into and perform its obligations under the Operative Agreements. 14 (b) Authorization, Etc. The Operative Agreements have been duly authorized, executed and delivered by Sublessor, do not require any approval of its stockholders or consent of any trustee or holder of any of its indebtedness or other obligations for borrowed money or any instrument or agreement with respect thereto and assuming the due authorization, execution, and delivery by the other parties thereto constitute legal, valid and binding obligations of Sublessor enforceable against it in accordance with their respective terms except as enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws and general principles of equity. (c) No Violation. Neither the execution, delivery or performance by Sublessor of the Operative Agreements nor the consummation of any of the transactions by Sublessor contemplated thereby contravenes any law, regulation, order or judgment applicable to or binding on Sublessor, or any provision of the charter or by-laws (each as amended to date) of Sublessor or will result in the creation of a Lien on any part of the Aircraft under, or will result in a breach of, or constitute a default under, or contravene any provisions of, any contract, agreement or instrument to which Sublessor is a party or by which it or its properties are bound, except for the Liens of the Operative Agreements. (d) No Consents or Approvals. Neither the execution, delivery or performance by Sublessor of the Operative Agreements nor the consummation by Sublessor of any of the transactions contemplated thereby requires the consent or approval of, the giving of notice to, the registration with, the recording or filing of any documents with, or the taking of any other action in respect of, any Federal, state or local governmental commission, authority, agency or body except for the filings and recordings of this Sublease and the Sublease Supplement with the FAA and filings, if any, made pursuant to any routine recording or regulatory requirements applicable to Sublessor. (e) U.S. Citizenship. As of the date hereof to Sublessor's knowledge, each of the Owner and Head Lessor of the Airframe is a "citizen of the United States," as defined in Section 40102(a)(15) of the Act. If either the Owner or Head Lessor of the Airframe is not now or ceases to be a "citizen of the United States" within the meaning of the foregoing definition, Sublessor agrees to take appropriate measures under the Head Lease with respect to the Airframe to prevent deregistration of the Airframe under the Act or limitation on use or operation of the Aircraft. (f) Sublessor's Liens. There is no Lien on the Aircraft attributable to Sublessor or to Sublessor's knowledge, Head Lessor or Owner except for (i) Liens of the type identified in clauses (a), (b), (f), (g) and (h) of Section 9.1 hereof, (ii) Liens in favor of a Person who has provided, or prior to the Delivery Date will provide, to Sublessee a letter of quiet enjoyment in form and substance reasonably satisfactory to Sublessee and (iii) with respect to Engines only, Liens in favor of a Head Lessor, Owner or Lender so long as such Person does not interfere with Sublessee's possession and use of such Engine (collectively, "Permitted Sublessor/Head Lessor Liens"). Sublessor shall, at its own cost and expense, promptly take such action as may be necessary to discharge duly any Head Lessor Lien or Sublessor Lien on the Airframe or any part thereof other than a Permitted Sublessor/Head Lessor Lien. In addition, if any Head Lessor, Owner or Lender holding a Lien on an Engine shall interfere with Sublessee's use and possession of such Engine, Sublessor shall (a) provide Sublessee with a replacement engine for use on the Airframe, (b) induce such Head Lessor, Owner or Lender to enter into an engine exchange or (c) take other appropriate steps to cure such interference. Sublessor will indemnify and hold harmless the Sublessee from and against any loss, cost or expense (including legal fees and expenses incurred by Sublessee) as a result of the imposition or enforcement against the Aircraft, or any part thereof, of any Sublessor Lien or Head Lessor Lien. 15 (g) No Transfer. Sublessor shall not transfer any interest in the Aircraft or the Sublease except in compliance with Section 15.4. (h) Disclaimers. SUBJECT TO SATISFACTION OF THE CONDITIONS SET FORTH IN SECTION 2 HEREOF, SUBLESSOR SUBLEASES AND SUBLESSEE EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". EXCEPT AS SET FORTH IN SECTION 4.2(f) HEREOF SUBLESSOR MAKES, HAS MADE OR SHALL BE DEEMED TO HAVE MADE NO -- AND SUBLESSEE HEREBY EXPRESSLY DISCLAIMS ANY-- REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, COMPLIANCE WITH SPECIFICATIONS, DESIGN, QUALITY, DURABILITY, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT, OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, OR ANY PART THEREOF, IT BEING UNDERSTOOD THAT SUBLESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT TO ANY OF THE FOREGOING MATTERS AND THAT ALL RISKS OF ANY NATURE INCIDENT THERETO ARE TO BE BORNE BY SUBLESSEE. Sublessor agrees to and does hereby authorize Sublessee to exercise for the account of Sublessor such rights as Sublessor may have under any warranty, express or implied, with respect to the Aircraft made by the manufacturer of the Airframe, Engines or any Part thereof, any subcontractor or supplier thereof, or any other seller thereof, and Sublessor agrees to exert its diligent efforts, at Sublessee's expense, to enforce such rights as Sublessor may have with respect thereto for the benefit of Sublessee; provided, however, that upon an Event of Default and termination of this Sublease all such rights shall immediately revert to Sublessor. 4.3 Subordination of Sublease to Head Lease. SUBLESSEE ACKNOWLEDGES THAT THIS SUBLEASE IS SUBJECT AND SUBORDINATE TO ALL THE TERMS OF THE HEAD LEASE COVERING THE AIRFRAME, INCLUDING WITHOUT LIMITATION THE RIGHTS OF THE HEAD LESSOR OF THE AIRFRAME TO REPOSSESSION PURSUANT TO ARTICLE 14 OF THE HEAD LEASE. WITHOUT LIMITING THE FOREGOING, THE HEAD LESSOR OF THE AIRFRAME MAY AVOID OR TERMINATE THIS SUBLEASE FOLLOWING AN EVENT OF DEFAULT UNDER SUCH HEAD LEASE. IF THE HEAD LESSOR OF THE AIRFRAME DECLARES SUCH HEAD LEASE TO BE IN DEFAULT PURSUANT TO ARTICLE 14 THEREOF, THE SUBLESSOR'S RIGHTS UNDER THIS SUBLEASE SHALL AUTOMATICALLY BE DEEMED ASSIGNED AS SECURITY TO THE HEAD LESSOR OF THE AIRFRAME. 16 If as a result of an event of default under, or termination of, the Head Lease covering the Airframe, the rights of Sublessee under this Sublease are terminated, and no Event of Default by Sublessee under this Sublease has occurred and is continuing, then such event of default under, or termination of, such Head Lease shall be a breach by Sublessor under this Sublease that will entitle Sublessee to all rights and remedies in respect of such default under all applicable laws. In addition, Sublessor agrees to indemnify Sublessee from and against any and all losses, costs and liabilities incurred by Sublessee resulting therefrom. ARTICLE 5 REGISTRATION, POSSESSION, MAINTENANCE, OPERATION 5.1 Registration and Insignia. (a) Sublessee acknowledges that title to the Airframe shall remain vested in the Head Lessor of the Airframe and title to each Engine shall remain vested in the Head Lessor or Owner of such Engine during the Term. Sublessee shall, at its own expense, maintain the registration of the Aircraft with the FAA to reflect the interest of Head Lessor of the Airframe as owner. Sublessee shall reasonably cooperate with Sublessor, to the extent Sublessee's cooperation is required, in connection with causing any documents evidencing any Lender's interest in the Aircraft pursuant to any Facility Lien to be filed with the FAA. Sublessee agrees to take no action which would result in the Airframe failing to remain duly registered in the name of Head Lessor of the Airframe with the FAA under the Act (it being understood that Sublessee shall not be required to comply with this covenant to the extent that the Head Lessor or Owner of the Airframe fails to comply with its covenants in the Head Lease covering the Airframe and related documents to maintain its citizenship or takes any other action which precludes or prevents such registration from being maintained and makes such compliance by Sublessee impossible). (b) Nameplate. If permitted under applicable law or governmental regulation and to the extent provided by Sublessor, Sublessee agrees to maintain in the cockpit of the Airframe and on each Engine the nameplates or stencils or other appropriate markings currently installed on the Airframe and Engines and any substitute nameplate or stencils that may be provided by Sublessor or reasonably requested by Sublessor to be obtained by Sublessee (such nameplate or other markings to be replaced, if necessary, with a nameplate or other markings reflecting the name of any successor Head Lessor or the addition of the name of a Lender or the name of the Sublessor within a reasonable period of time after notice by Sublessor). 17 5.2 Possession. (a) Shipping, Testing and Repair. Except as expressly provided herein, Sublessee will not sell, sub-sublease or otherwise deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided, however, that, so long as no Event of Default has occurred and is continuing, Sublessee may, without such consent, deliver possession of the Aircraft, Airframe or any Engine, or Part thereof, (i) to any Person for the purpose of shipping or (ii) to the manufacturer thereof or to any other organization for testing, service, repair, maintenance or overhaul work or similar purposes or for required or permitted alterations or modifications in or additions to the Aircraft, Airframe or any Engine. With respect to any transaction pursuant to the preceding paragraph of this Section 5.2(a), Sublessee shall remain primarily liable hereunder for the performance of all the terms of this Sublease to the same extent as if such contract or transfer had not occurred. (b) Limitations on Transfers of Possession Imposed by the Head Leases. Sublessee acknowledges that the Head Leases specifically prohibit any sublessee of the Aircraft (including the Sublessee) from transferring possession of or any other rights to the Aircraft or any Engine to any other Person except as permitted by Section 5.2(a). Without limiting the foregoing, Sublessee agrees that it will not do any of the following without the prior written consent of Sublessor and the relevant Head Lessor: (1) United States Government. Transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to a contract or to the Civil Reserve Air Fleet Program or any similar or substitute programs; (2) Installation of Engines. Install an Engine on an airframe owned by Sublessee; or (3) Installation of Engines on Other Airframes. Install an Engine on an airframe leased to, or purchased by, Sublessee subject to a lease, conditional sale, trust indenture or other security agreement. (c) Recognition of Rights. Sublessor hereby agrees for the benefit of each lessor, conditional seller, indenture trustee or secured party of any engine leased to or purchased by Sublessee subject to a lease, conditional sale, trust indenture or other security agreement that Sublessor will not acquire or claim, as against such lessor, conditional seller, indenture trustee or secured party, any right, title or interest in any engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, trust indenture or other security agreement and owned by such lessor or conditional seller or subject to a trust indenture or security interest in favor of such indenture trustee or secured party. 18 5.3 Maintenance. At its own cost and expense, Sublessee shall enter into the MSA prior to delivery of the Aircraft. If for whatever reason Sublessee terminates the MSA, from and after the date of such termination, at its own cost and expense, Sublessee shall: (a) perform maintenance, service, repair and testing of the Aircraft, Airframe and each Engine in accordance with an FAA-approved maintenance program for the Aircraft, Airframe and Engines, so as to keep the Aircraft, the Airframe and each Engine and each part thereof in good operating condition in conformity with any manufacturer's operating manual, instructions or service bulletins and in accordance with Sublessee's standard practices for similar Equipment (including without limitation Sublessee's maintenance program for such Equipment, as from time to time in effect and approved to the extent required by law by the FAA), which practices shall at all times be at or above the standard of the industry for maintenance of similar Equipment; and in the case of the Aircraft, without prejudice to Sublessee's right to receive contribution to the cost of compliance in accordance with Section 6.3 hereof, in such condition as may be necessary to enable the airworthiness certificate of the Aircraft to be maintained under the applicable rules and regulations of the FAA; provided that if the Aircraft is not registered under the Act pursuant to Section 5.1 hereof, the Aircraft shall nevertheless at all times be maintained in the condition necessary to enable the Sublessor or Sublessee to obtain an airworthiness certificate for the Aircraft under the Act; (b) maintain all records, logs and other materials required by the FAA to be maintained in respect of each item of Equipment; (c) promptly furnish to Sublessor such information as may be required to enable the Head Lessor to file any reports required to be filed by it with any governmental authority because of Head Lessor's ownership of the Equipment; and (d) not discriminate against the Aircraft (as compared to other aircraft of the same type owned or operated by Sublessee) in contemplation of the expiration or termination of the Sublease with respect to the maintenance of the Aircraft, other than withdrawal of the Aircraft from use and operation as is necessary to prepare the Aircraft for return to Sublessor upon such expiration or termination. 5.4 Operations. (a) Sublessee shall not maintain, service, repair, test, use or operate any item of Equipment in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) over the Aircraft, or in violation of any airworthiness certificate, license or registration relating to any item of Equipment issued by any such authority or in violation of or conflict with any applicable maintenance or operations manual or manufacturer's guidelines or inconsistent with prudent commercial airline standards, unless Sublessee is contesting in good faith the validity or application of any such law, rule, regulation, order, certificate, license or registration by appropriate proceedings in any reasonable manner which does not create a material risk of sale, loss or forfeiture of any Equipment or any interest therein or result in the grounding of the Aircraft. If any such law, rule, regulation or order requires alteration of any item of Equipment, unless the validity thereof is being contested in good faith and by appropriate proceedings in any reasonable manner which does not create a material risk of sale, loss or forfeiture of any Equipment or any interest therein, the Sublessee will, subject to its rights under Sections 6.3 and 7.7 hereof, conform thereto or obtain conformance thereto at no expense to Sublessor and will maintain such item of Equipment in proper operating condition under such laws, rules, regulations and orders. 19 (b) Sublessee agrees not to operate, use or locate the Aircraft, the Airframe or any Engine, or permit the Aircraft, the Airframe or any Engine to be operated, used or located (i) in any area excluded from coverage by the insurance required by the terms of Section 8, or (ii) in any war zone or in any recognized or, in Sublessee's reasonable judgment, threatened area of hostilities unless fully covered by war risk insurance satisfying the terms of Section 8, or unless the Aircraft, the Airframe or such Engine is operated or used under contract with the Government under which contract the Government assumes liability in an amount not less than the amount of insurance and providing coverage as full and complete as otherwise required by Section 8 for any damage, loss, destruction or failure to return possession of the Aircraft, the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others. ARTICLE 6 REPLACEMENT AND POOLING OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS 6.1 Replacement of Parts. Except as otherwise provided herein and if for whatever reason Sublessee terminates the MSA, from and after the date of such termination, Sublessee, at its own cost and expense, will promptly replace (or cause to be replaced) all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, Sublessee may, at its own cost and expense, remove (or cause to be removed under the MSA) in the ordinary course of maintenance, service, repair, overhaul or testing any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, that Sublessee, except as otherwise provided herein, at its own cost and expense, will, replace (or cause to be replaced) such Parts as promptly as practicable with equivalent Parts of the same make, model and part number or an improved make, model or part number and made by the same manufacturer and in accordance with Continental's maintenance policies and procedures. All replacement Parts shall be free and clear of all Liens (except for pooling arrangements permitted by Section 6.2 hereof) and shall be in good operating condition and have a value and utility not less than the value and utility of the Parts replaced (assuming such replaced Parts were in the condition required hereunder). Subject to Section 6.3 hereof, all Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of relevant Head Lessor or Owner of such Airframe or Engine, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Except as provided in Section 6.2 hereof, immediately upon any replacement Part becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Sublessee free and clear of all Sublessor Liens and all rights of Sublessor and all Head Lessor Liens and all rights of Head Lessor and Owner, and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in the Head Lessor of the Airframe (in the case of replacement Parts incorporated in the Airframe) or Head Lessor or Owner of the relevant Engine (in the case of replacement Parts incorporated in such Engine) (subject only to Permitted Liens), and (iii) such replacement Part shall become subject to this Sublease and be deemed part of the Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 20 6.2 Title to Parts. Any replacement Part when incorporated in an item of Equipment in accordance with Section 6.1 hereof may be owned by a third party subject to a normal pooling arrangement, so long as Sublessee as promptly thereafter as reasonably possible either (i) causes title to such replacement Part to vest in the relevant Head Lessor or Owner in accordance with Section 6.1, free and clear of all Liens, or (ii) replaces (or causes to be replaced) such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Sublessee free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in the relevant Head Lessor or Owner in accordance with Section 6.1. 6.3 Alterations, Modifications and Additions. Sublessee shall make (or cause to be made under the MSA or otherwise) such alterations and modifications in and additions to the Equipment at its expense as may be required from time to time to meet all applicable standards of the FAA or other governmental authority having jurisdiction, unless the validity or application thereof is being contested in good faith by appropriate proceedings (but only so long as such proceedings do not involve any material risk of sale, forfeiture or loss of any of the Equipment or any interest therein). If any mandatory modification work is required, Sublessee shall pay for the first $__________ of the actual cost for any one such mandatory modification and the first $__________ of the actual cost for multiple such mandatory modifications. If the actual cost of such mandatory modification (that is, without markup) exceeds $__________ for any one such mandatory modification and $__________ for multiple such mandatory modifications, then Sublessor shall reimburse Sublessee for a portion of such excess cost in an amount equal to the excess of such cost over $__________ (in the case of a single mandatory modification) or $__________ (in the case of multiple such mandatory modifications) multiplied by a fraction, the numerator of which is the number of months then remaining in the Term of this Sublease and the denominator of which is 84. The Sublessor shall reimburse Sublessee for the balance of such excess cost to Sublessee promptly following completion of such mandatory modification, provided that no Event of Default has occurred and is continuing. 21 In addition, Sublessee, at its own cost and expense, may from time to time request that Continental make under the MSA such alterations and modifications in and additions to any item of Equipment as Sublessee may deem desirable in the proper conduct of its business; provided, however, that no such alteration, modification or addition shall diminish, in Sublessor's reasonable determination, the value or utility of such item of Equipment below the value, utility and airworthiness thereof immediately prior to such alteration, modification or addition, assuming such item of Equipment was then in the condition and airworthiness required to be maintained by the terms of this Sublease. Except as otherwise provided herein, title to all Parts (other than Removable Parts (as defined below)) incorporated in an item of Equipment as the result of such alteration, modification or addition shall, without further act, vest in the Head Lessor and become subject to this Sublease. Notwithstanding the foregoing sentence of this Section 6.3, so long as no Event of Default shall have occurred and be continuing, Sublessee may request that Continental under the MSA remove any Part (such Part being referred to herein as a "Removable Part") at any time during the Term if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated in the Aircraft, Airframe or such Engine at the time of delivery thereof hereunder, (ii) such Part is not required, in Sublessor's determination, to be incorporated or installed in or attached or added to such item of Equipment pursuant to the terms of Section 5.3 or 5.4 hereof or the first sentence of this Section 6.3 and (iii) such Part can be removed from such item of Equipment without diminishing or impairing, in Sublessor's determination, the value, utility or airworthiness which such item of Equipment would have had at such time had such alteration, modification or addition not occurred. Removable Parts may be subleased from third parties other than Sublessor. Upon the removal by Sublessee (or by Continental under the MSA) of any Part as above provided, title thereto shall, without further act, vest in Sublessee and such Part shall no longer be deemed part of the Aircraft, Airframe or such Engine from which it was removed. Any Part not removed as above provided prior to the return of such item of Equipment to Sublessor hereunder shall remain the property of Head Lessor provided that Sublessor may require Sublessee, in connection with the return of the Aircraft pursuant to Section 12 hereof, to remove any Removable Part from the Aircraft and to restore the Aircraft to its condition prior to the addition of such Removable Part. Sublessor shall not bear any liability for any alteration, modification or addition or for any grounding or suspension of certification of any item of Equipment or for loss of revenue. 22 ARTICLE 7 LOSS, DESTRUCTION, REQUISITION 7.1 Event of Loss with Respect to Airframe. Upon the occurrence of an Event of Loss with respect to the Airframe or the Airframe and one or more Engines, Sublessee shall give Sublessor prompt (and in any event within 14 days after such occurrence) written notice of such Event of Loss and within the time period prescribed below shall make payment to the Sublessor for the items of Equipment subject to such Event of Loss as provided below. Not later than the earlier to occur of (i) the 60th day following the date of the occurrence of such Event of Loss, or (ii) the second Business Day following the receipt of insurance proceeds with respect to such occurrence, Sublessee shall pay to Sublessor (or to such other party as Sublessor directs), in the manner and in funds of the type specified in Section 3.3, (A) the Stipulated Loss Value for the Aircraft as of the Stipulated Loss Value Date immediately preceding such Event of Loss, unless such Event of Loss occurred on a Stipulated Loss Value Date, in which case Stipulated Loss Value shall be computed as of such date, and (B) any other Rent (including Basic Rent) which is due and payable through and including the date of payment (excluding the payment of or Basic Rent due on the date of payment). At such time as Sublessor shall have received the sum of the amounts specified above, together with all other amounts then due and payable hereunder, (A) the obligation of Sublessee to pay Basic Rent hereunder with respect to the Aircraft for any period commencing after the date of payment of such amounts shall terminate, (B) the Term for the Aircraft shall end, and (C) Sublessor will use its best efforts to cause Head Lessor to Transfer the Aircraft to Sublessee, subject to the rights of any insurer. Unless and until Sublessee pays the amounts required pursuant to Section 7.1(a), no Event of Loss with respect to an Airframe under the circumstances contemplated by the terms of this Section 7.1 shall result in any reduction of Basic Rent. 7.2 Event of Loss with Respect to an Engine. (a) Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Sublessee shall give Sublessor prompt written notice (and in any event within 10 days after such occurrence) thereof and shall, as promptly as possible and in any event, within 120 days after the occurrence of such Event of Loss either, at the option of Sublessor, (1) convey or cause to be conveyed to the relevant Head Lessor or Owner of such Engine, as replacement for the Engine with respect to which such Event of Loss occurred, title to another General Electric model CF6-50C2 engine, which engine shall be free and clear of all Liens, other than Permitted Liens referred to in clauses (a), (c), (d) and (e) of the definition thereof, and having a value and utility (taking into consideration such Engine's life-limited parts and time since heavy maintenance on each of such Engine's modules) at the time of substitution at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such Engine was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss, or (2) pay the Stipulated Loss Value for such Engine to Sublessor. 23 (b) Upon full compliance by Sublessee with the terms of Sections 7.2(a) and 7.3 hereof and if no Event of Default shall have occurred and be continuing, the Sublessor shall use its best efforts to cause the Head Lessor or Owner of the Engine that was subject to such Event of Loss to Transfer such Engine to the Sublessee or as the Sublessee shall direct, subject to the rights of any insurer. Upon such Transfer, such Engine subject to such Event of Loss shall cease to be an "Engine" hereunder. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 7.2 shall result in any reduction of Basic Rent. 7.3 Documents Required in Connection with Substitution. Prior to or at the time of any substitution for any Engine pursuant to Section 7.2(a) hereof, Sublessee will promptly, at its sole cost and expense: (i) provide Sublessor with a full warranty bill of sale in form and substance satisfactory to the relevant Head Lessor or Owner for such replacement Engine duly conveying title to such item to such Head Lessor or Owner, and take such other action as such Head Lessor or Owner may reasonably request in order that title to such replacement Engine shall be duly vested in such Head Lessor or Owner; (ii) cause a Sublease Supplement, in form and substance reasonably satisfactory to Sublessor, subjecting such replacement Engine to this Sublease, duly executed by Sublessee, to be delivered to Sublessor for execution and, upon such execution, to be filed for recordation with the FAA pursuant to the Act; (iii) provide Sublessor with evidence of compliance with the insurance provisions of Article 8 hereof with respect to such replacement Engine as Sublessor or the relevant Head Lessor or Owner may reasonably request; (iv) provide Sublessor with an officer's certificate signed by an officer of Sublessee certifying that, upon consummation of such replacement, no Event of Default will exist hereunder; (v) promptly upon the recordation of the Sublease Supplement covering such replacement Engine pursuant to the Act, Sublessee, at its sole cost and expense will cause to be delivered to Sublessor and Lender an opinion of counsel satisfactory to Sublessor as to the due recordation of such Sublease Supplement and, so long as the Facility Lien exists and assuming that Sublessor and Lender have taken all necessary action to perfect the Facility Lien with respect to the replacement Engine, as to the existence of Liens on the replacement Engine to the same effect as the opinion of FAA counsel delivered in connection with the original recordation of the Sublease; and 24 (vi) furnish such other certificates and opinions as Sublessor and the relevant Head Lessor and Owner may deem reasonably necessary or appropriate, in form, scope and substance satisfactory to each of them. 7.4 Application of Payments from Governmental Authorities for Requisition of Title. Any payments (other than insurance proceeds the application of which is provided for in Article 8 hereof) received at any time by Sublessor or Sublessee from any governmental authority or other Person with respect to any Event of Loss resulting from the condemnation, confiscation, theft or seizure of, or requisition of title to or use of any item of Equipment will be applied as follows: (a) If such payments are received with respect to an Event of Loss relating to the Airframe or the Airframe and the Engines or engines installed on the Airframe, so much of such payments as shall not exceed Stipulated Loss Value shall be applied in reduction of Sublessee's obligation to pay such Stipulated Loss Value and other amounts required to be paid by Sublessee hereunder, if not already paid by Sublessee, or, if already paid by Sublessee, shall so long as no Event of Default shall have occurred and be continuing, be applied to reimburse Sublessee for its payment of such Stipulated Loss Value and other amounts; and the balance, if any, of such payment remaining thereafter will be paid over to, or retained by, Sublessee. (b) If such payments are received with respect to an Engine under circumstances contemplated by Section 7.2 hereof, such payments shall be paid over to, or retained by, Sublessee, provided Sublessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 7.2(a) with respect to the Event of Loss for which such payments are made. 7.5 Requisition for Use by the Government. In the event of the requisition for use or transfer of possession to the Government of any item of Equipment not constituting an Event of Loss during the Term, Sublessee shall promptly notify Sublessor of such requisition and, unless such requisition shall constitute an Event of Loss (in which case the Sublessee shall comply with Section 7.1 or 7.2 hereof, as the case may be), all of Sublessee's obligations under this Sublease with respect to the Airframe and the Engines shall continue to the same extent as if such requisition had not occurred. If the Airframe and Engines or engines installed thereon are not returned by the Government prior to the end of the Term, Sublessee shall be obligated to return such item of Equipment to Sublessor pursuant to, and in all other respects in compliance with the provisions of, Article 12 hereof, promptly upon its return by the Government, and upon compliance therewith by Sublessee, the Sublessor shall (to the extent that it is lawfully able to do so) assign to the Sublessee all of the Sublessor's rights against the Government with respect to the condition and fitness of such item of Equipment, including all repair obligations of the Government upon return by it of the item of Equipment at the expiration of the period of requisition for use. All payments received by Sublessor or Sublessee from the Government that are allocable to use of such item of Equipment during the Term shall be paid over to, or retained by, Sublessee; and all other payments received by Sublessor or Sublessee from the Government for the use of the Airframe and Engines or engines after January 2, 2002 shall be paid over to, or retained by, Sublessor. 25 7.6 Application of Payments During Existence of Event of Default. Any amount referred to in Section 7.4(a), 7.4(b) or 7.5 hereof which is payable or creditable to or retainable by Sublessee shall not be paid or credited to or retained by Sublessee if, at the time of such payment, credit or retention, an Event of Default shall have occurred and be continuing hereunder but shall be paid to and held by Sublessor as security for the obligations of Sublessee under this Sublease and, if Sublessor declares this Sublease to be in default pursuant to Section 14 hereof, applied against Sublessee's obligations hereunder as and when due and at such time as there shall not be continuing any such Default, such amount shall be paid to Sublessee to the extent not previously applied in accordance the terms hereof. 7.7 Replacement of Engines. Upon not less than 35 days' prior written notice to Sublessor, Sublessee may, subject to Sublessor's prior written consent (which may be given or withheld in its sole discretion), replace any Engine subleased hereunder with another engine (the "replacement Engine") of the same or improved make and model as the Engine which is to be replaced and which has a value and utility (taking into account such Engine's life-limited parts and time since heavy maintenance on each of such Engine's modules) at least equivalent to, and in as good operating condition as, such replaced Engine assuming such replaced Engine was in the condition and repair required by the terms of this Sublease. Such replacement Engine shall be deemed to be an "Engine" and Sublessor and Sublessee shall comply with the provisions of Section 7.2(a) and 7.3 with regard to the replacement Engine and the Engine so replaced. ARTICLE 8 INSURANCE 8.1 Public Liability and Property Damage Insurance. Sublessee shall at all times procure and maintain at is own expense policies of public liability insurance (including, without limiting the generality of the foregoing, passenger legal liability insurance) and property damage insurance (exclusive of manufacturer's product liability insurance), including, without limiting the generality of the foregoing, aircraft liability, aircraft passenger liability, contractual liability and cargo and baggage liability and property damage liability, with respect to the Aircraft, Airframe and Engines (a) in amounts which are not less than the public liability and property damage liability insurance applicable to similar aircraft and engines which comprise Sublessee's fleet; (b) of the types usually carried by United States commercial air carriers and in no event less than the limit of liability set forth on Schedule 1 hereto and (c) which is maintained in effect with insurers of recognized responsibility and reasonably acceptable to Sublessor. With respect to the insurance described in this clause, Sublessee may self-insure by way of deductible, franchise or similar provision in such insurance policies, the risk required to be insured against pursuant to the first sentence in this Section 8.1. The amount of such self-insurance shall not exceed $_______ for any one occurrence. 26 All such policies of insurance carried in accordance with this Section 8.1 shall (A) name Head Lessor of the Airframe as owner of the Airframe and Sublessor and each Owner and Lender (if any) as additional named insureds (the "Additional Insureds"), as their respective interests may appear (but without imposing upon any such parties any obligation imposed upon the insured, including the liability to pay the premiums for such policies, (B) provide that in respect of the interests of Sublessor and each Head Lessor, Owner and Lender (if any) in such policies, the insurance shall not be invalidated by any action or inaction of Sublessee and shall insure the Additional Insureds as their interests may appear regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Sublessee, (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which materially adversely affects the interests of the Additional Insureds or if such insurance may be allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Additional Insureds for 30 days (ten days in the case of cancellation for non-payment and seven days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is given to the Additional Insureds from such insurers of such cancellation, change or lapse, (D) be effective with respect to both domestic and international operation, (E) provide that the insurers shall waive any right to any setoff, recoupment or counterclaim or any other deduction, by attachment or otherwise, (F) provide that all the provisions thereof, except the limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured, (G) provide that the Additional Insureds shall not be liable for any insurance premium, (H) be primary and without right of contribution from other insurance which may provide coverage to the Additional Insureds and (I) expressly provide that the insurers shall waive any rights of subrogation against the Additional Insureds. 8.2 Insurance Against Loss or Damage to Aircraft. At its own expense, Sublessee shall maintain in effect with insurers of recognized responsibility and reasonably acceptable to Sublessor all-risk aircraft hull insurance (including flight, taxiing and ingestion coverage) covering the Aircraft and all risk insurance on the Engines and Parts while removed from the Aircraft including war-risk insurance if the Aircraft, the Airframe or any Engine is being operated (i) in any recognized or, in Sublessee's reasonable judgment, threatened area of hostilities, or (ii) on international routes and war risk insurance is customarily maintained by other U.S. air carriers operating on such routes, which war risk insurance shall be of the type and form, and in an amount not less than that, carried by Sublessee on similar equipment owned or Subleased by Sublessee and is in an amount not less than the Stipulated Loss Value. If such war-risk insurance is not so available from private insurers, the Sublessee shall maintain such war risk insurance to the extent available from the United States Government or any agency thereof. With respect to the insurance described in this clause, Sublessee may self-insure, by means of a deductible, franchise or similar provision in such insurance policies, the risk required to be insured against pursuant to the first sentence of this Section 8.2 in accordance with the then current airline industry practice and in an amount not exceeding that which is maintained by Sublessee in accordance with its fleet-wide practice; provided that the amount of such self-insurance with respect to the Aircraft shall not exceed $_________ for any one occurrence. 27 Any policies maintained in accordance with this Section 8.2 shall (a) name the Head Lessor of the Airframe (or, if the Head Lessor of the Airframe so directs, Lender) as loss payee, (b) without prejudice to Sublessee's rights under Section 8.4 and 8.8 hereof, provide that payment for any loss in excess of $__________ shall be payable to the Head Lessor of the Airframe (or, if the Head Lessor of the Airframe so directs, to the Lender), except in the case of a loss with respect to an Engine installed on an airframe other than the Airframe, in which case the Sublessee shall arrange for any payment of insurance proceeds in respect of such loss to be held for the account of the Head Lessor of the Airframe (or if the Head Lessor of the Airframe so directs, the Lender) whether such payment is made to the Sublessee or any third party, (c) provide that in respect of the respective interests of the Additional Insureds in such policies, the insurance shall not be invalidated by any action or inaction of the Sublessee or any other Person insured thereby (other than action or inaction of such Additional Insured, as the case may be), and shall insure the Additional Insureds as their interests may appear, regardless of any breach or violation by the Sublessee or any other Person insured thereby (other than such Additional Insured) of any warranties, declarations or conditions contained in such policies, (d) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which adversely affects the interest of Sublessor or Lender, if any, if such insurance may be allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to Sublessor or any Head Lessor, Owner or Lender, if any, for 30 days (ten days in the case of cancellation for non-payment and seven days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by such Person from such insurers of such cancellation, change or lapse; (e) provide that the insurers shall waive any rights of subrogation against Sublessor and each Head Lessor, Owner and Lender, if any; 28 (f) provide that the insurers shall waive any right to any set-off, recoupment or counterclaim or any other deduction, by attachment or otherwise; (g) provide that none of Sublessor, any Head Lessor, Owner or Lender, if any, shall be liable for any insurance premium; and (h) be effective with respect to both domestic and international operation. 8.3 Government Indemnity. Notwithstanding any other provision of this Sublease requiring Sublessee to maintain insurance (but without otherwise affecting any obligations of the Sublessee, or any rights of Persons other than the Sublessee, under this Article 8), Sublessor agrees to accept, in lieu of insurance against any risk with respect to the Aircraft, indemnification from the Government against such risks and in an amount which, when added to the amount of insurance against such risk maintained by Sublessee (including permitted self-insurance) with respect to the Aircraft, shall be at least equal to the amount of insurance against such risk otherwise required by this Article 8. 8.4 Application of Insurance Proceeds. As between Sublessor and Sublessee, it is agreed that all insurance payments received as the result of the occurrence of an Event of Loss with respect to an item of Equipment will be applied as follows: (a) if such payments are received with respect to an Event of Loss relating to the Airframe or the Airframe and one or more Engines or engines installed on the Airframe, so much of such payments as shall not exceed the amounts due under Section 7.1 hereof shall be applied in reduction of Sublessee's obligation to pay such amounts, if not already paid by the Sublessee, or, if already paid by Sublessee, shall be applied to reimburse the Sublessee for its payments of such amounts, and the balance, if any, of such payments remaining thereafter will be paid over to, or retained by, the Sublessee; and (b) if such payments are received with respect to an Engine under the circumstances contemplated by Section 7.2 hereof, such payments shall be paid over to, or retained by the Sublessee, provided that the Sublessee shall have fully performed or, concurrently therewith, will fully perform under Section 7.2(a) hereof. 8.5 Application of Insurance Proceeds for Other Than Event of Loss. As between Sublessor and Sublessee, the insurance proceeds of any property damage loss to any Equipment not constituting an Event of Loss will be applied in payment (or to reimburse the Sublessee) for repairs or for replacement property in accordance with the terms of Articles 5 and 6 hereof, and any balance remaining after compliance with such Articles with respect to such loss shall be paid to, or retained by, the Sublessee if the Sublessor shall have received from the Sublessee prior to making any such payment to the Sublessee an Officer's Certificate of the Sublessee certifying that the property so damaged has been repaired in full and that the costs of such repair (which costs shall be specified in such certificate) have been paid in full. If such repairs are made pursuant to contracts requiring progress payments or if such repairs are made by the Sublessee, such insurance proceeds shall be paid over to the Sublessee from time to time upon appropriate certification by the Sublessee. 29 8.6 Application in Default. Any amount referred to in Sections 8.4(a) or (b) or 8.5 hereof which is payable to the Sublessee shall not be paid to the Sublessee or, if it has been previously paid to the Sublessee, shall not be retained by the Sublessee, if at the time of such payment (a) in the case of Section 8.4 hereof, a Default or an Event of Default shall have occurred and be continuing or (b) in the case of Section 8.5 hereof, an Event of Default or a Default which after lapse of time would constitute an Event of Default of the character referred to in paragraph (a), (b) or (c) of Article 13 hereof shall have occurred and be continuing. In such event, all such amounts shall be paid to and held by the Sublessor as security for the obligations of the Sublessee to make payments hereunder. At such time as there shall not be continuing any Default or Event of Default or, in the case of payments pursuant to Section 8.5 hereof, any Event of Default or Default of the character referred to above, all such amounts at the time held by the Sublessor in excess of the amount, if any, which the Sublessor shall have elected to apply as above provided shall be paid to the Sublessee. 8.7 Certificates of Insurance. Sublessee agrees to furnish the Sublessor on the Delivery Date and on or prior to the date of renewal of the insurance required hereunder during the Term an insurance certificate and report signed by a firm of independent aircraft insurance brokers reasonably acceptable to Sublessor and the Head Lessor of the Airframe certifying that, in the opinion of such broker, the insurance then carried and maintained on each item of Equipment complies with the terms hereof. Such insurance certificate and report shall provide that (i) the broker will advise Sublessor and each Head Lessor, Owner and Lender, if any, in writing promptly of any default in the payment of any premium and (ii) no insurance provided pursuant to this Article 8 shall expire or terminate prior to thirty (30) days (ten days in the case of cancellation for non-payment or, with respect to war risk and allied perils insurance, seven (7) days or such shorter period as may be generally available) after written notice has been issued to Sublessor and each Head Lessor, Owner and Lender, if any. Upon the transfer by any Head Lessor, Owner or Lender, if any, of its interests in the Aircraft or any Engine, Sublessee will cooperate in obtaining new certificates naming the transferee of such interest. 8.8 Insurance of Sublessee's Interest. (a) Nothing contained herein shall prevent Sublessee from carrying at its own expense additional insurance in excess of that required hereunder, and notwithstanding anything to the contrary contained elsewhere in this Sublease, any and all proceeds of such additional insurance shall be payable solely to Sublessee or the appropriate third party liability claimant, as the case may be. Nothing in this Article 8 shall be construed to prohibit the Sublessor or any Head Lessor or Owner from insuring the Aircraft, any Engine or its interest therein, but the insurance so maintained by the Sublessor or such Head Lessor or Owner shall not provide for or result in a reduction of the coverage or the amounts payable under any of the insurance required to be maintained by Sublessee by this Article 8. 30 (b) If Sublessee shall fail to maintain or cause to be maintained insurance as herein provided, Sublessor may at its option (but shall not be obligated to) provide such insurance and in such event, Sublessee shall, upon demand, reimburse such Person for the cost thereof. ARTICLE 9 LIENS AND INDEMNITIES 9.1 Liens. Sublessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein except: (a) the respective rights of the parties to the Operative Agreements; (b) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of the Operative Agreements; (c) Sublessor Liens; (d) Head Lessor Liens; (e) Facility Liens; (f) liens for taxes, assessments or other governmental charges either not yet due or being contested in good faith by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine; (g) materialmen's, mechanics', workers', repairers', employees' or other like Liens for amounts the payment of which is either not yet delinquent for more than 60 days or is being contested in good faith by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine; (h) Liens arising out of any judgment or award unless the judgment secured shall not, within 60 days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within 60 days after the execution of such stay and provided such Lien presents no material risk of the forfeiture or loss of the Aircraft, Airframe or any Engine or of Sublessor's interest therein, and (i) any other Lien with respect to which Sublessee shall have provided security in form and amount adequate in the reasonable judgment of Sublessor. Sublessee will promptly take (or cause to be taken) such action at its own expense as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. 9.2 General Indemnity. (a) Sublessee hereby agrees to assume liability for and to indemnify, protect, save and keep harmless the Sublessor and each Head Lessor, Owner and Lender (if any) and their respective successors, permitted assigns, affiliates, directors, officers, employees, agents and servants (in this Section 9.2 and in Section 9.3 hereof, collectively, the "Indemnitees") from and against any and all liabilities (including liability in tort, absolute or otherwise), obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements of whatsoever kind and nature (including reasonable legal fees and expenses) (any and all "Claims"), imposed on, incurred by or asserted against any Indemnitee (whether or not also indemnified against by any other Person under any other document) in any way relating to or arising out of (i) this Lease or (ii) the delivery, sublease, possession, use, operation, condition, return or other disposition of any item of Equipment, to the extent incurred or arising out of events occurring at any time after delivery of the Aircraft to Sublessor hereunder and prior to return of the Aircraft to Sublessor hereunder in full compliance by the Sublessee with all of the terms of this Sublease with respect thereto (including latent and other defects, whether or not discoverable by any Indemnitee or the Sublessee, and any claim for patent, trademark or copyright infringement); provided, however, that the Sublessee shall not be required (A) to indemnify Sublessor in respect of any amounts which Sublessor has specifically agreed to pay hereunder, (B) to indemnify any Owner or any of its Affiliates against loss, liability or expense incurred by any such Affiliate as a result of any claim against any such Affiliate in its capacity as manufacturer of the Engines and components thereof including claims for patent, trademark or copyright infringement, (C) to pay any cost, expense or disbursement (including legal fees and expenses) in connection with the entering into or withholding any future amendments, supplements, waivers or consents with respect to this Sublease or under any Head Lease other than such as have been requested by Sublessee, (D) to indemnify any Indemnitee for loss, liability or expense resulting from the willful misconduct or gross negligence of such Indemnitee or its successors, assigns, affiliates, agents or servants or, in the case of any Owner, any owner trustee acting for such Owner or, in the case of any such owner trustee, the relevant Owner, (E) to indemnify any Indemnitee for any loss, liability or expense which any of them may incur as the result of any failure or refusal of any of them to perform or observe any agreement, covenant or condition contained in any Operative Document, or (G) to indemnify any Indemnitee for any loss, liability or expense which any of them may incur as the result of any Head Lessor Lien or Sublessor Lien; provided further that Sublessee does not under this Section 9.2 assume liability for, or indemnify, protect, save and keep harmless, any Indemnitee from or against or in respect of any liabilities, obligations, losses, damages, penalties, claims, actions or suits in any way relating to or arising out of any Taxes, as defined in Section 9.3. 31 Upon payment in full of any indemnities contained in this Section 9.2 by the Sublessee, it shall be subrogated to any rights of the Indemnitee in respect of the matter against which indemnity has been given, but any amount recovered by the Sublessee as a result of such subrogation shall, unless all amounts then due to such Indemnitee from the Sublessee have been paid, be held in trust by the Sublessee for and shall, to the extent of any such amount then due, be paid promptly after demand to, such Indemnitee. If any Indemnitee shall have knowledge of any claim or liability hereby indemnified against, it shall give prompt written notice hereof to the Sublessee and each other interested party, but the failure to do so shall not relieve Sublessee from any liability which it may have to such Indemnitee or any other Indemnitee except to the extent that the Sublessee shall demonstrate that such liability was materially increased as a result of such failure. If the Sublessee is required to make payment under this Section 9.2, the Sublessee shall pay the Indemnitee any amount which, after deduction of all taxes required to be paid by such Indemnitee in respect of the receipt thereof under the laws of the United States or of any foreign country or any political subdivision of either (after giving credit for any savings in respect of any taxes by reason of deductions, credits or allowances in respect of the payment of the expense indemnified against) shall be equal to the amount of such payment. 32 (b) Contest. With respect to any Claim imposed on, incurred by, or asserted against one or more Continental Indemnitees but not imposed on, incurred by or asserted against any other Indemnitees, Sublessee shall be entitled, at its sole cost and expense, acting through counsel reasonably acceptable to the respective Continental Indemnitee, (i) in any judicial or administrative proceeding that involves solely one or more such Claims, to assume responsibility for and control thereof, (ii) in any judicial or administrative proceeding involving one or more such Claims and other claims related or unrelated to the transactions contemplated by this Sublease, to assume responsibility for and control of such Claims to the extent that the same may be and is severed from such other claims (and such Continental Indemnitee shall use its best efforts to obtain such severance), and (iii) in any other case involving such Claim, to be consulted by such Continental Indemnitee with respect to judicial proceedings subject to the control of such Continental Indemnitee. Notwithstanding any of the foregoing to the contrary, Sublessee shall not be entitled to assume responsibility for and control of any such judicial or administrative proceedings involving such a Claim (A) while an Event of Default under the Sublease shall have occurred and be continuing, (B) if such proceedings will involve any material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Aircraft, any item of Equipment, this Sublease or any part thereof unless Sublessee shall have protected Sublessor against such risk in a manner acceptable to Sublessor, (C) such Claims involved relate in any way to the business of any Indemnitee other than the transactions contemplated by this Sublease, (D) such Claims, in the opinion of independent counsel for such Continental Indemnitee reasonably satisfactory to Sublessee, have a reasonable possibility of otherwise compromising or jeopardizing any substantial interests of such Indemnitee, or (E) promptly following the request of a Continental Indemnitee, Sublessee shall not have furnished such Continental Indemnitee with an opinion of independent counsel reasonably satisfactory to such Continental Indemnitee to the effect that there exists a meritorious basis for contesting such Claims. The Continental Indemnitee may participate with its own counsel, at its own expense, in any judicial proceeding controlled by Sublessee pursuant to the preceding provisions. The Continental Indemnitee shall supply Sublessee with such information reasonably requested by Sublessee as is necessary or advisable for Sublessee to control or participate in any proceeding to the extent permitted by this Section 9.2(b). Such Continental Indemnitee shall not enter into a settlement or other compromise with respect to any such Claims without the prior written consent of Sublessee, which consent shall not be unreasonably withheld or delayed, unless such Continental Indemnitee waives its right to be indemnified with respect to such Claims under this Section 9.2. 9.3 General Tax Indemnity. (a) Sublessee agrees to pay and to indemnify and hold each Indemnitee (as defined in Section 9.2 hereof) harmless from all license, documentation, recording and registration fees, taxes, levies, imposts, duties, assessments, fees, charges and withholdings of any nature whatsoever, together with any penalties, fines, additions to tax or interest thereon, howsoever imposed, whether levied or imposed upon an Indemnitee or otherwise, by any Federal state or local government or governmental subdivision or taxing authority in the United States or by any foreign country or foreign taxing authority or territory or possession of the United States or any subdivision or taxing authority of any of the foregoing, upon or with respect to (i) the Equipment or any part thereof, (ii) the ownership, delivery, subleasing, possession, use, operation, storage, sale, transfer of title, return, or other disposition of the Equipment, (iii) the rentals, receipts or earnings arising from this Sublease, (iv) the execution, delivery or performance of the Operative Agreements, (v) any payment made pursuant to any such agreement or document or (vi) the property or the income or other proceeds received with respect to property held by the Sublessor hereunder (all such license, documentation, recording and registration fees, taxes, levies, imposts, duties, assessments, fees, charges, withholdings, penalties, fines, additions to tax and interest imposed as aforesaid being hereinafter in this Section 9.3 called "Taxes"). 33 (b) Exclusions. Sublessee shall have no obligation to indemnify an Indemnitee under this Section 9.3 for (i) any Taxes to the extent contested by the Sublessee in good faith in accordance with the provisions of paragraph (c) below; (ii) any Taxes imposed as a result of a sale, transfer, assignment or other disposition, whether prior to, during or after the Term, with respect to any item of Equipment, by an Indemnitee of any interest in such item of Equipment, the trust created by the trust agreement between any Head Lessor and Owner (the "Owner Trust"), this Sublease or any Head Lease unless such sale, transfer, assignment or other disposition is made as the result of the exercise of remedies after an Event of Default pursuant to Article 14 hereof, but in no event shall the Sublessee be liable for any Taxes on, based on, or measured by or related to any income or gain realized upon any such disposition; (iii) any Taxes imposed with respect of an item of Equipment for any period (A) prior to the delivery of such item of Equipment by Sublessor to Sublessee pursuant to this Sublease or (B) after the redelivery of such item of Equipment to Sublessor or its designee or (C) after the expiration of the Term with respect thereto; (iv) any Taxes imposed on or for the account of any Lender; (v) any Taxes on, based on or measured by, the net income of an Indemnitee and any Taxes enacted by any jurisdiction after the date of this Sublease which are, in effect, a substitute for or in lieu of any such Taxes and any Taxes, however denominated, based on or measured by, value added, except any such Taxes to the extent imposed on the receipt of a payment under this Section 9.3; 34 (vi) any Taxes to the extent that such Taxes would not have been imposed had there not been a transfer by an original Indemnitee of an interest in an item of Equipment, the Owner Trust, this Sublease, or any Head Lease or, if such Taxes would have been imposed on or with respect to such original Indemnitee, such original Indemnitee would not have been entitled to indemnification with respect to such Taxes; (vii) any Taxes consisting of penalties, fines or interest imposed as a result of the failure of an Indemnitee to file any return or pay any amount when due, unless the Sublessee was responsible for such filing or payment; (viii) any Taxes included in the original cost to any Head Lessor of acquiring the Aircraft or any Engine; (ix) any Taxes to the extent such Taxes would not have been imposed had the Owner Trust and the Head Lessor of the Airframe been resident in the State of Utah; and (x) any Taxes imposed with respect to any fees or compensation received by Sublessor. (c) Contest. If a claim is made against an Indemnitee for any Taxes indemnified against under this Section 9.3, such Indemnitee will, within 10 days after such Indemnitee is aware of such claim, notify the Sublessee in writing of such claim, but the failure to do so will not relieve the Sublessee from any liability which it may have to such Indemnitee if, notwithstanding such failure, the Sublessee's ability to contest such claim under this paragraph (c) is not adversely affected. If requested by the Sublessee in writing, the Indemnitee shall permit the Sublessee to contest such claim at Sublessee's expense, upon receipt of an indemnity undertaking from Sublessee reasonably satisfactory to the Indemnitee for such Taxes and for all costs, expenses, legal and accountants' fees and disbursements, penalties, fines, additions to tax and interest resulting from such contest. Sublessee may contest such claim, in the name of the Sublessee or such Indemnitee, to the extent permitted by law, by (i) seeking administrative review of the claim, (ii) resisting payment thereof if possible, (iii) not paying the same except under protest, if protest is necessary and proper, (iv) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative or judicial proceedings, or both and (v) taking any other reasonable action appropriate to contest the claim. (d) Reports. In case any report or return is required to be made with respect to any obligation of the Sublessee under this Section 9.3 and unless an Indemnitee shall notify the Sublessee that it intends to make such report or return, the Sublessee either shall make such report or return in such manner as will show, if appropriate, the interest of the Sublessor, Head Lessor and Owner in the Aircraft or other item of Equipment, or shall promptly notify such Indemnitee, Sublessor, Head Lessor and Owner of such requirement and shall make such report or return in such manner as shall be reasonably satisfactory to such Indemnitee, the Sublessor, Head Lessor and Owner. All costs and expenses (including legal and accountants' fees) of preparing any such return or report shall be borne by the Sublessee. If an Indemnitee has notified the Sublessee pursuant to this subsection that it intends to make any report or return, the Indemnitee shall give the Sublessee written notice prior to either filing any return, statement or report with respect to any Taxes for which indemnification would be payable by the Sublessee under this Section 9.3 or paying any such Taxes and shall send a copy of such report or return to the Sublessee at least 10 days prior to the date on which such report or return is due to be filed or payment is to be made. 35 (e) Repayments. If an Indemnitee obtains a refund of any Taxes with respect to which the Sublessee has paid an indemnity under this Section 9.3 or a reduction in any Taxes as a result of the payment or incurrence of any Tax for which the Sublessee has paid an indemnity under this Section 9.3, the Indemnitee shall pay to the Sublessee the amount of such refund or reduction, including any interest received thereon, plus any net reduction of Taxes imposed on such Indemnitee resulting from the payment to the Sublessee under this subsection. An Indemnitee is not required to make any payments to the Sublessee under this subsection to the extent that such payments would exceed the aggregate payments by the Sublessee to such Indemnitee under this Section 9.3. (f) Payments. The Sublessee agrees to pay any amount it is required to pay under this Section 9.3 promptly after the Indemnitee requests the payment in writing, but the Sublessee is not required to make any payment before the Indemnitee has paid the Taxes in respect of which the Sublessee's payment is to be made. If the Sublessee is required to indemnify any Person for Taxes under this Section 9.3, the Sublessee shall pay to such Person an amount which, after deduction of all Taxes required to be paid by such Person in respect of the receipt of such amount under the laws of the United States or of any foreign country or any political subdivision of either (after giving credit for any savings in respect of any such Taxes by reason of deductions, credits or allowances in respect of the payment of the expenses indemnified against), shall be equal to the amount of the indemnification required. Each Indemnitee agrees to pay the Sublessee any amount it is required to pay the Sublessee under this Section 9.3 promptly after the Indemnitee receives a refund with respect to such Taxes or realizes a reduction in Taxes giving rise to an obligation to make such payment. Any demand for payment to the Sublessee and any payment to the Sublessee shall be accompanied by a written statement describing in reasonable detail the computation of the payment. If the Sublessee requests, the statement will be verified, at the Sublessee's expense, by independent public accountants of recognized standing selected by the Indemnitee submitting the statement. (g) Agreement of Indemnitee. If an Indemnitee is not a party to this Sublease, the Sublessee may require the Indemnitee to agree to the terms of this Section 9.3 prior to making any payment to the Indemnitee under this Section 9.3. 9.4 Survival. All indemnities and agreements contained in Sections 9.2 and 9.3 will survive any investigation or inspection made by or on behalf of any Indemnitee or the Sublessee and the expiration or other termination of this Sublease, in whole or in part for a period of five (5) years. 36 ARTICLE 10. INSPECTION; FINANCIAL STATEMENTS AND OTHER INFORMATION 10.1 Inspection. At reasonable times during the Term of this Sublease, Sublessee shall provide to Sublessor and each Head Lessor and Owner such information concerning the location, condition, use and operation of the Equipment as they may reasonably request. Additionally, Sublessee shall permit (a) Sublessor, each Owner and any of their authorized representatives at such Person's expense to visit and inspect any item of Equipment, its condition, use and operation and any records in Sublessee's possession maintained in connection therewith (except to the extent prohibited by applicable national security regulations of the Government), and (b) Sublessor and any of its representatives to discuss the finances and accounts of the Sublessee in relation to the performance of its obligations hereunder, with the financial officers of the Sublessee; provided that such visits, inspections and discussions do not interfere with the operations of the Sublessee and are scheduled at the reasonable request of the Sublessor and the Owner at times mutually convenient to such Person and the Sublessee. The Sublessee hereby agrees to make all reasonable efforts to arrange for such visits, inspections and discussions at times convenient for such Person. Neither the Sublessor or any Owner shall have any duty to make any such inspection nor shall any of them incur any liability or obligation by reason of not making any such inspection nor waive or be deemed to waive any rights hereunder or under any other Operative Agreement. Sublessor shall not have any obligation to third parties or to any Person to ensure that Sublessee maintains the Aircraft or causes the Aircraft to be maintained in an airworthy condition or otherwise in accordance with the terms hereof. 10.2 Financial Statements and Other Information. (a) Within 60 days after the end of each of the first three fiscal quarters and 120 days after the end of each fiscal year, Sublessee shall deliver to Sublessor (1) a certificate signed by Sublessee's principal financial officer stating that, to the best of his knowledge, there did not exist at any time during such period a Default or Event of Default or, if such principal financial officer shall have obtained knowledge of any Default or Event of Default, specifying the nature and period of existence thereof and what action the Sublessee has taken, is taking or proposes to take with respect thereto, and (2) if requested by Sublessor or the Owner of the Airframe, a copy of the Sublessee's quarterly report on Form 10-Q or Annual Report on Form 10-K, as the case may be, filed with the Securities and Exchange Commission or, if Sublessee does not file such periodic reports, equivalent financial information. 37 (b) at any time or times and for such period of time as requested by Sublessor, such further information and data with respect to Sublessee as the Sublessor (or Owner through Sublessor) from time to time may reasonably request; and (c) promptly after any principal officer of the Sublessee having managerial responsibilities obtains knowledge of the occurrence of any Event of Default hereunder, an Officer's Certificate of Sublessee specifying the nature and period of existence of such Event of Default and what action, if any, the Sublessee has taken, is taking or proposes to take with respect thereto. ARTICLE 11. RECORDATION AND FURTHER ASSURANCES Forthwith upon the execution and delivery of each Sublease Supplement, the Sublessee will cause such Sublease Supplement to be duly filed and recorded in accordance with the Act. In addition, Sublessee will promptly and duly execute and deliver to Sublessor such further documents and assurances and take such further action as the Sublessor may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Sublease and to establish and protect the rights and remedies created or intended to be created in favor of the Sublessor hereunder. The Sublessee's obligations under Article 11 shall be limited to action to be taken in the United States of America, unless the Aircraft is registered under the laws of a country other than the United States of America, in which case this Article 11 shall apply to action to be taken as well in the country in which such Aircraft is registered or such other applicable jurisdiction. ARTICLE 12. RETURN OF AIRCRAFT 12.1 Return. Except as otherwise provided herein, at the expiration of the Term or upon the earlier termination of this Sublease, Sublessee, at its own risk and expense, shall return the Aircraft to the Sublessor by delivering the same to the Sublessor at any location in the continental United States of America designated by Sublessor. At the time of return to the Sublessor, the Aircraft shall be fully equipped with three Engines or other engines owned by the Sublessee (and complying with Section 7.8 hereof) properly installed thereon and all other Parts and items of Equipment that were installed on or delivered with the Aircraft on the Delivery Date (including the two shipsets of galley equipment, 26 LD3 cargo containers, 12 cargo compartment partial load latches (4 forward and 8 aft) part number AWJ7019-501, 8 cargo compartment partial load latches (all forward) part number 225-46787-1), except for Parts replaced or removed in accordance with Sections 6.1 or 6.3. 38 12.2 Records. Upon the return of the Aircraft, Sublessee shall deliver to Sublessor (a) all logs, manuals, certificates, data and inspection, modification and overhaul records required to be maintained with respect thereto under applicable rules and regulations of the FAA in Sublessee's possession and any other governmental authority having jurisdiction, and (b) and logs, manuals and catalogs included with each item of Equipment on the Delivery Date thereof. 12.3 Condition. Except as otherwise provided in Section 6.3 hereof, the Aircraft when returned to Sublessor shall be in the same configuration as when the Aircraft was originally delivered to Sublessee hereunder, shall be clean by commercial airlines standards, shall be airworthy and shall have a currently effective FAA certificate of airworthiness and shall be registered in the name of the Head Lessor in accordance with the Act and each item of Equipment returned to Sublessor shall (a) be in the condition required under Article 5 hereof and shall have been maintained pursuant to Section 5.3 hereof throughout the Term as if the Sublessee were the owner and operator thereof and as if the Term were not then ending, (b) be free and clear of any Liens (other than Liens of the character referred to clauses (a), (c), (d) and (e) of the definition of Permitted Liens), (c) shall be in as good a condition as when delivered, ordinary wear and tear excepted and (d) shall be in a condition for immediate operation under Federal Aviation Regulation 121. Sublessor shall have the right to conduct a ground inspection of the Aircraft to determine compliance with this Article 12. Each fuel tank and oil tank of the returned Aircraft shall contain not less than the quantity of fuel as was contained in such tanks when delivered to Sublessee on the Delivery Date, and, in the case of any differences in such quantities, an appropriate adjustment will be made by payment therefor at the then current market price at the place of delivery of fuel. ARTICLE 13. EVENTS OF DEFAULT The following events shall constitute Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) Sublessee shall fail to make any payment of Basic Rent when due and such payment shall be overdue for a period of 5 days; or (b) Sublessee shall fail to make any payment of Supplemental Rent or any payment due to Continental under the MSA, in each case after the same shall have become due, and such payment shall be overdue for a period of 10 days; or (c) Sublessee shall fail to carry and maintain insurance on or with respect to the Equipment in compliance with the provisions of Article 8 hereof; or 39 (d) Sublessee shall fail to perform or observe any other covenant or agreement to be performed or observed by it hereunder or under any other Operative Agreement and such failure shall continue unremedied for a period of 30 days after written notice thereof by Sublessor to Sublessee; provided, however, that if such failure cannot be remedied within such 30-day period and Sublessee shall be diligently proceeding to correct such failure as Sublessor deem appropriate and necessary to remedy such failure, such period shall be extended for up to an additional 30 days; or (e) Any representation or warranty made by Sublessee herein or in any other Operative Document or in any document or certificate provided by Sublessee pursuant hereto or thereto shall prove to have been false or misleading in any material respect, and such condition shall remain material and continue unremedied for a period of 30 days after written notice thereof by Sublessor to Sublessee; or (f) The entry of a decree or order for relief by a court having jurisdiction in the premises in respect of the Sublessee in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law (collectively, "Bankruptcy Laws"), or appointing a receiver, liquidator, assignee custodian, trustee, sequestrator (or similar official) of Sublessee or for all or substantially all of its property, or ordering the winding-up or liquidation of its affairs, or the commencement of an involuntary case under any Bankruptcy Laws against Sublessee and the continuance of any such decree or order or involuntary case unstayed and in effect for a period of 60 consecutive days; or (g) The commencement by Sublessee of a voluntary case under any Bankruptcy Laws, or any other proceeding seeking liquidation, reorganization or other relief with respect to itself under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or (h) Failure to return Aircraft to Sublessor on or before January 2, 2002 in compliance with the terms hereof; provided, however, that failure to return the Aircraft on the date set forth herein will not be an Event of Default for five (5) days after such date if Sublessee has ceased commercial operation of the Aircraft and makes diligent effort to return the Aircraft and failure to return the Aircraft on the date set forth herein will not be an Event of Default (without limitation as to time of delay) if such failure is a result of the failure of Continental to perform the MSA. 40 ARTICLE 14. REMEDIES 14.1 Default; Remedies. Upon the occurrence of an Event of Default and at any time thereafter so long as the same shall be continuing, Sublessor may, at its option, declare this Sublease to be in default, and may exercise one or more of the following remedies as Sublessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) Sublessor may cause Sublessee, upon written demand by Sublessor and at Sublessee's expense, to return promptly, and Sublessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Sublessor may so demand to Sublessee at such location on Sublessee's route system selected by Sublessor in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 12 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Sublessor, at its option, may enter upon any premises where all or any part of the Aircraft, Airframe, Engines, or Part thereof, is located or reasonably believed to be located and take immediate possession of and remove the same without the necessity for first instituting proceedings or by summary proceedings or other method under applicable law all without liability accruing to Sublessor for or by reason of such entering and taking of possession (except liability resulting from the willful misconduct or gross negligence of Sublessor or its agents); or (b) Sublessor may sell all or any part of the Aircraft, Airframe or any Engine, or Part thereof, at public or private sale, at such times and places, to such Persons as Sublessor may determine, or otherwise dispose of, hold, use, operate or Sublease to others the Aircraft, Airframe or any Engine, or Part thereof, as Sublessor, in its sole discretion, may determine, all free and clear of any rights of Sublessee and without any duty to account to Sublessee with respect to such action or inaction or for any proceeds with respect thereto (except in connection with the calculation of liquidated damages as provided below); or (c) Whether or not Sublessor shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (a) or (b) above, Sublessor, by written notice to Sublessee specifying a payment date not earlier than ten days from the date of such notice, may cause Sublessee to pay to Sublessor, and Sublessee shall pay to Sublessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft, Airframe, Engine or Part thereof due for the periods commencing after the date specified for payment in such notice), any unpaid Basic Rent due for periods prior to and including the period ending with the Rent Payment Date immediately preceding the date specified in such notice plus an amount equal to the excess, if any, of the present value of the remaining payments of Basic Rent during the Term over the present value of the fair market rental value of the Aircraft, Airframe, Engine or Part thereof, for the remainder of such Term, using in each case a discount rate equal to the Prime Rate as of the date specified for payment in such notice; or 41 (d) Sublessor may rescind this Sublease as to all or any part of the Aircraft, Airframe and Engines, or Part thereof, or may exercise any other right or remedy which may be available to it under the Uniform Commercial Code whether or not in effect in the jurisdiction in which enforcement is sought or other applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. For the purpose of this Section 14, the "fair market rental value" of the Aircraft shall be as specified in an appraisal by BK Associates or Aircraft Information Services, Inc., as selected by Sublessor or, if neither appraiser is available, another nationally recognized independent aircraft appraiser chosen by Sublessor, who shall determine such value on the basis of the actual location and condition of the Aircraft. In addition to the foregoing remedies, Sublessee shall be liable for any and all Supplemental Rent due hereunder before or after termination hereof, except as otherwise expressly provided above, for all legal fees and other costs and expenses of Sublessor incurred by reason of the occurrence of an Event of Default and the exercise of Sublessor's remedies with respect thereto including all costs and expenses incurred in connection with the return of the Airframe or any Engine in accordance with the terms of Article 12 hereof or any appraisal of the Aircraft. At any sale of the Airframe or any Engine, Sublessor may bid for and purchase such property. 14.2 No Waiver, Etc No remedy referred to in this Section 14 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Sublessor at law or in equity; and the exercise or beginning of exercise by Sublessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Sublessor of any or all of such other remedies. No express or implied waiver by Sublessor of any Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Event of Default. ARTICLE 15. MISCELLANEOUS 15.1 Notices. All notices required under the terms and provisions hereof shall be in writing and shall be given by certified mail, overnight courier, telecopy, telex, teletype or any other customary means of written communication, addressed: 42 If to Sublessor, at 1600 Smith Street, 32nd Floor - HQSFM, Houston, Texas 77002, Attention: Vice President - Fleet Management or at such other address as Sublessee shall from time to time designate in writing; If to Sublessee, at Honolulu International Airport, P.O. Box 30008, Honolulu, Hawaii 96820-0009, Attention: VP - Finance, copy to General Counsel, or at such other address as Sublessor shall from time to time designate in writing; 15.2 Right to Perform for Sublessee. If Sublessee fails to make any payment of Supplemental Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Sublessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the reasonable cost of such performance or compliance, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Sublessee upon demand. 15.3 Assignment by Sublessee. Except as expressly permitted in the following sentence, Sublessee will not assign any of its rights under this Sublease without the prior written consent of Sublessor and Head Lessor. On ten days' written notice to Sublessor, Sublessee may consolidate with or merge into any other corporation provided that the following conditions are met: (a) the corporation formed by such consolidation or into which Sublessee is merged shall be a corporation organized under the laws of the United States of America or any State thereof or the District of Columbia, shall be a citizen of the United States within the meaning of the Act, shall be a United States certificated air carrier holding one or more certificates of public convenience and necessity and shall execute and deliver to Sublessor and Head Lessor an agreement containing an assumption by such successor corporation of the due and punctual performance of each covenant and condition contained in this Sublease and the other Operative Agreements, (b) immediately after giving effect to such transaction, no Event of Default shall have occurred and be continuing and (c) Sublessee shall have delivered to Sublessor an Officer's Certificate of Sublessee stating that such transaction complies with the requirements of this Section 15.3. 15.4 Assignment by Sublessor. Sublessor shall not sell, assign, convey or otherwise transfer its interest in the Operative Agreements (whether by sale, merger or otherwise) except on the conditions set forth in this Section 15.4. Sublessor may transfer its right, title and interest in the Operative Agreements to (1) Continental, (2) the Head Lessor or (3) the Owner. 43 In addition, Sublessor may transfer its right, title and interest in and to the Operative Agreements to another Person (for the purposes of this Section 15.4, the "Transferee"), subject to the conditions that: (a) The Transferee shall have full power and authority and legal right to execute and deliver and to perform its assumed obligations under this Agreement and the other Operative Agreements and shall provide reasonably satisfactory evidence of such power and authority to Sublessee; (b) The Transferee shall enter into one or more legal, valid, binding and enforceable agreements (and, if such Transferee is not an Affiliate or wholly-owned subsidiary of Sublessor, accompanied by an opinion of counsel reasonably satisfactory to Sublessee addressed to Sublessee to the effect that such agreement or agreements are legal, binding and enforceable in accordance with its or their terms with such exceptions and qualification as are permitted in the comparable opinion delivered on the Delivery Date), pursuant to which such Transferee agrees to be bound by all the terms of, and to undertake all of the obligations arising after such transfer of, the transferring Sublessor contained in the Operative Agreements and in which it makes representations and warranties comparable to those contained in Section 4.2; (c) Any such transfer shall not violate the Act or result in a "prohibited transaction" within the meaning of ERISA; and (d) The Transferee shall be either (i) a United States bank, insurance company or other financial institution with a capital and surplus of at least $10,000,000, or a wholly-owned subsidiary of such a bank, insurance company or other financial institution, or (ii) a corporation which has a net worth of at least $10,000,000 (or is a wholly-owned subsidiary of such a corporation), and, as of the date of such transfer, is an entity experienced in participating as an equity investor in equipment leasing transactions having similar magnitude to this transaction; provided, that if the Transferee does not itself have a capital and surplus or a net worth of at least $10,000,000, the transferring Sublessor shall continue to be liable for (or if the parent of such Transferee meets such net worth test, such parent shall enter into a legal, valid, binding and enforceable agreement, in form and substance reasonably satisfactory to Sublessee, effective to confirm that such parent shall be liable for) all the obligations of Sublessor hereunder assumed by the Transferee; and provided further that if the Transferee is a partnership, each partner (including each limited partner, if any) shall be a "citizen of the United States" within the meaning of Section 101(16) of the Act or a "Resident Alien" within the meaning of the Act and shall not be a tax exempt organization or entity, governmental unit or foreign person or entity within the meaning of Section 48(a)(4), 48(a)(5) or 168(h)(2) of the Code; Sublessor shall give written notice to Sublessee at least 10 days prior to such transfer, specifying the name and address of the proposed Transferee, and the facts necessary to determine whether or not the requirements for a transfer, as set forth herein, are satisfied. Upon any such transfer, the Transferee shall be deemed the "Sublessor" to the extent appropriate for purposes hereof, and the transferring Sublessor shall be released from its obligations under the Operative Agreements arising after such transfer to the extent, but only to the extent, that such obligations have been assumed by the Transferee. 44 Any fees, charges and expenses, including the reasonable legal fees, charges and expenses, incurred by Sublessor or Sublessee in connection with the transfer by Sublessor of any interest in the Aircraft or the Operative Agreements, or by the Transferee in any such case, will be paid for by the Sublessor making such transfer and in no case will the Sublessee be responsible for any such fees, charges or expenses. Without limiting the generality of any of the foregoing, Sublessor will reimburse Sublessee for its reasonable out-of-pocket costs in reviewing documents required by Sublessor, Lender or the Transferee in connection with any such transfer by Sublessor. Sublessor also agrees to reimburse Sublessee for up to $__________ of its actual, out-of-pocket fees, charges and expenses, including the reasonable legal fees, charges and expenses, incurred by Sublessee in connection with the transfer by Owner or Head Lessor of any interest in the Aircraft or the Operative Agreements. Notwithstanding anything herein to the contrary, Sublessee shall not be obligated to take any action in connection with any transfer, assignment, pledge or other conveyance, for security or otherwise, by Sublessor of its interest in any of the Operative Agreements or any item of Equipment if such transfer, assignment, pledge or other conveyance materially adversely affects the rights or obligations of Sublessee under the Operative Agreements or otherwise materially adversely affects Sublessee. The agreements, covenants, obligations and liabilities contained in this Sublease including, but not limited to, all obligations to pay Rent and indemnify each Indemnitee are made for the benefit of each Indemnitee and their respective successors and assigns; provided, however, that no transfer, assignment, pledge, or other conveyance shall increase the aggregate financial exposure under the indemnity obligations of Sublessee under this Sublease as compared to what such obligations would have been had such transfer, assignment, pledge or other conveyance not occurred. Sublessee acknowledges that Head Lessors and Owners have the rights under the relevant Head Lease and related agreements to transfer and finance their interests in the Aircraft and the Head Lease subject to certain restrictions contained therein. In the event of any such transfer or assignment by the Head Lessor or Owner of the Airframe, Sublessor shall use commercially reasonable efforts to (a) procure a letter, satisfactory to Sublessee, from the transferee or assignee agreeing not to disturb Sublessee's possession and use of the Aircraft unless an Event of Default occurs hereunder and (b) ensure the continued United States registration of the Aircraft under the Act without limitation on use or operation and without disrupting Sublessee's continuous operation of the Aircraft. 45 The terms and provisions of this Sublease shall be binding upon and inure to the benefit of Sublessor and Sublessee and their respective permitted successors and assigns. 15.5 Quiet Enjoyment. So long as no Event of Default shall have occurred and be continuing, Sublessor covenants that neither it, Owner, Head Lessor nor any person claiming lawfully through any of them shall interfere with any right of Sublessee peaceably and quietly without hindrance or molestation to hold, possess and use, during the Term and in accordance with the terms hereof, the Aircraft, Airframe and Engines. 15.6 Investment of Funds. Any amounts required to be paid to, or retained by Sublessor on behalf of, Sublessee that are not then required to be paid to Sublessee pursuant to this Sublease (including any security or commitment deposit, if applicable), shall, until paid to Sublessee as provided in this Sublease, be invested by Sublessor at the direction of Sublessee and at the expense and risk of Sublessee in the following securities (which shall mature within 180 days of the date of purchase thereof): (a) direct obligations of the Government; (b) obligations fully guaranteed by the Government; (c) open market commercial paper issued by any corporation rated P-1 or P-2 by Moody's Investors Service Inc. or A-1 or A-2 by Standards & Poor's Corporation; or (d) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with First Security Bank, National Association or any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or any state thereof having a combined capital and surplus of at least $150,000,000. There shall be promptly remitted to Sublessee any gain (including interest received) realized as the result of any such investment (net of any fees, commissions, taxes and other expenses, if any, incurred in connection with such investment) unless an Event of Default shall have occurred and be continuing. Sublessee will promptly pay to Sublessor, on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses (including any taxes), if any, incurred in connection with such investment). 15.7 Maintenance of Status. To the extent provided thereby (or to the fullest extent it may lawfully so agree, whether or not provided thereby), Sublessee hereby agrees that any right of Sublessor to take possession of such Aircraft or Engines in compliance with the provisions of this Sublease and in accordance with Section 1110 of Title 11 of the United States Code or any similar provision of any superseding statute, as amended from time to time, shall not be affected by the provisions of Sections 362 or 363 or said Title, or other analogous part of any superseding statute, as amended from time to time, and accordingly, it is the intention of the parties hereto that this Sublease be afforded the benefits of said Section 1110. 15.8 Confidentiality. Sublessee and Sublessor agree to keep this Agreement, including Schedule 1 hereto, confidential and shall not disclose or cause to be disclosed the same to any Person, except (i) to prospective permitted transferees of any such party's interests or to any prospective Lender or their respective counsel or other agents who agree to hold such information confidential, (ii) to any such party's counsel or special counsel, insurance brokers, auditors or other agents, Affiliates, advisors or investors who agree to hold such information confidential, (iii) as may be required by any statute, court or administrative order, ruling or regulation or applicable law, (iv) the Head Lessor and Owner and (v) such other Persons as are reasonably deemed necessary by the disclosing party in order to protect the interests of such party for the purpose of enforcing such documents by such party. 46 15.9 Applicable Law. All representations, warranties and indemnities of Sublessee and Sublessor provided for in this Sublease and in the other Operative Agreements shall survive the execution and delivery of this Sublease. Any provision of this Sublease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. No term or provision of this Sublease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Sublease shall constitute an agreement of Sublease, and nothing herein shall be construed as conveying to Sublessee any right, title or interest in or to the Aircraft, Airframe or Engines except as a Sublessee only. The section and paragraph headings in this Sublease, the table of contents and the cover (other than the chattel paper language contained thereon) are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof and all references herein to numbered sections, unless otherwise indicated, are to sections of this Sublease. THIS SUBLEASE HAS BEEN, AND EACH SUBLEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Sublease and each Sublease Supplement and amendment hereto may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. This Sublease shall be a net Sublease and, except as specifically provided herein, Sublessee shall be responsible during the Term for all costs incurred in the operation, use, maintenance and possession of the Aircraft by Sublessee. Each party hereto agrees to execute such further documents and make any filings as may be reasonably necessary to protect the rights of the parties hereunder. 47 IN WITNESS WHEREOF, Sublessor and Sublessee have each caused this Sublease to be duly executed and delivered as of the day and year first above written. HAWAIIAN AIRLINES, INC. By:_________________________ Title: By:_________________________ Title: CONTINENTAL MICRONESIA, INC. By:_________________________ Title: 48 EXHIBIT A TO SUBLEASE AGREEMENT SUBLEASE SUPPLEMENT NO. THIS SUBLEASE SUPPLEMENT NO. , dated , 19 between HAWAIIAN AIRLINES, INC. ("Sublessee"), and CONTINENTAL MICRONESIA, INC., a Delaware corporation ("Sublessor"). Sublessor and Sublessee have heretofore entered into that certain Sublease Agreement 060, dated as of _____, 1999 (as at any time amended, modified or supplemented, herein called the "Sublease" and the terms defined therein being herein used with the same meanings), which Sublease provides for the execution of Sublease Supplements substantially in the form hereof for the purpose of leasing an Aircraft under the Sublease as and when delivered by Sublessor to Sublessee in accordance with the terms thereof. [The Sublease relates, among other matters, to the Airframe and Engines described below, and this Sublease Supplement is attached to a counterpart of the Sublease for purposes of filing and recordation with the FAA pursuant to the Act.] [The Sublease relates to the Airframe [and] [Engines] described below, and a counterpart of the Sublease, attached to and made a part of Sublease Supplement No. 1, dated , 1999, to the Sublease, has been recorded by the FAA on , _______ as one document and assigned Conveyance No. ]. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Sublease, Sublessor and Sublessee hereby agree as follows: This Sublease Supplement has been executed in several counterparts. No security interest in Sublessor's right, title and interest in and to this Sublease Supplement may be created through the transfer or possession of any counterpart other than the original counterpart. [This is not the original counterpart.] 1. Sublessor hereby delivers and Subleases to Sublessee, and Sublessee hereby accepts and Subleases from Sublessor, under the Sublease, as herein supplemented: [The following described McDonnell Douglas model DC-10-30 Aircraft (the "Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S. Registration Number______________; Manufacturer's Serial No. __________; and Engines: General Electric model CF6-50C2 engines bearing manufacturer's serial numbers as follows: Position 1: ____ Position 2: ____ Position 3: ____ Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the [Delivered Aircraft] [Engine] is the date of this Sublease Supplement set forth in the opening paragraph hereof. [The Aircraft was delivered with ______ gallons of fuel.] 3. Sublessee hereby confirms to Sublessor that Sublessee has accepted the [Delivered Aircraft] [Engine] for all purposes hereof and of the Sublease. 4. THIS SUBLEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. 49 IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Sublease Supplement to be duly executed and delivered as of the date and year first above written. HAWAIIAN AIRLINES, INC. By:_________________________ Title: By:_________________________ Title: CONTINENTAL MICRONESIA, INC. By:_________________________ Title: SCHEDULE 1 To Sublease Agreement 060 Certain Financial Terms Monthly Aircraft Basic Rent $__________ initially, and subject to adjustment, as provided in the last sentence of this paragraph. Sublessor and Sublessee acknowledge and agree that this Agreement and the MSA have been entered into as part of a single transaction, and that this Agreement and the MSA should be regarded as a single agreement for purposes of assumption or rejection under Section 365 of the U.S. Bankruptcy Code. If the MSA terminates for any reason (including, without limitation, due to default by either party or rejection in a bankruptcy proceeding) while this Agreement remains in effect and Continental fails to make payment to Sublessee of the monthly maintenance credit thereunder, Sublessor and Sublessee agree that the amount of Basic Rent payable hereunder shall be automatically reduced by the amount of such unpaid monthly maintenance credit without further act by either party. Monthly Entertainment System Basic Rent $__________ Holdover Basic Rent $__________ Limits of Liability: $__________ Heavy Maintenance Reserve: $__________ per flight hour prior to mid-D Check and $__________ per flight hour thereafter Aircraft Per Engine Stipulated Loss Stipulated Stipulated Value Date Loss Value Loss Value 2 Oct - 99 $__________ $__________ 2 Jan - 00 __________ __________ 2 Apr- 00 __________ __________ 2 Jul - 00 __________ __________ 2 Oct - 00 __________ __________ 2 Jan - 01 __________ __________ 2 Apr - 01 __________ __________ 2 Jul - 01 __________ __________ 2 Oct - 01 __________ __________ 2 Jan - 02 __________ __________ One Time Start up Costs Reconfiguration of Aircraft $__________ Painting of Aircraft with Hawaiin Logo at cost Sceptre computer installation (five terminals) $__________ Technical training/MX program set up $__________ SCHEDULE 1 To Sublease Agreement 060 Certain Financial Terms Monthly Aircraft Basic Rent $ *** initially, and subject to adjustment, as provided in the last sentence of this paragraph. Sublessor and Sublessee acknowledge and agree that this Agreement and the MSA have been entered into as part of a single transaction, and that this Agreement and the MSA should be regarded as a single agreement for purposes of assumption or rejection under Section 365 of the U.S. Bankruptcy Code. If the MSA terminates for any reason (including, without limitation, due to default by either party or rejection in a bankruptcy proceeding) while this Agreement remains in effect and Continental fails to make payment to Sublessee of the monthly maintenance credit thereunder, Sublessor and Sublessee agree that the amount of Basic Rent payable hereunder shall be automatically reduced by the amount of such unpaid monthly maintenance credit without further act by either party. Monthly Entertainment System Basic Rent $*** Holdover Basic Rent $*** Limits of Liability: $*** Heavy Maintenance Reserve: $*** per flight hour prior to mid-D Check and $*** per flight hour thereafter *** Omitted from the version of this document filed with the Federal Aviation Administration as containing confidential financial information. Aircraft Per Engine Stipulated Loss Stipulated Stipulated Value Date Loss Value Loss Value 2 Oct - 99 $*** $*** 2 Jan - 00 2 Apr - 00 2 Jul - 00 2 Oct - 00 2 Jan - 01 2 Apr - 01 2 Jul - 01 2 Oct - 01 2 Jan - 02 One Time Start up Costs Reconfiguration of Aircraft $*** Painting of Aircraft with Hawaiin Logo at cost Sceptre computer installation (five terminals) $*** Technical training/MX program set up $*** *** Omitted from the version of this document filed with the Federal Aviation Administration as containing confidential financial information. EX-10.7 3 EXHIBIT 10.7 EXECUTION COPY SUBLEASE AGREEMENT 061 Dated as of October 26, 1999 between CONTINENTAL MICRONESIA, INC. Sublessor and HAWAIIAN AIRLINES, INC. Sublessee One McDonnell Douglas DC-10-30 Aircraft N12061 TO THE EXTENT THAT THIS SUBLEASE AND ANY SUBLEASE SUPPLEMENT CONSTITUTE CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED IN THIS SUBLEASE THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". TABLE OF CONTENTS Section Page ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS..................................1 1.1. Definitions......................................................1 1.2. Accounting Terms.................................................6 ARTICLE 2. DELIVERY AND ACCEPTANCE...........................................6 2.1. Agreement to Sublease............................................6 2.2. Conditions Precedent to Sublease of Aircraft by Sublessee........6 2.3. Conditions to Sublease of Aircraft by Sublessor..................7 2.4. Aircraft Delivery Condition; Inspection..........................8 2.5. Reconfiguration and Painting Costs...............................9 2.6. Reimbursement of Costs...........................................9 ARTICLE 3. TERM AND RENT...................................................11 3.1. Term............................................................11 3.2. Basic Rent and Maintenance Reserves.............................11 3.3. Payments on Business Days.......................................12 3.4. Supplemental Rent...............................................12 3.5. Place of Payments...............................................12 3.6. No Set-Off, Counterclaim, Etc...................................13 ARTICLE 4. REPRESENTATIONS, WARRANTIES; DISCLAIMERS........................14 4.1. Of Sublessee....................................................14 4.2. Of Sublessor....................................................15 4.3. Subordination of Sublease to Head Lease.........................17 ARTICLE 5. REGISTRATION, POSSESSION, MAINTENANCE, OPERATION.............................................................17 5.1. Registration and Insignia.......................................18 5.2. Possession......................................................18 5.3. Maintenance.....................................................19 5.4. Operations......................................................20 ARTICLE 6. REPLACEMENT AND POOLING OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS...........................................21 6.1. Replacement of Parts............................................21 6.2. Title to Parts..................................................21 6.3. Alterations, Modifications and Additions........................22 ARTICLE 7. LOSS, DESTRUCTION, REQUISITION..................................23 7.1. Event of Loss with Respect to Airframe..........................23 7.2. Event of Loss with Respect to an Engine.........................24 7.3. Documents Required in Connection with Substitution..............24 7.4. Application of Payments from Governmental Authorities for Requisition of Title........................................25 7.5. Requisition for Use by the Government...........................26 7.6. Application of Payments During Existence of Event of Default....26 7.7. Replacement of Engines..........................................26 ARTICLE 8. INSURANCE.......................................................27 8.1. Public Liability and Property Damage Insurance..................27 8.2. Insurance Against Loss or Damage to Aircraft....................28 8.3. Government Indemnity............................................29 8.4. Application of Insurance Proceeds...............................29 8.5. Application of Insurance Proceeds for Other Than Event of Loss...................................................30 8.6. Application in Default..........................................30 8.7. Certificates of Insurance.......................................30 8.8. Insurance of Sublessee's Interest...............................31 ARTICLE 9. LIENS AND INDEMNITIES...........................................32 9.1. Liens...........................................................32 9.2. General Indemnity...............................................32 9.3. General Tax Indemnity...........................................34 9.4. Survival........................................................37 ARTICLE 10. INSPECTION; FINANCIAL STATEMENTS AND OTHER INFORMATION...........................................................37 10.1. Inspection.....................................................37 10.2. Financial Statements and Other Information.....................38 ARTICLE 11. RECORDATION AND FURTHER ASSURANCES.............................38 ARTICLE 12. RETURN OF AIRCRAFT.............................................39 12.1 Return.........................................................39 12.2. Records........................................................39 12.3. Condition......................................................39 ARTICLE 13. EVENTS OF DEFAULT..............................................40 ARTICLE 14. REMEDIES.......................................................41 14.1. Default; Remedies..............................................41 14.2. No Waiver, Etc.................................................43 ARTICLE 15. MISCELLANEOUS..................................................43 15.1 Notices........................................................43 15.2. Right to Perform for Sublessee.................................43 15.3. Assignment by Sublessee........................................44 15.4. Assignment by Sublessor........................................44 15.5. Quiet Enjoyment................................................46 15.6. Investment of Funds............................................46 15.7. Maintenance of Status..........................................47 15.8. Confidentiality................................................47 15.9. Applicable Law.................................................47 Exhibit A Sublease Supplement Schedule 1 Certain Financial Terms SUBLEASE AGREEMENT 061, dated as of October 26, 1999, between CONTINENTAL MICRONESIA, INC., a Delaware corporation ("Sublessor"), and HAWAIIAN AIRLINES, INC., a Hawaii corporation ("Sublessee"). ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS Section 1.1. Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Sublease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time. The word "including" means "including without limitation". "Act" means that portion of the United States Code comprising the provisions formerly referred to as the Federal Aviation Act of 1958, as amended from time to time. "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Aircraft" means the Airframe which is Subleased hereunder, together with each Engine initially installed on the Airframe when delivered and Subleased hereunder and described on the Sublease Supplement for the Airframe (or any engine substituted for any of such Engines pursuant to Section 7.1, 7.2, 7.7 or 12.2 hereof), whether or not any of such initial or substituted Engines may from time to time be installed on the Airframe. "Airframe" means (a) the McDonnell Douglas Model DC-10-30 aircraft (excluding Engines or engines from time to time installed thereon but including quick engine change kits, which shall be deemed to be part of the Airframe) described on the Sublease Supplement executed on the Delivery Date and Subleased hereunder by Sublessor to Sublessee, and (b) any and all Parts so long as the same shall be incorporated in such airframe and any and all Parts removed from such airframe so long as title to such Parts shall remain vested in Sublessor in accordance with the terms of Section 6. "Basic Rent" means the rent payable for the Aircraft pursuant to Section 3.2 hereof. "Basic Rent Payment Date" means the second day of each calendar month, commencing on May 2, 2000 and concluding on January 2, 2002. "Business Day" shall mean a day other than a Saturday, Sunday or other day on which commercial banking institutions are required or authorized to close in New York, New York or Honolulu, Hawaii. Any reference herein to "days" shall mean calendar days unless Business Days are specified. 1 "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Code. "Continental" means Continental Airlines, Inc., a Delaware corporation, and its successors and assigns. "Continental Indemnitee" means Sublessor and its successors, assigns, affiliates, directors, officers, employees, agents and servants. "Default" means any event or condition which, with notice or lapse of time or both, would constitute an Event of Default. "Delivery Date" means the date of the Sublease Supplement for the Aircraft, which date shall be the date on which the Aircraft is delivered to and accepted by Sublessee and Subleased to Sublessee hereunder, and which date shall be on or about April 3, 2000 (adjusted, if necessary, if the "Scheduled Redelivery Date" (as defined in the MSA) for the Aircraft is adjusted at the conclusion of the condition determination phase of the Aircraft's next scheduled "C" Check due in March/April 2000) or such later date as the parties may mutually agree. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (a) each of the three General Electric model CF6-50C2 engines listed by manufacturer's serial number in a Sublease Supplement subjecting such Engine to this Sublease, whether or not from time to time installed on such Airframe or installed on any other airframe or on any other aircraft, (b) any engine which may from time to time be substituted for an Engine pursuant to Section 7.1, 7.2, 7.7 or 12.2 hereof, whether or not from time to time installed on the Airframe or any other airframe or on any other aircraft, and (c) any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title to such Parts shall remain vested in Sublessor in accordance with the terms of Section 6; provided, however, that the term "Engine" shall not include any Engine after this Sublease shall have terminated with respect thereto. At such time as a replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means as of any date of determination, all Engines then subleased hereunder. "Equipment" means, as of any date of determination and as the context may require, any or all of the Aircraft, Airframe and Engines subleased to the Sublessee hereunder on such date. An "item of Equipment" means the Airframe or any or all of the Engines, as the context may require. "Escrow Agreement" means that certain Escrow Agreement [N68060 and N12061] dated as of November 15, 1999 among Sublessor, Sublessee and First Security Bank, National Association for the deposit and withdrawal of Maintenance Reserves as contemplated by Section 3.2(c). 2 "Event of Default" is defined in Section 13. "Event of Loss" means, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such item of Equipment: (a) loss of such item of Equipment due to destruction, damage beyond repair or rendition of such item of Equipment unfit for normal use for any reason whatsoever; (b) any loss of or damage to such item of Equipment which results in an insurance settlement with respect to such item of Equipment on the basis of a total loss or constructive total loss; (c) the requisition of title to or condemnation of such item of Equipment; or (d) the theft, disappearance, confiscation or seizure of, or requisition of use of, such item of Equipment (other than a requisition for use by the Government or any instrumentality or agency thereof (except a requisition that (i) is determined at the time of requisition or at any time thereafter prior to the end of the Term to be for a period that will continue for more than six months beyond the end of the Term or (ii) is a requisition of any Engine or Engines, but not of the Airframe) unless and until such item of Equipment shall have been modified or adapted in such manner as would render reconversion of such item of Equipment for use in normal commercial service impractical or uneconomical)) which shall have resulted in the loss of possession of such item of Equipment by the Sublessee for 30 consecutive days, in the case of a theft or disappearance, or 90 consecutive days, in the case of a confiscation, seizure or requisition for use, or, at the request of the Sublessee, as the Owner in its absolute discretion may agree, up to 180 consecutive days. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe which constitutes a part of the Aircraft. "FAA" means the Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "Facility Lien" means any Lien on the Aircraft or any Engine granted by a Head Lessor or Owner in favor of a Lender. "Government" means the federal government of the United States of America or any instrumentality or agency thereof whose obligations are backed by the full faith and credit of the United States of America. "Head Lease" means (a) in the case of the Airframe, Lease Agreement No. II dated as of August 25, 1980 between Sublessor, as lessee, and First Security Bank, National Association, as owner trustee and lessor, and (b) in the case of any Engine leased by Sublessor but not covered by such Lease Agreement No. II, the lease agreement covering such Engine. 3 "Head Lessor Lien" means (i) a Facility Lien, (ii) the Liens on the Airframe and Engines arising under the Head Leases, (iii) any Lien on the Airframe or any Engine created by a Head Lessor or Owner or resulting from the affirmative act of the Head Lessor or Owner that is not related to or expressly permitted by the Sublease or consented to by Sublessee, (iv) any Lien on the Airframe or any Engine resulting from claims against a Head Lessor or Owner not related to the transactions contemplated by this Sublease, and (v) any Lien resulting from Taxes imposed against a Head Lessor or Owner which are not indemnified against by Sublessee. "Head Lessor" means (a) in the case of the Airframe, First Security Bank, National Association, as owner trustee and lessor under the Head Lease referred to clause (a) of the definition of "Head Lease" or any of its successors and assigns in such capacity, and (b) in the case of any Engine leased by Sublessor but not covered by the Head Lease referred to in clause (a) of the definition of "Head Lease", the lessor under the relevant Head Lease referred to in clause (b) of the definition of "Head Lease" covering such Engine. "Heavy Maintenance Reserves" means the monthly payments by Sublessee to be made pursuant to Section 3.2(c). "Indemnitee" means Sublessor, Head Lessor, Owner, Lender, their respective successors, permitted assigns, affiliates, directors, officers, employees, agents and servants. "Lender" means any bank or other financial institution providing debt financing to the Head Lessor or Owner of the Airframe or an Engine. "Lien" means any mortgage, pledge, lien, charge, encumbrance, security interest or lease in the nature thereof (including any conditional sale agreement, equipment trust agreement or other title retention agreement) affecting the title to or any interest in property. "MSA" means the Maintenance Services Agreement dated as of October 26, 1999 between Sublessee and Continental. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Person providing such certificate. "Operative Agreements" means this Agreement and each Sublease Supplement. "Overdue Rate" means the Prime Rate plus 150 basis points. "Owner" means (a) with respect to the Airframe, Castle Harbour - I Limited Liability Company, the beneficial owner of the Aircraft, and its successors and assigns, and (b) with respect to any Engine not covered by the Head Lease referred to in clause (a) of the definition of "Head Lease", the beneficial owner of such Engine. "Parts" means all appliances, parts, instruments, avionics, appurtenances, accessories, furnishings and other equipment or components of whatever nature (other than complete Engines or engines and other than Removable Parts and any items leased by Sublessee from a third party other than Sublessor in accordance with Section 6) so long as the same shall be incorporated or installed in or attached to any item of Equipment or so long as title thereto shall remain vested in Sublessor in accordance with Section 6 hereof after removal from such item of Equipment. 4 "Permitted Lien" means (a) any Facility Lien, (b) the rights of others under agreements or arrangements expressly permitted by the terms of Section 5.2 or 6.2 hereof, (c) Liens created by a Head Lessor or Owner, (d) any Lien referred to in clauses (a) through (i) of Section 9.1 and (e) Sublessor Liens. "Permitted Sublessor/Head Lessor Liens" is defined in Section 4.2(f). "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Prime Rate" means the rate per annum announced by The Chase Manhattan Bank, N.A. as its prime commercial lending rate at its principal office in New York from time to time. "Rent" means Basic Rent and Supplemental Rent. "Securities Act" means the Securities Act of 1933, as amended. "Stipulated Loss Value" as of any Stipulated Loss Value Date (a) for the Aircraft means the amount designated as Aircraft Stipulated Loss Value opposite such Stipulated Loss Value Date on Schedule 1 hereto and (b) for an Engine means the amount designated as Engine Stipulated Loss Value opposite such Stipulated Loss Value Date on Schedule 1 hereto. "Stipulated Loss Value Date" means each date for which a Stipulated Loss Value is listed on Schedule 1 hereto. "Sublease", "this Sublease", "this Agreement", "hereby", "herein", "hereof", "hereunder", or other like words mean this Sublease Agreement 061, including without limitation supplementation hereof by one or more Sublease Supplements. "Sublease Supplement" means a supplement to this Sublease substantially in the form attached as Exhibit A hereto, subjecting the Aircraft or other property to this Sublease. "Sublessor Lien" means (i) any Lien (other than a Facility Lien, a Lien created by the Head Lessor or Owner or the Lien on the Airframe or any Engine arising under the relevant Head Lease) created by Sublessor or resulting from the affirmative act of the Sublessor that is not related to or expressly permitted by the Sublease or consented to by Sublessee, (ii) any Lien resulting from claims against Sublessor not related to transactions contemplated by this Sublease, and (iii) any Lien resulting from Taxes imposed against an Indemnitee which are not indemnified against by Sublessee; but does not include any Lien resulting from Sublessor's exercise of remedies pursuant to Section 14 while an Event of Default has occurred and is continuing. 5 "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Sublessee assumes or agrees to pay to Sublessor or to or on behalf of any Indemnitee under this Sublease directly or otherwise, including (i) Stipulated Loss Value payments and (ii) all amounts required to be paid by Sublessee under the indemnities contained in Article 9 hereof. "Taxes" is defined in Section 9.3(a). "Term" means the term for which the Aircraft is subleased beginning on the date on which the Aircraft is delivered to Sublessee hereunder and continuing until January 2, 2002; provided that if the Sublessee fails to return the Aircraft to Sublessor on the anticipated last day of the Term in the condition required hereunder, the Term shall be extended until the Aircraft is so returned. "Transfer" means, with respect to any Person, to transfer, by bill of sale or otherwise, all such Person's right, title and interest in and to the Aircraft, Airframe or any Engine or Part, as the case may be, to another Person on an "as is, where is" basis, free and clear of any Lien or Sublessor Lien but otherwise without recourse, representation or warranty, express or implied, including an express disclaimer of warranties, representations and guarantees in a manner comparable to that set forth in Section 4.2(h). 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with generally accepted accounting principles applied on a consistent basis, and all financial data required to be submitted pursuant to this Sublease shall be prepared in conformity with such principles except as otherwise provided herein. ARTICLE 2. DELIVERY AND ACCEPTANCE 2.1. Agreement to Sublease. Subject to satisfaction of the applicable conditions contained in Section 2.3 below, Sublessor hereby agrees to tender delivery of the Aircraft on the Delivery Date and simultaneously to sublease to Sublessee hereunder, and subject to satisfaction of the applicable conditions contained in Section 2.2 below, Sublessee hereby agrees to accept such delivery and to Sublease from Sublessor hereunder the Aircraft. By execution and delivery of the Sublease Supplement regarding the Aircraft, (i) Sublessor and Sublessee shall each confirm the satisfaction of the conditions contained in Section 2.3 and 2.2, respectively, below and (ii) Sublessee shall confirm to Sublessor that Sublessee has irrevocably accepted the Aircraft for all purposes hereof. Sublessee shall inspect the Aircraft on or prior to the Delivery Date and will become knowledgeable as to its operating condition. 2.2. Conditions Precedent to Sublease of Aircraft by Sublessee. Sublessee's obligation to Sublease the Aircraft under the Sublease shall be subject to the following having been complied with to the satisfaction of or waived by Sublessee on or before the Delivery Date, each document, instrument or opinion referred to below to be reasonably satisfactory in form and substance to Sublessee: 6 2.2.1 Authorization, Execution and Delivery of Documents. The Sublessor shall have duly authorized, executed and delivered the Operative Agreements and the Escrow Agreement and Continental shall have duly authorized, executed and delivered the MSA and all such agreements shall be in full force and effect on the Delivery Date. 2.2.2 Opinions of Counsel. Sublessee shall have received a favorable opinion of counsel to Sublessor as to the matters referred to in Sections 2.2.1, 4.2(a), 4.2(b) and the first clause of 4.2(c) hereof and the opinion of special FAA counsel referred to in Section 2.3.6 below. 2.2.3 Representations and Warranties. The representations and warranties of Sublessor contained in Section 4.2 hereof shall be true and correct on and as of the Delivery Date as though made on and as of the Delivery Date (except to the extent that such representations and warranties relate solely to an earlier date in which case such representation or warranties shall be true and correct as of such earlier date). 2.2.4 No Loss or Destruction of the Aircraft. Neither the Airframe nor any Engine shall have suffered an Event of Loss. 2.2.5 Delivery Condition of Aircraft. Sublessor shall have complied with, and satisfied, the covenants set forth in Section 2.4 hereof, Sublessee shall have completed its inspection and acceptance flight of the Aircraft as provided in Section 2.4 and the Aircraft shall have met the requirements of the delivery condition set forth in Section 2.4 or Sublessor and Sublessee shall have entered into an agreement to address any failure to satisfy any of the foregoing. 2.2.6 Liens. Sublessor shall have delivered a certificate from an officer of Sublessor stating that there is no Sublessor Lien or, to Sublessor's knowledge, Head Lessor Lien on the Aircraft other than any Permitted Sublessor/Head Lessor Liens. 2.2.7 Filing. On such Delivery Date, the Sublease and the Sublease Supplement for the Aircraft shall have been duly filed with the FAA pursuant to the Act. 2.2.8 All Necessary Approvals. All necessary approvals for the transactions set forth in this Sublease have been obtained, including without limitation, the final approvals of Head Lessor and Owner. 2.3. Conditions to Sublease of Aircraft by Sublessor. The obligation of Sublessor to sublease the Aircraft to Sublessee on the Delivery Date is subject to the following conditions having been complied with to the satisfaction of or waived by Sublessor on or before the Delivery Date (each document, instrument, certificate or opinion referred to below to be reasonably satisfactory in form and substance to Sublessor): 7 2.3.1 Authorization, Execution and Delivery of Documents. The Operative Agreements, the MSA and the Escrow Agreement shall have been duly authorized, executed and delivered by Sublessee and shall be in full force and effect on the Delivery Date. 2.3.2 Representations and Warranties Correct; Event of Default. After giving effect to the Sublease of the Aircraft pursuant to this Agreement, the representations and warranties of Sublessee contained in Section 4.1 hereof shall be true and correct on and as of the Delivery Date as if such representations had been made on and as of the Delivery Date, except to the extent that such representations and warranties relate solely to an earlier date (in which case such representations and warranties shall be correct on and as of such earlier date), and (ii) no Event of Default shall have occurred and be continuing. 2.3.3 Insurance Certificates. Sublessor shall have received a broker's report and insurance certificates signed by Sublessee's regularly retained independent aircraft insurance broker or brokers evidencing Sublessee's due compliance with the insurance provisions of the Sublease. 2.3.4 Filing. On such Delivery Date, the Sublease and the Sublease Supplement for the Aircraft shall have been duly filed with the FAA pursuant to the Act. 2.3.5 Opinion of Counsel for Sublessee. Sublessor shall have received a favorable opinion from counsel to Sublessee as to the matters referred to in Sections 2.3.1, 4.1(a), 4.1(b) and 4.1(d). 2.3.6 Opinion of Oklahoma City Counsel. Sublessor and Sublessee shall have received a favorable written opinion or opinions addressed to them from Lytle, Soule & Curlee, special counsel in Oklahoma City, the cost of which shall be borne equally by Sublessor and Sublessee. 2.3.7 No Loss or Destruction of the Aircraft. Neither the Airframe nor any Engine shall have suffered an Event of Loss. 2.3.8 Adoption by Sublessee of Continental's Maintenance Program. Sublessee shall have adopted Continental's "Maintenance Program" with respect to the Airframe (as such term is defined in the MSA), as contemplated by Article 3.G of the MSA. 2.4. Aircraft Delivery Condition; Inspection. Sublessor covenants that prior to the Delivery Date, (a) heavy maintenance of the Aircraft have been recently completed in compliance with the maintenance program of Continental and all requirements for immediate operation under Federal Aviation Regulation 121; 8 (b) Sublessee or its representatives will be entitled to complete a standard ground and test flight inspection of the Aircraft including log books and records and shall not be required to accept the Aircraft unless the condition of the Aircraft is reasonably satisfactory; (c) the Aircraft will be equipped with a 28 first class and 254 coach seating configuration and painted with Sublessee's tail and fuselage logo against Continental's existing white and gray paint scheme, unless mutually agreed to otherwise; (d) Sublessor will provide one shipset of galley equipment (in addition to the extra shipset of galley equipment that was delivered to Sublessee on November 15, 1999), 12 cargo compartment partial load latches (4 forward and 8 aft) part number AWJ7019-501, 8 cargo compartment partial load latches (all forward) part number 225-46787-1 and 26 LD3 containers; and (e) Sublessor will make reasonable best efforts to obtain a letter, satisfactory to Sublessee, from the Head Lessor and Owner of the Airframe agreeing not to disturb Sublessee's possession and use of the Aircraft unless an Event of Default occurs hereunder. For the avoidance of doubt, the standard ground inspection referred to in clause (b) above shall not include borescoping the Engines or auxiliary power unit or the opening of any access panels. 2.5. Reconfiguration and Painting Costs. The start-up costs associated with the reconfiguration and painting of the Aircraft as detailed in Schedule 1 shall be for the account of Sublessee and shall be paid within 30 days after receipt by Sublessee of an invoice for such start-up costs. 2.6. Reimbursement of Costs. (a) If the transactions set forth in this Sublease do not occur or the Aircraft is not otherwise delivered pursuant hereto - - in either case due to the failure of Sublessor to obtain the final approvals set forth in Section 2.2.8, then (1) Sublessor shall reimburse Sublessee for the reasonable actual costs and expenses associated with the documentation of such transactions, including without limitation, attorneys' fees and the costs of preparation and review of documents, (2) this Sublease shall terminate and (3) neither party shall have any further obligation to the other party hereunder. (b) If the transactions set forth in this Sublease do not occur because Sublessee and Sublessor disagree as to whether the Aircraft meets the delivery conditions set forth in Section 2.4(a) and (b), each party acting reasonably, then (1) each party shall bear its own actual costs and expenses associated with the documentation of such transactions, including without limitation, attorneys' fees and the costs of preparation and review of documents, (2) Sublessee shall reimburse Sublessor (or Continental under the MSA) for the start-up costs referenced in Section 2.5, (3) this Sublease shall terminate and (4) neither party shall have any further obligation to the other party hereunder. 9 ARTICLE 3. TERM AND RENT 3.1. Term. Unless otherwise earlier terminated pursuant to the provisions hereof, the Term shall commence on the Delivery Date thereof and shall continue until the end of the Term. 3.2. Basic Rent and Maintenance Reserves. (a) Sublessee hereby agrees to pay to Sublessor Basic Rent in arrears throughout the Term in monthly installments on each Basic Rent Payment Date with each such installment of Basic Rent being in an amount equal to the sum of the amounts designated as Monthly Aircraft Basic Rent on Schedule 1 ("Aircraft Basic Rent") and Monthly Entertainment System Basic Rent on Schedule 1 hereto; provided, however, that the first installment of Basic Rent payable on May 2, 2000 shall be pro-rated. (b) Notwithstanding the foregoing, if Sublessee fails to return the Aircraft to Sublessor on or before the anticipated last day of the Term (i.e., January 2, 2002) in the condition required hereunder, Aircraft Basic Rent shall accrue thereafter until the Aircraft is so returned at a monthly amount equal to the amount designated as monthly "Holdover Basic Rent" on Schedule 1 hereto and Entertainment System Basic Rent shall also continue to accrue thereafter until the Aircraft is so returned at the regular monthly rate; provided, however, that notwithstanding the foregoing, (1) Aircraft Basic Rent shall accrue at the regular monthly Aircraft Basic Rent amount and not at the Holdover Basic Rent amount for up to five days after January 2, 2002 for so long as (W) the redelivery location designated by Sublessor pursuant to Article 12 is not Los Angeles International Airport, (X) Sublessee is unable to return the Aircraft as a result of conditions or events that are not within Sublessee's control or power to avoid or prevent, (Y) Sublessee has ceased commercial operation of the Aircraft and (Z) Sublessee makes diligent efforts to return the Aircraft, and (2) no Basic Rent shall accrue whatsoever if Sublessee's failure to return the Aircraft on the date set forth herein is a result of the failure of Continental to perform under the MSA. If the conditions or events mentioned in clause (1)(X) of the preceding sentence continue to prevent Sublessee from returning the Aircraft on January 8, 2002, beginning on that date and continuing until the Aircraft is returned in the condition required hereunder, Aircraft Basic Rent shall accrue at a monthly amount equal to the amount designated as monthly "Holdover Basic Rent" on Schedule 1 hereto. (c) Not later than the fifth day of each calendar month after the commencement of the Term, Sublessee shall deliver to Sublessor a report showing the flight hours flown by the Aircraft for the preceding calendar month and shall make payment in respect of the Maintenance Reserves in an amount equal to the sum of the number of flight hours for the Aircraft for such month multiplied by the applicable amount set forth on Schedule 1 hereto opposite the caption "Heavy Maintenance Reserve"; provided that the number of flight hours used in computing the amount of Heavy Maintenance Reserves for the first four months of the Term, shall not be less than 220 flight hours. Such payment shall be made to an interest-bearing account controlled jointly by Sublessor and Sublessee and identified in the Escrow Agreement. The Heavy Maintenance Reserves shall be used to pay for heavy maintenance work on the Aircraft for the C Check due on the Aircraft in April 2001. Any fees, costs and expenses payable under the Escrow Agreement shall be deducted from interest earned on the Heavy Maintenance Reserves. 10 Following completion of such heavy maintenance work, Sublessor and Sublessee shall execute a joint instruction under the Escrow Agreement releasing from the escrowed Heavy Maintenance Reserves an amount sufficient to pay for such heavy maintenance work to Continental or as Continental directs so long as the MSA is in effect or, if the MSA is not then in effect, to the facility performing the heavy maintenance work (the "Maintenance Facility") and in either case in accordance with any applicable requirements regarding time and manner of payment of the heavy maintenance provider performing such work. If the amount of Heavy Maintenance Reserves released is not sufficient to pay for the cost of such work, within five days of receipt of an invoice for such deficiency, Sublessee shall make payment to Continental or as Continental directs if the MSA is in effect or, if the MSA is not then in effect, to the Maintenance Facility in an amount equal to any such deficiency. Upon completion of the last regularly scheduled heavy maintenance visit (i.e., "C" Check) prior to the end of the Term and payment of all amounts due with respect thereto, Sublessee shall have no further obligation to make any additional Heavy Maintenance Reserve payments hereunder, and the parties shall execute a joint instruction under the Escrow Agreement to the escrow agent thereunder releasing any remaining balance in the escrow account to Sublessee. 3.3. Payments on Business Days. If any date on which a payment of Rent becomes due and payable is not a Business Day, then such payment need not be made on such scheduled date but may be made on the next Business Day with the same force and effect as if made on such scheduled date, and (provided such payment is made on the next Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date. 3.4. Supplemental Rent. Sublessee also agrees to pay to Sublessor, or to the Person entitled thereto, any and all Supplemental Rent with respect to Stipulated Loss Value promptly as the same shall become due and owing and all other amounts of Supplemental Rent that become due and payable hereunder within ten Business Days after demand, and Sublessee will also pay to Sublessor, or to whomsoever shall be entitled thereto as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Rate on any part of any installment of Basic Rent or Supplemental Rent not paid when due for any period from and including the date on which the same was due to but excluding the date of payment in full. 3.5. Place of Payments. Payments of Basic Rent and Supplemental Rent (other than Heavy Maintenance Reserve payments, which shall be paid to the account identified in the Escrow Agreement) shall be paid in funds of the United States of America which shall be immediately available not later than 1:00 P.M. Houston time, at the place of receipt, on the date due by wire transfer to the account of Sublessor, at The Chase Manhattan Bank, ABA 021-000-21, Account No. ___________, Ref: Aircraft 061 Sublease, or to such other financial institution located in the continental United States as directed by Sublessor in writing to Sublessee at least three Business Days prior to the due date of such payment. 11 3.6. No Set-Off, Counterclaim, Etc. Subject to the provisions set forth below in this Section 3.6, this Sublease is a net Sublease, and Sublessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right (including right of reimbursement) which Sublessee may have against Sublessor or any other Person for any reason whatsoever; (b) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Sublessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Sublessee; (d) any restriction, prevention or curtailment of or interference with any use of the Aircraft or part thereof; (e) any invalidity or unenforceability or disaffirmance of this Sublease or any provision hereof or any of the other Operative Agreements or any provision thereof, in each case whether against or by Sublessee or otherwise; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Sublease shall be terminated in whole or in part by operation of law or otherwise (other than as a result of any act or failure to act by the Sublessor) except as specifically provided herein, if and to the extent that the Sublessee retains the use and possession of the Aircraft on substantially the same terms as those provided in this Sublease, Sublessee nonetheless agrees to pay to the Sublessor an amount equal to each Rent payment at the time such payment would have become due in accordance with the terms hereof had this Sublease not been terminated in whole or in part. Notwithstanding any provision of this Section 3.6 to the contrary, (a) Sublessee reserves such rights as it may have under applicable law with respect to the breach by Sublessor of the covenant set forth in Section 15.5 hereof; (b) if Sublessor becomes subject to a bankruptcy proceeding and Sublessor's trustee in bankruptcy rejects this Sublease, Sublessee shall return the Aircraft to Sublessor in compliance with all the terms and provisions of this Sublease which are applicable to the return of the Aircraft on the last day of the Term and, upon such return and performance of such terms and conditions, this Sublease and Sublessee's obligation to pay any Rent hereunder shall terminate; and (c) nothing contained in this Section 3.6 shall be construed as a waiver of Sublessee's right to seek, or its entitlement to, damages, specific performance, separate recovery of any payment of Rent made by Sublessee which is not due and payable in accordance with the terms of this Sublease, other remedies at law or equity and any combination thereof, as against Sublessor or any other Person as shall be liable therefor, on account of any failure of Sublessor or any other such Person to perform its obligations under this Sublease (including, but not limited to, breach of Section 15.5 hereof) or on account of any act or omission of Sublessor or any other such Person or to enforce any judgment therefor. 12 ARTICLE 4. REPRESENTATIONS, WARRANTIES; DISCLAIMERS 4.1. Of Sublessee. Sublessee hereby makes the following representations, warranties and covenants to Sublessor: (a) Organization, Etc. Sublessee is a corporation duly organized and validly existing in good standing under the laws of the State of Hawaii and has the corporate power and authority to perform its obligations under the Operative Agreements to which it is a party. (b) Authorization, Etc. The Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of Sublessee, do not require any approval of the stockholder of Sublessee (or if such approval is required, such approval has been obtained), and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by Sublessee with any of the terms and provisions hereof will contravene its Certificate of Incorporation or By-Laws or any law or governmental rule or regulation (as in effect on the date this representation is made) applicable to Sublessee or result in any breach of, or constitute any default under, or result in the creation of any Lien (other than Permitted Liens) upon any property of Sublessee under any material indenture, mortgage or other agreement to which Sublessee is a party or by which Sublessee or its properties or assets may be bound. (c) Consents. Sublessee has received or has complied with every necessary consent, approval, order, or authorization of, or registration with, or the giving of prior notice to, any federal or state governmental authority having jurisdiction over Sublessee required to be received or complied with on or prior to the Delivery Date to the extent required for the Sublessee to execute and deliver the Operative Agreements to which it is a party currently in effect and to perform any of the transactions contemplated hereby and thereby. 13 (d) Enforceability, Etc. The Operative Agreements to which it is a party have been (or, upon execution thereof by Sublessee, will be) duly executed and delivered by Sublessee, and the Operative Agreements to which it is a party will, upon execution and delivery by the other party or parties thereto, constitute (or, upon execution thereof by Sublessee, shall constitute) legal, valid, and binding obligations of Sublessee, enforceable in accordance with their respective terms except as enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws and general principles of equity. (e) No Liens. On the Delivery Date, the Aircraft shall be free and clear of all Liens (other than Permitted Liens) attributable to Sublessee. (f) No Defaults. No Event of Default or event which, with the giving of notice or lapse of time or both, would become such Event of Default has occurred and is continuing. 4.2. Of Sublessor. Sublessor hereby makes the following representations, warranties and covenants to Sublessee: (a) Organization, Etc. Sublessor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into and perform its obligations under the Operative Agreements. (b) Authorization, Etc. The Operative Agreements have been duly authorized, executed and delivered by Sublessor, do not require any approval of its stockholders or consent of any trustee or holder of any of its indebtedness or other obligations for borrowed money or any instrument or agreement with respect thereto and assuming the due authorization, execution, and delivery by the other parties thereto constitute legal, valid and binding obligations of Sublessor enforceable against it in accordance with their respective terms except as enforcement thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws and general principles of equity. (c) No Violation. Neither the execution, delivery or performance by Sublessor of the Operative Agreements nor the consummation of any of the transactions by Sublessor contemplated thereby contravenes any law, regulation, order or judgment applicable to or binding on Sublessor, or any provision of the charter or by-laws (each as amended to date) of Sublessor or will result in the creation of a Lien on any part of the Aircraft under, or will result in a breach of, or constitute a default under, or contravene any provisions of, any contract, agreement or instrument to which Sublessor is a party or by which it or its properties are bound, except for the Liens of the Operative Agreements. (d) No Consents or Approvals. Neither the execution, delivery or performance by Sublessor of the Operative Agreements nor the consummation by Sublessor of any of the transactions contemplated thereby requires the consent or approval of, the giving of notice to, the registration with, the recording or filing of any documents with, or the taking of any other action in respect of, any Federal, state or local governmental commission, authority, agency or body except for the filings and recordings of this Sublease and the Sublease Supplement with the FAA and filings, if any, made pursuant to any routine recording or regulatory requirements applicable to Sublessor. 14 (e) U.S. Citizenship. As of the date hereof to Sublessor's knowledge, each of the Owner and Head Lessor of the Airframe is a "citizen of the United States," as defined in Section 40102(a)(15) of the Act. If either the Owner or Head Lessor of the Airframe is not now or ceases to be a "citizen of the United States" within the meaning of the foregoing definition, Sublessor agrees to take appropriate measures under the Head Lease with respect to the Airframe to prevent deregistration of the Airframe under the Act or limitation on use or operation of the Aircraft. (f) Sublessor's Liens. There is no Lien on the Aircraft attributable to Sublessor or to Sublessor's knowledge, Head Lessor or Owner except for (i) Liens of the type identified in clauses (a), (b), (f), (g) and (h) of Section 9.1 hereof, (ii) Liens in favor of a Person who has provided, or prior to the Delivery Date will provide, to Sublessee a letter of quiet enjoyment in form and substance reasonably satisfactory to Sublessee and (iii) with respect to Engines only, Liens in favor of a Head Lessor, Owner or Lender so long as such Person does not interfere with Sublessee's possession and use of such Engine (collectively, "Permitted Sublessor/Head Lessor Liens"). Sublessor shall, at its own cost and expense, promptly take such action as may be necessary to discharge duly any Head Lessor Lien or Sublessor Lien on the Airframe or any part thereof other than a Permitted Sublessor/Head Lessor Lien. In addition, if any Head Lessor, Owner or Lender holding a Lien on an Engine shall interfere with Sublessee's use and possession of such Engine, Sublessor shall (a) provide Sublessee with a replacement engine for use on the Airframe, (b) induce such Head Lessor, Owner or Lender to enter into an engine exchange or (c) take other appropriate steps to cure such interference. Sublessor will indemnify and hold harmless the Sublessee from and against any loss, cost or expense (including legal fees and expenses incurred by Sublessee) as a result of the imposition or enforcement against the Aircraft, or any part thereof, of any Sublessor Lien or Head Lessor Lien. (g) No Transfer. Sublessor shall not transfer any interest in the Aircraft or the Sublease except in compliance with Section 15.4. (h) Disclaimers. SUBJECT TO SATISFACTION OF THE CONDITIONS SET FORTH IN SECTION 2 HEREOF, SUBLESSOR SUBLEASES AND SUBLESSEE EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". EXCEPT AS SET FORTH IN SECTION 4.2(f) HEREOF SUBLESSOR MAKES, HAS MADE OR SHALL BE DEEMED TO HAVE MADE NO -- AND SUBLESSEE HEREBY EXPRESSLY DISCLAIMS ANY-- REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, COMPLIANCE WITH SPECIFICATIONS, DESIGN, QUALITY, DURABILITY, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT, OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, OR ANY PART THEREOF, IT BEING UNDERSTOOD THAT SUBLESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT TO ANY OF THE FOREGOING MATTERS AND THAT ALL RISKS OF ANY NATURE INCIDENT THERETO ARE TO BE BORNE BY SUBLESSEE. 15 Sublessor agrees to and does hereby authorize Sublessee to exercise for the account of Sublessor such rights as Sublessor may have under any warranty, express or implied, with respect to the Aircraft made by the manufacturer of the Airframe, Engines or any Part thereof, any subcontractor or supplier thereof, or any other seller thereof, and Sublessor agrees to exert its diligent efforts, at Sublessee's expense, to enforce such rights as Sublessor may have with respect thereto for the benefit of Sublessee; provided, however, that upon an Event of Default and termination of this Sublease all such rights shall immediately revert to Sublessor. 4.3. Subordination of Sublease to Head Lease. SUBLESSEE ACKNOWLEDGES THAT THIS SUBLEASE IS SUBJECT AND SUBORDINATE TO ALL THE TERMS OF THE HEAD LEASE COVERING THE AIRFRAME, INCLUDING WITHOUT LIMITATION THE RIGHTS OF THE HEAD LESSOR OF THE AIRFRAME TO REPOSSESSION PURSUANT TO ARTICLE 14 OF THE HEAD LEASE. WITHOUT LIMITING THE FOREGOING, THE HEAD LESSOR OF THE AIRFRAME MAY AVOID OR TERMINATE THIS SUBLEASE FOLLOWING AN EVENT OF DEFAULT UNDER SUCH HEAD LEASE. IF THE HEAD LESSOR OF THE AIRFRAME DECLARES SUCH HEAD LEASE TO BE IN DEFAULT PURSUANT TO ARTICLE 14 THEREOF, THE SUBLESSOR'S RIGHTS UNDER THIS SUBLEASE SHALL AUTOMATICALLY BE DEEMED ASSIGNED AS SECURITY TO THE HEAD LESSOR OF THE AIRFRAME. If as a result of an event of default under, or termination of, the Head Lease covering the Airframe, the rights of Sublessee under this Sublease are terminated, and no Event of Default by Sublessee under this Sublease has occurred and is continuing, then such event of default under, or termination of, such Head Lease shall be a breach by Sublessor under this Sublease that will entitle Sublessee to all rights and remedies in respect of such default under all applicable laws. In addition, Sublessor agrees to indemnify Sublessee from and against any and all losses, costs and liabilities incurred by Sublessee resulting therefrom. ARTICLE 5. REGISTRATION, POSSESSION, MAINTENANCE, OPERATION 16 5.1. Registration and Insignia. (a) Sublessee acknowledges that title to the Airframe shall remain vested in the Head Lessor of the Airframe and title to each Engine shall remain vested in the Head Lessor or Owner of such Engine during the Term. Sublessee shall, at its own expense, maintain the registration of the Aircraft with the FAA to reflect the interest of Head Lessor of the Airframe as owner. Sublessee shall reasonably cooperate with Sublessor, to the extent Sublessee's cooperation is required, in connection with causing any documents evidencing any Lender's interest in the Aircraft pursuant to any Facility Lien to be filed with the FAA. Sublessee agrees to take no action which would result in the Airframe failing to remain duly registered in the name of Head Lessor of the Airframe with the FAA under the Act (it being understood that Sublessee shall not be required to comply with this covenant to the extent that the Head Lessor or Owner of the Airframe fails to comply with its covenants in the Head Lease covering the Airframe and related documents to maintain its citizenship or takes any other action which precludes or prevents such registration from being maintained and makes such compliance by Sublessee impossible). (a) Nameplate. If permitted under applicable law or governmental regulation and to the extent provided by Sublessor, Sublessee agrees to maintain in the cockpit of the Airframe and on each Engine the nameplates or stencils or other appropriate markings currently installed on the Airframe and Engines and any substitute nameplate or stencils that may be provided by Sublessor or reasonably requested by Sublessor to be obtained by Sublessee (such nameplate or other markings to be replaced, if necessary, with a nameplate or other markings reflecting the name of any successor Head Lessor or the addition of the name of a Lender or the name of the Sublessor within a reasonable period of time after notice by Sublessor). 5.2. Possession. (a) Shipping, Testing and Repair. Except as expressly provided herein, Sublessee will not sell, sub-sublease or otherwise deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided, however, that, so long as no Event of Default has occurred and is continuing, Sublessee may, without such consent, deliver possession of the Aircraft, Airframe or any Engine, or Part thereof, (i) to any Person for the purpose of shipping or (ii) to the manufacturer thereof or to any other organization for testing, service, repair, maintenance or overhaul work or similar purposes or for required or permitted alterations or modifications in or additions to the Aircraft, Airframe or any Engine. With respect to any transaction pursuant to the preceding paragraph of this Section 5.2(a), Sublessee shall remain primarily liable hereunder for the performance of all the terms of this Sublease to the same extent as if such contract or transfer had not occurred. (b) Limitations on Transfers of Possession Imposed by the Head Leases. Sublessee acknowledges that the Head Leases specifically prohibit any sublessee of the Aircraft (including the Sublessee) from transferring possession of or any other rights to the Aircraft or any Engine to any other Person except as permitted by Section 5.2(a). 17 Without limiting the foregoing, Sublessee agrees that it will not do any of the following without the prior written consent of Sublessor and the relevant Head Lessor: (1) United States Government. Transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to a contract or to the Civil Reserve Air Fleet Program or any similar or substitute programs; (2) Installation of Engines. Install an Engine on an airframe owned by Sublessee; or (3) Installation of Engines on Other Airframes. Install an Engine on an airframe leased to, or purchased by, Sublessee subject to a lease, conditional sale, trust indenture or other security agreement. (c) Recognition of Rights. Sublessor hereby agrees for the benefit of each lessor, conditional seller, indenture trustee or secured party of any engine leased to or purchased by Sublessee subject to a lease, conditional sale, trust indenture or other security agreement that Sublessor will not acquire or claim, as against such lessor, conditional seller, indenture trustee or secured party, any right, title or interest in any engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, trust indenture or other security agreement and owned by such lessor or conditional seller or subject to a trust indenture or security interest in favor of such indenture trustee or secured party. 5.3. Maintenance. At its own cost and expense, Sublessee shall enter into the MSA prior to delivery of the Aircraft. If for whatever reason Sublessee terminates the MSA, from and after the date of such termination, at its own cost and expense, Sublessee shall: (a) perform maintenance, service, repair and testing of the Aircraft, Airframe and each Engine in accordance with an FAA-approved maintenance program for the Aircraft, Airframe and Engines, so as to keep the Aircraft, the Airframe and each Engine and each part thereof in good operating condition in conformity with any manufacturer's operating manual, instructions or service bulletins and in accordance with Sublessee's standard practices for similar Equipment (including without limitation Sublessee's maintenance program for such Equipment, as from time to time in effect and approved to the extent required by law by the FAA), which practices shall at all times be at or above the standard of the industry for maintenance of similar Equipment; and in the case of the Aircraft, without prejudice to Sublessee's right to receive contribution to the cost of compliance in accordance with Section 6.3 hereof, in such condition as may be necessary to enable the airworthiness certificate of the Aircraft to be maintained under the applicable rules and regulations of the FAA; provided that if the Aircraft is not registered under the Act pursuant to Section 5.1 hereof, the Aircraft shall nevertheless at all times be maintained in the condition necessary to enable the Sublessor or Sublessee to obtain an airworthiness certificate for the Aircraft under the Act; (b) maintain all records, logs and other materials required by the FAA to be maintained in respect of each item of Equipment; 18 (c) promptly furnish to Sublessor such information as may be required to enable the Head Lessor to file any reports required to be filed by it with any governmental authority because of Head Lessor's ownership of the Equipment; and (d) not discriminate against the Aircraft (as compared to other aircraft of the same type owned or operated by Sublessee) in contemplation of the expiration or termination of the Sublease with respect to the maintenance of the Aircraft, other than withdrawal of the Aircraft from use and operation as is necessary to prepare the Aircraft for return to Sublessor upon such expiration or termination. 5.4. Operations. (a) Sublessee shall not maintain, service, repair, test, use or operate any item of Equipment in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) over the Aircraft, or in violation of any airworthiness certificate, license or registration relating to any item of Equipment issued by any such authority or in violation of or conflict with any applicable maintenance or operations manual or manufacturer's guidelines or inconsistent with prudent commercial airline standards, unless Sublessee is contesting in good faith the validity or application of any such law, rule, regulation, order, certificate, license or registration by appropriate proceedings in any reasonable manner which does not create a material risk of sale, loss or forfeiture of any Equipment or any interest therein or result in the grounding of the Aircraft. If any such law, rule, regulation or order requires alteration of any item of Equipment, unless the validity thereof is being contested in good faith and by appropriate proceedings in any reasonable manner which does not create a material risk of sale, loss or forfeiture of any Equipment or any interest therein, the Sublessee will, subject to its rights under Sections 6.3 and 7.7 hereof, conform thereto or obtain conformance thereto at no expense to Sublessor and will maintain such item of Equipment in proper operating condition under such laws, rules, regulations and orders. (b) Sublessee agrees not to operate, use or locate the Aircraft, the Airframe or any Engine, or permit the Aircraft, the Airframe or any Engine to be operated, used or located (i) in any area excluded from coverage by the insurance required by the terms of Section 8, or (ii) in any war zone or in any recognized or, in Sublessee's reasonable judgment, threatened area of hostilities unless fully covered by war risk insurance satisfying the terms of Section 8, or unless the Aircraft, the Airframe or such Engine is operated or used under contract with the Government under which contract the Government assumes liability in an amount not less than the amount of insurance and providing coverage as full and complete as otherwise required by Section 8 for any damage, loss, destruction or failure to return possession of the Aircraft, the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others. 19 ARTICLE 6. REPLACEMENT AND POOLING OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS 6.1. Replacement of Parts. Except as otherwise provided herein and if for whatever reason Sublessee terminates the MSA, from and after the date of such termination, Sublessee, at its own cost and expense, will promptly replace (or cause to be replaced) all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, Sublessee may, at its own cost and expense, remove (or cause to be removed under the MSA) in the ordinary course of maintenance, service, repair, overhaul or testing any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, that Sublessee, except as otherwise provided herein, at its own cost and expense, will, replace (or cause to be replaced) such Parts as promptly as practicable with equivalent Parts of the same make, model and part number or an improved make, model or part number and made by the same manufacturer and in accordance with Continental's maintenance policies and procedures. All replacement Parts shall be free and clear of all Liens (except for pooling arrangements permitted by Section 6.2 hereof) and shall be in good operating condition and have a value and utility not less than the value and utility of the Parts replaced (assuming such replaced Parts were in the condition required hereunder). Subject to Section 6.3 hereof, all Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of relevant Head Lessor or Owner of such Airframe or Engine, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Except as provided in Section 6.2 hereof, immediately upon any replacement Part becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Sublessee free and clear of all Sublessor Liens and all rights of Sublessor and all Head Lessor Liens and all rights of Head Lessor and Owner, and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in the Head Lessor of the Airframe (in the case of replacement Parts incorporated in the Airframe) or Head Lessor or Owner of the relevant Engine (in the case of replacement Parts incorporated in such Engine) (subject only to Permitted Liens), and (iii) such replacement Part shall become subject to this Sublease and be deemed part of the Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 6.2. Title to Parts. Any replacement Part when incorporated in an item of Equipment in accordance with Section 6.1 hereof may be owned by a third party subject to a normal pooling arrangement, so long as Sublessee as promptly thereafter as reasonably possible either (i) causes title to such replacement Part to vest in the relevant Head Lessor or Owner in accordance with Section 6.1, free and clear of all Liens, or (ii) replaces (or causes to be replaced) such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Sublessee free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in the relevant Head Lessor or Owner in accordance with Section 6.1. 20 6.3. Alterations, Modifications and Additions. Sublessee shall make (or cause to be made under the MSA or otherwise) such alterations and modifications in and additions to the Equipment at its expense as may be required from time to time to meet all applicable standards of the FAA or other governmental authority having jurisdiction, unless the validity or application thereof is being contested in good faith by appropriate proceedings (but only so long as such proceedings do not involve any material risk of sale, forfeiture or loss of any of the Equipment or any interest therein). If any mandatory modification work is required, Sublessee shall pay for the first $________ of the actual cost for any one such mandatory modification and the first $________ of the actual cost for multiple such mandatory modifications. If the actual cost of such mandatory modification (that is, without markup) exceeds $________ for any one such mandatory modification and $________ for multiple such mandatory modifications, then Sublessor shall reimburse Sublessee for a portion of such excess cost in an amount equal to the excess of such cost over $________ (in the case of a single mandatory modification) or $________ (in the case of multiple such mandatory modifications) multiplied by a fraction, the numerator of which is the number of months then remaining in the Term of this Sublease and the denominator of which is 84. The Sublessor shall reimburse Sublessee for the balance of such excess cost to Sublessee promptly following completion of such mandatory modification, provided that no Event of Default has occurred and is continuing. In addition, Sublessee, at its own cost and expense, may from time to time request that Continental make under the MSA such alterations and modifications in and additions to any item of Equipment as Sublessee may deem desirable in the proper conduct of its business; provided, however, that no such alteration, modification or addition shall diminish, in Sublessor's reasonable determination, the value or utility of such item of Equipment below the value, utility and airworthiness thereof immediately prior to such alteration, modification or addition, assuming such item of Equipment was then in the condition and airworthiness required to be maintained by the terms of this Sublease. Except as otherwise provided herein, title to all Parts (other than Removable Parts (as defined below)) incorporated in an item of Equipment as the result of such alteration, modification or addition shall, without further act, vest in the Head Lessor and become subject to this Sublease. Notwithstanding the foregoing sentence of this Section 6.3, so long as no Event of Default shall have occurred and be continuing, Sublessee may request that Continental under the MSA remove any Part (such Part being referred to herein as a "Removable Part") at any time during the Term if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated in the Aircraft, Airframe or such Engine at the time of delivery thereof hereunder, (ii) such Part is not required, in Sublessor's determination, to be incorporated or installed in or attached or added to such item of Equipment pursuant to the terms of Section 5.3 or 5.4 hereof or the first sentence of this Section 6.3 and (iii) such Part can be removed from such item of Equipment without diminishing or impairing, in Sublessor's determination, the value, utility or airworthiness which such item of Equipment would have had at such time had such alteration, modification or addition not occurred. Removable Parts may be subleased from third parties other than Sublessor. Upon the removal by Sublessee (or by Continental under the MSA) of any Part as above provided, title thereto shall, without further act, vest in Sublessee and such Part shall no longer be deemed part of the Aircraft, Airframe or such Engine from which it was removed. Any Part not removed as above provided prior to the return of such item of Equipment to Sublessor hereunder shall remain the property of Head Lessor provided that Sublessor may require Sublessee, in connection with the return of the Aircraft pursuant to Section 12 hereof, to remove any Removable Part from the Aircraft and to restore the Aircraft to its condition prior to the addition of such Removable Part. Sublessor shall not bear any liability for any alteration, modification or addition or for any grounding or suspension of certification of any item of Equipment or for loss of revenue. 21 ARTICLE 7. LOSS, DESTRUCTION, REQUISITION 7.1. Event of Loss with Respect to Airframe. Upon the occurrence of an Event of Loss with respect to the Airframe or the Airframe and one or more Engines, Sublessee shall give Sublessor prompt (and in any event within 14 days after such occurrence) written notice of such Event of Loss and within the time period prescribed below shall make payment to the Sublessor for the items of Equipment subject to such Event of Loss as provided below. Not later than the earlier to occur of (i) the 60th day following the date of the occurrence of such Event of Loss, or (ii) the second Business Day following the receipt of insurance proceeds with respect to such occurrence, Sublessee shall pay to Sublessor (or to such other party as Sublessor directs), in the manner and in funds of the type specified in Section 3.3, (A) the Stipulated Loss Value for the Aircraft as of the Stipulated Loss Value Date immediately preceding such Event of Loss, unless such Event of Loss occurred on a Stipulated Loss Value Date, in which case Stipulated Loss Value shall be computed as of such date, and (B) any other Rent (including Basic Rent) which is due and payable through and including the date of payment (excluding the payment of or Basic Rent due on the date of payment). At such time as Sublessor shall have received the sum of the amounts specified above, together with all other amounts then due and payable hereunder, (A) the obligation of Sublessee to pay Basic Rent hereunder with respect to the Aircraft for any period commencing after the date of payment of such amounts shall terminate, (B) the Term for the Aircraft shall end, and (C) Sublessor will use its best efforts to cause Head Lessor to Transfer the Aircraft to Sublessee, subject to the rights of any insurer. 22 Unless and until Sublessee pays the amounts required pursuant to Section 7.1(a), no Event of Loss with respect to an Airframe under the circumstances contemplated by the terms of this Section 7.1 shall result in any reduction of Basic Rent. 7.2. Event of Loss with Respect to an Engine. (a) Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Sublessee shall give Sublessor prompt written notice (and in any event within 10 days after such occurrence) thereof and shall, as promptly as possible and in any event, within 120 days after the occurrence of such Event of Loss either, at the option of Sublessor, (1) convey or cause to be conveyed to the relevant Head Lessor or Owner of such Engine, as replacement for the Engine with respect to which such Event of Loss occurred, title to another General Electric model CF6-50C2 engine, which engine shall be free and clear of all Liens, other than Permitted Liens referred to in clauses (a), (c), (d) and (e) of the definition thereof, and having a value and utility (taking into consideration such Engine's life-limited parts and time since heavy maintenance on each of such Engine's modules) at the time of substitution at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such Engine was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss, or (2) pay the Stipulated Loss Value for such Engine to Sublessor. (b) Upon full compliance by Sublessee with the terms of Sections 7.2(a) and 7.3 hereof and if no Event of Default shall have occurred and be continuing, the Sublessor shall use its best efforts to cause the Head Lessor or Owner of the Engine that was subject to such Event of Loss to Transfer such Engine to the Sublessee or as the Sublessee shall direct, subject to the rights of any insurer. Upon such Transfer, such Engine subject to such Event of Loss shall cease to be an "Engine" hereunder. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 7.2 shall result in any reduction of Basic Rent. 7.3. Documents Required in Connection with Substitution. Prior to or at the time of any substitution for any Engine pursuant to Section 7.2(a) hereof, Sublessee will promptly, at its sole cost and expense: (i) provide Sublessor with a full warranty bill of sale in form and substance satisfactory to the relevant Head Lessor or Owner for such replacement Engine duly conveying title to such item to such Head Lessor or Owner, and take such other action as such Head Lessor or Owner may reasonably request in order that title to such replacement Engine shall be duly vested in such Head Lessor or Owner; (ii) cause a Sublease Supplement, in form and substance reasonably satisfactory to Sublessor, subjecting such replacement Engine to this Sublease, duly executed by Sublessee, to be delivered to Sublessor for execution and, upon such execution, to be filed for recordation with the FAA pursuant to the Act; 23 (iii) provide Sublessor with evidence of compliance with the insurance provisions of Article 8 hereof with respect to such replacement Engine as Sublessor or the relevant Head Lessor or Owner may reasonably request; (iv) provide Sublessor with an officer's certificate signed by an officer of Sublessee certifying that, upon consummation of such replacement, no Event of Default will exist hereunder; (v) promptly upon the recordation of the Sublease Supplement covering such replacement Engine pursuant to the Act, Sublessee, at its sole cost and expense will cause to be delivered to Sublessor and Lender an opinion of counsel satisfactory to Sublessor as to the due recordation of such Sublease Supplement and, so long as the Facility Lien exists and assuming that Sublessor and Lender have taken all necessary action to perfect the Facility Lien with respect to the replacement Engine, as to the existence of Liens on the replacement Engine to the same effect as the opinion of FAA counsel delivered in connection with the original recordation of the Sublease; and (vi) furnish such other certificates and opinions as Sublessor and the relevant Head Lessor and Owner may deem reasonably necessary or appropriate, in form, scope and substance satisfactory to each of them. 7.4. Application of Payments from Governmental Authorities for Requisition of Title. Any payments (other than insurance proceeds the application of which is provided for in Article 8 hereof) received at any time by Sublessor or Sublessee from any governmental authority or other Person with respect to any Event of Loss resulting from the condemnation, confiscation, theft or seizure of, or requisition of title to or use of any item of Equipment will be applied as follows: (a) If such payments are received with respect to an Event of Loss relating to the Airframe or the Airframe and the Engines or engines installed on the Airframe, so much of such payments as shall not exceed Stipulated Loss Value shall be applied in reduction of Sublessee's obligation to pay such Stipulated Loss Value and other amounts required to be paid by Sublessee hereunder, if not already paid by Sublessee, or, if already paid by Sublessee, shall so long as no Event of Default shall have occurred and be continuing, be applied to reimburse Sublessee for its payment of such Stipulated Loss Value and other amounts; and the balance, if any, of such payment remaining thereafter will be paid over to, or retained by, Sublessee. (b) If such payments are received with respect to an Engine under circumstances contemplated by Section 7.2 hereof, such payments shall be paid over to, or retained by, Sublessee, provided Sublessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 7.2(a) with respect to the Event of Loss for which such payments are made. 24 7.5. Requisition for Use by the Government. In the event of the requisition for use or transfer of possession to the Government of any item of Equipment not constituting an Event of Loss during the Term, Sublessee shall promptly notify Sublessor of such requisition and, unless such requisition shall constitute an Event of Loss (in which case the Sublessee shall comply with Section 7.1 or 7.2 hereof, as the case may be), all of Sublessee's obligations under this Sublease with respect to the Airframe and the Engines shall continue to the same extent as if such requisition had not occurred. If the Airframe and Engines or engines installed thereon are not returned by the Government prior to the end of the Term, Sublessee shall be obligated to return such item of Equipment to Sublessor pursuant to, and in all other respects in compliance with the provisions of, Article 12 hereof, promptly upon its return by the Government, and upon compliance therewith by Sublessee, the Sublessor shall (to the extent that it is lawfully able to do so) assign to the Sublessee all of the Sublessor's rights against the Government with respect to the condition and fitness of such item of Equipment, including all repair obligations of the Government upon return by it of the item of Equipment at the expiration of the period of requisition for use. All payments received by Sublessor or Sublessee from the Government that are allocable to use of such item of Equipment during the Term shall be paid over to, or retained by, Sublessee; and all other payments received by Sublessor or Sublessee from the Government for the use of the Airframe and Engines or engines after January 2, 2002 shall be paid over to, or retained by, Sublessor. 7.6. Application of Payments During Existence of Event of Default. Any amount referred to in Section 7.4(a), 7.4(b) or 7.5 hereof which is payable or creditable to or retainable by Sublessee shall not be paid or credited to or retained by Sublessee if, at the time of such payment, credit or retention, an Event of Default shall have occurred and be continuing hereunder but shall be paid to and held by Sublessor as security for the obligations of Sublessee under this Sublease and, if Sublessor declares this Sublease to be in default pursuant to Section 14 hereof, applied against Sublessee's obligations hereunder as and when due and at such time as there shall not be continuing any such Default, such amount shall be paid to Sublessee to the extent not previously applied in accordance the terms hereof. 7.7. Replacement of Engines. Upon not less than 35 days' prior written notice to Sublessor, Sublessee may, subject to Sublessor's prior written consent (which may be given or withheld in its sole discretion), replace any Engine subleased hereunder with another engine (the "replacement Engine") of the same or improved make and model as the Engine which is to be replaced and which has a value and utility (taking into account such Engine's life-limited parts and time since heavy maintenance on each of such Engine's modules) at least equivalent to, and in as good operating condition as, such replaced Engine assuming such replaced Engine was in the condition and repair required by the terms of this Sublease. Such replacement Engine shall be deemed to be an "Engine" and Sublessor and Sublessee shall comply with the provisions of Section 7.2(a) and 7.3 with regard to the replacement Engine and the Engine so replaced. 25 ARTICLE 8. INSURANCE 8.1. Public Liability and Property Damage Insurance. Sublessee shall at all times procure and maintain at is own expense policies of public liability insurance (including, without limiting the generality of the foregoing, passenger legal liability insurance) and property damage insurance (exclusive of manufacturer's product liability insurance), including, without limiting the generality of the foregoing, aircraft liability, aircraft passenger liability, contractual liability and cargo and baggage liability and property damage liability, with respect to the Aircraft, Airframe and Engines (a) in amounts which are not less than the public liability and property damage liability insurance applicable to similar aircraft and engines which comprise Sublessee's fleet; (b) of the types usually carried by United States commercial air carriers and in no event less than the limit of liability set forth on Schedule 1 hereto and (c) which is maintained in effect with insurers of recognized responsibility and reasonably acceptable to Sublessor. With respect to the insurance described in this clause, Sublessee may self-insure by way of deductible, franchise or similar provision in such insurance policies, the risk required to be insured against pursuant to the first sentence in this Section 8.1. The amount of such self-insurance shall not exceed $_________ for any one occurrence. All such policies of insurance carried in accordance with this Section 8.1 shall (A) name Head Lessor of the Airframe as owner of the Airframe and Sublessor and each Owner and Lender (if any) as additional named insureds (the "Additional Insureds"), as their respective interests may appear (but without imposing upon any such parties any obligation imposed upon the insured, including the liability to pay the premiums for such policies, (B) provide that in respect of the interests of Sublessor and each Head Lessor, Owner and Lender (if any) in such policies, the insurance shall not be invalidated by any action or inaction of Sublessee and shall insure the Additional Insureds as their interests may appear regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Sublessee, (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which materially adversely affects the interests of the Additional Insureds or if such insurance may be allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Additional Insureds for 30 days (ten days in the case of cancellation for non-payment and seven days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is given to the Additional Insureds from such insurers of such cancellation, change or lapse, (D) be effective with respect to both domestic and international operation, (E) provide that the insurers shall waive any right to any setoff, recoupment or counterclaim or any other deduction, by attachment or otherwise, (F) provide that all the provisions thereof, except the limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured, (G) provide that the Additional Insureds shall not be liable for any insurance premium, (H) be primary and without right of contribution from other insurance which may provide coverage to the Additional Insureds and (I) expressly provide that the insurers shall waive any rights of subrogation against the Additional Insureds. 26 8.2. Insurance Against Loss or Damage to Aircraft. At its own expense, Sublessee shall maintain in effect with insurers of recognized responsibility and reasonably acceptable to Sublessor all-risk aircraft hull insurance (including flight, taxiing and ingestion coverage) covering the Aircraft and all risk insurance on the Engines and Parts while removed from the Aircraft including war-risk insurance if the Aircraft, the Airframe or any Engine is being operated (i) in any recognized or, in Sublessee's reasonable judgment, threatened area of hostilities, or (ii) on international routes and war risk insurance is customarily maintained by other U.S. air carriers operating on such routes, which war risk insurance shall be of the type and form, and in an amount not less than that, carried by Sublessee on similar equipment owned or Subleased by Sublessee and is in an amount not less than the Stipulated Loss Value. If such war-risk insurance is not so available from private insurers, the Sublessee shall maintain such war risk insurance to the extent available from the United States Government or any agency thereof. With respect to the insurance described in this clause, Sublessee may self-insure, by means of a deductible, franchise or similar provision in such insurance policies, the risk required to be insured against pursuant to the first sentence of this Section 8.2 in accordance with the then current airline industry practice and in an amount not exceeding that which is maintained by Sublessee in accordance with its fleet-wide practice; provided that the amount of such self-insurance with respect to the Aircraft shall not exceed $________ for any one occurrence. Any policies maintained in accordance with this Section 8.2 shall (a) name the Head Lessor of the Airframe (or, if the Head Lessor of the Airframe so directs, Lender) as loss payee, (b) without prejudice to Sublessee's rights under Section 8.4 and 8.8 hereof, provide that payment for any loss in excess of $________ shall be payable to the Head Lessor of the Airframe (or, if the Head Lessor of the Airframe so directs, to the Lender), except in the case of a loss with respect to an Engine installed on an airframe other than the Airframe, in which case the Sublessee shall arrange for any payment of insurance proceeds in respect of such loss to be held for the account of the Head Lessor of the Airframe (or if the Head Lessor of the Airframe so directs, the Lender) whether such payment is made to the Sublessee or any third party, (c) provide that in respect of the respective interests of the Additional Insureds in such policies, the insurance shall not be invalidated by any action or inaction of the Sublessee or any other Person insured thereby (other than action or inaction of such Additional Insured, as the case may be), and shall insure the Additional Insureds as their interests may appear, regardless of any breach or violation by the Sublessee or any other Person insured thereby (other than such Additional Insured) of any warranties, declarations or conditions contained in such policies, 27 (d) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which adversely affects the interest of Sublessor or Lender, if any, if such insurance may be allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to Sublessor or any Head Lessor, Owner or Lender, if any, for 30 days (ten days in the case of cancellation for non-payment and seven days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by such Person from such insurers of such cancellation, change or lapse; (e) provide that the insurers shall waive any rights of subrogation against Sublessor and each Head Lessor, Owner and Lender, if any; (f) provide that the insurers shall waive any right to any set-off, recoupment or counterclaim or any other deduction, by attachment or otherwise; (g) provide that none of Sublessor, any Head Lessor, Owner or Lender, if any, shall be liable for any insurance premium; and (h) be effective with respect to both domestic and international operation. 8.3. Government Indemnity. Notwithstanding any other provision of this Sublease requiring Sublessee to maintain insurance (but without otherwise affecting any obligations of the Sublessee, or any rights of Persons other than the Sublessee, under this Article 8), Sublessor agrees to accept, in lieu of insurance against any risk with respect to the Aircraft, indemnification from the Government against such risks and in an amount which, when added to the amount of insurance against such risk maintained by Sublessee (including permitted self-insurance) with respect to the Aircraft, shall be at least equal to the amount of insurance against such risk otherwise required by this Article 8. 8.4. Application of Insurance Proceeds. As between Sublessor and Sublessee, it is agreed that all insurance payments received as the result of the occurrence of an Event of Loss with respect to an item of Equipment will be applied as follows: (a) if such payments are received with respect to an Event of Loss relating to the Airframe or the Airframe and one or more Engines or engines installed on the Airframe, so much of such payments as shall not exceed the amounts due under Section 7.1 hereof shall be applied in reduction of Sublessee's obligation to pay such amounts, if not already paid by the Sublessee, or, if already paid by Sublessee, shall be applied to reimburse the Sublessee for its payments of such amounts, and the balance, if any, of such payments remaining thereafter will be paid over to, or retained by, the Sublessee; and 28 (b) if such payments are received with respect to an Engine under the circumstances contemplated by Section 7.2 hereof, such payments shall be paid over to, or retained by the Sublessee, provided that the Sublessee shall have fully performed or, concurrently therewith, will fully perform under Section 7.2(a) hereof. 8.5. Application of Insurance Proceeds for Other Than Event of Loss. As between Sublessor and Sublessee, the insurance proceeds of any property damage loss to any Equipment not constituting an Event of Loss will be applied in payment (or to reimburse the Sublessee) for repairs or for replacement property in accordance with the terms of Articles 5 and 6 hereof, and any balance remaining after compliance with such Articles with respect to such loss shall be paid to, or retained by, the Sublessee if the Sublessor shall have received from the Sublessee prior to making any such payment to the Sublessee an Officer's Certificate of the Sublessee certifying that the property so damaged has been repaired in full and that the costs of such repair (which costs shall be specified in such certificate) have been paid in full. If such repairs are made pursuant to contracts requiring progress payments or if such repairs are made by the Sublessee, such insurance proceeds shall be paid over to the Sublessee from time to time upon appropriate certification by the Sublessee. 8.6. Application in Default. Any amount referred to in Sections 8.4(a) or (b) or 8.5 hereof which is payable to the Sublessee shall not be paid to the Sublessee or, if it has been previously paid to the Sublessee, shall not be retained by the Sublessee, if at the time of such payment (a) in the case of Section 8.4 hereof, a Default or an Event of Default shall have occurred and be continuing or (b) in the case of Section 8.5 hereof, an Event of Default or a Default which after lapse of time would constitute an Event of Default of the character referred to in paragraph (a), (b) or (c) of Article 13 hereof shall have occurred and be continuing. In such event, all such amounts shall be paid to and held by the Sublessor as security for the obligations of the Sublessee to make payments hereunder. At such time as there shall not be continuing any Default or Event of Default or, in the case of payments pursuant to Section 8.5 hereof, any Event of Default or Default of the character referred to above, all such amounts at the time held by the Sublessor in excess of the amount, if any, which the Sublessor shall have elected to apply as above provided shall be paid to the Sublessee. 8.7. Certificates of Insurance. Sublessee agrees to furnish the Sublessor on the Delivery Date and on or prior to the date of renewal of the insurance required hereunder during the Term an insurance certificate and report signed by a firm of independent aircraft insurance brokers reasonably acceptable to Sublessor and the Head Lessor of the Airframe certifying that, in the opinion of such broker, the insurance then carried and maintained on each item of Equipment complies with the terms hereof. Such insurance certificate and report shall provide that (i) the broker will advise Sublessor and each Head Lessor, Owner and Lender, if any, in writing promptly of any default in the payment of any premium and (ii) no insurance provided pursuant to this Article 8 shall expire or terminate prior to thirty (30) days (ten days in the case of cancellation for non-payment or, with respect to war risk and allied perils insurance, seven (7) days or such shorter period as may be generally available) after written notice has been issued to Sublessor and each Head Lessor, Owner and Lender, if any. Upon the transfer by any Head Lessor, Owner or Lender, if any, of its interests in the Aircraft or any Engine, Sublessee will cooperate in obtaining new certificates naming the transferee of such interest. 29 8.8. Insurance of Sublessee's Interest. (a) Nothing contained herein shall prevent Sublessee from carrying at its own expense additional insurance in excess of that required hereunder, and notwithstanding anything to the contrary contained elsewhere in this Sublease, any and all proceeds of such additional insurance shall be payable solely to Sublessee or the appropriate third party liability claimant, as the case may be. Nothing in this Article 8 shall be construed to prohibit the Sublessor or any Head Lessor or Owner from insuring the Aircraft, any Engine or its interest therein, but the insurance so maintained by the Sublessor or such Head Lessor or Owner shall not provide for or result in a reduction of the coverage or the amounts payable under any of the insurance required to be maintained by Sublessee by this Article 8. (b) If Sublessee shall fail to maintain or cause to be maintained insurance as herein provided, Sublessor may at its option (but shall not be obligated to) provide such insurance and in such event, Sublessee shall, upon demand, reimburse such Person for the cost thereof. 30 ARTICLE 9. LIENS AND INDEMNITIES 9.1. Liens. Sublessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein except: (a) the respective rights of the parties to the Operative Agreements; (b) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of the Operative Agreements; (c) Sublessor Liens; (d) Head Lessor Liens; (e) Facility Liens; (f) liens for taxes, assessments or other governmental charges either not yet due or being contested in good faith by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine; (g) materialmen's, mechanics', workers', repairers', employees' or other like Liens for amounts the payment of which is either not yet delinquent for more than 60 days or is being contested in good faith by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine; (h) Liens arising out of any judgment or award unless the judgment secured shall not, within 60 days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within 60 days after the execution of such stay and provided such Lien presents no material risk of the forfeiture or loss of the Aircraft, Airframe or any Engine or of Sublessor's interest therein, and (i) any other Lien with respect to which Sublessee shall have provided security in form and amount adequate in the reasonable judgment of Sublessor. Sublessee will promptly take (or cause to be taken) such action at its own expense as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. 9.2. General Indemnity. (a) Sublessee hereby agrees to assume liability for and to indemnify, protect, save and keep harmless the Sublessor and each Head Lessor, Owner and Lender (if any) and their respective successors, permitted assigns, affiliates, directors, officers, employees, agents and servants (in this Section 9.2 and in Section 9.3 hereof, collectively, the "Indemnitees") from and against any and all liabilities (including liability in tort, absolute or otherwise), obligations, losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements of whatsoever kind and nature (including reasonable legal fees and expenses) (any and all "Claims"), imposed on, incurred by or asserted against any Indemnitee (whether or not also indemnified against by any other Person under any other document) in any way relating to or arising out of (i) this Lease or (ii) the delivery, sublease, possession, use, operation, condition, return or other disposition of any item of Equipment, to the extent incurred or arising out of events occurring at any time after delivery of the Aircraft to Sublessor hereunder and prior to return of the Aircraft to Sublessor hereunder in full compliance by the Sublessee with all of the terms of this Sublease with respect thereto (including latent and other defects, whether or not discoverable by any Indemnitee or the Sublessee, and any claim for patent, trademark or copyright infringement); provided, however, that the Sublessee shall not be required (A) to indemnify Sublessor in respect of any amounts which Sublessor has specifically agreed to pay hereunder, (B) to indemnify any Owner or any of its Affiliates against loss, liability or expense incurred by any such Affiliate as a result of any claim against any such Affiliate in its capacity as manufacturer of the Engines and components thereof including claims for patent, trademark or copyright infringement, (C) to pay any cost, expense or disbursement (including legal fees and expenses) in connection with the entering into or withholding any future amendments, supplements, waivers or consents with respect to this Sublease or under any Head Lease other than such as have been requested by Sublessee, (D) to indemnify any Indemnitee for loss, liability or expense resulting from the willful misconduct or gross negligence of such Indemnitee or its successors, assigns, affiliates, agents or servants or, in the case of any Owner, any owner trustee acting for such Owner or, in the case of any such owner trustee, the relevant Owner, (E) to indemnify any Indemnitee for any loss, liability or expense which any of them may incur as the result of any failure or refusal of any of them to perform or observe any agreement, covenant or condition contained in any Operative Document, or (G) to indemnify any Indemnitee for any loss, liability or expense which any of them may incur as the result of any Head Lessor Lien or Sublessor Lien; provided further that Sublessee does not under this Section 9.2 assume liability for, or indemnify, protect, save and keep harmless, any Indemnitee from or against or in respect of any liabilities, obligations, losses, damages, penalties, claims, actions or suits in any way relating to or arising out of any Taxes, as defined in Section 9.3. 31 Upon payment in full of any indemnities contained in this Section 9.2 by the Sublessee, it shall be subrogated to any rights of the Indemnitee in respect of the matter against which indemnity has been given, but any amount recovered by the Sublessee as a result of such subrogation shall, unless all amounts then due to such Indemnitee from the Sublessee have been paid, be held in trust by the Sublessee for and shall, to the extent of any such amount then due, be paid promptly after demand to, such Indemnitee. If any Indemnitee shall have knowledge of any claim or liability hereby indemnified against, it shall give prompt written notice hereof to the Sublessee and each other interested party, but the failure to do so shall not relieve Sublessee from any liability which it may have to such Indemnitee or any other Indemnitee except to the extent that the Sublessee shall demonstrate that such liability was materially increased as a result of such failure. If the Sublessee is required to make payment under this Section 9.2, the Sublessee shall pay the Indemnitee any amount which, after deduction of all taxes required to be paid by such Indemnitee in respect of the receipt thereof under the laws of the United States or of any foreign country or any political subdivision of either (after giving credit for any savings in respect of any taxes by reason of deductions, credits or allowances in respect of the payment of the expense indemnified against) shall be equal to the amount of such payment. (b) Contest. With respect to any Claim imposed on, incurred by, or asserted against one or more Continental Indemnitees but not imposed on, incurred by or asserted against any other Indemnitees, Sublessee shall be entitled, at its sole cost and expense, acting through counsel reasonably acceptable to the respective Continental Indemnitee, (i) in any judicial or administrative proceeding that involves solely one or more such Claims, to assume responsibility for and control thereof, (ii) in any judicial or administrative proceeding involving one or more such Claims and other claims related or unrelated to the transactions contemplated by this Sublease, to assume responsibility for and control of such Claims to the extent that the same may be and is severed from such other claims (and such Continental Indemnitee shall use its best efforts to obtain such severance), and (iii) in any other case involving such Claim, to be consulted by such Continental Indemnitee with respect to judicial proceedings subject to the control of such Continental Indemnitee. Notwithstanding any of the foregoing to the contrary, Sublessee shall not be entitled to assume responsibility for and control of any such judicial or administrative proceedings involving such a Claim (A) while an Event of Default under the Sublease shall have occurred and be continuing, (B) if such proceedings will involve any material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on the Aircraft, any item of Equipment, this Sublease or any part thereof unless Sublessee shall have protected Sublessor against such risk in a manner acceptable to Sublessor, (C) such Claims involved relate in any way to the business of any Indemnitee other than the transactions contemplated by this Sublease, (D) such Claims, in the opinion of independent counsel for such Continental Indemnitee reasonably satisfactory to Sublessee, have a reasonable possibility of otherwise compromising or jeopardizing any substantial interests of such Indemnitee, or (E) promptly following the request of a Continental Indemnitee, Sublessee shall not have furnished such Continental Indemnitee with an opinion of independent counsel reasonably satisfactory to such Continental Indemnitee to the effect that there exists a meritorious basis for contesting such Claims. The Continental Indemnitee may participate with its own counsel, at its own expense, in any judicial proceeding controlled by Sublessee pursuant to the preceding provisions. The Continental Indemnitee shall supply Sublessee with such information reasonably requested by Sublessee as is necessary or advisable for Sublessee to control or participate in any proceeding to the extent permitted by this Section 9.2(b). Such Continental Indemnitee shall not enter into a settlement or other compromise with respect to any such Claims without the prior written consent of Sublessee, which consent shall not be unreasonably withheld or delayed, unless such Continental Indemnitee waives its right to be indemnified with respect to such Claims under this Section 9.2. 32 9.3. General Tax Indemnity. (a) Sublessee agrees to pay and to indemnify and hold each Indemnitee (as defined in Section 9.2 hereof) harmless from all license, documentation, recording and registration fees, taxes, levies, imposts, duties, assessments, fees, charges and withholdings of any nature whatsoever, together with any penalties, fines, additions to tax or interest thereon, howsoever imposed, whether levied or imposed upon an Indemnitee or otherwise, by any Federal state or local government or governmental subdivision or taxing authority in the United States or by any foreign country or foreign taxing authority or territory or possession of the United States or any subdivision or taxing authority of any of the foregoing, upon or with respect to (i) the Equipment or any part thereof, (ii) the ownership, delivery, subleasing, possession, use, operation, storage, sale, transfer of title, return, or other disposition of the Equipment, (iii) the rentals, receipts or earnings arising from this Sublease, (iv) the execution, delivery or performance of the Operative Agreements, (v) any payment made pursuant to any such agreement or document or (vi) the property or the income or other proceeds received with respect to property held by the Sublessor hereunder (all such license, documentation, recording and registration fees, taxes, levies, imposts, duties, assessments, fees, charges, withholdings, penalties, fines, additions to tax and interest imposed as aforesaid being hereinafter in this Section 9.3 called "Taxes"). 33 (b) Exclusions. Sublessee shall have no obligation to indemnify an Indemnitee under this Section 9.3 for (i) any Taxes to the extent contested by the Sublessee in good faith in accordance with the provisions of paragraph (c) below; (ii) any Taxes imposed as a result of a sale, transfer, assignment or other disposition, whether prior to, during or after the Term, with respect to any item of Equipment, by an Indemnitee of any interest in such item of Equipment, the trust created by the trust agreement between any Head Lessor and Owner (the "Owner Trust"), this Sublease or any Head Lease unless such sale, transfer, assignment or other disposition is made as the result of the exercise of remedies after an Event of Default pursuant to Article 14 hereof, but in no event shall the Sublessee be liable for any Taxes on, based on, or measured by or related to any income or gain realized upon any such disposition; (iii) any Taxes imposed with respect of an item of Equipment for any period (A) prior to the delivery of such item of Equipment by Sublessor to Sublessee pursuant to this Sublease or (B) after the redelivery of such item of Equipment to Sublessor or its designee or (C) after the expiration of the Term with respect thereto; (iv) any Taxes imposed on or for the account of any Lender; (v) any Taxes on, based on or measured by, the net income of an Indemnitee and any Taxes enacted by any jurisdiction after the date of this Sublease which are, in effect, a substitute for or in lieu of any such Taxes and any Taxes, however denominated, based on or measured by, value added, except any such Taxes to the extent imposed on the receipt of a payment under this Section 9.3; (vi) any Taxes to the extent that such Taxes would not have been imposed had there not been a transfer by an original Indemnitee of an interest in an item of Equipment, the Owner Trust, this Sublease, or any Head Lease or, if such Taxes would have been imposed on or with respect to such original Indemnitee, such original Indemnitee would not have been entitled to indemnification with respect to such Taxes; (vii) any Taxes consisting of penalties, fines or interest imposed as a result of the failure of an Indemnitee to file any return or pay any amount when due, unless the Sublessee was responsible for such filing or payment; 34 (viii) any Taxes included in the original cost to any Head Lessor of acquiring the Aircraft or any Engine; (ix) any Taxes to the extent such Taxes would not have been imposed had the Owner Trust and the Head Lessor of the Airframe been resident in the State of Utah; and (x) any Taxes imposed with respect to any fees or compensation received by Sublessor. (c) Contest. If a claim is made against an Indemnitee for any Taxes indemnified against under this Section 9.3, such Indemnitee will, within 10 days after such Indemnitee is aware of such claim, notify the Sublessee in writing of such claim, but the failure to do so will not relieve the Sublessee from any liability which it may have to such Indemnitee if, notwithstanding such failure, the Sublessee's ability to contest such claim under this paragraph (c) is not adversely affected. If requested by the Sublessee in writing, the Indemnitee shall permit the Sublessee to contest such claim at Sublessee's expense, upon receipt of an indemnity undertaking from Sublessee reasonably satisfactory to the Indemnitee for such Taxes and for all costs, expenses, legal and accountants' fees and disbursements, penalties, fines, additions to tax and interest resulting from such contest. Sublessee may contest such claim, in the name of the Sublessee or such Indemnitee, to the extent permitted by law, by (i) seeking administrative review of the claim, (ii) resisting payment thereof if possible, (iii) not paying the same except under protest, if protest is necessary and proper, (iv) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative or judicial proceedings, or both and (v) taking any other reasonable action appropriate to contest the claim. (d) Reports. In case any report or return is required to be made with respect to any obligation of the Sublessee under this Section 9.3 and unless an Indemnitee shall notify the Sublessee that it intends to make such report or return, the Sublessee either shall make such report or return in such manner as will show, if appropriate, the interest of the Sublessor, Head Lessor and Owner in the Aircraft or other item of Equipment, or shall promptly notify such Indemnitee, Sublessor, Head Lessor and Owner of such requirement and shall make such report or return in such manner as shall be reasonably satisfactory to such Indemnitee, the Sublessor, Head Lessor and Owner. All costs and expenses (including legal and accountants' fees) of preparing any such return or report shall be borne by the Sublessee. If an Indemnitee has notified the Sublessee pursuant to this subsection that it intends to make any report or return, the Indemnitee shall give the Sublessee written notice prior to either filing any return, statement or report with respect to any Taxes for which indemnification would be payable by the Sublessee under this Section 9.3 or paying any such Taxes and shall send a copy of such report or return to the Sublessee at least 10 days prior to the date on which such report or return is due to be filed or payment is to be made. (e) Repayments. If an Indemnitee obtains a refund of any Taxes with respect to which the Sublessee has paid an indemnity under this Section 9.3 or a reduction in any Taxes as a result of the payment or incurrence of any Tax for which the Sublessee has paid an indemnity under this Section 9.3, the Indemnitee shall pay to the Sublessee the amount of such refund or reduction, including any interest received thereon, plus any net reduction of Taxes imposed on such Indemnitee resulting from the payment to the Sublessee under this subsection. An Indemnitee is not required to make any payments to the Sublessee under this subsection to the extent that such payments would exceed the aggregate payments by the Sublessee to such Indemnitee under this Section 9.3. 35 (f) Payments. The Sublessee agrees to pay any amount it is required to pay under this Section 9.3 promptly after the Indemnitee requests the payment in writing, but the Sublessee is not required to make any payment before the Indemnitee has paid the Taxes in respect of which the Sublessee's payment is to be made. If the Sublessee is required to indemnify any Person for Taxes under this Section 9.3, the Sublessee shall pay to such Person an amount which, after deduction of all Taxes required to be paid by such Person in respect of the receipt of such amount under the laws of the United States or of any foreign country or any political subdivision of either (after giving credit for any savings in respect of any such Taxes by reason of deductions, credits or allowances in respect of the payment of the expenses indemnified against), shall be equal to the amount of the indemnification required. Each Indemnitee agrees to pay the Sublessee any amount it is required to pay the Sublessee under this Section 9.3 promptly after the Indemnitee receives a refund with respect to such Taxes or realizes a reduction in Taxes giving rise to an obligation to make such payment. Any demand for payment to the Sublessee and any payment to the Sublessee shall be accompanied by a written statement describing in reasonable detail the computation of the payment. If the Sublessee requests, the statement will be verified, at the Sublessee's expense, by independent public accountants of recognized standing selected by the Indemnitee submitting the statement. (g) Agreement of Indemnitee. If an Indemnitee is not a party to this Sublease, the Sublessee may require the Indemnitee to agree to the terms of this Section 9.3 prior to making any payment to the Indemnitee under this Section 9.3. 9.4. Survival. All indemnities and agreements contained in Sections 9.2 and 9.3 will survive any investigation or inspection made by or on behalf of any Indemnitee or the Sublessee and the expiration or other termination of this Sublease, in whole or in part for a period of five (5) years. ARTICLE 10. INSPECTION; FINANCIAL STATEMENTS AND OTHER INFORMATION 10.1. Inspection. At reasonable times during the Term of this Sublease, Sublessee shall provide to Sublessor and each Head Lessor and Owner such information concerning the location, condition, use and operation of the Equipment as they may reasonably request. Additionally, Sublessee shall permit (a) Sublessor, each Owner and any of their authorized representatives at such Person's expense to visit and inspect any item of Equipment, its condition, use and operation and any records in Sublessee's possession maintained in connection therewith (except to the extent prohibited by applicable national security regulations of the Government), and (b) Sublessor and any of its representatives to discuss the finances and accounts of the Sublessee in relation to the performance of its obligations hereunder, with the financial officers of the Sublessee; provided that such visits, inspections and discussions do not interfere with the operations of the Sublessee and are scheduled at the reasonable request of the Sublessor and the Owner at times mutually convenient to such Person and the Sublessee. The Sublessee hereby agrees to make all reasonable efforts to arrange for such visits, inspections and discussions at times convenient for such Person. Neither the Sublessor or any Owner shall have any duty to make any such inspection nor shall any of them incur any liability or obligation by reason of not making any such inspection nor waive or be deemed to waive any rights hereunder or under any other Operative Agreement. Sublessor shall not have any obligation to third parties or to any Person to ensure that Sublessee maintains the Aircraft or causes the Aircraft to be maintained in an airworthy condition or otherwise in accordance with the terms hereof. 36 10.2. Financial Statements and Other Information. (a) Within 60 days after the end of each of the first three fiscal quarters and 120 days after the end of each fiscal year, Sublessee shall deliver to Sublessor (1) a certificate signed by Sublessee's principal financial officer stating that, to the best of his knowledge, there did not exist at any time during such period a Default or Event of Default or, if such principal financial officer shall have obtained knowledge of any Default or Event of Default, specifying the nature and period of existence thereof and what action the Sublessee has taken, is taking or proposes to take with respect thereto, and (2) if requested by Sublessor or the Owner of the Airframe, a copy of the Sublessee's quarterly report on Form 10-Q or Annual Report on Form 10-K, as the case may be, filed with the Securities and Exchange Commission or, if Sublessee does not file such periodic reports, equivalent financial information. (b) at any time or times and for such period of time as requested by Sublessor, such further information and data with respect to Sublessee as the Sublessor (or Owner through Sublessor) from time to time may reasonably request; and (c) promptly after any principal officer of the Sublessee having managerial responsibilities obtains knowledge of the occurrence of any Event of Default hereunder, an Officer's Certificate of Sublessee specifying the nature and period of existence of such Event of Default and what action, if any, the Sublessee has taken, is taking or proposes to take with respect thereto. ARTICLE 11. RECORDATION AND FURTHER ASSURANCES 37 Forthwith upon the execution and delivery of each Sublease Supplement, the Sublessee will cause such Sublease Supplement to be duly filed and recorded in accordance with the Act. In addition, Sublessee will promptly and duly execute and deliver to Sublessor such further documents and assurances and take such further action as the Sublessor may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Sublease and to establish and protect the rights and remedies created or intended to be created in favor of the Sublessor hereunder. The Sublessee's obligations under Article 11 shall be limited to action to be taken in the United States of America, unless the Aircraft is registered under the laws of a country other than the United States of America, in which case this Article 11 shall apply to action to be taken as well in the country in which such Aircraft is registered or such other applicable jurisdiction. ARTICLE 12. RETURN OF AIRCRAFT. 12.1 Return. Except as otherwise provided herein, at the expiration of the Term or upon the earlier termination of this Sublease, Sublessee, at its own risk and expense, shall return the Aircraft to the Sublessor by delivering the same to the Sublessor at any location in the continental United States of America designated by Sublessor. At the time of return to the Sublessor, the Aircraft shall be fully equipped with three Engines or other engines owned by the Sublessee (and complying with Section 7.8 hereof) properly installed thereon and all other Parts and items of Equipment that were installed on or delivered with the Aircraft on the Delivery Date or delivered separately to Sublessee prior to the Delivery Date (including the two shipsets of galley equipment (one of which was delivered to Sublessee on November 15, 1999), 26 LD3 cargo containers, 12 cargo compartment partial load latches (4 forward and 8 aft) part number AWJ7019-501, 8 cargo compartment partial load latches (all forward) part number 225-46787-1), except for Parts replaced or removed in accordance with Sections 6.1 or 6.3. 12.2. Records. Upon the return of the Aircraft, Sublessee shall deliver to Sublessor (a) all logs, manuals, certificates, data and inspection, modification and overhaul records required to be maintained with respect thereto under applicable rules and regulations of the FAA in Sublessee's possession and any other governmental authority having jurisdiction, and (b) and logs, manuals and catalogs included with each item of Equipment on the Delivery Date thereof. 12.3. Condition. Except as otherwise provided in Section 6.3 hereof, the Aircraft when returned to Sublessor shall be in the same configuration as when the Aircraft was originally delivered to Sublessee hereunder, shall be clean by commercial airlines standards, shall be airworthy and shall have a currently effective FAA certificate of airworthiness and shall be registered in the name of the Head Lessor in accordance with the Act and each item of Equipment returned to Sublessor shall (a) be in the condition required under Article 5 hereof and shall have been maintained pursuant to Section 5.3 hereof throughout the Term as if the Sublessee were the owner and operator thereof and as if the Term were not then ending, (b) be free and clear of any Liens (other than Liens of the character referred to clauses (a), (c), (d) and (e) of the definition of Permitted Liens), (c) shall be in as good a condition as when delivered, ordinary wear and tear excepted and (d) shall be in a condition for immediate operation under Federal Aviation Regulation 121. Sublessor shall have the right to conduct a ground inspection of the Aircraft to determine compliance with this Article 12. Each fuel tank and oil tank of the returned Aircraft shall contain not less than the quantity of fuel as was contained in such tanks when delivered to Sublessee on the Delivery Date, and, in the case of any differences in such quantities, an appropriate adjustment will be made by payment therefor at the then current market price at the place of delivery of fuel. 38 ARTICLE 13. EVENTS OF DEFAULT The following events shall constitute Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) Sublessee shall fail to make any payment of Basic Rent when due and such payment shall be overdue for a period of 5 days; or (b) Sublessee shall fail to make any payment of Supplemental Rent or any payment due to Continental under the MSA, in each case after the same shall have become due, and such payment shall be overdue for a period of 10 days; or (c) Sublessee shall fail to carry and maintain insurance on or with respect to the Equipment in compliance with the provisions of Article 8 hereof; or (d) Sublessee shall fail to perform or observe any other covenant or agreement to be performed or observed by it hereunder or under any other Operative Agreement and such failure shall continue unremedied for a period of 30 days after written notice thereof by Sublessor to Sublessee; provided, however, that if such failure cannot be remedied within such 30-day period and Sublessee shall be diligently proceeding to correct such failure as Sublessor deem appropriate and necessary to remedy such failure, such period shall be extended for up to an additional 30 days; or (e) Any representation or warranty made by Sublessee herein or in any other Operative Document or in any document or certificate provided by Sublessee pursuant hereto or thereto shall prove to have been false or misleading in any material respect, and such condition shall remain material and continue unremedied for a period of 30 days after written notice thereof by Sublessor to Sublessee; or 39 (f) The entry of a decree or order for relief by a court having jurisdiction in the premises in respect of the Sublessee in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law (collectively, "Bankruptcy Laws"), or appointing a receiver, liquidator, assignee custodian, trustee, sequestrator (or similar official) of Sublessee or for all or substantially all of its property, or ordering the winding-up or liquidation of its affairs, or the commencement of an involuntary case under any Bankruptcy Laws against Sublessee and the continuance of any such decree or order or involuntary case unstayed and in effect for a period of 60 consecutive days; or (g) The commencement by Sublessee of a voluntary case under any Bankruptcy Laws, or any other proceeding seeking liquidation, reorganization or other relief with respect to itself under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or (h) Failure to return Aircraft to Sublessor on or before January 2, 2002 in compliance with the terms hereof; provided, however, that failure to return the Aircraft on the date set forth herein will not be an Event of Default for five (5) days after such date if Sublessee has ceased commercial operation of the Aircraft and makes diligent effort to return the Aircraft and failure to return the Aircraft on the date set forth herein will not be an Event of Default (without limitation as to time of delay) if such failure is a result of the failure of Continental to perform the MSA. ARTICLE 14. REMEDIES 14.1. Default; Remedies. Upon the occurrence of an Event of Default and at any time thereafter so long as the same shall be continuing, Sublessor may, at its option, declare this Sublease to be in default, and may exercise one or more of the following remedies as Sublessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) Sublessor may cause Sublessee, upon written demand by Sublessor and at Sublessee's expense, to return promptly, and Sublessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Sublessor may so demand to Sublessee at such location on Sublessee's route system selected by Sublessor in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 12 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Sublessor, at its option, may enter upon any premises where all or any part of the Aircraft, Airframe, Engines, or Part thereof, is located or reasonably believed to be located and take immediate possession of and remove the same without the necessity for first instituting proceedings or by summary proceedings or other method under applicable law all without liability accruing to Sublessor for or by reason of such entering and taking of possession (except liability resulting from the willful misconduct or gross negligence of Sublessor or its agents); or 40 (b) Sublessor may sell all or any part of the Aircraft, Airframe or any Engine, or Part thereof, at public or private sale, at such times and places, to such Persons as Sublessor may determine, or otherwise dispose of, hold, use, operate or Sublease to others the Aircraft, Airframe or any Engine, or Part thereof, as Sublessor, in its sole discretion, may determine, all free and clear of any rights of Sublessee and without any duty to account to Sublessee with respect to such action or inaction or for any proceeds with respect thereto (except in connection with the calculation of liquidated damages as provided below); or (c) Whether or not Sublessor shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (a) or (b) above, Sublessor, by written notice to Sublessee specifying a payment date not earlier than ten days from the date of such notice, may cause Sublessee to pay to Sublessor, and Sublessee shall pay to Sublessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft, Airframe, Engine or Part thereof due for the periods commencing after the date specified for payment in such notice), any unpaid Basic Rent due for periods prior to and including the period ending with the Basic Rent Payment Date immediately preceding the date specified in such notice plus an amount equal to the excess, if any, of the present value of the remaining payments of Basic Rent during the Term over the present value of the fair market rental value of the Aircraft, Airframe, Engine or Part thereof, for the remainder of such Term, using in each case a discount rate equal to the Prime Rate as of the date specified for payment in such notice; or (d) Sublessor may rescind this Sublease as to all or any part of the Aircraft, Airframe and Engines, or Part thereof, or may exercise any other right or remedy which may be available to it under the Uniform Commercial Code whether or not in effect in the jurisdiction in which enforcement is sought or other applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. For the purpose of this Section 14, the "fair market rental value" of the Aircraft shall be as specified in an appraisal by BK Associates or Aircraft Information Services, Inc., as selected by Sublessor or, if neither appraiser is available, another nationally recognized independent aircraft appraiser chosen by Sublessor, who shall determine such value on the basis of the actual location and condition of the Aircraft. 41 In addition to the foregoing remedies, Sublessee shall be liable for any and all Supplemental Rent due hereunder before or after termination hereof, except as otherwise expressly provided above, for all legal fees and other costs and expenses of Sublessor incurred by reason of the occurrence of an Event of Default and the exercise of Sublessor's remedies with respect thereto including all costs and expenses incurred in connection with the return of the Airframe or any Engine in accordance with the terms of Article 12 hereof or any appraisal of the Aircraft. At any sale of the Airframe or any Engine, Sublessor may bid for and purchase such property. 14.2. No Waiver, Etc No remedy referred to in this Section 14 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Sublessor at law or in equity; and the exercise or beginning of exercise by Sublessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Sublessor of any or all of such other remedies. No express or implied waiver by Sublessor of any Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Event of Default. ARTICLE 15. MISCELLANEOUS. 15.1 Notices. All notices required under the terms and provisions hereof shall be in writing and shall be given by certified mail, overnight courier, telecopy, telex, teletype or any other customary means of written communication, addressed: If to Sublessor, at 1600 Smith Street, 32nd Floor - HQSFM, Houston, Texas 77002, Attention: Vice President - Fleet Management or at such other address as Sublessee shall from time to time designate in writing; If to Sublessee, at Honolulu International Airport, P.O. Box 30008, Honolulu, Hawaii 96820-0009, Attention: VP - Finance, copy to General Counsel, or at such other address as Sublessor shall from time to time designate in writing; 15.2. Right to Perform for Sublessee. If Sublessee fails to make any payment of Supplemental Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Sublessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the reasonable cost of such performance or compliance, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Sublessee upon demand. 42 15.3. Assignment by Sublessee. Except as expressly permitted in the following sentence, Sublessee will not assign any of its rights under this Sublease without the prior written consent of Sublessor and Head Lessor. On ten days' written notice to Sublessor, Sublessee may consolidate with or merge into any other corporation provided that the following conditions are met: (a) the corporation formed by such consolidation or into which Sublessee is merged shall be a corporation organized under the laws of the United States of America or any State thereof or the District of Columbia, shall be a citizen of the United States within the meaning of the Act, shall be a United States certificated air carrier holding one or more certificates of public convenience and necessity and shall execute and deliver to Sublessor and Head Lessor an agreement containing an assumption by such successor corporation of the due and punctual performance of each covenant and condition contained in this Sublease and the other Operative Agreements, (b) immediately after giving effect to such transaction, no Event of Default shall have occurred and be continuing and (c) Sublessee shall have delivered to Sublessor an Officer's Certificate of Sublessee stating that such transaction complies with the requirements of this Section 15.3. 15.4. Assignment by Sublessor. Sublessor shall not sell, assign, convey or otherwise transfer its interest in the Operative Agreements (whether by sale, merger or otherwise) except on the conditions set forth in this Section 15.4. Sublessor may transfer its right, title and interest in the Operative Agreements to (1) Continental, (2) the Head Lessor or (3) the Owner. In addition, Sublessor may transfer its right, title and interest in and to the Operative Agreements to another Person (for the purposes of this Section 15.4, the "Transferee"), subject to the conditions that: (a) The Transferee shall have full power and authority and legal right to execute and deliver and to perform its assumed obligations under this Agreement and the other Operative Agreements and shall provide reasonably satisfactory evidence of such power and authority to Sublessee; (b) The Transferee shall enter into one or more legal, valid, binding and enforceable agreements (and, if such Transferee is not an Affiliate or wholly-owned subsidiary of Sublessor, accompanied by an opinion of counsel reasonably satisfactory to Sublessee addressed to Sublessee to the effect that such agreement or agreements are legal, binding and enforceable in accordance with its or their terms with such exceptions and qualification as are permitted in the comparable opinion delivered on the Delivery Date), pursuant to which such Transferee agrees to be bound by all the terms of, and to undertake all of the obligations arising after such transfer of, the transferring Sublessor contained in the Operative Agreements and in which it makes representations and warranties comparable to those contained in Section 4.2; 43 (c) Any such transfer shall not violate the Act or result in a "prohibited transaction" within the meaning of ERISA; and (d) The Transferee shall be either (i) a United States bank, insurance company or other financial institution with a capital and surplus of at least $10,000,000, or a wholly-owned subsidiary of such a bank, insurance company or other financial institution, or (ii) a corporation which has a net worth of at least $10,000,000 (or is a wholly-owned subsidiary of such a corporation), and, as of the date of such transfer, is an entity experienced in participating as an equity investor in equipment leasing transactions having similar magnitude to this transaction; provided, that if the Transferee does not itself have a capital and surplus or a net worth of at least $10,000,000, the transferring Sublessor shall continue to be liable for (or if the parent of such Transferee meets such net worth test, such parent shall enter into a legal, valid, binding and enforceable agreement, in form and substance reasonably satisfactory to Sublessee, effective to confirm that such parent shall be liable for) all the obligations of Sublessor hereunder assumed by the Transferee; and provided further that if the Transferee is a partnership, each partner (including each limited partner, if any) shall be a "citizen of the United States" within the meaning of Section 101(16) of the Act or a "Resident Alien" within the meaning of the Act and shall not be a tax exempt organization or entity, governmental unit or foreign person or entity within the meaning of Section 48(a)(4), 48(a)(5) or 168(h)(2) of the Code; Sublessor shall give written notice to Sublessee at least 10 days prior to such transfer, specifying the name and address of the proposed Transferee, and the facts necessary to determine whether or not the requirements for a transfer, as set forth herein, are satisfied. Upon any such transfer, the Transferee shall be deemed the "Sublessor" to the extent appropriate for purposes hereof, and the transferring Sublessor shall be released from its obligations under the Operative Agreements arising after such transfer to the extent, but only to the extent, that such obligations have been assumed by the Transferee. Any fees, charges and expenses, including the reasonable legal fees, charges and expenses, incurred by Sublessor or Sublessee in connection with the transfer by Sublessor of any interest in the Aircraft or the Operative Agreements, or by the Transferee in any such case, will be paid for by the Sublessor making such transfer and in no case will the Sublessee be responsible for any such fees, charges or expenses. Without limiting the generality of any of the foregoing, Sublessor will reimburse Sublessee for its reasonable out-of-pocket costs in reviewing documents required by Sublessor, Lender or the Transferee in connection with any such transfer by Sublessor. Sublessor also agrees to reimburse Sublessee for up to $________ of its actual, out-of-pocket fees, charges and expenses, including the reasonable legal fees, charges and expenses, incurred by Sublessee in connection with the transfer by Owner or Head Lessor of any interest in the Aircraft or the Operative Agreements. 44 Notwithstanding anything herein to the contrary, Sublessee shall not be obligated to take any action in connection with any transfer, assignment, pledge or other conveyance, for security or otherwise, by Sublessor of its interest in any of the Operative Agreements or any item of Equipment if such transfer, assignment, pledge or other conveyance materially adversely affects the rights or obligations of Sublessee under the Operative Agreements or otherwise materially adversely affects Sublessee. The agreements, covenants, obligations and liabilities contained in this Sublease including, but not limited to, all obligations to pay Rent and indemnify each Indemnitee are made for the benefit of each Indemnitee and their respective successors and assigns; provided, however, that no transfer, assignment, pledge, or other conveyance shall increase the aggregate financial exposure under the indemnity obligations of Sublessee under this Sublease as compared to what such obligations would have been had such transfer, assignment, pledge or other conveyance not occurred. Sublessee acknowledges that Head Lessors and Owners have the rights under the relevant Head Lease and related agreements to transfer and finance their interests in the Aircraft and the Head Lease subject to certain restrictions contained therein. In the event of any such transfer or assignment by the Head Lessor or Owner of the Airframe, Sublessor shall use commercially reasonable efforts to (a) procure a letter, satisfactory to Sublessee, from the transferee or assignee agreeing not to disturb Sublessee's possession and use of the Aircraft unless an Event of Default occurs hereunder and (b) ensure the continued United States registration of the Aircraft under the Act without limitation on use or operation and without disrupting Sublessee's continuous operation of the Aircraft. The terms and provisions of this Sublease shall be binding upon and inure to the benefit of Sublessor and Sublessee and their respective permitted successors and assigns. 15.5. Quiet Enjoyment. So long as no Event of Default shall have occurred and be continuing, Sublessor covenants that neither it, Owner, Head Lessor nor any person claiming lawfully through any of them shall interfere with any right of Sublessee peaceably and quietly without hindrance or molestation to hold, possess and use, during the Term and in accordance with the terms hereof, the Aircraft, Airframe and Engines. 15.6. Investment of Funds. Any amounts required to be paid to, or retained by Sublessor on behalf of, Sublessee that are not then required to be paid to Sublessee pursuant to this Sublease (including any security or commitment deposit, if applicable), shall, until paid to Sublessee as provided in this Sublease, be invested by Sublessor at the direction of Sublessee and at the expense and risk of Sublessee in the following securities (which shall mature within 180 days of the date of purchase thereof): (a) direct obligations of the Government; (b) obligations fully guaranteed by the Government; (c) open market commercial paper issued by any corporation rated P-1 or P-2 by Moody's Investors Service Inc. or A-1 or A-2 by Standards & Poor's Corporation; or (d) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with First Security Bank, National Association or any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or any state thereof having a combined capital and surplus of at least $150,000,000. There shall be promptly remitted to Sublessee any gain (including interest received) realized as the result of any such investment (net of any fees, commissions, taxes and other expenses, if any, incurred in connection with such investment) unless an Event of Default shall have occurred and be continuing. Sublessee will promptly pay to Sublessor, on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses (including any taxes), if any, incurred in connection with such investment). 45 15.7. Maintenance of Status. To the extent provided thereby (or to the fullest extent it may lawfully so agree, whether or not provided thereby), Sublessee hereby agrees that any right of Sublessor to take possession of such Aircraft or Engines in compliance with the provisions of this Sublease and in accordance with Section 1110 of Title 11 of the United States Code or any similar provision of any superseding statute, as amended from time to time, shall not be affected by the provisions of Sections 362 or 363 or said Title, or other analogous part of any superseding statute, as amended from time to time, and accordingly, it is the intention of the parties hereto that this Sublease be afforded the benefits of said Section 1110. 15.8. Confidentiality. Sublessee and Sublessor agree to keep this Agreement, including Schedule 1 hereto, confidential and shall not disclose or cause to be disclosed the same to any Person, except (i) to prospective permitted transferees of any such party's interests or to any prospective Lender or their respective counsel or other agents who agree to hold such information confidential, (ii) to any such party's counsel or special counsel, insurance brokers, auditors or other agents, Affiliates, advisors or investors who agree to hold such information confidential, (iii) as may be required by any statute, court or administrative order, ruling or regulation or applicable law, (iv) the Head Lessor and Owner and (v) such other Persons as are reasonably deemed necessary by the disclosing party in order to protect the interests of such party for the purpose of enforcing such documents by such party. 15.9. Applicable Law. All representations, warranties and indemnities of Sublessee and Sublessor provided for in this Sublease and in the other Operative Agreements shall survive the execution and delivery of this Sublease. Any provision of this Sublease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. No term or provision of this Sublease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Sublease shall constitute an agreement of Sublease, and nothing herein shall be construed as conveying to Sublessee any right, title or interest in or to the Aircraft, Airframe or Engines except as a Sublessee only. The section and paragraph headings in this Sublease, the table of contents and the cover (other than the chattel paper language contained thereon) are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof and all references herein to numbered sections, unless otherwise indicated, are to sections of this Sublease. THIS SUBLEASE HAS BEEN, AND EACH SUBLEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Sublease and each Sublease Supplement and amendment hereto may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. This Sublease shall be a net Sublease and, except as specifically provided herein, Sublessee shall be responsible during the Term for all costs incurred in the operation, use, maintenance and possession of the Aircraft by Sublessee. Each party hereto agrees to execute such further documents and make any filings as may be reasonably necessary to protect the rights of the parties hereunder. 46 IN WITNESS WHEREOF, Sublessor and Sublessee have each caused this Sublease to be duly executed and delivered as of the day and year first above written. HAWAIIAN AIRLINES, INC. By:_________________________ Title: By:_________________________ Title: CONTINENTAL MICRONESIA, INC. By:_________________________ Title: 47 EXHIBIT A TO SUBLEASE AGREEMENT SUBLEASE SUPPLEMENT NO. THIS SUBLEASE SUPPLEMENT NO. , dated _______, _____ between HAWAIIAN AIRLINES, INC., a Hawaii corporation ("Sublessee"), and CONTINENTAL MICRONESIA, INC., a Delaware corporation ("Sublessor"). Sublessor and Sublessee have heretofore entered into that certain Sublease Agreement 061, dated as of _____, 1999 (as at any time amended, modified or supplemented, herein called the "Sublease" and the terms defined therein being herein used with the same meanings), which Sublease provides for the execution of Sublease Supplements substantially in the form hereof for the purpose of leasing an Aircraft under the Sublease as and when delivered by Sublessor to Sublessee in accordance with the terms thereof. [The Sublease relates, among other matters, to the Airframe and Engines described below, and this Sublease Supplement is attached to a counterpart of the Sublease for purposes of filing and recordation with the FAA pursuant to the Act.] [The Sublease relates to the Airframe [and] [Engines] described below, and a counterpart of the Sublease, attached to and made a part of Sublease Supplement No. 1, dated ______, ______, to the Sublease, has been recorded by the FAA on _____, _______ as one document and assigned Conveyance No. __]. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Sublease, Sublessor and Sublessee hereby agree as follows: - ----------- This Sublease Supplement has been executed in several counterparts. No security interest in Sublessor's right, title and interest in and to this Sublease Supplement may be created through the transfer or possession of any counterpart other than the original counterpart. [This is not the original counterpart.] 1. Sublessor hereby delivers and subleases to Sublessee, and Sublessee hereby accepts and subleases from Sublessor, under the Sublease, as herein supplemented: [The following described McDonnell Douglas model DC-10-30 Aircraft (the "Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S. Registration Number _______; Manufacturer's Serial No. ____; and Engines: General Electric model CF6-50C2 engines bearing manufacturer's serial numbers as follows: Position 1: ____ Position 2: ____ Position 3: ____ Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the [Delivered Aircraft] [Engine] is the date of this Sublease Supplement set forth in the opening paragraph hereof. [The Aircraft was delivered with ______ gallons of fuel.] 3. Sublessee hereby confirms to Sublessor that Sublessee has accepted the [Delivered Aircraft] [Engine] for all purposes hereof and of the Sublease. 4. THIS SUBLEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Sublease Supplement to be duly executed and delivered as of the date and year first above written. HAWAIIAN AIRLINES, INC. By:_________________________ Title: By:_________________________ Title: CONTINENTAL MICRONESIA, INC. By:_________________________ Title: SCHEDULE 1 To Sublease Agreement 061 Certain Financial Terms Monthly Aircraft Basic Rent $________ initially, and subject to adjustment, as provided in the last sentence of this paragraph. Sublessor and Sublessee acknowledge and agree that this Agreement and the MSA have been entered into as part of a single transaction, and that this Agreement and the MSA should be regarded as a single agreement for purposes of assumption or rejection under Section 365 of the U.S. Bankruptcy Code. If the MSA terminates for any reason (including, without limitation, due to default by either party or rejection in a bankruptcy proceeding) while this Agreement remains in effect and Continental fails to make payment to Sublessee of the monthly maintenance credit thereunder, Sublessor and Sublessee agree that the amount of Basic Rent payable hereunder shall be automatically reduced by the amount of such unpaid monthly maintenance credit without further act by either party. Monthly Entertainment System Basic Rent $________ Holdover Basic Rent $_______ Limits of Liability: $________ Heavy Maintenance Reserve: $______ per flight hour prior to the C Check currently scheduled for April 2001 and $____ per flight hour after such C Check Aircraft Per Engine Stipulated Loss Stipulated Stipulated Value Date Loss Value Loss Value 2 Apr - 00 $__________ $__________ 2 Jul - 00 __________ __________ 2 Oct - 00 __________ __________ 2 Jan - 01 __________ __________ 2 Apr - 01 __________ __________ 2 Jul - 01 __________ __________ 2 Oct - 01 __________ __________ 2 Jan - 02 __________ __________ One Time Start up Costs Reconfiguration of Aircraft $__________ Painting of Aircraft with Hawaiin Logo at cost SCHEDULE 1 To Sublease Agreement 061 Certain Financial Terms Monthly Aircraft Basic Rent $ *** initially, and subject to adjustment, as provided in the last sentence of this paragraph. Sublessor and Sublessee acknowledge and agree that this Agreement and the MSA have been entered into as part of a single transaction, and that this Agreement and the MSA should be regarded as a single agreement for purposes of assumption or rejection under Section 365 of the U.S. Bankruptcy Code. If the MSA terminates for any reason (including, without limitation, due to default by either party or rejection in a bankruptcy proceeding) while this Agreement remains in effect and Continental fails to make payment to Sublessee of the monthly maintenance credit thereunder, Sublessor and Sublessee agree that the amount of Basic Rent payable hereunder shall be automatically reduced by the amount of such unpaid monthly maintenance credit without further act by either party. Monthly Entertainment System Basic Rent $*** Holdover Basic Rent $*** Limits of Liability: $*** Heavy Maintenance Reserve: $*** per flight hour prior to the C Check currently scheduled for April 2001 and $*** per flight hour after such C Check *** Omitted from the version of this document filed with the Federal Aviation Administration as containing confidential financial information. Aircraft Per Engine Stipulated Loss Stipulated Stipulated Value Date Loss Value Loss Value 2 Apr - 00 $*** $*** 2 Jul - 00 2 Oct - 00 2 Jan - 01 2 Apr- 01 2 Jul - 01 2 Oct - 01 2 Jan - 02 One Time Start up Costs Reconfiguration of Aircraft $*** Painting of Aircraft with Hawaiin Logo at cost *** Omitted from the version of this document filed with the Federal Aviation Administration as containing confidential financial information. EX-10.8 4 EXHIBIT 10.8 AIRCRAFT MAINTENANCE SERVICES AGREEMENT dated as of October 26, 1999 by and between HAWAIIAN AIRLINES, INC., as Customer and CONTINENTAL AIRLINES, INC., as Maintenance Provider INDEX ARTICLE HEADING Page ARTICLE 1 -- DEFINITIONS 1 ARTICLE 2 -- TERM OF AGREEMENT 6 ARTICLE 4 -- CERTAIN REGULATORY REQUIREMENTS 14 ARTICLE 5 -- DELIVERY AND REDELIVERY OF AIRCRAFT; INVENTORY 15 ARTICLE 6 -- DESIGNATED CUSTOMER REPRESENTATIVE 16 ARTICLE 7 -- MATERIAL SUPPLY 18 ARTICLE 8 -- OFFICE SPACE, MONITORING, AUDITS AND INSPECTION 18 ARTICLE 9 -- CHARGES 19 ARTICLE 10 -- PAYMENTS 21 ARTICLE 11 -- COST RECOVERY 25 ARTICLE 12 -- EXCUSABLE DELAY 26 ARTICLE 13 -- ASSURANCE OF SUPPLY 27 ARTICLE 15 -- WARRANTIES 27 ARTICLE 16 -- PATENT PROTECTION 29 ARTICLE 17 -- COMPLIANCE WITH LEGAL REQUIREMENTS 30 ARTICLE 18 -- MAINTENANCE PROVIDER'S INSURANCE 30 ARTICLE 19 -- INDEMNIFICATION 31 ARTICLE 20 -- CANCELLATION, DEFAULT, AND TERMINATION 32 ARTICLE 21 -- NOTICES AND REQUESTS 33 ARTICLE 22 -- CONFIDENTIALITY 35 ARTICLE 23 -- MAINTENANCE PROVIDER AS INDEPENDENT CONTRACTOR 35 ARTICLE 24 -- ASSIGNMENT 35 ARTICLE 25 -- SUBCONTRACTING 35 ARTICLE 26 -- SAVINGS CLAUSE 36 ARTICLE 27 -- WAIVER CLAUSE 36 ARTICLE 28 -- GOVERNING LAW 36 ARTICLE 29 -- COSTS OF ENFORCEMENT 36 ARTICLE 30 -- INTEGRATION CLAUSE 37 ARTICLE 31 -- HEADINGS 37 ARTICLE 32 -- COUNTERPARTS 37 ARTICLE 33 -- NON-LIABILITY OF CERTAIN PERSONS 37 ARTICLE 34 -- CONSEQUENTIAL, INCIDENTAL AND EXEMPLARY DAMAGES. 37 i INDEX TO EXHIBITS Exhibit Exhibit Heading Page - ------- --------------- ---- A Schedule of Charges for Initial Conversion Services and Line Maintenance Services..................................A-1 B Schedule of Time and Material Charges For Additional Services..B-1 C Statement of Work..............................................C-1 D Delivery/Redelivery Receipt....................................D-1 E Loose Equipment Inventory List.................................E-1 F Daily Aircraft Status Summary .................................F-1 G Customer Work Change Authorization ............................G-1 H Invoicing Cost Categories .....................................H-1 I Monthly Aircraft Usage Report..................................I-1 ii AIRCRAFT MAINTENANCE SERVICES AGREEMENT THIS AIRCRAFT MAINTENANCE SERVICES AGREEMENT is made and entered into to have effect as of this 26th day of October, 1999 (the "Effective Date"), by and between HAWAIIAN AIRLINES, INC., a Hawaii corporation ("Customer") and CONTINENTAL AIRLINES, INC., a Delaware corporation ("Continental" or "Maintenance Provider"). RECITALS: 1. On the date hereof, Customer is entering into aircraft sublease agreements for two DC-10-30 aircraft with Continental Micronesia, Inc., an indirect, wholly-owned subsidiary of Continental. 2. Customer desires that Maintenance Provider perform certain Services (as hereinafter defined) on the Aircraft (as hereinafter defined). 3. Maintenance Provider is willing and able to perform the Services pursuant to the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: ARTICLE 1 -- DEFINITIONS Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Agreement and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time. The word "including" means "including without limitation". "Additional Services" shall have the meaning ascribed to such term in Article 3.A.4. "Agreement", "herein", "hereof", "hereunder", and like terms shall refer to this Aircraft Maintenance Services Agreement, as the same may be amended or supplemented from time to time. "Aircraft" shall mean the two McDonnell Douglas DC10-30 aircraft bearing U.S. Registration Nos. N12061 and N68060, respectively, and manufacturer's serial numbers 47851 and 47850, respectively, in each case including the airframe, all attached engines and instruments, and all other equipment, apparatus, assemblies, Parts, and accessories attached thereto, incorporated therein, or installed thereon from time to time. 1 "Current Heavy Maintenance Facilities" shall mean FLS Aerospace Limited, Mobile Aerospace Engineering, Inc., Israeli Aircraft Industries and Alitalia. "Customer" shall mean the legal entity identified as "Customer" in the introductory paragraph of this Agreement. "Customer-Furnished Material" shall mean all Parts and Materials provided by Customer as required for the provision of any Services. "Customer-Requested Services" shall have the meaning ascribed to such term in Article 3.A.4.C. "Customer Parties" shall mean and include Customer and its successors and assigns and their respective affiliates, officers, directors, agents and employees. "Customer Work Change Authorization" shall mean a document, in substantially the form of Exhibit G and executed on behalf of both Maintenance Provider and Customer, used to document any changes in respect of a Statement of Work, including, without limitation, any addition to or deletion permitted under this Agreement from the scope of Services initially described on such Statement of Work and any change to the Scheduled Redelivery Date specified therein. "Cycle" shall mean, with respect to any Aircraft, one (1) take-off of such Aircraft and the next subsequent landing of such Aircraft. "Default" shall have the meaning set forth in Article 20, Paragraph B of this Agreement. "Delivery" shall mean the act by which Customer delivers or causes to be delivered an Aircraft to Maintenance Provider for the provision of Services. "Delivery/Redelivery Receipt" shall have the meaning ascribed to such term in Article 5.A. "Designated Customer Representative" shall mean, with respect to any Aircraft, (1) the on-site representative of Customer, designated in writing by Customer to Maintenance Provider, pursuant to paragraph (B) of Article 6, designated as such or (2) in the absence of any such designation by Customer, Customer's Vice-President or Assistant Vice President of Technical Services. "Discrepancy" shall mean any condition of any Aircraft, Engine, Part, or other component or system of any of the foregoing, that is outside of permissible limits under the applicable Maintenance Manual whether or not this condition could eventually result in failure, confirmed as such by Maintenance Provider. "Effective Date" shall have the meaning specified in the first paragraph of this Agreement. 2 "Engine" shall mean (1) any aircraft engine installed on or attached to any Aircraft at the time of Delivery to the Maintenance Provider for the performance of Services under this Agreement, and (2) any replacement or spare General Electric model CF6-50C2 engine owned or otherwise operated by Customer from time to time in conjunction with the Aircraft, whether or not such engine is installed on an Aircraft at the time Services are requested in respect of such engine under this Agreement. "Environmental Laws" shall mean any and all applicable federal, state, or local laws, statutes, ordinances, codes, rules, decrees, regulations, guides, or orders relating to health, safety, or the environment as now or at any time hereafter in effect during the Term. "Expendable Part" means any Part that, in the ordinary course of correcting a Discrepancy, is replaced rather than Overhauled, Repaired, or calibrated. "Expiration Date" shall mean January 2, 2002. "FAA" shall mean the Federal Aviation Administration of the United States Department of Transportation, or any agency succeeding to the power and authority thereof. "FARs" shall mean any and all regulations promulgated by the FAA or any predecessor agency, as well as those promulgated by any other Federal agency that are applicable to the provision of the Services, including, without limitation, those set out in Title 14 of the Code of Federal Regulations, as from time to time in effect. "Flight Hour" shall mean, with respect to any Aircraft, the amount of time (expressed in hours and rounded to the nearest one-hundredth (1/100th of an hour) between the time the wheels of the Aircraft leave the ground on take-off to the time the wheels touch down on the ground at landing. "Hazardous Materials" shall mean and include any petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquified natural gas, synthetic gas usable for fuel, or any mixture thereof, flammable explosives, asbestos, polychlorinated biphenyls, radioactive materials, or other substance now or in the future defined or listed in, or otherwise classified pursuant to, or regulated by, any Environmental Law as a hazardous substance, hazardous material, hazardous waste, infectious waste, toxic substance, pollutant, or contaminant, or any other term used to define, list, classify, or regulate substances by reason of properties such as their threshold limit concentrations, ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or "EP toxicity." "Heavy Maintenance Checks" shall have the meaning ascribed to such term in Article 3.A.3. "Heavy Maintenance Check Location" shall mean the heavy maintenance base from time to time selected in accordance with this Agreement for the performance of Heavy Maintenance Checks. "Initial Conversion Services" shall have the meaning ascribed to such term in Article 3.A.1. 3 "Inventory" shall mean all loose equipment, manuals, certificates, and other items on board an Aircraft at the time of Delivery, as evidenced by their inclusion on the relevant Loose Equipment Inventory List. "Line Maintenance" shall have the meaning ascribed to such term in Article 3.A.2. "Line Maintenance Location" shall mean (1) Los Angeles International Airport and (2) Honolulu International Airport in Honolulu, Hawaii. "Loose Equipment Inventory List" shall mean each completed form, in substantially the form of Exhibit E, required to be delivered pursuant to Article 5. "Maintenance" shall mean that work required to maintain an Aircraft in, or return it to, serviceable and airworthy condition, whether through inspection, Overhaul, Repair, calibration, or replacement. "Maintenance Provider" shall mean Continental Airlines, Inc. "Maintenance Manual" shall mean any maintenance manual or portion of a maintenance manual prepared, distributed or approved by Continental in respect of any Aircraft, Engine or Part. "Maintenance Program" shall mean Maintenance Provider's FAA-approved Continuous Airworthiness Maintenance Program for aircraft operated by the Maintenance Provider that are of the same manufacturer, make and model as the Aircraft, including Maintenance Provider's FAA-approved Reliability Program (per Continental Continuous Maintenance Performance Audit Report #020R001, Revision No. 58), Maintenance Provider's procedures for the reliability program (per Continental General Maintenance Manual), and Maintenance Provider's Operations Specifications (per Continental Operations Specifications Part D, including DC10 Task Oriented Maintenance Specification Engineering Report No. 0520R00134, and CF6-50 Engine Repair Specification Report No. ER7200R00033). "Manufacturer" shall mean (1) The Boeing Company, as successor in interest to McDonnell Douglas Aircraft Corporation, with respect to each Aircraft, (2) GE Aircraft Engines with respect to the Engines, and (3) with respect to any Part, the original equipment manufacturer of such Part. "Materials" shall mean raw stock (as opposed to pre-manufactured Parts) and other supplies used or consumed in the performance of Services. "Modification" shall mean the work required to modify the Aircraft in a specified manner. 4 "Monthly Aircraft Usage Report" shall mean a Monthly Aircraft Usage Report substantially in the form of Exhibit I attached hereto, duly completed and submitted by Customer to Maintenance Provider pursuant to Article 10(A). "Monthly Credit" shall mean the sum of Thirty Five Thousand U.S. Dollars ($________) per month during the Term, which shall be deducted from Customer's obligation to pay the Monthly Payment on each Monthly Payment Date in accordance with Article 10(A) below. "Monthly Payment" shall have the meaning specified in Article 9(B) of this Agreement. "Monthly Payment Date" shall mean the fifth (5th) calendar day of each calendar month, commencing with the calendar month immediately following the month in which the Effective Date occurs, and ending with the calendar month immediately following the month in which the Expiration Date occurs or in which the Term of this Agreement otherwise terminates in accordance with the provisions hereof, except that if such fifth (5th) calendar day in any month is not a day on which banks are open in New York City, New York and Honolulu, Hawaii, then the Monthly Payment Date for such month shall be on the next calendar day when such banks are open. "Non-Routine Items" shall mean all Discrepancies detected through or in the course of performance of routine items that, in accordance with the Maintenance Program require inspection, Repair or Overhaul before the affected Aircraft or Part can be returned to service. "Off-line Maintenance" shall have the meaning ascribed to such term in Article 3.A.4.a. "Overhaul" shall mean to disassemble, clean, inspect, repair and re-assemble, in each case as required, any Rotable Part to return such Rotable Part to a condition of compliance with such limits of tolerance as are established by the Maintenance Program. "Parts" shall mean any one or more Rotable Parts or Expendable Parts that is used or installed on any Aircraft or Engine. "Redelivery" shall mean the act by which Maintenance Provider returns, or causes to be returned, the Aircraft to Customer after completion (or cancellation) of the Services requested to be performed thereon pursuant to the applicable Statement of Work and any applicable Customer Work Change Authorizations. "Repair" shall mean the work required to return a Rotable Part to a serviceable (and, where applicable, airworthy) condition in accordance with the Maintenance Program. "Rotable Parts" shall mean Parts that are renewable and inventory- or time-controlled on a unit basis, usually (but not necessarily) by serial number, and have a definite potential for reuse through inspection, Overhaul, Repair, or calibration in connection with the Maintenance Program. 5 "Schedule of Charges" shall mean Exhibit B, as the same may be amended or supplemented from time to time. "Scheduled Redelivery Date" shall have the meaning ascribed to such term in Article 5.A. "Services" shall mean all services (including Off-Line Maintenance) to be provided by Maintenance Provider for Customer pursuant to this Agreement, as described on any Statement of Work or Customer Work Change Authorization, whether consisting of the performance of Initial Conversion Services, Line Maintenance Services, Heavy Maintenance Checks, Additional Services or AOG Services, and whether such services constitute routine items or Non-Routine Items. "Statement of Work" shall have the meaning ascribed to such term in Article 3.B. "Sublease" shall mean each Aircraft Sublease Agreement dated the date hereof in respect of an Aircraft between Continental Micronesia, Inc., as sublessor and Customer as sublessee. "Sublease Delivery" with respect to each Aircraft shall mean the delivery of such Aircraft to Customer under the applicable Sublease. "Term" shall have the meaning specified in Article 2. "U.S. Dollars" and "U.S. $" shall mean legal currency of the United States of America. "Weekly Aircraft Status Summary" shall mean a weekly report with respect to the status of Heavy Maintenance Checks requested to be performed on a particular Aircraft, in substantially the form of Exhibit F or of such replacement form as Customer and Maintenance Provider may agree from time to time for the purpose of monitoring the status of Heavy Maintenance Checks being performed. "Work Cards" shall mean the work cards submitted by Customer to Maintenance Provider in connection with any Statement of Work or Customer Work Change Authorization to assist in describing the nature of the Services to be performed pursuant thereto. ARTICLE 2 -- TERM OF AGREEMENT Except as may be otherwise provided herein, the term of this Agreement shall commence as of the Effective Date and shall continue in full force and effect until the Expiration Date, subject to earlier termination pursuant to the terms hereof (the "Term"). ARTICLE 3 - SERVICES COVERED 6 A. General. On the terms and subject to the conditions set forth in this Agreement, Maintenance Provider shall provide to Customer, and Customer shall purchase from Maintenance Provider, the following services during the Term of this Agreement: 1. Initial Conversion Services. Maintenance Provider agrees to provide the following initial services ("Initial Conversion Services") to Customer: a. install five (5) Sceptre computer terminals (four on premises used by the Customer at Honolulu airport and the fifth terminal on premises used by the Customer at Los Angeles International Airport) and provide access to Continental's Sceptre computer terminals until such five (5) terminals are installed, b. provide training at a mutually acceptable location to a reasonable number of employees of the Customer designated by the Customer with respect to the Maintenance Program and operation of the Sceptre computer system, c. prepare, with the assistance of Customer, a standard practice manual, which shall be subject to Customer's approval (not to be unreasonably withheld, conditioned or delayed) for reference in the performance of the Services hereunder and which shall include definitions of organizational responsibilities and interfaces, together with any amendments made thereto from time to time agreed upon by the parties hereto, d. reconfigure each of the Aircraft to a Continental standard 28 first class and 254 coach interior seating configuration, and e. install the Customer's logo to the exterior of each Aircraft (either by painting or by installation of decals provided by the Customer to Maintenance Provider, as the Customer may elect so long as such decals or stencils are provided by October 25, 1999 for Aircraft N68060 and March 1, 2000 for Aircraft N12061), with the specifications to be provided by Customer to Maintenance Provider. Maintenance Provider shall complete the Initial Conversion Services (1) described in clause "b" above not later than the date on which the first Aircraft is delivered to Customer under the applicable Sublease, (2) described in clauses "a" and "c" above as soon as reasonably practicable after the delivery of the first Aircraft to Customer under the relevant Sublease and (3) described in clauses "d" and "e" above with respect to each Aircraft not later than the date on which such Aircraft is delivered to Customer under the applicable Sublease. The Maintenance Provider may commence the provision of Initial Conversion Services at any time after the execution and delivery of this Agreement. 7 Maintenance Provider also agrees to provide as Additional Services (as defined in Article 3.A.4 below) such other Services prior to the Sublease Delivery of an Aircraft as the Customer may reasonably request hereunder, subject to the conditions applicable to the provision of Customer-Requested Services hereunder, and such Services provided prior to the Sublease Delivery of an Aircraft shall be treated as Customer-Requested Services. 2. Line Maintenance. Maintenance Provider will provide the following line maintenance services to Customer with respect to each Aircraft and each Engine ("Line Maintenance"): a. line maintenance work required to maintain an Aircraft in, or return it to, serviceable and airworthy condition, whether through inspection, Overhaul, Repair, calibration or replacement of Parts and Modification -- all in accordance with the Maintenance Program, b. spares provisioning as and when required under the Maintenance Program, including the provision of spare engines and auxiliary power units ("APUs"), at an inventory level no less than that maintained by Maintenance Provider in respect of like model and vintage aircraft in its fleet as reasonably adjusted to account for such factors as the total number of aircraft being supported by such spares inventory, the location of such spares inventory and the utilization and stage lengths of the aircraft being supported by such spares inventory, c. Phase "A" checks, d. other customary line maintenance services, e. all engineering, maintenance, inspection and testing work required in connection with the completion of "service checks", "Phase `A' checks", "transit checks", "time control inspection" and "MEL recovery" (as such terms are used in the Maintenance Program), and f. washing services at Honolulu or Los Angeles through a third party vendor mutually agreed upon by Maintenance Provider and Customer. but excluding the following: (u) cleaning the interior of the Aircraft, (v) ground handling of the Aircraft, including fueling the Aircraft, pushing the Aircraft back from the gate, moving the Aircraft from gate to gate and similar tasks customarily performed as part of ground handling, (w) "meet and greet" maintenance performed on an Aircraft upon arrival and departure at Honolulu, Kailua-Kona and Maui and, if Customer elects, Los Angeles International Airport, (x) providing any passenger convenience and safety items, including pillows, blankets, magazines, soap, paper towels, audio headphones, galley equipment, video cassettes, emergency briefing cards, life vests, cockpit and cabin logbooks, galley equipment, etc., (y) Heavy Maintenance Checks (as defined in Article 3.A.3), and (z) all Additional Services (as defined in Article 3.A.4). 8 The Maintenance Provider shall commence the provision of Line Maintenance with respect to each Aircraft at the time of the Sublease Delivery of such Aircraft. 3. Heavy Maintenance Checks. Maintenance Provider agrees to perform or cause to be performed on the Aircraft the "C" check, the mid-"D" check, the "D" check (including all phases and multiples thereof) as defined in the Maintenance Program, including all work required to correct all Discrepancies identified in the course of such check, whether such work consists of routine items or Non-Routine Items (collectively, "Heavy Maintenance Checks"). Each Heavy Maintenance Check will be performed on each Aircraft at or prior to the intervals prescribed for such Heavy Maintenance Check under the Maintenance Program. Maintenance Provider shall use reasonable efforts to schedule the next Heavy Maintenance Check for Aircraft N68060 to coincide with the delivery of Aircraft N12061 to Customer under the relevant Sublease and sufficiently in advance of June 1, 2000 so as to result in Aircraft N68060 being returned from such Heavy Maintenance Check and available to Customer for service not later than June 1, 2000, provided that such date is subject to adjustment pursuant to Article 5.D. In any case, Maintenance Provider shall ensure that the next Heavy Maintenance Check for Aircraft N68060 does not occur until the delivery of Aircraft N12061 under the applicable Sublease. Maintenance Provider will develop the work scope for each Heavy Maintenance Check, including estimates of man-hours required for such Heavy Maintenance Check, approximately 30 to 45 days prior to induction of the Aircraft into the applicable Heavy Maintenance Check Location and shall present such work scope to Customer for review. Maintenance Provider shall give due consideration to any request by Customer to exclude any task proposed to be included in a workscope (a) if such task is not normally performed under the Maintenance Program during the scheduled Heavy Maintenance Check or (b) if such task is one that would not otherwise be due until the next Heavy Maintenance Check or within thirty (30) days after the end of the term of the relevant Sublease, if earlier. 4. Additional Services. Maintenance Provider agrees to provide the following additional services to Customer ("Additional Services"), subject to the limitations and conditions set forth in this Agreement: a. all inspection, work, maintenance, Repair or Overhaul of any Aircraft, Engine or Part required to maintain the airworthiness or serviceability of an Aircraft as determined by the Maintenance Program and required in a circumstance that makes it impractical (due to scheduling, routing, unplanned failure or other reasons) for the Services to be performed at a Heavy Maintenance Check Location or a Line Maintenance Location, including maintenance services for charter flights to locations other than a Line Maintenance Location ("Off-Line Maintenance"). Customer shall use reasonable efforts to fly a mechanic on board the Aircraft during operations to locations other than Line Maintenance Locations, 9 b. all inspection, work, maintenance, Repair or Overhaul of any Aircraft, Engine or Part required under the Maintenance Program as a result of ground damage, foreign object damage (whether to the airframe of such Aircraft, any Engine or both), installation of Customer-Furnished Material that is a damaged Part or the wrong Part, misuse or abuse of such equipment or operation of such equipment in violation or outside the parameters of the Maintenance Manual, the flight manual for such Aircraft (or its equivalent), applicable FARs or the applicable manufacturer's guidelines or negligent performance of line maintenance by a maintenance provider other than Continental, its employees, agents or subcontractors and replacement of any Part lost or stolen while the Aircraft or such Part is in Customer's custody ("Extraordinary Maintenance"), and c. all other maintenance services not included in the definitions of Extraordinary Maintenance, Off-Line Maintenance, Heavy Maintenance Checks, Line Maintenance or Initial Conversion Services that Customer desires to have performed with respect to any Aircraft, Engine or Part and that are accepted by the Maintenance Provider ("Customer-Requested Services"). Maintenance Provider shall provide Customer-Requested Services so long as (1) Maintenance Provider receives notice of such Customer-Requested Service reasonably in advance of when such Services are to be performed, (2) the labor or materials required to perform such Services are available (either from Maintenance Provider's own staff and inventory or from third party vendors) without imposing an unreasonable burden on Maintenance Provider, (3) the Customer-Requested Service would not violate the applicable Sublease or (4) would not unreasonably delay Redelivery of the Aircraft. 5. AOG Services. Maintenance Provider agrees to provide all support reasonably required and available to return to service as promptly as practicable an Aircraft that is grounded at any location where repair or recovery is feasible (an "AOG Aircraft"). If a parts shortage at a Line Maintenance Location results in an AOG Aircraft, Maintenance Provider agrees to exert all commercially reasonable efforts to obtain, through whatever means available, the parts required to return the Aircraft to service. If Off-Line Maintenance Services would be required with respect to an AOG Aircraft, Maintenance Provider agrees to dispatch (or cause to be dispatched) a field service team to the relevant location as promptly as feasible. If under the circumstances Customer and Maintenance Provider jointly conclude that an AOG Aircraft could be rectified more promptly and/or efficiently through the retention of a third party vendor, Maintenance Provider shall use the services of the appropriate third party vendor to perform the relevant Off-Line Maintenance Services. 10 B. Statements of Work. In each instance, any Extraordinary Maintenance or Customer-Requested Services shall be initiated by Customer and Maintenance Provider entering into a document in substantially the form of Exhibit C delivered to Maintenance Provider by or on behalf of Customer defining and describing the Services to be performed on one or more Aircraft or Engines and which has been accepted by Maintenance Provider (a "Statement of Work") covering such Services. Each Statement of Work shall specify, with respect to each item or type of Service described therein, within which type of Additional Service such Service falls (i.e., Extraordinary Maintenance or Customer-Requested Services). No Statement of Work shall be required for the provision of Initial Conversion Services, Line Maintenance, Heavy Maintenance Checks or Off-Line Maintenance, but Customer may provide, at its election, a Statement of Work for Initial Conversion Services. Any Statement of Work required hereunder shall be issued in a timely manner to enable the relevant Services to be performed when required. C. Aircraft Routing Information; Scheduling and Coordination. Customer agrees to provide Continental employees with: o the anticipated routing and flight schedules for each of the Aircraft on a regular basis, not less frequently than once per week, provided two weeks in advance; o any changes to such routing and flight schedules promptly after they become available to Customer and o notice of any proposed ad hoc charter flights (i.e., non-recurring charter flights) of the Aircraft promptly after Customer knows of such charters. Customer and Continental will use the routing and flight schedules to coordinate the provision of Services under this Agreement and the locations at which Services will be provided with the routing and scheduling of each Aircraft. Customer acknowledges that each Aircraft will need to be scheduled for a maintenance "hold" for certain Line Maintenance at Honolulu once per week on Monday through Thursday for a minimum of 12 hours and approximately once per month for 24 hours (in addition to longer removals of the Aircraft from passenger service for more extensive periodic checks). Furthermore, each Aircraft shall overnight in Los Angeles or Honolulu for a minimum of five (5) nights per week for 12 hours per night. In addition, Customer agrees to provide additional scheduled maintenance holds, subject to the fourth sentence of Article 3.E, when reasonably requested by Maintenance Provider. D. Location of Services. 1. Initial Conversion Services. The Initial Conversion Services shall be performed at a location selected by Continental. 11 2. Line Maintenance Services. All Line Maintenance shall be performed at a Line Maintenance Location; provided, however, that Maintenance Provider agrees that it shall provide transit checks to Customer at its facilities in San Francisco, and, if Maintenance Provider has available sufficient manpower and materials to provide other Line Maintenance Services at such location at the relevant time without disrupting its normal operations, shall also provide such additional Line Maintenance Services and that such checks shall occur no more than once per week on an unscheduled basis and as a result of an irregular operation. Any costs due to the shipment of any Parts or materials required to support any such transit check or other Line Maintenance in San Francisco shall be at the expense of the Customer and shall be in addition to the Monthly Payment. 3. Heavy Maintenance Check. Maintenance Provider anticipates contracting with one of its four Current Heavy Maintenance Facilities to provide the Heavy Maintenance Checks for the Aircraft. Maintenance Provider agrees that it shall ensure that all of the pricing, warranty and other material terms and conditions applicable to Services performed at one of the Current Heavy Maintenance Facilities on the Aircraft are at least as favorable to Customer as the terms and conditions applicable to similar services performed at such facilities on Continental's aircraft. Customer acknowledges that three of the four Current Heavy Maintenance Facilities are located outside the continental United States. In the event that Maintenance Provider determines that Heavy Maintenance Check should be performed by a third party vendor other than one of the Current Heavy Maintenance Facilities, reasonably in advance of the relevant Heavy Maintenance Check, Maintenance Provider shall advise Customer of the decision to use a different vendor and Maintenance Provider and Customer shall mutually agree upon the vendor to be used. Customer shall be entitled to receive reasonable assurances from Maintenance Provider that the third party vendor so selected to perform the Heavy Maintenance Check shall perform the relevant Services on terms and conditions that are fair and reasonable and no less favorable to Customer than the terms and conditions generally applicable to similar services performed for Continental on like model and vintage aircraft by the selected vendor, if Continental regularly uses such vendor for such services, or at the other vendors from whom Continental regularly obtains such services. 4. Off-Line Maintenance Services. Upon reasonable notice, Off-Line Maintenance Services shall be performed at such location as Customer may reasonably request subject to Continental's approval (not to be unreasonably withheld, conditioned or delayed), provided that the location proposed by Customer is capable of supporting DC-10-30 operations. If Customer makes such a request, Maintenance Provider and Customer shall cooperate with one another to establish an appropriate plan for providing the Services at the requested location. Customer acknowledges that Maintenance Provider will be entitled to compensation on a time and material basis for establishing Services at any such location. 12 5. Extraordinary Maintenance. Extraordinary Maintenance shall be performed at a Line Maintenance Location, a Heavy Maintenance Check Location, at any other location as the parties may agree, and, in the case of an AOG Aircraft, at such location as may be required in accordance with Article 3.A.5 hereof. 6. Customer Requested Services. Customer Requested Services shall be performed at either a Heavy Maintenance Check Location (if the Aircraft at such Heavy Maintenance Check Location) or a Line Maintenance Location as specified in the applicable Statement of Work. E. Performance Standards. Maintenance Provider agrees that in providing Services hereunder (including without limitation arranging, monitoring, and auditing Services provided through third party vendors hereunder), Maintenance Provider shall use at least the same degree of care and consideration as it applies to performing similar services for similar aircraft in its fleet. Maintenance Provider agrees that it shall not discriminate, and shall use its reasonable best efforts not to permit any of its subcontractors to discriminate against the Aircraft in favor of similar aircraft in Maintenance Provider's fleet. Upon reasonable request by Customer in relation to any particular circumstances, Continental shall provide Customer with reasonably satisfactory assurances or, to the extent possible, substantiation that it has not discriminated against the Aircraft (as compared to other equipment of the same type owned or operated by Continental) with respect to the Services provided under the Agreement; provided, however, that the foregoing agreement shall not be construed as obligating Maintenance Provider (or its subcontractors) to give Customer's Aircraft priority over Continental's servicing of its own aircraft, it being the intention of the parties that Maintenance Provider afford to Customer's Aircraft the same priority in the performance of Services as Maintenance Provider affords to Continental's own operations. In this regard, Maintenance Provider agrees to use its commercially reasonable efforts to perform all Line Maintenance Services on a schedule that will coincide with the flight scheduling information furnished by Customer pursuant Article 3.C, and shall minimize, to the extent feasible, the risk of disruption to Customer's scheduled service. Without limiting the generality of the foregoing, Maintenance Provider agrees to include the Aircraft in Continental's reliability program as if such Aircraft were operated in Continental's fleet. Maintenance Provider shall endeavor to attain a dispatch reliability for the Aircraft from the line stations it manages measured for each calendar quarter that equals or exceeds the average dispatch reliability for the other DC-10-30 aircraft included in Continental's reliability program, after adjusting the applicable statistics to account for differences in flight operations. At the end of each calendar quarter, beginning with the quarter ending in March 2000, Maintenance Provider shall issue a reliability report comparing the performance of the Aircraft to the other DC-10-30 aircraft included in Continental's reliability program. Promptly following the issuance of such report, Maintenance Provider and Customer shall meet to assess performance and identify any actions required of Customer and/or Maintenance Provider to improve reliability. If the reliability performance of the Aircraft during any such quarterly period falls in the lowest (i.e., the fourth) quartile for Continental's DC-10-30 fleet, Maintenance Provider agrees to promptly devote the resources appropriate to increasing such reliability to at least equal the dispatch reliability for the third quartile of Continental's DC-10-30 fleet in the following quarter. 13 F. Reports. Maintenance Provider shall deliver to the Designated Customer Representative and to Customer each week, for monitoring and verification purposes, a Weekly Aircraft Status Summary relating to each Aircraft in a Heavy Maintenance Check, setting forth with respect to the Services requested to be performed on such Aircraft such information as may be called for by such form as then may be in effect. G. Adoption of Maintenance Program. During the Term of this Agreement, each of the Aircraft shall be on the Customer's operations specifications except for when an Aircraft is in a Heavy Maintenance Check, at which time if required, the Aircraft shall be placed on Continental's operations specifications during such Heavy Maintenance Check. Not later than the date on which the first Aircraft is delivered to Customer under a Sublease, Customer shall adopt Continental's Maintenance Program for the Aircraft. If Continental makes any change to the Maintenance Program, Continental shall communicate the change to Customer, which shall accept such change. Following the adoption of the Maintenance Program, such program as adopted by Customer with respect to the Aircraft shall at all times remain under the exclusive control of Customer, and the provision by Continental of the Services to be provided under this Agreement shall not be interpreted to remove exclusive control of the Maintenance Program as adopted by Customer with respect to the Aircraft from Customer. Customer shall ensure that all maintenance and repair that it performs on the Aircraft shall be accomplished in accordance with the Maintenance Program. Customer agrees that the Services requested in any Statement of Work shall not be in violation of any FAR or in violation of any applicable provision of the relevant Sublease. ARTICLE 4 -- CERTAIN REGULATORY REQUIREMENTS In performing the Services, Maintenance Provider shall comply in all material respects with the Maintenance Program relating to the Aircraft. Without limiting in any manner the generality of the foregoing (and without limiting in any manner the obligations of Maintenance Provider under Article 17), Maintenance Provider shall: A. provide maintenance for the Aircraft in accordance with the provisions of FAR 121.379 by providing trained and qualified maintenance personnel authorized to execute an Airworthiness Release (returned to service) as outlined in FAR 121.709; B. promptly report to the Designated Customer Representative any discrepancies between FAA requirements and Maintenance Provider's operations that are reported to Maintenance Provider by the FAA and that affect the Aircraft or the provision of Services hereunder; C. provide the Designated Customer Representative with access to records of all Services performed that are required to be maintained in accordance with the FARs; 14 D. prepare and execute such forms and other releases, make such log entries, and obtain such other FAA approvals, as may be required for the return of an Aircraft to service following the provision of Services requested pursuant to a particular Statement of Work and any related Customer Work Change Authorizations, in any such case, covering all major Repairs, Modifications and other alterations to such Aircraft accomplished during the performance of such Services; E. Provide Customer and Engineering Documentation that provide repairs, alterations, and modifications to the Aircraft with the supporting justification including FAA approval, when required; F. maintain such data and records as may be necessary to assist Customer and the Designated Customer Representative in the preparation of alteration and repair reports required by FAR 121.707, and make such data and records available to Customer and the Designated Customer Representative for inspection and copying at all times during normal business hours. All such data and records shall contain such information, as may be reasonably requested and required by Customer upon reasonable notice. ARTICLE 5 -- DELIVERY AND REDELIVERY OF AIRCRAFT; INVENTORY A. Delivery of Aircraft for Services; Scheduled Redelivery Date. Prior to the time when a particular Service is to be provided under this Agreement (other than Initial Conversion Services), Customer shall deliver the Aircraft to the applicable location at its sole risk and expense (including fuel, navigation charges, landing fees and similar charges). Upon delivery of an Aircraft by Customer to the Heavy Check Location, the parties shall execute an appropriately completed receipt substantially in the form of Exhibit D (the "Delivery/Redelivery Receipt") to evidence the delivery of such Aircraft. No Delivery/Redelivery Receipt shall be required for delivery of an Aircraft to Maintenance Provider for Line Maintenance, Off-Line Maintenance, Additional Services or AOG Services. At the time an Aircraft is delivered for a Heavy Maintenance Check, the parties shall agree upon a date (the "Scheduled Redelivery Date") on which such Aircraft is expected to be redelivered to Customer upon completion of the relevant Services, which date is subject to subsequent adjustment as provided in Article 5.D below. B. De-Catering the Aircraft; Loose Equipment Inventory. Prior to delivery of an Aircraft for a Heavy Maintenance Check, phase "A" checks and such other times as Maintenance Provider may reasonably request, Customer shall de-cater the Aircraft by removing all pillows, blankets, headsets, galley carts, trays, beverages and food and empty the lavatories and the potable water on the Aircraft. At delivery of the Aircraft for a Heavy Maintenance Check, Maintenance Provider and the Designated Customer Representative shall conduct an inventory of all Inventory on board the Aircraft and prepare and sign a Loose Equipment Inventory List listing all such Inventory on board the Aircraft at delivery. Upon completion of the Services and at the time Maintenance Provider redelivers the Aircraft to Customer, Maintenance Provider and the Designated Customer Representative shall inspect the Aircraft to determine whether all such Inventory is on board the Aircraft at redelivery. Maintenance Provider shall be responsible to Customer for replacing any missing items of such Inventory at the time the Aircraft is redelivered to Customer. 15 C. Redelivery of Aircraft. Upon (1) completion of the Services to be performed on an Aircraft or (2) if earlier, cancellation of the relevant Services pursuant to Article 20, Maintenance Facility shall (subject to Article 10) redeliver the Aircraft to Customer, and (subject to its rights of inspection and testing) Customer shall accept redelivery of the Aircraft at the location where such Services were performed, at such other location as the parties may mutually agree, or as specified in the applicable Statement of Work or any related Customer Work Change Authorization, in each case at Customer's expense. Upon redelivery of the Aircraft to Customer following completion of a Heavy Maintenance Check, the parties shall sign an appropriately completed Delivery/Redelivery Receipt. No Delivery/Redelivery Receipt shall be required for redelivery of an Aircraft to Customer following the performance of Services other than a Heavy Maintenance Check. D. Adjustments to Scheduled Redelivery Date. The Scheduled Redelivery Date shall be adjusted in the following circumstances: (1) if there is any delay in the delivery of any Aircraft to Maintenance Provider or in the issuance of any Statement of Work required hereunder, (2) in the case of Heavy Maintenance Checks, if the outside vendor performing such Heavy Maintenance Check acting in accordance with procedures contained in the underlying agreement between Continental and such vendor, at the conclusion of the condition determination phase, an estimated date on which such Heavy Maintenance Check shall be completed that differs from the originally Scheduled Redelivery Date, (3) if there is any revision of the originally Scheduled Redelivery Date in or as a result of a Customer Work Change Authorization or Customer Requested Services and (4) if there is an excusable delay covered by Article 12. In such case, the Scheduled Redelivery Date shall be adjusted to take into account such delayed delivery, revision of the originally Scheduled Redelivery Date, revised estimated redelivery date or excusable delay, as the case may be. Maintenance Provider agrees to inform Customer of the procedures referred to in item (2) of the preceding sentence at or prior to the time when an Aircraft is delivered to the applicable vendor for a Heavy Maintenance Check. The Designated Customer Representative shall be permitted to participate with Maintenance Provider in the condition assessment phase of a Heavy Maintenance Check referred to in such item (2). ARTICLE 6 - DESIGNATED CUSTOMER REPRESENTATIVE Customer may designate a representative to Maintenance Provider to act on behalf of the Customer with respect to the performance of the Services requested with respect to any Aircraft (the "Designated Customer Representative" for purposes of the Services to be provided to such Aircraft), and such Designated Customer Representative shall be empowered by Customer to make in Customer's name all required decisions with respect to such Aircraft , including the following: 16 A. to observe the performance of all Services hereunder (including, without limitation, Heavy Maintenance Checks), B. to monitor the progress of the performance of Services hereunder by Sceptre or other means, C. to authorize changes in the scope or terms of the Heavy Maintenance Checks and Additional Services to be provided pursuant to a Statement of Work with respect to an Aircraft, D. to sign on Customer's behalf any relevant Delivery/Redelivery Receipt, Statement of Work or Customer Work Change Authorization, E. to carry out on Customer's behalf any other function described herein with respect to an Aircraft, F. generally to liaise with Continental personnel performing Services hereunder in coordinating flight routing/scheduling and the timing and location of the Services performed hereunder and G. to participate on a sampling basis in Continental's process of review and approval of invoices received from outside vendors for Heavy Maintenance Checks prior to the due date for such invoices. In observing and monitoring the performance of Services, the Designated Customer Representative shall not unreasonably interfere with the Maintenance Provider's performing the Services or Continental's operations unrelated to this Agreement. The Designated Customer Representative may enhance or increase the scope of work to be performed in a Heavy Maintenance Check, but he or she shall have no authority to reduce or defer the scope of work to be performed during a Heavy Maintenance Check other than in respect of tasks excluded in accordance with the last sentence of Article 3.A.3. Continental will obtain Customer approval (which shall not be unreasonably withheld, conditioned or delayed) for any Non-Routine Item if the estimated amount of man-hours required to correct exceeds _____ man hours of labor (or such higher limit as may be applicable in the underlying agreement with the supplier performing such Heavy Maintenance Check, but not to exceed _____ man hours of labor). Changes in or additions to Additional Services requested by Customer to be provided to such Aircraft shall be authorized and approved in writing by the Designated Customer Representative on a Customer Work Change Authorization prior to the performance of such changed or additional Services. 17 ARTICLE 7 -- MATERIAL SUPPLY A. General. Maintenance Provider shall provide all Parts (whether Expendable Parts or Rotable Parts) and Materials required to accomplish the Services, as well as all inventory support activities relating to those Parts and Materials. Charges for Maintenance Provider's supply of such Parts and Materials for Services other than Line Maintenance Services and Initial Conversion Services specified in item A.1. of Exhibit A shall be as specified in the Schedule of Charges (Exhibit B), and shall be inclusive of any and all handling charges imposed by Maintenance Provider with respect to such Parts or Materials. For the avoidance of doubt, there is no additional charge beyond the Monthly Payment specified in Article 9.B. for the provisions of Parts and Materials by Maintenance Provider in performing Line Maintenance. B. Inventory; Customer-Furnished Material. All Inventory listed on the Loose Equipment Inventory List completed in connection with Delivery of an Aircraft, and all Customer-Furnished Material, regardless of the source, shall be handled by Maintenance Provider through its normal FAA-approved incoming material receiving inspection procedures (i.e., FARs 145.2, 145.45(c), and 145.45(d)). All Customer Furnished Material will be delivered to Maintenance Provider free from defects and in serviceable condition in conformity with applicable FAR and manufacturers specifications. C. Waiver of Liens. MAINTENANCE PROVIDER EXPRESSLY WAIVES ANY RIGHT TO A LIEN IN ANY CUSTOMER-FURNISHED MATERIAL PRIOR TO ITS INSTALLATION ON AN AIRCRAFT, WHETHER ARISING UNDER CALIFORNIA BUSINESS AND PROFESSIONS CODE CHAPTER 19.5, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 1208.61 ET SEQ., CALIFORNIA CIVIL CODE SECTIONS 3051 ET SEQ., SECTION 184 OF THE NEW YORK LIEN LAW, THE LAWS OF THE STATE OF HAWAII, OR OTHERWISE; AND UNDER NO CIRCUMSTANCES SHALL MAINTENANCE PROVIDER WITHHOLD REDELIVERY OF SUCH UNINSTALLED CUSTOMER-FURNISHED MATERIAL BECAUSE OF ANY BREACH OR ALLEGED BREACH BY CUSTOMER OF ANY PAYMENT OR OTHER OBLIGATION OF CUSTOMER UNDER THIS AGREEMENT. ARTICLE 8 -- OFFICE SPACE, MONITORING, AUDITS AND INSPECTION A. Office Space and Facilities. Maintenance Provider agrees to arrange for the third party performing any Heavy Maintenance Check to provide suitable office space to Customer at the Heavy Check Maintenance Location as Customer may reasonably request. Such office space may be shared with Continental and, if applicable, will be at Customer's expense. B. Monitoring of Services. Upon reasonable notice to Continental, Customer shall have the right to observe all work in progress at Line Maintenance Locations and Heavy Maintenance Check Locations and all AOG Services and to monitor on a sampling basis the inspection of Parts and Materials being Repaired, Modified, Overhauled, or calibrated. For that purpose Maintenance Provider shall permit the Designated Customer Representative, and other representatives of Customer, to enter the relevant location at all reasonable times during Maintenance Provider's business hours; provided that no such inspection shall unreasonably interfere with the progress of the work. 18 C. Auditing of Services. Maintenance Provider shall keep complete records and accounts from which may be determined the actual cost any Heavy Maintenance Check provided under this Agreement. Continental shall use commercially reasonable efforts to ensure that, provided Customer agrees to be subject to the same confidentiality provisions restrictions as are applicable to Continental under the agreements between Continental and the provider of Heavy Maintenance Checks, such records and accounts shall be open for inspection, examination, audit, and copying by the Designated Customer Representative, and other representatives of Customer, at all reasonable times and with reasonable notice for a period 180 days after invoice. If such records and accounts are not open to Customer for such inspection, examination, audit, and copying, upon reasonable request by Customer, Maintenance Provider agrees to exercise such rights as it may have under such agreements to provide Customer with reasonable assurances that any items as to which Customer has expressed a reasonable concern have been substantiated to the extent that Maintenance Provider is entitled to receive substantiation. D. Inspection of Services. All Services with respect to any Aircraft are subject to Customer's final inspection and acceptance (not to be unreasonably delayed, conditioned or withheld) at the location at which Redelivery of such Aircraft is effected, notwithstanding any prior payment(s) made in respect thereof. Such inspection shall be made at the time of Redelivery and shall be for the purposes of determining whether the Services provided comply with the Maintenance Program and represent satisfactory completion of all tasks included in the workscope. Acceptance of any Service, however, shall not be deemed to alter or affect the obligations of Maintenance Provider, or the rights of Customer, under Article 15, relating to Maintenance Provider's warranties. E. Flight Tests. Maintenance Provider shall conduct, with its own pilots and covered by its own policies of insurance, any required flight test of the Aircraft following the provision of Services hereunder. Customer shall be responsible for all other costs associated with any such flight. Customer shall be entitled to have an observer on board the Aircraft during any such test flight. Any Discrepancies discovered during such flight testing and relating to Services performed by Maintenance Provider shall be corrected at a location determined by Maintenance Provider. Any warranty claims for reimbursement of the costs of correcting such Discrepancies shall be settled in accordance with Article 15. ARTICLE 9 -- CHARGES A. Initial Conversion Services. Maintenance Provider's charges to Customer in respect of the Initial Conversion Services shall be as set forth on Exhibit A. Maintenance Provider shall invoice Customer for all charges in respect of Initial Conversion Services in accordance with Article 10 below. 19 B. Line Maintenance. As payment in full for all Line Maintenance required in respect of the Aircraft during the Term of this Agreement (other than washing services at Honolulu or Los Angeles), Customer shall pay to Maintenance Provider for each Aircraft on each Monthly Payment Date the sum of the following amounts (1) and (2) (such sum being referred to herein as the Monthly Payment): (1) the product of (i) the number of Flight Hours flown by such Aircraft during the immediately preceding calendar month, or portion thereof occurring during the Term of this Agreement, and (ii) the amount set forth under "Total Cost Per Flight Hour" under Part B of Exhibit A hereto, and (2) the product of (i) the number of Cycles flown by such Aircraft during the immediately preceding calendar month, or portion thereof occurring during the Term of this Agreement, and (ii) the amount set forth under "Total Cost Per Cycle" under Part B of Exhibit A hereto; provided, however, that (x) if the number of Flight Hours flown by an Aircraft during any month is less than 50, the actual number of Flight Hours for such month for such Aircraft shall be deemed to be 50 for purposes of calculating the portion of the amount of the Monthly Payment represented by clause (1) above unless such Aircraft is either in a Heavy Maintenance Check for such month or out of service during such month as a result of Maintenance Provider's negligence or improper provision of Services, in either such case, the actual number of Flight Hours for such Aircraft shall be used for such calculation, and (y) the portion of the Total Cost Per Cycle consisting of charges in respect of a transit check shall be reduced to delete each flight segment (other than a flight segment to either Los Angeles or Honolulu) for which a transit check is not performed. Customer agrees to provide Maintenance Provider with a report each week identifying the flight segments as to which clause (y) of the preceding sentence is applicable. The amount invoiced to Customer for washing services in Honolulu or Los Angeles (or both) shall be equal to the amount invoiced to Continental by the third party vendor. C. Heavy Maintenance Checks. 1. Time. The amount invoiced to Customer for Heavy Maintenance Checks will be the sum of (A) the amount invoiced to Continental by the outside vender (which Customer acknowledges may include taxes), and (B) (1) labor charges for Continental employees in charge of supervising or monitoring such Heavy Maintenance Check and expenses as provided in the Schedule of Time and Material Charges for Additional Services and Heavy Maintenance Checks attached hereto as Exhibit B multiplied by (2) the actual number of labor hours or labor days (or fractions of such days), as applicable, performed, and (C) per diem and accommodation allowances and car rental expenses identified on Exhibit B. 2. Materials. Customer shall pay the cost of all Parts and Materials (whether supplied by Continental or an outside vendor) and other direct charges incurred in connection with the performance of Heavy Maintenance Checks by Maintenance Provider or the applicable outside vendor in accordance with the Schedule of Time and Material Charges for Additional Services and Heavy Maintenance Checks attached hereto as Exhibit B. 20 D. Additional Services and AOG Services. 1. Time. The amount invoiced to Customer for labor charges for Additional Services and AOG Services will be computed by multiplying the hourly rate for the appropriate labor category specified on the Schedule of Time and Material Charges for Additional Services, AOG Services and Heavy Maintenance Checks attached hereto as Exhibit B by the actual number of labor hours performed under a particular Statement of Work or Customer Work Change Authorization. 2. Materials. Customer shall pay the cost of all Parts and Materials (whether supplied by Continental or an outside vendor), and other direct charges (such as travel expenses, if required to perform Services) incurred in connection with the performance of Additional Services or AOG Services by Maintenance Provider in accordance with the Schedule of Time and Material Charges for Additional Services, AOG Services and Heavy Maintenance Checks attached hereto as Exhibit B. 3. Engine FOD. Notwithstanding any other provision in this Agreement to the contrary, Maintenance Provider agrees to perform, at no cost to Customer, any Services (including Extraordinary Services) occasioned by the discovery of foreign object damage ("FOD") in any Engine during the first five hundred flight hours of operation after Sublease Delivery of such Engine, other than FOD that results from the operation of the Aircraft during such period (as reasonably demonstrated by Continental) and FOD that is related to a confirmed FOD incident occurring during such period. 4. Off-Line Transit Checks. Customer shall be entitled to a credit in the amount of $_____ against the time and material charges assessed in accordance with this Article 9.D in respect of each transit check of an Aircraft at an Off-Line Maintenance Location. If Maintenance Provider retains Customer, rather than a third party vendor, to perform a transit check of an Aircraft at an Off-Line Maintenance Location, the charges by Customer for such check shall be deemed to exactly offset the associated charges under Article 9.D hereof in respect of such transit check. Customer agrees to provide Maintenance Provider with a report each week identifying the transit checks as to which this paragraph is applicable. ARTICLE 10 -- PAYMENTS 21 A. Payment for Line Maintenance. On each Monthly Payment Date, Customer shall pay the Monthly Payment, less the amount of the Monthly Credit, to Maintenance Provider in the manner specified in paragraph G of this Article 10. If the Monthly Credit exceeds the amount of the Monthly Payment due from Customer on any Monthly Payment Date and if no other amounts are due and payable hereunder, Maintenance Provider shall promptly remit such excess to Customer in immediately available funds at such account as Customer may designate in writing. On each Monthly Payment Date, Customer shall submit to Maintenance Provider a Monthly Aircraft Usage Report specifying the number of Flight Hours and Cycles operated by each Aircraft during the immediately preceding calendar month, which report shall also set forth Customer's calculation as to (i) the gross amount of the Monthly Payment due in respect of the operations of the Aircraft shown on such report, and (ii) the net amount of the Monthly Payment to be remitted by Customer to Maintenance Provider after application of the Monthly Credit, or the excess amount of the Monthly Credit to be remitted by Maintenance Provider to Customer under the terms of this Article 10(A), as the case may be. Maintenance Provider shall not be required to issue any invoices to Customer under this Article 10 in respect of any Line Maintenance. B. Payment for Additional Services, Heavy Maintenance Checks and AOG Services. In consideration of Additional Services and AOG Services rendered under this Agreement, Customer agrees, subject to paragraphs D and E of this Article 10, to pay Maintenance Provider all amounts due and payable for Additional Services and AOG Services within 25 days following receipt of Maintenance Provider's final invoice therefor. For the Heavy Maintenance Checks, Customer shall pay Continental's invoice to Customer at the later of (i) the date when such payment is due from Continental to the outside vendor performing such Heavy Maintenance Check under Continental's agreement with such vendor, or (ii) the twenty-fifth day following receipt of such invoice. The parties acknowledge that the "fixed price" portion of invoices for Heavy Maintenance Checks is sometimes due upon completion of such check and the remaining balance within 30 days thereafter. At least five days prior to the date that an Aircraft is scheduled for Redelivery, Continental shall give Customer written notice setting forth the "fixed price" portion of the invoices for any Heavy Maintenance Check. C. Changes in Charges Due by Reason of Customer Work Change Authorizations. If a Customer Work Change Authorization causes an increase in the estimated total labor charges of Additional Services to be performed on a time-and-materials basis, all amounts payable by Customer and attributable to such Customer Work Change Authorization shall be paid thirty days after receipt of Maintenance Facility's invoice of all Additional Services requested with respect to such Aircraft. If a Customer Work Change Authorization results in a credit to Customer, such credit shall be issued by Maintenance Provider and applied in reduction of the next scheduled payment due under paragraph (B) of this Article 10 above. D. Invoices and Approvals. 1. Invoices for Additional Services, AOG Services and Heavy Maintenance Checks Generally. All invoices for Additional Services, AOG Services and Heavy Maintenance Checks submitted to Customer hereunder shall include the following information: 22 a. invoice number b. invoice date c. Statement of Work number d. Aircraft registration number e. Engine serial number (if relevant) f. dates of work accomplished g. all time-and-material charges 2. Back-Up and Level of Itemization for Invoices for Additional Services and AOG Services. Detailed labor-and material back-up attached to or included with any invoice for Additional Services will include the following: a. costs classified and identified by cost category b. a report of all labor, divided into routine items and Non-Routine Items, identified by task description and total man-hours c. an itemized report of Parts and Materials d. an itemized report of all other applicable charges e. number of approved hours worked for time-and-material work f. part number or serial number g. part manufacturer h. quantity of part purchased i. part cost j. sub-contracted services cost, etc. Maintenance Provider shall not be required to itemize separately on invoices common commercial low value hardware and other items purchased in bulk, which may be carried as floor stock by Maintenance Provider, where individual item control is not considered practical or economical. 3. Back-Up and Level of Itemization for Invoices for Heavy Maintenance Checks. Detailed labor-and material back-up attached to or included with any invoice for Heavy Maintenance Checks other than with respect to the "fixed price" portion of such invoice will include the following: a. costs classified and identified by cost category b. a report of all labor, divided into total approved man-hours for routine items and for Non-Routine Items c. an itemized report of for man-hours for Non-Routine Items if the number of approved man-hours for any one Non-Routine Item exceeds 125 (or such higher limit as may be applicable in the underlying agreement with the supplier performing such Heavy Maintenance Check, but not to exceed 150 man hours of labor) 23 d. an itemized report of Parts and Materials e. an itemized report of all other applicable charges f. part number or serial number g. part manufacturer h. quantity of part purchased i. part cost j. sub-contracted services cost, etc. For the portion of invoices for Heavy Maintenance Checks attributable to charges of the outside vendor performing such work, Continental shall provide to Customer a copy of such vendor's invoice to Continental (provided that Customer agrees to be bound by any restrictions imposed by confidentiality provisions in agreements between such vendor and Continental). Customer acknowledges that no itemized detail is normally provided with respect to the "fixed price" portion of such outside vendor invoice. 4. Time Period Within Which Work Must Be Invoiced. Customer will not pay any invoice received beyond ____ days after Redelivery of the Aircraft to which such invoice relates (other than past-due invoices for previously invoiced and overdue amounts, which shall continue to be due and payable); provided however, if, prior to the expiration of such ____ day period, Maintenance Provider advises Customer in writing of any outstanding items to be invoiced, Customer shall pay the invoices for such items upon receipt as long as such invoices are received by Customer within ____ days after Redelivery of the Aircraft to which such invoice relates. In no event shall Customer be obligated to pay any invoice that is received by Customer more than ____ days after Redelivery of the Aircraft to which invoice relates. Notwithstanding the time limits expressed in the preceding two sentences, if the Services that give rise to the relevant invoice are performed by a third party vendor with whom Continental has an existing general terms agreement and under the terms applicable to such Services (and to other services performed for Continental at such facility) a later time limit for rendering invoices has been expressly agreed upon, then such later time limits shall be applicable to the affected invoice in lieu of the time limits set forth herein. 5. Approval of Invoices. All invoices for Parts, Materials, and Services performed by subcontractors (i.e., all invoices except the final invoice for Maintenance Provider's labor charges) shall be submitted promptly to the Customer for payment. Customer may, but shall not be required to, pay any invoice before it becomes due, and in so doing may take advantage of any cash discounts made available to Maintenance Provider from time to time; no such payment, however, shall constitute a waiver of, or shall otherwise impair, Customer's right to reject the Services and to have a valid claim against Maintenance Provider for any loss, shortage, defect, delay, or other default in the Services reflected on the relevant invoice(s). Any adjustment in an invoice deemed appropriate by the parties shall be made by means of a subsequent invoice or by refund to Customer. 24 E. Submittal of Invoices. Maintenance Provider shall send all invoices to Customer at the address for notices set forth in Article 21. F. Disputes. The parties will negotiate in good faith to promptly resolve any dispute as to an invoice. If a bona fide dispute occurs regarding the amount of any payment due hereunder except for the "fixed price" portion of an invoice for a Heavy Maintenance Check, Customer may withhold payment of the amount in dispute, but shall pay the balance. Customer agrees to pay the agreed upon "fixed price" portion of the cost of any completed Heavy Maintenance Check on or prior to the due date, regardless of any dispute with respect to the balance of the invoice for such Services or any other dispute hereunder in relation to other Services. Customer agrees that it shall provide Maintenance Provider with written notice of any dispute and the reasons for such dispute and supporting detail not less than five (5) days prior to the date by which payment on the invoice to which such dispute relates is due under this Agreement. No action taken pursuant to this Article 10, however, shall be deemed to constitute a waiver of either party's rights or obligations under this Agreement. G. Method of Payment. All payments due to Maintenance Provider hereunder shall be made by wire transfer to Maintenance Provider's account as follows: The Chase Manhattan Bank ABA No. 021-000-21 Account No.: _______________ Account Name: Continental Airlines, Inc. Reference: Hawaiian DC10-30 Maintenance Agreement ARTICLE 11 -- COST RECOVERY A. Damage, Loss, and Other Occurrences Requiring Replacement of Customer's Property. If any Aircraft, Engine, Inventory, Part, Customer-Furnished Material, or other item delivered by Customer to Maintenance Provider hereunder is damaged or lost or otherwise requires replacement while in the care, custody or control of Maintenance Provider or any of its employees, agents, or subcontractors (other than any Aircraft, Engine, Inventory, Part, Customer-Furnished Material or other item that is damaged or lost or otherwise requires replacement because it is damaged or lost by representatives of the Customer or, in the case of Customer-Furnished Material, was delivered to Maintenance Facility damaged or is the incorrect Part), Maintenance Provider shall pay the cost of replacing the item damaged or lost or otherwise requiring replacement or provide a replacement part. In addition, Maintenance Provider shall promptly notify the Designated Customer Representative if the replacement cost of such items exceeds $________. 25 B. Late Delivery Charge. If Redelivery of an Aircraft is delayed in a Heavy Maintenance Check beyond the Scheduled Redelivery Date (as adjusted pursuant to Article 5.D) for reasons other than those set forth in Article 12 hereof, Maintenance Provider agrees to review and evaluate the causes of such delay and its rights in respect thereof under the agreement between Maintenance Provider and the outside vendor contracted to perform such Services. If, under the circumstances, Maintenance Provider concludes reasonably that it may be entitled to a late delivery payment or similar compensation in respect of such delay in completion of the subject Services, Maintenance Provider agrees that it shall pursue such contractual rights that it may have under its agreement with such outside vendor and pass the full amount of any payment or other compensation (which may take the form of a credit) received from such vendor in respect of the claim to Customer. C. AOG Charge. If an Aircraft incurs ground damage as a result of Maintenance Provider's own negligence and such ground damage results in such Aircraft becoming an AOG Aircraft for a period in excess of 24 hours, Maintenance Provider agrees to pay Customer in respect of each additional period of 24 hours that such Aircraft remains an AOG Aircraft, the sum of $--------. D. Rights Cumulative. Customer's rights under this Article 11 shall not be exclusive, but shall be in addition to any and all other remedies available to Customer upon the occurrence of an event referred to in this Article. ARTICLE 12 -- EXCUSABLE DELAY Maintenance Provider shall not be liable for any delay in the Redelivery of any Aircraft if the delay is due to causes beyond the reasonable control of Maintenance Provider or the applicable subcontractor, including, but not limited to acts or omissions of Customer, fire, explosion, flood or other natural catastrophe, governmental act, order or regulation, acts of God or the public enemy, war or warlike operations, inability or failure of suppliers to deliver parts or materials in a timely manner, insurrection or riots, failure of public transportation or common carrier, strikes or other labor disputes; provided, that where reasonable efforts could have been taken by Maintenance Provider under all the attendant circumstances to avert the results of such occurrences, that such reasonable efforts were in fact taken by Maintenance Provider; provided further, however, that delay due to any such cause shall be excused only for so long as resumption of performance remains beyond the reasonable control of Maintenance Provider due to any such cause. Maintenance Provider shall use every reasonable effort to minimize the effects of any such cause of delay. Maintenance Provider shall notify Customer promptly after a responsible officer or employee of Maintenance Provider with management responsibilities becomes aware of the occurrence of any such event claimed to be a cause of excusable delay, and, in the absence of such notice, delayed performance by Maintenance Provider shall not be considered excused pursuant to this Article 12. 26 ARTICLE 13 -- ASSURANCE OF SUPPLY Continental represents and warrants to Customer that Continental's mechanics are covered by a collective bargaining agreement that becomes amendable January 8, 2002. If Maintenance Provider's ability to continue to render Services is adversely affected due to labor unrest, Maintenance Provider shall use reasonable and diligent efforts to either redirect, reassign, or transfer Service requirements to an unaffected facility operated by Maintenance Provider or to procure Services from other sources, and in the case of redirected Line Maintenance, such Line Maintenance shall be at no additional cost to Customer. ARTICLE 14 - TAXES Any bank fees, taxes, duties and other charges imposed or levied against any payment for the Services performed pursuant to this Agreement shall be borne by the Customer, unless such fees, taxes, duties or other charges are levied on the income or profits of Continental, in which case they will be borne by Continental. ARTICLE 15 -- WARRANTIES A. Warranties. Maintenance Provider expressly warrants that all of the Services (other than Services performed by third party vendors in relation to Heavy Maintenance Checks) shall be performed in a workmanlike manner and that all Parts manufactured by Continental and furnished under this Agreement will conform to applicable specifications, drawings, parts numbers, samples, or other descriptions given and with all applicable FARs, and that such Parts and such Services will be free from defects, whether patent or latent, in materials and workmanship, for a period of _______________ or _______ flight hours, whichever expires earlier, after Redelivery of the Aircraft upon completion of such Services. In the event of a defect covered by this warranty, Maintenance Provider agrees to rectify such warranty failure and, if necessary, at no additional charge to Customer, upon Customer's request, to dispatch to the Aircraft location field service personnel, and subject to Maintenance Provider's prior written consent (not to be unreasonably conditioned, withheld or delayed), Customer may perform any repairs in accordance with the Maintenance Program covered by this warranty and Maintenance Provider will reimburse Customer for the actual reasonable costs incurred by Customer in the performance of such repairs. For avoidance of doubt, Maintenance Provider confirms that any component failure caused by negligent or improper performance of Line Maintenance shall be rectified by Maintenance Provider without charge to Customer even if the failure occurs while an Aircraft is away from a Line Maintenance Location and the Services required to so rectify the failure must be performed away from a Line Maintenance Location. Maintenance Provider warrants that all Parts and Materials (other than Customer-Furnished Materials, as to which Continental disclaims any warranty other than that they shall be free and clear of liens, charges and encumbrances created by or arising through Continental) are, and will be, free and clear from all liens, charges, and encumbrances of any nature whatsoever, except for liens, charges and encumbrances created by or arising through Customer; the lien of the applicable Sublease and liens permitted thereunder. All warranties, whether express or implied, with respect to such Services and Parts manufactured by Continental shall extend to the benefit of Customer, its successors and assigns. The foregoing representations, warranties and conditions and the conditions set forth in Paragraph E of this Article 15 shall survive Redelivery of the Aircraft to which they relate, acceptance of the relevant Services and (unless they expire earlier, as provided in the first sentence of this Article 15.A) termination of this Agreement. THE CUSTOMER EXPRESSLY AGREES AND ACKNOWLEDGES THAT SAVE AS PREVIOUSLY EXPRESSED IN THIS ARTICLE 15.A, MAINTENANCE PROVIDER GIVES NO WARRANTIES, GUARANTEES OR REPRESENTATIONS, EXPRESS OR IMPLIED WITH RESPECT TO THE AIRCRAFT OR WORK PERFORMED HEREUNDER BY MAINTENANCE PROVIDER OR PERFORMED BY ANY SUBCONTRACTOR, AND ALL SUCH WARRANTIES, GUARANTEES OR REPRESENTATIONS, EXPRESS OR IMPLIED, STATUTORY OR ARISING BY LAW OR OTHERWISE, (INCLUDING WITHOUT LIMITATION ANY WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE) ARE EXPRESSLY EXCLUDED. 27 B. Limitation. Maintenance Provider does not warrant the quality or fitness of Parts or Materials furnished to Maintenance Provider by Customer. In no event shall Maintenance Provider have any liability in performing Services under this Agreement for any lost profits or revenues of Customer or for incidental or consequential damages. C. Manufacturers' Warranties. With regard to any Part or Material now or at any time hereafter supplied by Maintenance Provider to Customer hereunder having a warranty from the manufacturer of such Part or Material that is assignable, but without limiting in any manner Maintenance Provider's warranty set forth above in paragraph (A), Maintenance Provider hereby assigns to Customer, to the extent possible, each such warranty and shall provide all reasonable assistance to Customer in pursuing warranty claims (including without limitation procuring any manufacturer consent as may be required or advisable for such assignment). D. Third Party Vendor Warranties. Maintenance Provider shall ensure that all Services performed by a third party vendor, including without limitation, Heavy Maintenance Checks, are covered by a warranty (a "Vendor Warranty") that is at least as protective of the interests of Customer in relation to such Services as the warranty applicable to the services regularly performed by such vendor on aircraft operated by Continental. So long as this Agreement remains in effect, Maintenance Provider agrees to pursue any applicable Vendor Warranty in its name but for Customer's account. If this Agreement terminates prior to its scheduled expiration date, upon the Customer's request, Maintenance Provider shall assign to Customer all Vendor Warranties that are assignable, and Maintenance Provider shall seek such consents to and acknowledgments of assignment from the relevant third party vendor as are appropriate to confirm to Customer that Customer is entitled to enforce such Vendor Warranty. If a Vendor Warranty is not assignable or the relevant third party vendor refuses for any reason to permit the relevant warranty rights to be enforced by Customer, Maintenance Provider agrees to pursue such warranty rights in its own name, but for Customer's account. 28 E. Maintenance Provider's warranty obligations for Services performed hereunder are subject to the following conditions: 1. The warranted Aircraft has been used under normal operating conditions as established by the original equipment manufacturer and in compliance with airworthiness directives and has not been subject to misuse, neglect, accident or ingestion of foreign material or modifications of the Aircraft not authorized or consented to by Continental; and 2. Within the warranty period or within 30 days following discovery by Customer of malfunction, whichever is earlier, Customer notifies Maintenance Provider in writing of any claim and the basis for such claim. Customer shall reasonably endeavor to provide Maintenance Facility with notice of any malfunction or defect promptly following discovery. ARTICLE 16 -- PATENT PROTECTION Maintenance Provider will indemnify and hold harmless Customer, its affiliates and each of their employees, officers, and directors (each such person or entity, a "User") from any loss, damage, or liability which may be incurred on account of actual or alleged infringement of any patent, copyright, trademark, trade name, or trade secret with respect to the Services or any Part manufactured by Maintenance Provider or furnished by third party vendors or manufacturers to the extent manufactured or designed by Maintenance Provider (such Parts "Vendor Materials"), and will, at its own expense, defend each User in any action, suit, or claim in which such infringement is alleged. Without limiting in any manner the rights of any User under the foregoing sentence, if any Part manufactured by Continental or the Services infringes a patent, etc. and the affected user is deprived of the use of such Services or such Vendor Material, Maintenance Provider shall also, at its expense and at the option of any affected User, either (A) procure for each affected User the right to continued use of Services or Vendor Materials, (B) replace same with non-infringing Services or Vendor Materials satisfactory to such User, (C) modify such Services or Vendor Materials to non-infringing status (but without impairing their utility), or (D) remove the Services or Vendor Materials and refund a portion of the purchase price and other costs incurred by such User for the installation and removal thereof equal to the product of (A) such purchase price and costs of such infringing Service or Vendor Material and (B) a fraction, the numerator of which is the number of months of useful life of such Service or Vendor Material remaining as of the date on which the Customer was deprived of the use of such Service or Vendor Material and the denumerator of which is the number of months of useful life of such Service or Vendor Material at the time such Service or Vendor Material was originally performed or installed. Any original design of Customer, and any design, literary property, work of authorship, trade secret, invention, or other intellectual property developed during the rendering of Services or in the custom manufacture of Parts or Materials for Customer or for which Customer has paid the design or development costs, either separately or as part of the purchase price, shall become the property of Customer, and no patent or copyright application or other use of such design, literary property, work of authorship, trade secret, invention, or other intellectual property shall be made by Maintenance Provider without Customer's prior written approval. This Article 16 shall survive the termination of this Agreement. 29 ARTICLE 17 -- COMPLIANCE WITH LEGAL REQUIREMENTS Maintenance Provider shall be approved by the FAA and shall comply with all applicable FARs and other federal, state and local laws and executive orders and regulations issued pursuant thereto, except for immaterial, non-recurring violations of such FARs, laws, orders and regulations either unrelated to any Services performed hereunder or that would not result in a violation of any provision of the applicable Sublease and except for FARs, laws, orders and regulations the validity or application of which Continental is contesting in good faith. Maintenance Provider shall (1) obtain and pay for any required permits and licenses, applicable laws, zoning or other ordinances, fire underwriting requirements, and (2) upon completion of the Services to be performed hereunder with respect to an Aircraft prior to Redelivery, furnish written evidence to Customer that the Services have been inspected and approved by the FAA and/or other appropriate authorities if but only if required by law or regulation. ARTICLE 18 -- MAINTENANCE PROVIDER'S INSURANCE A. Throughout the course of this Agreement, Maintenance Provider shall maintain in force (and, if applicable, cause each subcontractor that provides services in fulfillment of Continental's obligations hereunder to maintain in force) insurance as required in this Article 18, with insurers of recognized responsibility. Maintenance Provider shall cause its independent insurance broker, or the relevant insurer(s), to furnish to Customer, upon execution and delivery of this Agreement and thereafter no later than thirty (30) days prior to the expiration of any policy required to be maintained hereunder showing renewal or replacement thereof for an additional term of at least twelve (12) months, a Certificate of Insurance detailing all of such insurance required hereunder, including, without limitation, expiration dates and limits of coverage of such insurance and each insurer's acceptance of the applicable provisions of this Agreement. All such policies of insurance shall be endorsed to provide that (1) coverage thereunder may not be canceled or materially altered without at least thirty (30) days' prior written notice to Customer, (2) the insurer thereunder has waived the right of subrogation with respect to the indemnification obligations hereunder, and (3) the coverage provided to Customer, or with respect to its interests, will not be invalidated by any breach of the insuring conditions by Maintenance Provider. B. Maintenance Provider agrees to maintain in force the following insurance, in the following amounts and with the following endorsements.: 1. Comprehensive general liability insurance (including, among other things, premises, completed operations and products) with a combined single limit for bodily injury and property damage of Seven Hundred Fifty Million U.S. Dollars (U.S. $_________) in respect of any one Accident/Occurrence/Aircraft (which, with respect to product liability, shall be an annual aggregate limit). Customer shall be named as an additional insured on all polices maintained pursuant to this subparagraph (1); 30 2. Worker's compensation insurance as required by law, together with employer's liability insurance with limits of not less than One Million U.S. Dollars (U.S. $_________) per occurrence or such greater amount as may be required by law; and 3. Hangarkeepers legal liability insurance with a limit of not less than Twenty Million U.S. Dollars (U.S. $_________) each aircraft, and One Hundred Million U.S. Dollars (U.S. $_________) each occurrence. Maintenance Provider shall bear all costs of the insurance policies maintained by Maintenance Provider as required hereunder. The insurance provided pursuant to this Article 18 shall be primary and without right of contribution from any other insurance carried by Customer. The Maintenance Provider shall agree to waive any right of subrogation, set off, recoupment, counterclaim, or any other deduction by attachment or otherwise, with respect to Maintenance Provider's indemnification obligations hereunder. The policies shall provide in respect of the interests of Customer as an additional insured in such policies, the insurance shall not be invalidated by any action or inaction of Continental and shall insure Customer regardless of any breach or violation of any warranty, declaration or condition contained in such policy. With respect to the liability coverage, all of the provisions thereof, except limits of liability, shall operate in the same manner as if there were a separate policy covering Customer. ARTICLE 19 -- INDEMNIFICATION A. Indemnity by Maintenance Provider. Maintenance Provider agrees to indemnify, reimburse and hold harmless each of the Customer Parties (as herein defined) from and against any and all damages, losses, liabilities, third party or other claims, demands, suits, judgments, causes of action, legal proceedings, whether civil or criminal, penalties, fines and sanctions, including any of the same relating to an accident or incident involving an Aircraft, injury or death to persons or damage to property, and any attorney's fees and other reasonable costs and expenses in connection with any of the foregoing (any and all of which are hereafter referred to as "Claims"), which in any way may result from or arise in any manner out of (a) any gross negligence (whether active or passive) or willful misconduct of Maintenance Provider, its subcontractors, agents or employees and/or (b) any violation of applicable laws or regulations by Maintenance Provider, its subcontractors, agents or employees. B. Apportionment. If an event or occurrence gives rise to rights of indemnity under Article 19.A. in favor of any of the Customer Parties and also gives rise to rights of indemnity under a Sublease in favor of Maintenance Provider, the right of recovery of the claiming Customer Party shall be reduced in the same proportion that the fault of the claiming Customer Party bears to the combined fault of the claiming Customer Party and Maintenance Provider. If an event or occurrence gives rise to rights of indemnity under a Sublease in favor of any Maintenance Provider and also gives rise to rights of indemnity under Article 19.A. in favor of any of the Customer Parties, the right of recovery of Maintenance Provider shall be reduced in the same proportion that the fault of Maintenance Provider bears to the combined fault of Maintenance Provider and the claiming Customer Party. 31 C. Survival of Indemnities; Interpretation. The indemnities, duties to hold harmless and rights of contribution contained in this Article 19 shall continue in full force and effect notwithstanding the expiration or other termination of this Agreement. Maintenance Provider and Customer intend that the provisions of this Article 19 apply to any and all Claims covered by Article 19 whether or not such Claims arise in a forum that recognizes the doctrine of comparative negligence. ARTICLE 20 -- CANCELLATION, DEFAULT, AND TERMINATION A. Cancellation of Services on Particular Aircraft. Without limiting in any manner any other remedies of Customer in respect thereof, Customer reserves the right to cancel a particular provision of Customer-Requested Services in a particular instance, without penalty to Customer and without terminating this Agreement upon fifteen days advance written notice to Maintenance Provider, if the quality of the Customer-Requested Services being performed by or at the direction of Maintenance Provider with respect to such Aircraft is, in Customer's reasonable judgment, unsatisfactory. If Customer cancels all or part of the Customer-Requested Services requested with respect to a particular Aircraft as provided in the preceding sentence and there is no default on the part of Maintenance Provider, Maintenance Provider shall be entitled to compensation in accordance with Article 9 hereof for charges up to and including the effective date of the cancellation. Upon any such cancellation, Customer shall have the right, in addition to all other remedies it may have in respect of the circumstances giving rise to its right of cancellation, to remove (if such removal is practicable) from the relevant location the Aircraft and all Inventory and Customer-Furnished Material, if any, delivered to Maintenance Provider in connection with the canceled Customer-Requested Services, and obtain replacement services for such Aircraft from any other source without liability to Maintenance Provider except as provided in this paragraph A. In the event that the Redelivery of an Aircraft undergoing Services at a third party vendor is substantially delayed from the Schedule Redelivery Date (as adjusted pursuant to Article 5.D), Maintenance Provider agrees to assess the circumstances causing the delay and its rights under the contract with the relevant vendor. Maintenance Provider and Customer shall consult with one another and attempt in good faith to reach agreement as to the best course of action available to return the affected Aircraft to service as promptly as possible. B. Default. Except as may be otherwise provided in this Agreement, if either party shall refuse, neglect, or fail to substantially perform, observe, and keep any of the material terms or conditions contained herein to be performed, observed, and kept by such party and such refusal, neglect, or failure shall continue for a period of thirty (30) days after written notice thereof, such refusal, neglect, or failure shall constitute a "default" under this Agreement in respect of which the other party shall have the right to terminate this Agreement upon written notice, effective immediately. In addition to and notwithstanding the foregoing, a party shall be deemed in "Default" hereunder and this Agreement shall terminate automatically effective immediately if an order for relief is entered with respect to such party, or any proceeding shall be initiated, consented to or acquiesced in by such party, or shall be filed against such party and not dismissed within 30 days thereafter, under any bankruptcy, insolvency, reorganization or similar laws or seeking with respect to such party liquidation, winding up, arrangement, adjustment, protection, relief or composition of such party or its debts or the appointment of any liquidator, receiver, sequestrator, trustee, custodian or similar official for such party or a substantial part of its assets. 32 C. Sublease. Maintenance Provider and Customer acknowledge and agree that this Agreement and each Sublease have entered into as part of a single transaction, and that this Agreement and each Sublease should be regarded as a single agreement for purposes of assumption or rejection under Section 365 of the U.S. Bankruptcy Code. If this Agreement terminates for any reason (including, without limitation, due to Default by either party or rejection in a bankruptcy proceeding) while such Sublease remains in effect, Maintenance Provider agrees that it shall nevertheless pay Customer the Monthly Credit in the amount of $________ per month for each month that such Sublease remains in effect. D. Rights and Remedies Cumulative. In addition to any right or remedy specifically provided to any party to this Agreement, in this Article 20 or elsewhere in this Agreement, upon the happening of a given occurrence, such party shall be entitled to all other rights or remedies to which it may be entitled under this Agreement or under applicable law. All of such rights and remedies shall be cumulative and not exclusive. Without limiting in any manner the generality of the foregoing, upon any termination of this Agreement, Customer shall have the right to Redelivery of all Aircraft and return of all Inventory and Customer-Furnished Material described in paragraph (A) of this Article 20 with respect to cancellation. All indemnities and warranties provided for hereunder shall survive termination of this Agreement. ARTICLE 21 -- NOTICES AND REQUESTS Except as otherwise expressly provided in this Agreement, any notice, request, or other communication required or authorized hereunder shall be sufficiently given if it is in writing and sent by (A) Registered Mail or Certified Mail, with postage prepaid, (B) courier or other messenger, or (C) fax, in any case, addressed as follows: If to Customer: Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Attn: VP - Maintenance & Engineering Telecopy: ______________ Telephone: ______________ 33 With a copy to: Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Attn: VP - General Counsel Telecopy: ______________ Telephone: ______________ If to Maintenance Provider: Continental Airlines, Inc. 1600 Smith Street 32nd Floor - HQSFM Houston, TX 77002 Attn: Vice President - Fleet Management Telecopy: ______________ Telephone: ______________ With a copy to: Continental Airlines, Inc. 600 Jefferson Street 11th Floor - HQT Houston, TX 77002 Attention: Vice President - Maintenance and Engineering Telecopy: ______________ Telephone: ______________ Any such notice, request, or other communication shall be deemed received (X) if mailed, five (5) days after it is mailed, (Y) if sent by courier or messenger, when it is delivered, and (Z) if faxed, when the fax is received. Either party may change its address for purposes of this Article 21 by notice to the other party given in accordance with the provisions of this Article. Any notice, request, or other communication required or authorized to be delivered to the Designated Customer Representative shall be delivered to him by hand at the Location or in such other manner as he may request in writing from time to time. Notices, requests, and other communications required to be delivered to both the Designated Customer Representative and Customer shall be delivered to each of them. 34 ARTICLE 22 -- CONFIDENTIALITY Except as required by law or to enforce the terms hereof, neither party (nor their respective advisors) shall disclose any details connected with this Agreement to any third party other than Continental Micronesia, Inc. without first obtaining the written consent of the other party. Advertising and promotional material that mentions either party must be approved in writing by such party prior to release. ARTICLE 23 -- MAINTENANCE PROVIDER AS INDEPENDENT CONTRACTOR Maintenance Provider agrees that it is an independent contractor, and under no circumstance an agent of Customer. Except as provided in Article 25.A, all persons performing Services hereunder, and the manner and details of performance thereof, shall be under the exclusive control of Maintenance Provider, and Maintenance Provider shall have the sole right to direct such persons. ARTICLE 24 -- ASSIGNMENT Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other party, and any such transfer without the other party's prior written consent shall be void and of no effect; provided, however, either party may assign this Agreement to an affiliate of such party or to a successor entity resulting from a merger or consolidation with such successor or purchaser of all or substantially all of the assets of such party. ARTICLE 25 -- SUBCONTRACTING A. Maintenance Provider will be permitted to subcontract Services to any entity on its approved vendor list; provided, however, if requested by Customer, Maintenance Provider shall identify each subcontractor that will provide Additional Services hereunder. Maintenance Provider shall not subcontract a material portion of the Line Maintenance Services with respect to any given Aircraft without the prior written consent of Customer. Customer may reasonably object to particular entities from Maintenance Provider's approved vendor list in which case such entities shall not be used to provide Services hereunder if it is practicable to use a different vendor. B. The engagement of a subcontractor by Maintenance Provider shall not create any contractual relationship or agency between Customer and such subcontractor. Maintenance Provider's obligation to pay its subcontractors shall be an obligation independent from Customer's obligation to pay Maintenance Provider, and Customer shall have no obligation to pay or to see to the payment of any monies directly to any subcontractor except as otherwise expressly provided in this Agreement. 35 ARTICLE 26 -- SAVINGS CLAUSE If any provision of this Agreement is declared unlawful or unenforceable as a result of final administrative, legislative, or judicial action, the parties agree that this Agreement shall be deemed to be amended to conform with the requirements of such action, but in such a manner as to achieve the intent of the parties to the fullest extent possible, and that all other provisions of this Agreement shall remain in full force and effect. ARTICLE 27 -- WAIVER CLAUSE Neither party's failure to require strict performance of, or to enforce, any provision of this Agreement, nor any delay in doing so, nor any previous waiver or forbearance by such party with respect to the same or any other provision of this Agreement, shall in any way be construed as a waiver or continuing waiver of that provision or of any other provision of this Agreement. ARTICLE 28 -- GOVERNING LAW THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED ACCORDING TO THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO BY RESIDENTS OF NEW YORK AND TO BE PERFORMED WHOLLY WITHIN THAT STATE, EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION AND VENUE OF THE COURTS OF THE STATE OF NEW YORK (AND OF THE COURTS OF THE UNITED STATES OF THE SOUTHERN DISTRICT OF NEW YORK) WITH RESPECT TO ALL DISPUTES ARISING HEREUNDER, WAIVES ANY CLAIM OF INCONVENIENT FORUM IN ANY PROCEEDING IN ANY SUCH COURT AND AGREES THAT LEGAL PROCESS MAY BE SERVED ON IT AT ITS ADDRESS FOR NOTICES SET FORTH IN ARTICLE 21 HEREOF. WITHOUT LIMITING ANY OTHER PROVISION HEREOF, EACH PARTY REPRESENTS TO AND AGREES WITH THE OTHER THAT THE CHOICE OF NEW YORK LAW AND FORUM IS A MATERIAL INDUCEMENT TO IT TO ENTER INTO THIS AGREEMENT, THAT IT HAS CONSULTED WITH LEGAL COUNSEL AND THAT THE FOREGOING AS TO SUCH PARTY IS A VALID AND BINDING CHOICE OF LAW AND FORUM PURSUANT TO SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW (WHICH THE PARTIES HERETO AGREE APPLY TO THIS AGREEMENT). ARTICLE 29 -- COSTS OF ENFORCEMENT If any party seeks to enforce its rights under this Agreement, by legal proceedings or otherwise, or seeks a declaration of any rights or obligations under this Agreement, the non-prevailing party shall pay all costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees and expert witnesses' and other consultants' fees. 36 ARTICLE 30 -- INTEGRATION CLAUSE This Agreement is the entire agreement of the parties and shall supersede any previously executed agreements, and any prior or contemporaneous oral understandings, between the parties which relate to the subject matter of this Agreement. ARTICLE 31 -- HEADINGS The headings to this Agreement are for convenience only and shall not affect the meaning or construction of any paragraph. ARTICLE 32 -- COUNTERPARTS This Agreement may be executed in one or more counterparts, all of which counterparts shall be treated as the same binding agreement, which shall be effective, as of the date set forth on the first page hereof, upon execution and delivery by each party hereto to each other party of one or more such counterparts. ARTICLE 33 -- NON-LIABILITY OF CERTAIN PERSONS No director, officer, agent or employee of either party shall be charged personally or held contractually liable by or to the other party under any term or provision of this Agreement or any supplement, modification, or amendment to this Agreement, because of any breach thereof, or because of its execution or attempted execution. ARTICLE 34 -- CONSEQUENTIAL, INCIDENTAL AND EXEMPLARY DAMAGES. Neither party hereto shall be liable to the other for any consequential, incidental or exemplary damages arising out of or relating to this Agreement. 37 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year set forth in the first paragraph above by their duly authorized representatives. "CUSTOMER" HAWAIIAN AIRLINES, INC. By: /S/______________________ Name: ______________________ Title: _______________________ By: /S/______________________ Name: ______________________ Title: _______________________ "MAINTENANCE PROVIDER" CONTINENTAL AIRLINES, INC. By: /S/______________________ Name: ______________________ Title: _______________________ 38 EXHIBIT A SCHEDULE OF CHARGES FOR INITIAL CONVERSION SERVICES AND LINE MAINTENANCE SERVICES A. INITIAL CONVERSION SERVICES 1. Fixed Charges Covering both Aircraft Interior reconfiguration of both Aircraft to 28/254 seating $_______ Sceptre Computer Installation (5 terminals) $_______ Technical Training/Maintenance Program Set-Up _______ Total Fixed Costs: $_______ 2. Additional Charge for Painting of Aircraft Maintenance Provider's actual out-of-pocket expenses paid to any third party in respect of the exterior painting of both Aircraft, together with labor charges and per diem for Continental employees in charge of supervising or monitoring such painting. B. LINE MAINTENANCE SERVICES 1. Charges Per Flight Hour a. Service Check: $________ b. Phase A Check: $________ c. Time Control Insp. and MEL Recovery $________ d. Engine(s): $________* e. APU: $________** f. Components: $________ Total Per Flight Hour Charge: $__________ 2. Charges Per Cycle a. Transit Check: $________ b. Engine LLP: $________ c. Wheels Tires and Brakes: $________ Total Per Cycle Charge: $________ A-1 * 3. Adjustments to Per Flight Hour Charge The rate set forth in Section B.1.d with respect to the charge per Flight Hour for Line Maintenance Services in respect of the Engines is based on the assumption that each Aircraft will be operated on 4.5/1 Flight Hours to Cycles ratio calculated for the period coinciding with the Term of this Agreement. If actual usage of any Aircraft results in a different Flight Hours to Cycles operational ratio in any calendar month, then the rate set forth in Section B.1.d for such month shall be determined as follows: - -------------------------------------------------------------------------------- Hour/Cycle Ratio Hourly Rate - -------------------------------------------------------------------------------- 4.0/1 $________ - -------------------------------------------------------------------------------- 4.5/1 $________ - -------------------------------------------------------------------------------- 5.0/1 $________ - -------------------------------------------------------------------------------- 5.5/1 $________ - -------------------------------------------------------------------------------- 6.0/1 $________ - -------------------------------------------------------------------------------- 6.5/1 $________ - -------------------------------------------------------------------------------- 7.0/1 $________ - -------------------------------------------------------------------------------- 7.5/1 $________ - -------------------------------------------------------------------------------- If the actual Hour-to-Cycle ratio falls between any two ratios shown in the foregoing table, the applicable Hourly Rate shall be determined by linear interpolation between the two values. If the actual Hour-to-Cycle ratio is less than 4.0 to 1.0 or greater than 8.0 to 1, then this table will be expanded to cover the actual range. Upon any adjustment pursuant to the foregoing provision, the "Total Per Flight Hour Charge" as set forth in Section B.1 shall also be adjusted to reflect the difference in the Engine component thereof. The rate set forth in Section B.1.d with respect to the charge per Flight Hour for Line Maintenance Services in respect to the Engines is also based on the assumption that the corresponding rate in the Engine Maintenance Agreement ESI-98-2098 between GE Engine Services, Inc. and Continental covering General Electric CF6-50C2 Engines remains at the rate in effect on the date hereof. In the event that such rate is adjusted upward or downward, Maintenance Provider shall promptly notify Customer of the change and the per Flight Hour charge for Line Maintenance Services in respect of the Engines shall be adjusted by a like amount. ** 4. Adjustments to APU per Flight Hour Charge The actual hours used by APUs shall be determined each month. If the APU hours multiplied by $____ is greater or less than the number of flight hours flown by the Aircraft multiplied by $_____, then Continental shall remit credit or debit to the Customer for such excess or credit. A-2 EXHIBIT B SCHEDULE OF TIME AND MATERIAL CHARGES FOR ADDITIONAL SERVICES, AOG SERVICES AND HEAVY MAINTENANCE CHECKS A. LABOR RATES FOR CONTINENTAL EMPLOYEES* The current labor rates applicable to Additional Services performed and Heavy Maintenance Checks overseen and prepared by Continental employees are as follows: 1. Standard Basic Hourly Labor Rate Straight Time $_____ Time and a Half $_____ Double Time $_____ Double Time and a Half $_____ 2. Field Team Basic Hourly Labor Rate Straight Time $_____ plus travel and lodging at cost and per diem Time and a Half $_____ Double Time $_____ Double Time and a Half $_____ 3. Field Team -- Management Personnel Straight Time $_____ Time and a Half $_____ Double Time $_____ Double Time and a Half $_____ 4. Engineering Hourly Labor Rate Straight Time $_____ B-1 5. Heavy Maintenance Representative Straight Time $_____ per day Per Diem $_____ Lodging $_____ per day 6. Heavy Maintenance Quality Assurance Representative Straight Time $_____ per day Per Diem $_____ Lodging $_____ per day The labor rates above may be adjusted for inflation (indexed to the Consumer Price Index published by the U.S. Department of Labor) not more than once in any calendar year. For items 1, 2 and 3 above, the basic hourly rate for personnel based in Hawaii or dispatched from Hawaii shall be increased by ___%. For items 5 and 6 above, Continental shall allocate such charges on a reasonable basis if the personnel assigned to the Aircraft are concurrently assigned to monitor other aircraft in the facility. The engineering labor rate may be charged, if and to the extent authorized by Customer in writing, for the development of non-standard Repairs and to satisfy other extraordinary engineering requirements. B. NONDESTRUCTIVE TESTING (NDT) FOR CONTINENTAL EMPLOYEES 1. Maintenance Provider will charge $_____ per man-hour for ultrasonic, eddy-current, dye penetrant, and magnetic particle testing, plus $_____ for tooling per event. 2. Maintenance Provider will charge $_____ per man-hour for X-ray inspections, plus film, plus $_____ for tooling per event. C. LABOR RATES FOR NON-CONTINENTAL EMPLOYEES Engineering services and labor for Additional Services and Nondestructive Testing obtained from outside vendors to perform Services required beyond the capacity or capability of Maintenance Provider, if and to the extent authorized by Customer in writing, will be charged at invoice. Charges related to engineering services performed by such outside vendors shall include travel, lodging, and per diem, and other directly related expenses when applicable. B-2 D. CONTRACTOR-FURNISHED SUPPLIES, MATERIALS, AND COMPONENTS. 1. Purchased Parts and Materials Maintenance Provider will charge vendor invoice without additional mark-ups by Maintenance Provider. 2. Maintenance Provider-Stocked Parts and Materials For all Parts and Materials, Maintenance Provider will charge replacement cost plus a _____% mark-up. E. OUTSIDE VENDOR SERVICES Services provided by outside vendors will be charged at invoice without additional mark-ups by Maintenance Provider. F. FREIGHT Invoiced at actual cost, without mark-up from Continental and shall include any freight charges incurred in shipping any Parts or Engines which result from an AOG Aircraft (unless under the terms of the applicable warranty charges associated with such AOG Aircraft are for the account of Maintenance Provider or the relevant third party vendor) or which are incurred in shipping an Engine to or from Hawaii, if required to support an unscheduled Engine change in Hawaii. If it is impracticable to schedule an Engine change in Los Angeles, Customer shall reimburse Maintenance Provider for one-half of the freight charges incurred in shipping any parts or Engines to or from Hawaii required to support a scheduled Engine change in Honolulu. F. STORAGE OF CUSTOMER-FURNISHED MATERIAL No charge for storage will be imposed when the quantity of Customer-Furnished Material is reasonable, taking into consideration the Services that Maintenance Provider has been requested to perform and availability of storage space. Taxes, insurance, and other direct costs relating to such storage will be passed through to Customer at actual cost, without mark-up. B-3 G. TRANSPORTATION -- FLIGHT CREW Flight crew transportation will be Customer's responsibility, but Maintenance Provider will provide flight crew transportation between the nearest commercial airport and the location where Services are performed, if requested, at no charge, if available, at no cost to Continental from the outside vendor performing the Heavy Maintenance Check. H. TRAVEL EXPENSES Reasonable travel and per diem expenses will be charged at actual cost, without mark-up. * The specified labor rates apply to all direct personnel, such as working leads, inspectors, mechanics, parts coordinators, and painters. B-4 EXHIBIT CSTATEMENT OF WORKNo._______ CHECK ONE OF THE FOLLOWING AND COMPLETE AS APPROPRIATE: ______ Aircraft Registration Number __________ and Serial Number__________ (which shall include the engines installed thereon) ______ Model GE CF6-50C2 Engine Serial Number _______ (not installed on Aircraft) COMPLETE FOLLOWING DATA: Delivery Date __________________ Scheduled Redelivery Date ___________________ Location of Work: _____________________ A. Services requested in respect of the above-referenced Aircraft are set forth on Exhibit A attached hereto and incorporated herein. B. Designated Customer Representative (if separately identified as of Delivery Date):__________________________________________________________________ Customer: Maintenance Provider: HAWAIIAN AIRLINES, INC. CONTINENTAL AIRLINES, INC. By: ________________________ By: _________________________ Name: ______________________ Name: _______________________ Title:_______________________ Title:________________________ By: ________________________ Name: ______________________ Title: _______________________ C-1 EXHIBIT A TO STATEMENT OF WORK Pricing of Work (Initial Conversion Services, or Description of Work Additional Services) - ------------------- -------------------- C-2 EXHIBIT D DELIVERY/REDELIVERY RECEIPT Date: ________________________ Time: ________________________ Location: _____________________ Received from Customer/Maintenance Provider, pursuant to the Aircraft Maintenance and Modification Services Agreement dated as of the ___________ day of ________________, ______, between Maintenance Provider and Customer, the following items: ______ Aircraft Reg. No: ______________ Mftrs. Serial No. ___________ ______ Engine Model: General Electric Mftrs. Serial No. ___________ CF6-50C2 Total Fuel on Aircraft: _______________Lbs. Delivered by: _____________________ Title: ______________________ Received by: ______________________ Title: ______________________ D-1 EXHIBIT E LOOSE EQUIPMENT INVENTORY LIST Customer/Maintenance Provider acknowledges receipt of the following manuals, certificates, and items of loose equipment on board the Aircraft bearing Manufacturer's Serial No. __________ and FAA Registration No. _____________, and delivered to Maintenance Provider by Customer on the __________day of ________________, 19____, at _________(AM/PM). ITEM QUANTITY INITIALS (Maint.Fac./Customer) A. MANUALS 1. ___________________________________ ________ ______/_________ 2. ___________________________________ ________ ______/_________ 3. ___________________________________ ________ ______/_________ 4. ___________________________________ ________ ______/_________ 5. ___________________________________ ________ ______/_________ 6. ___________________________________ ________ ______/_________ 7. ___________________________________ ________ ______/_________ 8. ___________________________________ ________ ______/_________ B. CERTIFICATES 1. ___________________________________ ________ ______/_________ 2. ___________________________________ ________ ______/_________ 3. ___________________________________ ________ ______/_________ 4. ___________________________________ ________ ______/_________ 5. ___________________________________ ________ ______/_________ 6. ___________________________________ ________ ______/_________ 7. ___________________________________ ________ ______/_________ 8. ___________________________________ ________ ______/_________ E-1 ITEM QUANTITY INITIALS(Maint. Fac./Customer) C. LOOSE EQUIPMENT 1. ___________________________________ ________ ______/_________ 2. ___________________________________ ________ ______/_________ 3. ___________________________________ ________ ______/_________ 4. ___________________________________ ________ ______/_________ 5. ___________________________________ ________ ______/_________ 6. ___________________________________ ________ ______/_________ 7. ___________________________________ ________ ______/_________ 8. ___________________________________ ________ ______/_________ D. SPARE PARTS PART NO. DESCRIPTION MFR. QUANTITY INITIALS (MAINT. FAC./ Customer) 1. ___________ ______________ __________ ________ ______/________ 2. ___________ ______________ __________ ________ ______/________ 3. ___________ ______________ __________ ________ ______/________ 4. ___________ ______________ __________ ________ ______/________ 5. ___________ ______________ __________ ________ ______/________ 6. ___________ ______________ __________ ________ ______/________ 7. ___________ ______________ __________ ________ ______/________ 8. ___________ ______________ __________ ________ ______/________ E-2 CUSTOMER'S DESIGNATED MAINTENANCE PROVIDER'S AUTHORIZED CUSTOMER REPRESENTATIVE REPRESENTATIVE BY: ___________________________ BY: ___________________________ NAME: ___________________________ NAME: ___________________________ TITLE: ___________________________ TITLE: ___________________________ E-3 EXHIBIT F - -------------------------------------------------------------------------------- WEEKLY AIRCRAFT STATUS SUMMARY FOR HEAVY MAINTENANCE CHECKS - ----------------------------------- ------------------------------- AIRCRAFT REG. NO.: On Schedule? Y N - ---------------------------------- ------------------------------- Date: Time: Maintenance Function: --------- -------- ------------------------------- ("C" Check, "D" Check, Corrosion Prevention & Control Program, etc.) - ------------------------------------------------------------------------------- Induction date: --Via Fax-- - ----------------- ----------------------- Sched. Departure Date: ------------- Sched. Ground Time: Days To: ------------- ----------------------- Elapsed Time: Days ------------- Time Remaining: Days From: ------------- ----------------------- Routine Cards: # Non-Routine # Cards--Total: ----------------- ------------- Routine Cards # Non-Routine Cards # (Open): (Open): ----------------- ------------- Routine Cards # Non-Routine Cards # (Closed): (Closed): ----------------- ------------- Routine Cards-- Non-Routine Cards-- % Complete: % %Complete: % ----------------- ------------- Non-Routine Cards Written in past 24 hours: # ------------- Routine Man-hrs Estimate: Non-Routine Man-hrs Estimate: - ----------------------------------- ------------- Routine Man-hrs Expended: Non-Routine Man-hrs Expended: - ----------------------------------- ------------- TOTAL NON-ROUTINE TASKS OVER 125 MAN-HOURS: Man-hours Material $ Used: Cost: -------- ---------- --------- F-1 Non-Routine Tasks That Exceed 125 Man-hours: 1. M-hrs Mat. Cost: $ Exp'd.: -------------------------- ---------- -------------- 2. M-hrs Mat. Cost: $ Exp'd.: -------------------------- ---------- -------------- 3. M-hrs Mat. Cost: $ Exp'd.: -------------------------- ---------- -------------- Material Cost To Actual: $ date (if and to the extent available from outside vendors): ---------------------- Estimate: $ ---------------------- Total: $ ---------------------- Man-hour Scheduling by Skill, By Shift: A & P: man-hrs. Paint: man-hrs. Misc.: --------- ------------ --------- S/M: man-hrs. C & I: man-hrs. --------- ------------ ------------------ R & E: man-hrs. Eng. : man-hrs. --------- ------------ ------------------ ------------------ Project Status: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- F-2 EXHIBIT G ======================================== CUSTOMER WORK CHANGE AUTHORIZATION ======================================== Aircraft Reg. No. Date: Aircraft Serial No. o Add: ______ o Delete: ______ o Change: ______ In accordance with the terms and conditions of Aircraft Maintenance Services Agreement between Hawaiian Airlines and Continental Airlines and Statement of Work No. _______, the following change is hereby authorized: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ NEW SCHEDULED REDELIVERY DATE (if changed): ______________________________ Approved and Authorized by: ____________________________________________________ [Customer's Designated Customer Representative] Approved and Accepted by: ____________________________________________________ [Maintenance Provider's Authorized I-1 EX-10.9 5 EXHIBIT 10.9 AGREEMENT BETWEEN U.S. BANK NATIONAL ASSOCIATION AND HAWAIIAN AIRLINES, INC. EFFECTIVE DATE: 12/31/99 TABLE OF CONTENTS 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. HONORING CARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 12 4. RESTRICTED CARD LIST . . . . . . . . . . . . . . . . . . . . . . . . . 13 5. RETURNED UNUSED TICKETS; CREDIT ADJUSTMENT . . . . . . . . . . . . . . 14 6. SUBMISSION OF SALES SLIPS AND CREDIT SLIPS . . . . . . . . . . . . . . 14 7. MAGNETIC TAPE OR ELECTRONIC TRANSMISSION . . . . . . . . . . . . . . . 17 8. CHARGEBACKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18 9. WARRANTIES AND REPRESENTATIONS. . . . . . . . . . . . . . . . . . . . .. 19 10. SERVICE MARKS AND TRADEMARKS . . . . . . . . . . . . . . . . . . . . . 21 11. AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21 12. DISPUTES WITH CARDHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 21 13. ASSIGNMENT; DELEGATION OF DUTIES . . . . . . . . . . . . . . . . . . . 22 14. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22 15. TERMINATION AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . .. 23 16. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23 17. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24 18. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 24 19. REIMBURSEMENT BY CARRIER . . . . . . . . . . . . . . . . . . . . . . .. 24 20. COST AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 21. ENTIRETY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 22. EXCLUSIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 23. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 24. ASSISTANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26 25. REPORTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 26. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 29 27. REMEDIES CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . . .. 29 28. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 29. CONSENT TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . 30 SCHEDULES SCHEDULE 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1-1 SCHEDULE 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2-1 ii AGREEMENT This AGREEMENT (hereinafter the "Agreement") made as of December 31, 1999 by and between: o HAWAIIAN AIRLINES, INC., a corporation organized under the laws of the State of Hawaii and having its place of business at 3375 Koapaka Street, Honolulu, Hawaii 96819 (hereafter "Carrier"); and o U.S. BANK NATIONAL ASSOCIATION, a national banking association with its principal office located at 601 Second Avenue South, Minneapolis, Minnesota 55402 (hereafter "Bank"). WITNESSETH: WHEREAS, Carrier, a certified air carrier engaged in the transportation of passengers by air, desires to make available to its customers a convenient means of purchasing air transportation, both on a current and time payment basis, through the use of Cards (as such term and other capitalized terms used herein are defined in Section 1); and WHEREAS, Bank is a member of certain Card Associations and is qualified to develop contractual relationships with merchants such as Carrier who wish to honor Cards which bear the service marks of the Card Associations; and the Card Associations contemplate that Cards will be issued by financial institutions who are members in the respective systems and that such Cards will be honored by carriers who have signed agreements with member financial institutions; and WHEREAS, Carrier and Bank are parties a certain agreement dated as of July 18, 1994 (the "1994 Agreement") concerning Carrier's participation in this system; and WHEREAS, Carrier and Bank wish to amend the 1994 Agreement concerning participation in this system with respect to Cards bearing the service mark of the Card Associations. THIS AGREEMENT amends the 1994 Agreement and establishes the terms and conditions pursuant to which Carrier may honor the Cards in connection with Card sales and the method of receiving payment or credit from Bank for the Sale Slips and/or Credit Slips which are generated as a result of such sales. 1. DEFINITIONS For the purpose of this Agreement, the terms below shall have the following meanings: a. Account-Number-Verifying Terminal -- A point-of-transaction terminal capable of (i) reading the account number encoded on the magnetic stripe, (ii) comparing the last four digits of the encoded account number to the manually key-entered last four digits of the embossed account number, and (iii) transmitting the full, unaltered contents of the magnetic stripe in the Authorization message. b. Agent -- A business organization duly licensed (if so required) and authorized to perform functions of a travel agent who is not an employee of Carrier and who has been duly designated, appointed and authorized by Carrier to act as a travel agent on behalf of Carrier. c. ARC -- Airlines Reporting Corporation. d. Authorization -- The process through which Carrier determines whether there is sufficient credit available via a Card Association to cover the particular Cardholder transaction for which Authorization is sought. Authorization shall not mean that payment to Carrier is guaranteed since the authorized Cardholder transaction will remain subject to Card Association Operating Regulations, as applicable, and to all of the representations, warranties, terms and conditions made and agreed to by Carrier under this Agreement. e. Business Day -- Any weekday, Monday through Friday, except when any such day is a legal holiday recognized by Bank. f. Card -- Any card with respect to MasterCard International Incorporated, Visa U.S.A., Inc. or Visa International or other cards bearing the service mark of MasterCard International, Inc., Visa U.S.A., Inc. or Visa International or any other national card association designated by the Bank. -2- g. Card Associations -- Visa U.S.A. Inc., Visa International, Inc., MasterCard International Incorporated and any other national card association designated by the Bank. h. Card Issuer -- Any bank or financial institution that is a member of a Card Association and issues a Card bearing the service marks of such Card Association. i. Cardholder -- Any person who has been issued or authorized to use a Card and has signed such card on the panel on the reverse side of the Card. j. Chargeback -- Any return to Bank or Carrier of, or, if the context so requires, the act of returning, a previously processed Sales Slip or Credit Slip as a result of application of Card Association Operating Regulations, as applicable, including, without limitation, any violation thereof or Carrier's failure to provide goods or services to Cardholders, or as otherwise provided by this Agreement. In the case of Carrier, the use of the term "Chargeback" in a particular context may mean the Carrier's reimbursement (whether a credit or debit) to Bank of amounts paid by Bank on account of Chargebacks. k. Credit Slip -- A form or electronic record approved by Bank which is used to evidence a refund or adjustment of a purchase made through the use of a Card, and which will be credited to a Cardholder account. l. Deposit -- The aggregate of (a) Reserved Funds and (b) any cash deposited by Carrier with Bank, and all additions thereto made from time to time and all monies, securities, investments and instruments purchased therewith and all interest, profits and/or dividends accruing thereon and proceeds thereof. m. ECCB -- As defined in Section 6.2. n. Electronic Data Capture or "EDC" -- Any means by which payment information (e.g. Sales Slip or Credit Slip) is transmitted electronically to Bank for processing. o. Effective Date -- The date on or by which both Carrier and Bank have duly executed and delivered to one another this Agreement, which upon such execution and delivery shall be deemed to be the date stated in the opening paragraph of this Agreement and identified as the Effective Date on the cover page hereof. -3- p. Floor Limit -- A dollar amount established for a single transaction for which Authorization must be obtained by Carrier from Bank. The Floor Limit, which may be changed from time to time, initially shall be $500.00 for all transactions, except those generated by Carrier's ticket sale locations and Agent locations equipped with electronic Authorization capabilities, or telephone or mail orders, handwritten or hand-printed transactions, in which case the Floor Limit shall be zero. A zero Floor Limit means that Carrier shall obtain Authorization for each instance of a sales transaction. Bank shall give Carrier at least thirty (30) days notice in the event that a Card Association revises these Floor Limits. All Card sales made to an individual Cardholder at any one Carrier or Agent location on any one day through use of a Card shall constitute one transaction to which the Floor Limit applies. q. Internet Transactions -- Those Card transactions Carrier may enter into over the internet once approved under secured electronic transfer standards promulgated by the National Institute of Weights and Measures, or such other security standards which are acceptable to Bank. r. Magnetic-Stripe-Reading Terminals -- A terminal at the point of transaction which is capable of reading the magnetic stripe on a Card. s. Net Activity -- For any day on which funds are to be remitted to Carrier under Section 6.2 hereof, the net aggregate amount of (i) the aggregate amount of the Sales Slips submitted to Bank one Business Day prior to such date of remittance of funds, plus (ii) adjustments in favor of Carrier, minus (iii) outstanding Credit Slips, Chargebacks to Carrier for which Bank has not been reimbursed, adjustments in favor of Bank, reimbursements to Bank, fees owed to Bank and the processing fees set out in Schedule 1 hereto and any other obligations of Carrier to Bank, minus (iv) any net addition to Reserved Funds on such date (or plus any net subtraction from Reserved Funds on such date). t. Operating Regulations -- The operating regulations of a Card Association as amended or supplemented from time to time. -4- u. Reference Rate -- The rate publicly announced by the Bank from time to time as its "reference rate"; the Bank may lend to its customers at rates that are at, above, or below the Reference Rate. v. Reserved Funds -- All funds paid to Bank by a Card Association on account of Sales Slips submitted to the Bank by Carrier pursuant to this Agreement and held by Bank pursuant to the terms and conditions of this Agreement, including, without limitation, amounts held by Bank pursuant to the provisions of Schedule 2 hereto. w. Restricted Card List -- Those printed warning notices, tape, or electronic media provided by a Card Association and published by or on behalf of a Card Association, containing the account numbers of Cards which should not be honored. x. Retained Documents -- As defined in Section 7.2. y. Sales Slip -- A form or electronic record approved by Bank which is used to evidence Travel Costs purchased by a Cardholder through the use of a Card. The standard airline industry form will be an approved form. z. Settlement Account -- A deposit account at a financial institution designated by Carrier as the account to be debited and/or credited, as applicable, for the Net Activity of Card transactions. Such account shall be maintained in an office of such financial institution located in the United States of America. aa. Submission Date -- As defined in Section 6.2. bb. Transaction Date -- The actual date on which the Cardholder purchases goods or services, or a Credit Slip is issued from the Carrier through use of a Card. cc.Travel Costs -- Any one, or any combination of, the following items: (1) the purchase of a ticket for air travel over the lines of Carrier; -5- (2) the purchase of a ticket for air travel over the lines of other carriers; (3) the payment of airport taxes, fees and surcharges in connection with the purchase of any item specified in this section; (4) the payment of excess baggage and other baggage charges; (5) the purchase of air freight and air cargo services offered by Carrier; (6) the purchase of small package delivery services offered by Carrier; (7) the purchase of land, water and car rental travel services (including accommodations) on tours sold by or through Carrier in conjunction with the furnishing of air travel; (8) the purchase of air travel for pets; (9) the payment of dues associated with Carrier's airport or other club system; (10) the purchase of goods sold and delivered on, or in association with, Carrier's flights; and (11) goods sold via direct mail catalog or by direct mail by Carrier. Travel Costs shall also mean such other goods or services as Carrier and Bank may agree to include in writing. Travel Costs shall not include charter services. 2. HONORING CARDS 2.1 Carrier will honor all valid Cards as set out in Section 2.3 when properly presented by a Cardholder as payment for Travel Costs and shall accord Cardholders the same service and privileges as other similarly eligible customers. Neither Carrier nor any Agent will impose a surcharge for purchases made with the Card. Neither Carrier nor any Agent shall establish minimum or maximum transaction amounts as a condition for honoring Cards, nor shall any surcharge be imposed. Any tax required to be collected by the Carrier must be included in the total transaction amount and not collected separately in cash. -6- 2. 2 Carrier shall use reasonable efforts to cause all Agents located in the United States of America and, at Carrier's option, elsewhere to permit Cardholders to charge Travel Costs only in accordance with the terms and conditions of this Agreement and in compliance with Card Association Operating Regulations. Carrier shall use reasonable efforts to cause compliance by Agents with all of the terms and conditions of this Agreement to be performed by Carrier or Agents. Carrier shall be responsible for: (a) any failure by any Agent in performing the applicable provisions of this Agreement; and (b) the settlement of Sales Slips and Credit Slips completed by Agents. 2.3 Before honoring a Card, Carrier or Agent shall do the following to determine whether the Card is valid: (a) examine the format of each Card presented in connection with a purchase for authenticity and confirm, by checking the effective date and the expiration date as stated on the face of the Card, that the Card has become effective and has not expired; and (b) obtain Authorization if required pursuant to Section 2.5. Neither the Carrier nor any Agent shall impose a requirement on Cardholders to provide any personal information such as a home or business telephone number, home or business address, driver's license number, or a photocopy of a driver's license as a condition for honoring Cards unless such information is required under specific circumstances cited in this Agreement. Notwithstanding the foregoing, with respect to transactions that are not conducted face-to-face, Carrier may request from a Cardholder the information necessary to complete an address verification service request. Neither the Carrier nor any Agent shall make a photocopy of a Card under any circumstances, nor shall a Cardholder be required to provide a photocopy of the Card as a condition for honoring the Card. Neither the Carrier nor any Agent shall require a Cardholder, as a condition for honoring the Card, to sign a statement that in any way waives the Cardholder's rights to dispute the transaction with the Bank. Carrier may require passengers to present personal information, including a driver's license, passport, or other picture identification, for purposes of complying with Carrier's policy or federal or state law. 2.4 Subject to the narrow exceptions contained in the last sentence of this Section 2.4, Carrier agrees that neither it nor any of its Agents will accept any cash or other form of payment, with respect to Travel Costs which are included on a Sales Slip. Carrier may offer Cardholders' rate discounts for payments in cash if such discounts comply with the terms and provisions of the federal Truth-In-Lending Act and Regulation Z promulgated pursuant thereto and Carrier may accept partial payment when such payment is made by the purchaser of the Travel Costs at the time of sale in cash or by check or both. -7- 2.5 Carrier or Agent shall obtain an Authorization for the total value of the Sales Slip in each of the following cases before completing the transaction if: (a) the amount of the transaction is equal to or exceeds the Floor Limit; (b) Carrier or Agent desires to make presentment of the Sales Slip beyond thirty (30) days from Transaction Date; (c) a Card is presented, but Carrier's or Agent's imprinter is not functioning, or for any other reason the Sales Slip cannot be imprinted with the Card; (d) the encoded account number on a Card cannot be read from the magnetic stripe; (e) the transaction involves an unsigned Card, or a Card that has expired is presented; (f) Carrier or Agent believes that the Card may be counterfeit or stolen or that the transaction is in some manner suspicious; (g) the account number of the Card is listed on the current Restricted Card List applicable thereto; or (h) the current Restricted Card List applicable thereto is not available. If a transaction involves suspicious or unusual circumstances, the Carrier shall request a "Code 10" Authorization from the Bank. For mail/telephone order/Internet Transactions/Automated Ticket Machine ("ATM") computer-generated transactions where merchandise is to be shipped or delivered to the Cardholder or the Cardholder's designee, the Authorization is considered valid if the Authorization is obtained within seven calendar days prior to the Transaction Date, and the transaction amount does not exceed the authorized amount plus 15 percent of the authorized amount, and the additional amount represents shipping costs. The shipment date of the merchandise is considered the Transaction Date. -8- 2.6 In those instances listed in Section 2.5 above, Carrier or Agent will contact an Authorization center to obtain Authorization in accordance with the standard Card Association Operating Regulations, as applicable, before completing the transaction. The Carrier or Agent will type or print legibly the Authorization approval code on the Sales Slip. If the encoded account number cannot be read from the magnetic stripe, the Carrier or Agent must, in addition to receiving Authorization as in Section 2.5(d) above, complete the transaction using a manual imprinter. 2.7 In those instances listed in Sections 2.5 (g) and (h), if the Carrier or Agent is instructed by the Authorization center to recover the Card, the Carrier or such Agent in such circumstance shall exert reasonable, peaceful means to obtain possession of the Card, and handle the card according to Sections 2.14 and 4.4. In the instance listed in Section 2.5(d), the Carrier or Agent must advise the Authorization center of the specific reason(s) Authorization is requested. 2.8 Neither Carrier nor any Agent shall make any Card sale to any customer in any of the following circumstances (with the exception of ticket by mail or telephone pursuant to Section 2.10 and ticket by automated machine pursuant to Section 2.11 or purchase through Internet Transactions): (a) a Card is not presented at the time of sale; (b) the signature on the Sales Slip does not appear to correspond to the signature appearing in the signature panel on the reverse side of the Card, or the Cardholder does not resemble the person depicted in any picture which appears on the Card; (c) the signature panel on the Card is blank; or (d) the total sale exceeds the Floor Limit, unless Carrier obtains Authorization pursuant to Section 2.5. Any Carrier or Agent completing a transaction under the conditions in this paragraph shall be responsible for such Sales Slip or Credit Slip regardless of any Authorization. (a) If the signature panel of the Card is blank, in addition to requesting Authorization, the Carrier or Agent must do the following: review positive identification to determine that the user is the Cardholder; indicate such positive identification (including any serial number and expiration date) on the Sales Slip; and require the Cardholder to sign the signature panel of the Card prior to completing the transaction. (b) If a Cardholder presents a Card that bears an embossed "valid from" date and the Transaction Date is prior to the "valid from" date, the Carrier or Agent shall not complete the transaction. A card embossed with a "valid from" date in month/year format shall be considered valid on the first day of the embossed month and year. A card embossed with a "valid from" date in month/day/year format is considered valid on the embossed date. -9- 2.9 Each Card sale shall be evidenced by a Sales Slip. Each Sales Slip shall be imprinted with the Card except if imprinter is not available, and except as provided in Section 2.5(c) (if Authorization is obtained) and Sections 2.10 and 2.11. If an imprinter is not available, the information on the Card and merchant plate shall be reproduced legibly on the Sales Slip in sufficient detail to identify the parties to such sale and the Bank. Such information shall include at least the Cardholder's name and account number and the Carrier's name and place of business. This requirement does not apply to Sales Slips or Credit Slips resulting from transactions involving Magnetic-Stripe-Reading Terminals which produce transaction records. The Carrier shall include all items of goods and services purchased in a single transaction in the total amount on a single Sales Slip or transaction record except for individual tickets issued to each passenger, when required by Carrier policy. Each Sales Slip shall include on its face: (a) the Authorization code (when such is required); (b) the total amount of the Travel Costs purchased by Cardholder (including any applicable state or federal taxes); (c) Carrier's ticket number or transaction control number; (d) the Transaction Date; (e) the place of issue (City and State); (f) the passenger's name; (g) the origin and destination; (h) the applicable fare basis code; (i) the date of first departure; (j) Cardholder account number; and (k) Carrier's name. Each Sales Slip shall be signed by the Cardholder (except where the sale is made pursuant to a mail order, telephone order, Internet Transaction or ATM transaction), which signature shall appear to be the same as the signature on the Card presented, as determined by Carrier or Agent. The Cardholder shall not be required to sign a Sales Slip until the final transaction amount is known and indicated in the "Total"column. The Carrier shall not effect a transaction for only part of the amount due on a single Sales Slip except when the balance of the amount due is paid by the Cardholder at the time of sale in cash, by check, with another card or Card, or any combination thereof. If Carrier or Agent honor the Card, the Carrier or Agent honoring the Card will deliver to the customer a true and completed copy of the Sales Slip. -10- 2.10 Carrier or Agent may enter into Card transactions in accordance with Carrier's or such Agent's ticket by mail, telephone, ATM or Internet Transaction program. In each such case, Carrier or Agent will complete the Sales Slip (in accordance with Section 2.9) and include on the Sales Slip the effective date and expiration date of the Card as obtained from the Cardholder together with words to reflect "mail order" or the letters "MO," or "telephone order," or the letters "TO," or "internet order" or the letters "IO" as appropriate. Carrier or Agent must obtain an Authorization code for ticket by mail, telephone or Internet Card sales. If a Carrier or Agent completes a transaction without imprinting of the Card or using a Magnetic-Stripe- Reading terminal, the Carrier or Agent shall be deemed to warrant the true identity of the Cardholder as the authorized holder of such Card unless the Carrier or Agent has obtained independent evidence of the Cardholder's true identity and has noted such evidence on the applicable Sales Slip. 2.11 Carrier or Agent may enter into Card transactions in accordance with its Carrier or such Agent's ticket by automated machine program. In each such case, Carrier or Agent will complete the Sales Slip (in accordance with Section 2.9). Carrier or Agent must obtain an Authorization code for ticket by automated machine Card sales. Such transaction records must include at least the following information: (a) the Account Number; (b) the Carrier or Agent's name; (c) the automated machine's Location Code or city and state; (d) the amount of the transaction; and (e) the Transaction Date. 2.12 Carrier or Agent may use Magnetic-Stripe-Reading Terminals to obtain Authorization and to capture Sales Slip data to submit to a Card Association by reading data encoded on either tracks 1 or 2 on the magnetic stripe of Cards in accordance with Operating Regulations. The Magnetic-Stripe-Reading Terminals are prohibited from printing or displaying more information than that which is normally embossed on the front of the Card. (a) Whenever the embossed account number is not the same as the encoded account number, the Carrier or Agent is required to (i) decline the transaction, (ii) attempt to retain the Card by reasonable and peaceful means, (iii) note the physical description of the Cardholder, (iv) notify the Bank, and (v) handle any recovered Card in accordance with the procedures specified in Sections 2.14 and 4.4. The Carrier or Agent, as applicable, must notify the Bank, indicated by both the embossed and encoded account numbers, of the incident. -11- (b) Whenever the encoded account number cannot be read from the magnetic stripe, the Carrier or Agent must follow normal Authorization procedures and complete the transaction using a manual imprinter. (c) When the embossed account number is the same as the encoded account number, the Carrier must follow normal Authorization procedures as described in this Section 2. 2.13 Neither Carrier nor any Agent may make a cash disbursement to any Cardholder. A Carrier or Agent may not accept Cards for the purchase of scrip. 2.14 Carrier or Agent shall use its best efforts to retain a Card by reasonable and peaceful means if (a) Carrier is requested by the Bank, an authorization center or a Card Issuer to retrieve a Card; (b) if the four printed digits above the embossed account number on a Card do not match the first four embossed digits; or (c) if Carrier has reasonable grounds to believe a Card is counterfeit, fraudulent or stolen. The Carrier or Agent shall immediately notify the Bank that the Card has been retrieved, and return the Card pursuant to Section 4.4. 3. CONFIDENTIAL INFORMATION 3.1 Carrier and Agent shall treat all information relating to any Card, including, without limitation, Cardholder name and identification information and account number information in any form, imprinted Sales Slips, carbon copies of imprinted Sales Slips, mailing lists, tapes, or other media, obtained by reason of any Card transaction or otherwise ("Cardholder Account Information"), as confidential information belonging to the Bank and shall protect such materials from disclosure to any third person, except as expressly permitted herein. Carrier shall not, without the consent of the Cardholder, sell, purchase, provide or exchange Cardholder Account Information to or with any third person, other than (a) Carrier's agents, employees and representatives, network providers or Card processors, for the purpose of assisting Carrier in completing the Card transaction; (b) the Bank; -12- (c) the applicable Card Association or Card Issuer in compliance with this Agreement or other applicable error resolution procedures; or (d) in accordance with applicable law. 3.2 Carrier shall treat this Agreement and any and all related Operating Regulations as confidential information belonging to Bank and shall protect such materials from disclosures to any third person, except as expressly permitted herein. 4. RESTRICTED CARD LIST 4.1 Upon Carrier's request, Bank will send or cause to be sent Restricted Card Lists to Carrier, which lists shall be on magnetic tape. Carrier may designate an agent or processor to receive the magnetic tape Restricted Card List; provided, that, Carrier first obtains Bank's consent, which will not be unreasonably withheld, and provided, further, that Carrier observes Bank's instructions regarding the timing of the transfer from Carrier's receipt of the magnetic tape to its agent's receipt. Carrier shall immediately upon receipt of such Restricted Card List enter this information into its system. Carrier's ticketing locations which use the system will be deemed to have notice of the information contained on the second business day following Carrier's (or such other agent as Carrier shall designate in accordance with this Section 4.1) receipt of such tape. 4.2 Carrier and its Agents will be deemed to be on notice of information contained on the Restricted Card Lists consistent with Section 4.1 above and shall cooperate with Bank in using reasonable methods to recover Cards listed on the Restricted Card List. 4.3 Bank will indemnify and make whole Carrier or any Agent for all losses, including costs and expenses, suffered or incurred by Carrier or such Agent, which directly arise from Carrier or such Agent strictly following Bank's or Bank's agent's instruction and otherwise acting in a reasonable manner to effect repossession of any Card which appears on a Restricted Card List. 4.4 Bank will facilitate the reward process for recovered Cards. Recovered Cards should be sent to: Bank Card Center Attn: Card Recovery -13- 5. RETURNED UNUSED TICKETS; CREDIT ADJUSTMENT 5.1 Carrier will maintain a fair and uniform policy for the return or exchange of tickets for credit adjustments. On the date Carrier accepts the return of unused tickets or otherwise allows an adjustment to the Travel Costs which were the subject of a previous Card sale, Carrier will date and otherwise properly complete a Credit Slip and process it within nine (9) calendar days of the date shown on the Credit Slip or such other period as complies with applicable law. Carrier will tender the Cardholder a copy of the Credit Slip. Upon and after the commencement by or against Carrier of any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy, reorganization, debt arrangement, liquidation or other insolvency law, Bank may, at its option, require as a condition to the processing of any Credit Slips submitted to it by Carrier relating to sales made by Carrier prior to the institution of such proceeding, the entry of an order, in form and substance acceptable to Bank, by the court having the jurisdiction of any such proceeding, authorizing Carrier to issue, and Bank to process, Credit Slips for sales made by Carrier prior to institution of such proceeding. 5.2 Carrier will make no cash refunds in connection with such credit adjustments, except to the extent it may be required to effect a cash refund pursuant to the involuntary refund requirements of applicable laws, rules, regulations, or tariffs. 5.3 If a Cardholder disputes the receipt of the proper amount of the cash refund, Carrier shall, within the terms established in Section 8 for Chargebacks, furnish Bank with such documentary evidence of such refund. 5.4 The submission of a Credit Slip will not impair Bank's right of Chargeback against Carrier in an amount not to exceed the difference between: (a) the amount of the Sales Slip and; (b) the amount of the Credit Slip submitted by Carrier. 5.5 A Carrier shall not accept monies from a Cardholder for the purpose of preparing and depositing a credit voucher that will effect a deposit to the Cardholder's account. A Carrier shall not process a credit voucher without having completed a previous purchase transaction with the same Cardholder. 6. SUBMISSION OF SALES SLIPS AND CREDIT SLIPS -14- 6.1 Carrier will establish and maintain a Settlement Account which shall be subject to Bank's customary practices and procedures applicable to accounts of that nature and subject to the terms of this Agreement. 6.2 Carrier or Agent shall not present for processing or entry to any Card Association, directly or indirectly, any Sales Slip or Credit Slip which was not originated as a result of a transaction between the Cardholder and such Carrier or Agent. Carrier or Agent may not deposit for entry to any Card Association, directly or indirectly, any Sales Slip or Credit Slip that it knows or should have known to be (i) fraudulent or (ii) not authorized by the Cardholder. With respect to this requirement, the Carrier or Agent shall be responsible for the actions of their respective employees while acting in their employ. Neither Carrier nor Agent may present for processing or entry to any Card Association any Sales Slip or Credit Slip representing a transaction which had been previously charged back to Bank and subsequently returned to Carrier. Carrier may, at its option, pursue payment from the customer outside the Card Association system. Carrier or Agent shall submit to Bank for processing each Sales Slip and each Credit Slip, no later than twenty (20) calendar days following the date of each such Sales Slip, and nine (9) calendar days following the date of each such Credit Slip (each such date of submission being a "Submission Date"). Permissible time periods shall include the Transaction Date and the receipt date. All Sales Slips and Credit Slips must be submitted to Bank by means of a summary thereof recorded on magnetic tape or electronically transmitted as provided in Sections 6.7 and 7.1. The method of billing for all Sales Slips and Credit Slips processed through ARC must be by electronic transmission, including Electronic Credit Card Billing ("ECCB"), and shall include itinerary records. If Carrier is unable to submit Sales Slips and Credit Slips originating at Carrier's sales locations, including airport locations, ticket-by-mail centers, and other sales locations, by means of a summary recorded on magnetic tape or electronically transmitted as provided in Sections 6.7 and 7.1, Carrier may submit such Sales Slips and Credit Slips to Bank by means of a paper summary and detail thereof to Bank's designated processing center, or by means of a terminal that generates an electronic transmission to Bank's designated terminal processor. On each Business Day, commencing on the first Business Day following the Effective Date on which the Deposit (if any) is in the amount required by Schedule 2 to this Agreement and funds are available for remittance to Carrier, Bank will deposit, via ACH or federal wire transfer, at Bank's discretion, into the Settlement Account, an amount equal to Net Activity; provided, that, Bank was in receipt of incoming transmission and tapes by 5:00 p.m. (Central Time) on the preceding Business Day and such transmission and tapes could be processed. Bank will make a reasonable effort to initiate ARC transmission to meet the 5:00 p.m. (Central Time) requirement. -15- With respect to each deposit made by Bank to the Settlement Account, Bank shall send to Carrier a statement (as described in Section 6.5) of Net Activity for the applicable period. Such statement is subject to audit by Bank and prompt adjustment will be made for any inaccuracies discovered. At any time that the amount of Net Activity results in an amount due Bank, Bank may, at its option: (a) deduct and retain the amount due Bank from amounts subsequently payable to Carrier under this Agreement by Bank on account of Sales Slips; (b) require an immediate federal wire transfer from Carrier in the amount due; or (c) apply or set off such amount of the Deposit, if any, as is necessary to satisfy Carrier's obligations hereunder. Carrier will pay interest on the amount due Bank for the period unpaid calculated at a per annum rate equal to the Reference Rate. Amounts deposited in the Settlement Account or otherwise credited to Carrier (including, without limitation, amounts credited against Carrier's obligations to Bank for fees, costs and expenses hereunder) in respect of any Sales Slip pursuant to this Agreement and Carrier's right to payment of Reserved Funds shall be provisional until the payment made to the Bank by the Card Association in respect of such Sales Slip shall become final (i.e., all rights of Chargeback or other rights of the Cardholder or Card issuer to obtain reimbursement of such payment from Bank shall have expired). 6.3 In the event Sales Slips are lost in transit, Bank will use its best efforts to process those Sales Slips which Carrier is able to reconstruct and promptly forward to Bank. Carrier understands and agrees that Bank may Chargeback to Carrier at any time any such reconstructed Sales Slips, if any claim or demand of any type whatsoever is asserted against Bank as a result of the late processing of Sales Slips as determined by Card Association Operating Regulations, as applicable, or as a result of the Bank's inability to satisfy a request for original documentation. 6.4 Bank will calculate the processing fees on the net Card sales and charge the sum of said fees against the Carrier's account on daily basis. The processing fees shall be as set forth in Schedule 1 attached hereto and incorporated herein. 6.5 At Carrier's request, Bank will provide Carrier with transaction reports that correspond to Net Activity in a mutually agreed format that will summarize sales, returns (refunds), Chargebacks, processing fees, and adjustments with adequate detail to allow Carrier to perform account reconciliation. -16- 6.6 At Carrier's option, Travel Costs in U.S. Dollars sold through Agents not doing business in the United States of America with respect to which Carrier's Agents, in compliance with Card Association Operating Regulations, submit Sales Slips and Credit Slips to an institution designated by the airline industry or directly to Carrier for processing and settlement shall be submitted to and purchased by Bank. 6.7 Carrier shall cause Agents to submit Sales Slips and Credit Slips to Bank by magnetic tape or electronic transmission as provided in Sections 6.2 and 7.1 through the Carrier's accounting office or the appropriate processing center of the area or bank settlement plan of which the Carrier is a member. Carrier or the appropriate processing center, as the case may be, shall submit the Sales Slips and Credit Slips to Bank in accordance with the terms of this Agreement. 6.8 If Carrier utilizes Electronic Draft Capture services pursuant to this Section 6.8 to transmit Sales Slips and credit vouchers for Card transactions through an electronic terminal, Carrier agrees to utilize such EDC Services in accordance with the Operating Regulations. Carrier may designate a third person as its agent to deliver to the Bank or directly to Card Associations transactions captured at the point of sale by such agent. If Carrier elects to designate such an agent, Carrier must provide the Bank prior written notice of such election. Carrier understands and agrees Bank is responsible to make payment to Carrier for only those transaction amounts delivered by such agent to the Card Associations, less amounts withheld by the Bank pursuant to this Agreement, and Carrier is responsible for any failure by such agent to comply with any Operating Regulations, including without limitation any such failure that results in a Chargeback. 7. MAGNETIC TAPE OR ELECTRONIC TRANSMISSION 7.1 When Sales Slips and Credit Slips are submitted to Bank by means of magnetic tape or electronically, other than Sales Slips and Credit Slips originating from terminals and processed by Bank's terminal processor, such Sales Slips and Credit Slips shall be submitted to Bank by means of a summary of all Travel Costs recorded on machine readable magnetic tape or electronic transmission compatible with the computer system of Bank. Such magnetic tape or electronic transmission shall contain, at a minimum, the information required for each Sales Slip by Section 2.9 and shall be made in accordance with the ARC format or any other format acceptable to Bank in its sole discretion. -17- If a magnetic tape or electronic transmission of Travel Costs does not meet the requirements of the Bank approved format, Bank shall use its best efforts to advise Carrier within two (2) business days of receipt of same. Any acceptance by Bank of a magnetic tape or electronic transmission of Travel Costs which does not comply with the appropriate format or, if in the appropriate format, does not contain the information in respect to each Travel Cost summarized therein required by the terms of this Agreement, shall not constitute a waiver of, or preclude Bank from exercising, the right of Chargeback. 7.2 Carrier shall retain, or cause to be retained, all original Sales Slips and Credit Slips and other documentation necessary for Bank to satisfy applicable Card Association Operating Regulations ("Retained Documents") relating to those transactions transmitted to Bank directly by Carrier for at least two (2) years from the Transaction Date of each such Sales Slip or Credit Slip. Promptly upon Carrier's receipt of Bank's request for the same, Carrier shall deliver to Bank, a copy, or the original if specifically requested by Bank, of the requested document, but in no event later than fourteen (14) calendar days following Carrier's receipt of Bank's request. In the event that any Retained Documents are in the possession of ARC or any other settlement plan, Carrier shall cause ARC or such other settlement plan to deliver to Bank all such settlement plan Retained Documents on microfilm acceptable to Bank. Notwithstanding the foregoing, either Carrier or Bank may elect to retain Retained Documents for no more than 180 days provided such party retains a microfilmed or microfiched copy of such documents for at least two (2) years from the Transaction Date of each such Sales Slip and Credit Slip. 8. CHARGEBACKS 8.1 Bank is not obligated to accept any Sales Slip which does not comply in every respect with the terms and conditions of the Agreement, or which does not comply in all respects with the applicable Operating Regulations. 8.2 Carrier agrees to pay Bank the amount of each Chargeback and, in the case of amounts that have not been paid to Carrier, acknowledges that Bank has no obligation to pay to Carrier amounts attributable to Chargebacks. Bank may deduct and retain any amount due to Bank from Carrier on account of Chargebacks from amounts otherwise payable to Carrier under this Agreement. The provisions of Section 6.2 with respect to payment of Carrier's obligations to Bank will apply in the event the amount of Net Activity results in an amount due Bank. Chargeback timeframes will be followed according to the Card Association Operating Regulations, as applicable. -18- 8.3 Bank will perform a credit match verification for Chargebacks for which credit has not been received for purposes of determining if a credit (refund) has already been processed. Bank will promptly update credit files and maintain historical credit data for six (6) months from the processing date of each Credit Slip. 9. WARRANTIES AND REPRESENTATIONS Carrier represents and warrants to Bank that: 9.1 Carrier has full and complete power and authority to enter into and perform under this Agreement and has obtained, and there remain in effect, all necessary licenses, resolutions and filings which are necessary for Carrier to perform its obligations under this Agreement. 9.2 Carrier's sales transactions and credit refund procedures comply in all material respects with all applicable laws and regulations of any governmental authority which are pertinent to such Card sales or refunds. 9.3 Carrier's execution and performance of this Agreement will not violate any provision of Carrier's Articles of Incorporation and bylaws, or any indenture, contract, agreement or instrument to which it is a party or by which it is bound and this Agreement constitutes the legal, valid and binding obligation of Carrier, enforceable in accordance with its terms. 9.4 Carrier is duly organized and in good standing under laws of the state specified in the first paragraph of this Agreement and is qualified to do business in each state where the nature of its activities or the character of its properties makes such qualification necessary or desirable and the failure to so qualify would have a material adverse effect on the assets or operations of a carrier. 9.5 Carrier's audited financial statements and its unaudited financial statements, as heretofore furnished to Bank, have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with those of the preceding year, and fairly present the financial condition of Carrier as of such date and the result of its operations and the changes in financial position for the period then ended. There have been no material adverse changes in the condition or operations, financial or otherwise, of Carrier since the date of the unaudited financial statements furnished to Bank prior to the execution of this Agreement, except as previously disclosed to Bank in writing. Neither the financial statements described herein nor any other certificate, written statement, budget, exhibit or report, including without limitation, information and reports relating to Card sales for Travel Costs, furnished by on behalf of Carrier in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make statements contained therein not misleading. Certificates or statements furnished by or on behalf of Carrier to Bank consisting of projections or forecasts of future results or events have been prepared in good faith and based on good faith estimates and assumptions of the management of Carrier and Carrier has no reason to believe that such projections or forecasts are not reasonable. All factual information hereafter furnished to Bank by Carrier or its agents will be true and accurate in all material respects on the date as of which such information is dated or certified and no such information will contain any material misstatement of fact or will omit to state a material fact or any fact necessary to make the statements contained therein not misleading. -19- 9.6 There is no action, suit or proceeding at law or equity, or before or by any federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or to the knowledge of Carrier, threatened against Carrier or any of its property which, if determined adversely to Carrier would materially adversely affect the present or prospective financial condition of Carrier or affect its ability to perform hereunder and Carrier is not in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or federal, state, local or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign where the effect of such default would materially adversely affect the present or prospective financial condition of Carrier. 9.7 Carrier is in compliance with its agreement with ARC and is entitled to all the benefits and rights afforded to Carrier under such agreement, which benefits and rights are substantially the same as those afforded to other carriers by ARC. 9.8 Carrier has reviewed and assessed its business operations and computer systems with respect to the "year 2000 problem" (that is, that computer applications and equipment used by Carrier directly, or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). Based on that review and assessment, Carrier reasonably believes that the year 2000 problem will not result in a material adverse change in Carrier's business condition (financial or otherwise), operations, prospects or ability to perform under this Agreement. This representation will be a continuing representation for the remainder of the term of this Agreement. Carrier agrees to take all actions reasonably necessary to ensure that this representation remains true, and Carrier agrees to promptly notify Bank if, at any time during the term of this Agreement, Carrier becomes aware of facts or circumstances such that this representation has become or may become untrue or its obligation under this Section 9.8 has been or may be breached. Carrier will promptly deliver to Bank such information relating to this representation and its obligation under this Section 9.8 as Bank requests from time to time, including, without limitation, any information pertaining to the aforementioned review and assessment. -20- 10. SERVICE MARKS AND TRADEMARKS 10.1 Bank shall not display nor show the trademarks, service marks, logos, or company names of Carrier in promotion, advertising, press releases, or otherwise without first having obtained Carrier's written consent. 10.2 Upon the prior written consent of Bank, Carrier may utilize trademark and service marks of a Card Association in its own promotional and advertising materials to state that Carrier will honor the Cards, subject to restrictions as to the colors, sizes and designs of such marks and such other restrictions as contained in materials supplied to Carrier by Bank. 10.3 Carrier and Bank acknowledge that neither party will acquire any right, title or interest in or to the other party's trademarks, service marks, logos or company names and such properties shall remain the exclusive property of the respective parties or their affiliates. Upon termination of this Agreement, the parties hereto will discontinue all reference to and/or display of the other party's trademarks, service marks, logos and company names. 11. AUDIT During the term hereof and for one year thereafter, Carrier and Bank shall have the right at reasonable times and upon reasonable notice to audit, copy or make extracts of the records of the other pertaining to the transactions between or among them under this Agreement to determine the accuracy of the amounts which have been or are to be paid, refunded or credited by one party to the other in accordance with the provisions hereof. 12. DISPUTES WITH CARDHOLDERS -21- 12.1 Carrier will handle all claims or complaints by a Cardholder with regard to Travel Costs. 12.2 Any dispute between Carrier and Cardholder arising out of the common carrier passenger relationship shall be settled directly by Carrier without liability, cost, or loss to Bank. 13. ASSIGNMENT; DELEGATION OF DUTIES This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto. Consent of Carrier shall not be required as to an assignment by Bank to any subsidiary, affiliate or parent of Bank or any successor to Bank by reason of merger or consolidation. Neither party shall make any other assignments of this Agreement without the prior written consent of the other, which consent shall not be unreasonably withheld. Bank, in its sole discretion, without prior notice to Carrier(s), may designate and authorize any affiliate(s) of Bank to take any action required or allowed by Bank hereunder and in such case such affiliate(s) shall be entitled to the rights and benefits of Bank hereunder. Notwithstanding any such designation and authorization, Bank shall remain liable for any breach or failure to perform hereunder by any such affiliate(s) of Bank. 14. INDEMNIFICATION Carrier shall indemnify and hold Bank harmless from and against any and all claims, loss, liability, cost, damage, and expense on account of or arising out of claims or complaints by a Cardholder with regard to Travel Costs and any and all disputes between Carrier and any Cardholder arising out of the common carrier passenger relationship and on account of or arising out of any settlement, litigation, arbitration, governmental inquiry or other proceeding pertaining or alleged to pertain thereto. Bank will promptly notify Carrier of any such claim and allow Carrier the right to assume the defense of any such claim; provided, that, counsel retained by Carrier shall be reasonably acceptable to Bank. Bank will not settle any such claim without Carrier's written consent. Nothing herein shall limit Bank's right of Chargeback as defined in Section 8 of this Agreement. Bank shall indemnify and hold Carrier harmless from and against any and all claims, loss, liability, cost, damage and expense on account of or arising out of any claims, complaints, disputes, settlement, litigation, arbitration, governmental inquiry or other proceeding alleging or arising from Bank's willful misconduct or grossly negligent acts or omissions. Carrier will promptly notify Bank of any such claim and allow Bank the right to assume the defense of any such claim; provided, that, counsel retained by Bank shall be reasonably satisfactory to Carrier. Carrier will not settle any such claim without Bank's written consent. Any other provisions contained herein to the contrary notwithstanding, it is hereby agreed that the indemnity provisions set forth in this Section 14 shall survive termination of this Agreement and remain in effect with respect to any occurrence or claim arising out of or in connection with this Agreement. -22- 15. TERMINATION AND WAIVER If either party shall commit a material default in the performance of its obligations under this Agreement and shall fail or refuse to remedy or commence to remedy such material default within fifteen (15) calendar days after receipt of written notice specifying the nature of such default, the other party may terminate this Agreement on twenty-four (24) hours written notice after such fifteen (15) day period; provided, that, Bank shall have no obligation to notify Carrier prior to any termination based upon any of (a) commencement, whether by or against Carrier, of any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy, reorganization, debt arrangement, liquidation or other insolvency law, (b) violation by Carrier of Bank's rights pursuant to Section 22 of this Agreement or (c) any modification of Carrier's rights or benefits under any agreement with ARC that would materially adversely affect the present or prospective financial condition of Carrier or impair its ability to perform hereunder or any suspension or termination of any agreement with ARC or of any of Carrier's rights or benefits thereunder. In the event of termination by Bank, Carrier shall give appropriate notice to its Agents. Material defaults shall include, without limitation, (i) any of the events described in clauses (a) through (c) in the first paragraph of this Section 15, (ii) the imposition, or an attempted imposition, of a lien in favor of any party other than Bank, whether voluntary or involuntary, on the Deposit or any portion thereof or any property of Carrier subject to the lien or security interest of Bank and the imposition of any freeze on any property of Carrier subject to the lien or security interest of Bank, (iii) failure by Carrier to maintain all licenses, permits and certificates necessary for it to conduct flight operations. No termination of this Agreement (whether under this Section 15 or any other provision of this Agreement) shall affect the rights or obligations of either party which may have arisen or accrued prior to such termination. -23- No waiver of any provision hereunder shall be binding unless such waiver shall be in writing and signed by the party alleged to have waived such provisions. 16. NOTICES All notices permitted or required by this Agreement shall be in writing and shall be deemed given when received and may be sent by certified mail, courier, overnight delivery or telecopy and shall be addressed as set forth below: TO BANK: U.S. Bank National Association Merchant Payment Services 1010 South Seventh Street Minneapolis, Minnesota 55415 ATTENTION: Vice President, Merchant Payment Services Telecopy: (612) 973-8525 TO CARRIER: Hawaiian Airlines, Inc. 3375 Koapaka Street Honolulu, Hawaii 96819 ATTENTION: Vice President/Controller Telecopy: (808) 835-3694 The above addresses and addressees may be changed by giving notice of such change in the manner provided herein for giving notice. Until such written notice is received, the last addresses and addressees herein shall be deemed to continue in effect for all purposes. 17. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Minnesota. Both parties shall abide by all applicable federal, state and local laws, ordinances and regulations. 18. RULES AND REGULATIONS Carrier acknowledges that the respective systems of the Card Associations are governed by their respective Operating Regulations and that all transactions hereunder are subject to such Operating Regulations. Carrier further acknowledges that Bank has entered into this Agreement in reliance upon the applicability of the Operating Regulations of applicable Card Associations to the transactions hereunder. -24- 19. REIMBURSEMENT BY CARRIER Carrier will reimburse Bank for any fees, charges, fines, assessments, penalties, and Chargebacks that Bank may be required to pay, incur, or purchase from a Card Association with regard to any transaction processed by Bank from Carrier; provided, that, Carrier shall have no obligation for any such amount incurred through the willful misconduct or grossly negligent acts or omissions of Bank. Without limiting the generality of the foregoing, Carrier will reimburse Bank for transactions required to be paid or repurchased by Bank by virtue of Card Association Operating Regulations as such Operating Regulations may be applied by the applicable Card Associations. Any losses suffered by Bank on account of delay by Bank in processing Chargebacks shall be reimbursed by Carrier with respect to Chargebacks processed by Bank subsequent to cessation or substantial curtailment of flight operations of Carrier. Bank shall have the right to deduct the amount of any reimbursement hereunder from any payment otherwise due from Bank to Carrier. If Bank is unable to so collect such amount, Carrier shall pay Bank, on demand, the full amount or any uncollected part thereof. Bank, at its option, may apply such portion of the Deposit, if any, to the extent necessary to satisfy Carrier's obligations hereunder. It shall then be the responsibility of Carrier to recover the amount involved or otherwise resolve the cause of the reimbursement. Without limiting the foregoing, Carrier acknowledges that Reserved Funds are funds provisionally credited to Bank pursuant to the Card Association Operating Regulations, subject to Chargeback as provided therein, and that pursuant to Section 3 of Schedule 2 hereto such funds will not be credited (provisionally or otherwise) to Carrier but will be held by Bank subject to subsequent credit as provided in Schedule 2 and are subject to Chargeback in accordance with the Card Association Operating Regulations as such Operating Regulations may be applied by the applicable Card Association. 20. COST AND EXPENSES Carrier shall reimburse Bank for all costs and expenses, including reasonable attorney's fees and expenses, paid or incurred by Bank in connection with the negotiation and preparation of this Agreement and with the enforcement and preservation of Bank's rights hereunder. Carrier further agrees that Carrier shall reimburse Bank for all costs and expenses incurred by Bank related to cessation of all or a material part of Carrier's business as currently conducted, or the commencement and actual liquidation of Carrier and its assets, whether under Chapter 11 or Chapter 7 of the Federal Bankruptcy Code or under other applicable law, or pursuant to a sale of substantially all of the assets of Carrier or otherwise, in the aggregate amount of such costs and expenses. Reimbursable costs and expenses shall include, without limitation, any amounts paid to other carriers by Bank to induce such carriers to accept tickets issued by Carrier. All costs and expenses to be paid by Carrier hereunder shall be payable on demand and are secured by the Deposit and all collateral of Bank hereunder. Bank, at its option, may deduct the amounts owed to it from any amount otherwise due Carrier from Bank or, with concurrent notice to Carrier, apply or set off such portion of the Deposit, if any, in the amount necessary to satisfy Carrier's obligations hereunder. -25- 21. ENTIRETY This Agreement, including Schedules 1 and 2 attached hereto and hereby made part hereof, shall constitute the entire understanding and agreement between the parties with respect to the subject matter herein contained, and there are no other agreements, representations, warranties or understanding, oral or written, expressed or implied, that are not merged herein and superseded hereby. This Agreement shall not be amended, supplemented, modified or changed in any manner, except in writing, signed by the parties hereto and attached to this Agreement. 22. EXCLUSIVITY Bank does and will retain the exclusive right to process all Card sales transacted by Carrier within the fifty States of the United States of America. Bank will also accept all U.S. dollar-denominated Card sales submitted by Carrier from other geographical locations that are in compliance with Card Association Operating Regulations. Submissions and payment from any location must be handled in compliance with all applicable government laws, rules and regulations. 23. TERM The Agreement shall continue for an initial term of two (2) years and shall automatically renew for successive terms of one (1) year thereafter; provided, however, that at any time during the term hereof Bank may terminate this Agreement, with or without cause, upon sixty (60) days prior written notice to Carrier, and provided further that this Agreement shall not renew if Carrier provides written notice to Bank no later than ninety (90) days prior to the then current term of its determination to terminate this Agreement, in which case this Agreement shall terminate on the scheduled date of expiration. -26- 24. ASSISTANCE Bank or Carrier shall not unreasonably withhold any documentation required by Carrier or Bank in connection with the defense of any claim asserted in connection with this Agreement. Bank will provide Cardholder's name and address for each Chargeback when it is included in the Cardholder's documentation received by Bank. 25. REPORTING Until any obligation of Bank to perform hereunder shall have expired or been terminated and all obligations of Carrier to Bank hereunder shall have been satisfied, Carrier shall furnish to Bank the following reports, notices and financial statements, which shall be stated in U.S. Dollars and shall be in English: 25.1 As soon as available and in any event within 90 days after the end of each fiscal year of Carrier, the consolidated financial statements of Carrier and its subsidiaries, if any, consisting of at least statements of income, cash flow and changes in stockholders' equity, and a consolidated balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit and stating Carrier's unrestricted cash (including cash equivalents) balance, certified without qualification by independent certified public accountants of recognized standing selected by Carrier and acceptable to Bank, together with consolidating statements, any management letters, management reports or other supplementary comments or reports to Carrier or its board of directors furnished by such accountants. 25.2 At the request of Bank, as soon as available and in any event within 30 days after the end of each fiscal month, consolidated statements of income, cash flow and changes in stockholders' equity for Carrier and its subsidiaries if any, for such month and for the period from the beginning of such fiscal year to the end of such month, and a consolidated balance sheet of Carrier and its subsidiaries, if any, as at the end of such month, setting forth in comparative form figures for the corresponding period for the preceding fiscal year and stating Carrier's unrestricted cash (including cash equivalents) balance, accompanied by consolidating statements for such period and a certificate signed by the chief financial officer of the Carrier (a) stating that such financial statements present fairly the financial condition of Carrier and its subsidiaries and that the same have been prepared in accordance with generally accepted accounting principles and (b) certifying as to Carrier's compliance with all statutes and regulations applicable to Carrier, except noncompliance that could not reasonably be expected to have a material adverse effect on the financial condition or business operations of Carrier. -27- 25.3 Promptly upon the mailing or filing thereof, copies of all financial statements and financial reports that Carrier sends to any of its security holders or files with any government agency and, promptly upon the request of Bank, copies of such other reports as Carrier may file with any government agency. 25.4 Immediately upon any officer of Carrier becoming aware of any material default by Carrier under this Agreement, a notice from Carrier describing the nature thereof and what action Carrier proposes to take with respect thereto. 25.5 Immediately upon any officer of Carrier becoming aware of the same, notice of any pending or threatened action, suit or proceeding at law or equity, or before or by any federal, state local or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, against Carrier or any of its property which, if determined adversely to Carrier would materially adversely affect the present or prospective financial condition of Carrier or affect its ability to perform hereunder. 25.6 Immediately upon (a) termination or suspension of any agreement, or any of Carrier's rights or benefits thereunder, that Carrier has with ARC, (b) modification of any agreement with ARC that would materially adversely affect the present or prospective financial condition of Carrier or impair its ability to perform hereunder or (c) receipt by Carrier of notice from ARC of ARC's intention to terminate, suspend or modify agreement with Carrier, a notice from Carrier of such termination, modification or receipt of notice and such information with respect to the same as Bank may request. Such notice shall be provided whether Carrier is a party to an agreement with ARC on the Effective Date or thereafter becomes party to an agreement with ARC. 25.7 Immediately upon the commencement, whether by or against Carrier, of any bankruptcy, reorganization, debt arrangement or other proceeding under any bankruptcy, reorganization, debt arrangement, liquidation or other insolvency law, notice of such commencement. -28- 25.8 Immediately upon the failure to pay, whether by acceleration or otherwise, any payment obligation of the Carrier pursuant to any aircraft lease, notice of such failure and information concerning the amount of the obligation and the actual or likely consequences of such failure. 25.9 Immediately upon the reduction by the Carrier of greater than fifteen percent (15%) of its scheduled flights during any consecutive five-day period, notice of such reduction. 25.10 Immediately upon the merger or consolidation of the Carrier, or entry by the Carrier into any analogous reorganization or transaction, with any other corporation, company or other entity or the sale, transfer, lease or other conveyance of all or any substantial part of the Carrier's assets, notice of such event, including a description of the parties involved and the structure of the reorganization or transaction. 25.11 Such other information with respect to the financial condition and operations of Carrier as Bank may reasonably request. 26. GENERAL No failure or delay on the part of Bank or Carrier in exercising any power or right under the Agreement shall operate as a waiver of such power or right. In the event of a conflict between Bank's normal rules and the terms of this Agreement, the terms of this Agreement shall control. Section headings are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Nothing in this Agreement or in the course of conduct between the parties shall be construed as creating a principal and agent partnership or joint-venture relationship between the parties hereto. 27. REMEDIES CUMULATIVE All remedies, rights, powers, and privileges, either under this Agreement or by law or otherwise afforded to Bank, shall be cumulative and not exclusive of any other such remedies, rights, powers and privileges. The Bank may exercise all such remedies in any order of priority. -29- 28. CONFIDENTIALITY Carrier covenants and agrees that Schedules 1 and 2 hereto (the "Confidential Schedules") shall be maintained in confidence and not disclosed by Carrier or Carrier's representatives, officers, agents or employees without Bank's prior written consent unless required to be disclosed pursuant to judicial order or applicable law. The Confidential Schedules shall not be utilized for any purpose other than performance by Carrier under this Agreement. In the event that Carrier determines that it is required to disclose the Confidential Schedules, or any of them, whether pursuant to a judicial order or to applicable law, Carrier agrees to provide Bank with ten (10) days prior written notice (or such shorter prior notice as shall be reasonable in the circumstances) of such determination and the basis for such determination prior to making disclosure so that Bank may consider whether to seek an appropriate protective order and/or to waive compliance with the requirements of this Section 28. 29. CONSENT TO JURISDICTION Carrier agrees that any legal action or proceeding arising out of or in connection with this Agreement may be brought in the courts of the State of Minnesota or the courts of the United States of America in the State of Minnesota, and hereby irrevocably submits to the non-exclusive jurisdiction of each such court and hereby irrevocably appoints CT Corporation System Inc. presently located at 405 Second Avenue South, Minneapolis, Minnesota 55401 as its authorized agent for service of process in such courts, and service in such manner shall be deemed to be good and valid service on Carrier. The submission to such jurisdictions shall not (and shall not be construed as to) limit the right of Bank to take proceedings against Carrier in whatsoever jurisdictions shall to it seem fit nor shall the initiating of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction. In addition, Carrier hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement brought in any District Court of the State of Minnesota, or the United States District Court for the District of Minnesota, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. -30- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and attested to by their duly authorized officers as of the day and year written. CARRIER: HAWAIIAN AIRLINES, INC. By (Print Name): -------------------------------------- Signature: -------------------------------------- Title: -------------------------------------- Date: -------------------------------------- BANK: U.S. BANK NATIONAL ASSOCIATION By (Print Name): -------------------------------------- Signature: -------------------------------------- Title: -------------------------------------- Date: -------------------------------------- -31- SCHEDULES 1 - PROCESSING FEES [REDACTED] 2 - DEPOSIT - CARRIER [REDACTED] EX-10.10 6 EXHIBIT 10.10 EXHIBIT A to AIRCRAFT GENERAL TERMS AGREEMENT AGTA-HWI between THE BOEING COMPANY and Hawaiian Airlines, Inc. BUYER FURNISHED equipment provisions document BUYER FURNISHED EQUIPMENT PROVISIONS DOCUMENT 1. General. Certain equipment to be installed in the Aircraft is furnished to Boeing by Customer at Customer's expense. This equipment is designated "Buyer Furnished Equipment" (BFE) and is listed in the Detail Specification. Boeing will provide to Customer a BFE Requirements On-Dock/Inventory Document (BFE Document) or an electronically transmitted BFE Report which may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions relating to the in sequence installation of BFE as described in the applicable Supplemental Exhibit to this Exhibit A in a purchase agreement at the time of aircraft purchase. 2. Supplier Selection. Customer will: 2.1 Select and notify Boeing of the suppliers of BFE items by those dates appearing in Supplemental Exhibit BFE1to the applicable purchase agreement at the time of aircraft purchase. 2.2 Meet with Boeing and such selected BFE suppliers promptly after such selection to: 2.2.1 complete BFE configuration design requirements for such BFE; and 2.2.2 confirm technical data submittal requirements for BFE certification. 3. Customer's Obligations. Customer will: 3.1 comply with and cause the supplier to comply with the provisions of the BFE Document or BFE Report; 3.1.1 deliver technical data (in English) to Boeing as required to support installation and FAA certification in accordance with the schedule provided by Boeing or as mutually agreed upon during the BFE meeting referenced in Article 2.2 above; 3.1.2 deliver BFE including production and/or flight training spares and BFE Aircraft Software to Boeing in accordance with the quantities and schedule provided A-1 therein or as mutually agreed during the BFE meeting referenced in Article 2.2 above; and 3.1.3 assure that all BFE Aircraft Software is delivered in compliance with Boeing's then-current Standards for Loadable Systems; 3.1.4 assure that all BFE parts are delivered to Boeing with appropriate quality assurance documentation; 3.2 authorize Boeing to discuss all details of the BFE directly with the BFE suppliers________________________________; 3.3 authorize Boeing to conduct or delegate to the supplier quality source inspection and supplier hardware acceptance of BFE at the supplier location; 3.3.1 require supplier's contractual compliance to Boeing defined quality assurance requirements, source inspection programs and supplier delegation programs, including availability of adequate facilities for Boeing resident personnel; and 3.3.2 assure that all BFE supplier's quality systems are approved to Boeing's then current standards for such systems ; 3.4 obtain from supplier a non-exclusive, perpetual, royalty-free, irrevocable license for Boeing to copy BFE Aircraft Software. The license is needed to enable Boeing to load the software copies in (i) the aircraft's mass storage device (MSD), (ii) media (e.g., diskettes, CD-ROMs, etc.), (iii) the BFE hardware and/or (iv) an intermediate device or other media to facilitate copying of the BFE Aircraft Software into the aircraft's MSD, BFE hardware and/or media, including media as Boeing may deliver to Customer with the aircraft; 3.5 grant Boeing a license, extending the same rights set forth in paragraph 3.4 above, to copy: a) BFE Aircraft Software and data Customer has modified and/or b) other software and data Customer has added to the BFE Aircraft Software; 3.6 provide necessary field service representation, ______________________, at Boeing's facilities to support Boeing on all issues related to the installation and certification of BFE; 3.7 deal directly with all BFE suppliers to obtain overhaul data, provisioning data, related product support documentation and any warranty provisions applicable to the BFE; A-2 3.8 work closely with Boeing and the BFE suppliers to resolve any difficulties, including defective equipment, that arise; 3.9 be responsible for modifying, adjusting and/or calibrating BFE as required for FAA approval and for all reasonable related expenses; 3.10 assure that a proprietary information agreement is in place between Boeing and BFE suppliers prior to Boeing providing any documentation to such suppliers; 3.11 warrant that the BFE will comply with all applicable FARs and the U.S. Food and Drug Administration (FDA) sanitation requirements for installation and use in the Aircraft at the time of delivery. Customer will be responsible for supplying any data and adjusting, calibrating, re-testing or updating such BFE and data to the extent necessary to obtain applicable FAA and FDA approval and shall bear the resulting expenses; 3.12 warrant that the BFE will meet the requirements of the Detail Specification; and 3.13 be responsible for providing equipment which is FAA certifiable at time of Aircraft delivery, or for obtaining waivers from the applicable regulatory agency for non-FAA certifiable equipment. 4. Boeing's Obligations. Other than as set forth below, Boeing will provide for the installation of and install the BFE and obtain certification of the Aircraft with the BFE installed. 5. Nonperformance by Customer. If Customer's nonperformance of obligations in this Exhibit or in the BFE Document causes a delay in the delivery of the Aircraft or causes Boeing to perform out-of-sequence or additional work, Customer will reimburse Boeing for all resulting reasonable expenses and be deemed to have agreed to any such delay in Aircraft delivery. In addition Boeing will have the right to: 5.1 provide and install specified equipment or suitable alternate equipment subject to agreement from Customer, and increase the price of the Aircraft accordingly; and/or 5.2 deliver the Aircraft to Customer without the BFE installed. A-3 6. Return of Equipment. BFE not installed in the Aircraft will be returned to Customer in accordance with Customer's instructions and at Customer's expense______________. 7. Title and Risk of Loss. 7.1 With respect to Aircraft manufactured in the State of Washington, title to and risk of loss of BFE provided for such Aircraft will at all times remain with Customer or other owner. Boeing will have only such liability for BFE as a bailee for mutual benefit would have, but will not be liable for loss of use. 7.2 With respect to Aircraft manufactured in the State of California, Customer agrees to sell and Boeing agrees to purchase each item of BFE concurrently with its delivery to Boeing. A reasonable shipset price for the BFE shall be established with Customer. Customer and Boeing agree that the Aircraft Price will be increased by the amount of said shipset price and such amount will be included on Boeing's invoice at time of Aircraft delivery. Boeing's payment for the purchase of each shipset of BFE from Customer will be made at the time of delivery of the Aircraft in which the BFE is installed. 8. Interchange of BFE To properly maintain Boeing's production flow and to preserve Boeing's delivery commitments, Boeing reserves the right, if necessary, due to equipment shortages or failures, to interchange new items of BFE acquired from or for Customer with new items of the same part numbers acquired from or for other customers of Boeing. Used BFE acquired from Customer or from other customers of Boeing will not be interchanged. 9. Indemnification of Boeing. Customer hereby indemnifies and holds harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Customer but not employees of Boeing, or for loss of or damage to any property, including any Aircraft, arising out of or in any way connected with any nonconformance or defect in any BFE and whether or not arising in tort or occasioned by the negligence of Boeing. This indemnity will not apply with respect to any nonconformance or defect caused solely by Boeing's installation of the BFE. A-4 10. Patent Indemnity. Customer hereby indemnifies and holds harmless Boeing from and against all claims, suits, actions, liabilities, damages and costs arising out of any actual or alleged infringement of any patent or other intellectual property rights by BFE or arising out of the installation, sale or use of BFE by Boeing. _______________________________________. (i) ________________________________________________________. (ii) ________________________________________________________. 11. Definitions. For the purposes of the above indemnities, the term "Boeing" includes The Boeing Company, its divisions, subsidiaries and affiliates, the assignees of each, and their directors, officers, employees and agents. A-5 EXHIBIT B to AIRCRAFT GENERAL TERMS AGREEMENT AGTA-HWI between THE BOEING COMPANY and Hawaiian Airlines, Inc. CUSTOMER SUPPORT DOCUMENT This document contains: Part 1: Maintenance and Flight Training Programs; Operations Engineering Support Part 2: Field Services and Engineering Support Services Part 3: Technical Information and Materials Part 4: Alleviation or Cessation of Performance Part 5: Protection of Proprietary Information and Proprietary Materials B CUSTOMER SUPPORT DOCUMENT PART 1: BOEING MAINTENANCE AND FLIGHT TRAINING PROGRAMS; OPERATIONS ENGINEERING SUPPORT 1. Boeing Training Programs. 1.1 Boeing will provide maintenance training and flight training programs to support the introduction of a specific model of aircraft into service. The training programs will consist of general and specialized courses and will be described in a Supplemental Exhibit to the applicable purchase agreement. __________________________________. 1.2 Boeing will conduct all training at Boeing's primary training facility for the model of aircraft purchased unless otherwise mutually agreed. 1.3 All training will be presented in the English language. If translation is required, Customer will provide interpreters. 1.4 Customer will be responsible for all expenses of Customer's personnel. Boeing will transport Customer's personnel between their local lodging and Boeing's training facility. 2. Training Planning Conferences. Customer and Boeing will conduct planning conferences at a mutually agreed time, approximately 12 months before the scheduled delivery month of the first aircraft of a model to define and schedule the maintenance and flight training programs. 3. Operations Engineering Support. 3.1 As long as an aircraft purchased by Customer from Boeing is operated by Customer in scheduled revenue service, Boeing will provide operations engineering support. Such support will include: 3.1.1 assistance with the analysis and preparation of performance data to be used in establishing operating practices and policies for Customer's operation of aircraft; 3.1.2 assistance with interpretation of the minimum equipment list, the definition of the configuration deviation list and the analysis of individual aircraft performance; B-1 3.1.3 assistance with solving operational problems associated with delivery and route-proving flights; 3.1.4 information regarding significant service items relating to aircraft performance or flight operations; and 3.1.5 if requested by Customer, Boeing will provide operations engineering support during an aircraft ferry flight. 4. Training at a Facility Other Than Boeing's. If requested by Customer, Boeing will conduct the classroom portions of the maintenance and flight training (except for the Performance Engineer training courses) at a mutually acceptable alternate training site, subject to the following conditions: 4.1 Customer will provide acceptable classroom space, simulators (as necessary for flight training) and training equipment as reasonably required by Boeing to present the courses; 4.2 Customer will pay Boeing's then-current per diem charge for each Boeing instructor for each day, or fraction thereof, that the instructor is away from their home location , including travel time; 4.3 Customer will reimburse Boeing for the actual costs of round-trip transportation, coach class (unless otherwise agreed by Customer), for Boeing's instructors and the shipping costs of training Materials between the primary training facility and the alternate training site; 4.4 Customer will be responsible for all taxes, fees, duties, licenses, permits and similar expenses incurred by Boeing and its employees as a result of Boeing's providing training at the alternate site or incurred as a result of Boeing providing revenue service training; and 4.5 Those portions of training that require the use of training devices not available at the alternate site will be conducted at Boeing's facility or at some other alternate site. 5. General Terms and Conditions. 5.1 Boeing flight instructor personnel will not be required to work more than 5 days per week, or more than 8 hours in any one 24-hour period, of which not more than 5 hours per 8-hour workday will be spent in actual flying. These foregoing restrictions will not apply to ferry assistance or revenue service training services, which will be governed by FAA rules and regulations. B-2 5.2 Normal Line Maintenance is defined as line maintenance that Boeing might reasonably be expected to furnish for flight crew training at Boeing's facility, and will include ground support and aircraft storage in the open, but will not include provision of spare parts. Boeing will provide Normal Line Maintenance services for any aircraft while the aircraft is used for flight crew training at Boeing's facility in accordance with the Boeing Maintenance Plan (Boeing document D6-82076) and the Repair Station Operation and Inspection Manual (Boeing document D6-25470). Customer will provide such services if flight crew training is conducted elsewhere. Regardless of the location of such training, Customer will be responsible for providing all maintenance items (other than those included in Normal Line Maintenance) required during the training, including, but not limited to, fuel, oil, landing fees and spare parts. 5.3 If the training is based at Boeing's facility, and the aircraft is damaged during such training, Boeing will make all necessary repairs to the aircraft as promptly as possible. Customer will pay Boeing's reasonable charge, including the price of parts and materials, for making the repairs. If Boeing's estimated labor charge for the repair exceeds $25,000, Boeing and Customer will enter into an agreement for additional services before beginning the repair work. 5.4 If the flight training is based at Boeing's facility, several airports in surrounding states may be used, at Boeing's option. Unless otherwise agreed in the flight training planning conference, it will be Customer's responsibility to make arrangements for the use of such airports. 5.5 If Boeing agrees to make arrangements on behalf of Customer for the use of airports for flight training, Boeing will pay on Customer's behalf any landing fees charged by any airport used in conjunction with the flight training. At least 30 days before flight training, Customer will provide Boeing an open purchase order against which Boeing will invoice Customer for any landing fees Boeing paid on Customer's behalf. The invoice will be submitted to Customer approximately 60 days after flight training is completed, when all landing fee charges have been received and verified. Customer will pay the amount of such invoice to Boeing within 30 days of the date of the invoice. 5.6 If requested by Boeing, and agreed by Customer, in order to provide the flight training or ferry flight assistance, Customer will make available to Boeing an aircraft after delivery to familiarize Boeing instructor or ferry flight crew personnel with such aircraft. If flight of the aircraft is required for any Boeing instructor or ferry flight crew member to maintain an FAA license for flight proficiency or landing currency, Boeing will be responsible for the costs of fuel, oil, landing fees and spare parts attributable to that portion of the flight. 5.7 If any part of the training described in paragraph 1.1 of this Exhibit is not used by Customer within 12 months after the delivery of the last aircraft under the relevant purchase agreement, Boeing will not be obligated to provide such training. B-3 CUSTOMER SUPPORT DOCUMENT PART 2: FIELD AND ENGINEERING SUPPORT SERVICES 1. Field Service Representation. Boeing will furnish field service representation to advise Customer with respect to the maintenance and operation of an aircraft (Field Service Representatives). 1.1 Field Service representation will be available at Customer's main maintenance or engineering facility beginning no later than one week before the scheduled delivery month of the first aircraft and ending 12 months after delivery of the last aircraft covered by a specific purchase agreement. 1.2 Customer will provide, at no charge to Boeing, suitable furnished office space and office equipment at the location where Boeing is providing Field Service Representatives. As reasonably required, Customer will assist each Field Service Representative with visas, work permits, customs, mail handling, identification passes and formal introduction to local airport authorities. 1.3 Boeing Field Service Representatives are assigned to various airports around the world. Whenever Customer's aircraft are operating through any such airport, the services of Boeing's Field Service Representatives are available to Customer. 2. Engineering Support Services. Boeing will, if requested by Customer, provide technical advisory assistance __________________________________ for any aircraft and Boeing Product (as defined in Part I of Exhibit C). _____________________________________________________. Engineering Support Services, provided from the Seattle area or at a base designated by Customer as appropriate, will include: 2.1 Operational Problem Support. If Customer experiences operational problems with an aircraft, Boeing will analyze the information provided by Customer to determine the probable nature and cause of the problem and to suggest possible solutions. 2.2 Schedule Reliability Support. If Customer is not satisfied with the schedule reliability of a specific model of aircraft, Boeing will analyze information provided by Customer to determine the nature and cause of the problem and to suggest possible solutions. B2-1 2.3 Maintenance Cost Reduction Support. If Customer is concerned that actual maintenance costs of a specific model of aircraft are excessive, Boeing will analyze information provided by Customer to determine the nature and cause of the problem and to suggest possible solutions. 2.4 Aircraft Structural Repair Support. If Customer is designing structural repairs and desires Boeing's support, Boeing will analyze and comment on Customer's engineering releases relating to structural repairs not covered by Boeing's Structural Repair Manual. 2.5 Aircraft Modification Support. If Customer is designing aircraft modifications and requests Boeing's support, Boeing will analyze and comment on Customer's engineering proposals for changes in, or replacement of, systems, parts, accessories or equipment manufactured to Boeing's detailed design. Boeing will not analyze or comment on any major structural change unless Customer's request for such analysis and comment includes complete detailed drawings, substantiating information (including any information required by applicable government agencies), all stress or other appropriate analyses, and a specific statement from Customer of the substance of the review and the response requested. 2.6 Facilities, Ground Equipment and Maintenance Planning Support. Boeing will, at Customer's request, _____________________________, evaluate Customer's technical facilities, tools and equipment for servicing and maintaining aircraft, to recommend changes where necessary and to assist in the formulation of an initial maintenance plan for the introduction of the aircraft into service. 2.7 Post-Delivery Service Support. Boeing will, at Customer's request, perform work on an aircraft after delivery but prior to the initial departure flight or upon the return of the aircraft to Boeing's facility prior to completion of that flight. In that event the following provisions will apply. 2.7.1 Boeing may rely upon the commitment authority of the Customer's personnel requesting the work. 2.7.2 As title and risk of loss has passed to Customer, the insurance provisions of Article 8.2 of the AGTA apply. 2.7.3 The provisions of the Boeing Warranty in Part 2 of Exhibit C of this AGTA apply. 2.7.4 Customer will pay Boeing for requested work not covered by the Boeing Warranty, if any. B2-2 2.7.5 The DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11 of Part 2 of Exhibit C of this AGTA apply. 2.8 Additional Services. Boeing may, at Customer's request, provide additional services for an aircraft after delivery, which may include, but not be limited to, retrofit kit changes (kits and/or information), training, flight services, maintenance and repair of aircraft. Such additional services will be subject to a mutually acceptable price, schedule and scope of work. The DISCLAIMER AND RELEASE and the EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions in Article 11 of Part 2 of Exhibit C of this AGTA and the insurance provisions in Article 8.2 of this AGTA will apply to any such work. Title to and risk of loss of any such aircraft will always remain with Customer. B2-3 CUSTOMER SUPPORT DOCUMENT PART 3: TECHNICAL INFORMATION AND MATERIALS 1. General. Materials are defined as any and all items that are created by Boeing or a third party, which are provided directly or indirectly from Boeing and serve primarily to contain, convey or embody information. Materials may include either tangible embodiments (for example, documents or drawings), or intangible embodiments (for example, software and other electronic forms) of information but excludes Aircraft Software. Aircraft Software is defined as software that is installed on and used in the operation of the aircraft. Boeing will furnish to Customer certain Materials to support the maintenance and operation of the aircraft at no additional charge to Customer, except as otherwise provided herein. Such Materials will, if applicable, be prepared generally in accordance with Air Transport Association of America (ATA) Specification No. 100, entitled "Specification for Manufacturers' Technical Data". Materials will be in English and in the units of measure used by Boeing to manufacture an aircraft. Digitally-produced Materials will, if applicable, be prepared generally in accordance with ATA Specification No. 2100, dated January 1994, "Digital Data Standards for Aircraft Support." 2. Materials Planning Conferences. Customer and Boeing will conduct planning conferences approximately 12 months before the scheduled delivery month of the first aircraft of a model in order to mutually determine the proper format and quantity of Materials to be furnished to Customer in support of the aircraft. When available, Customer may select one Boeing digital format as the delivery medium. Should a Boeing digital format not be chosen, Customer may select ___________________________, a reasonable quantity of printed and 16mm microfilm formats, with the exception of the Illustrated Parts Catalog, which will be provided in one selected format only. 3. Information and Materials - Incremental Increase. Until one year after the month of delivery of the last aircraft covered by a specific purchase agreement, Customer may annually request in writing a reasonable increase in the quantity of Materials with the exception of microfilm master copies, digital formats, and others for which a specified number of copies are provided. Boeing will provide the additional quantity at no additional charge beginning with the next normal revision cycle. Customer may request a decrease in revision quantities at any time. B3-1 4. Advance Representative Copies. All advance representative copies of Materials will be selected by Boeing from available sources. Such advance copies will be for advance planning purposes only. 5. Customized Materials. All customized Materials will reflect the configuration of each aircraft as delivered. 6. Revisions. 6.1 Revision Service. Boeing will provide revisions free of charge to certain Materials to be identified in the planning conference described in paragraph 2 above, conducted for a specific model of aircraft, reflecting changes developed by Boeing, as long as Customer operates an aircraft of that model. 6.2 Revisions Based on Boeing Service Bulletin Incorporation. If Boeing receives written notice that Customer intends to incorporate, or has incorporated, any Boeing service bulletin in an aircraft, Boeing will at no charge issue revisions to Materials with revision service reflecting the effects of such incorporation into such aircraft. 7. Computer Software Documentation for Boeing Manufactured Airborne Components and Equipment. Boeing will provide to Customer a Computer Software Index containing a listing of (i) all programmed airborne avionics components and equipment manufactured by Boeing or a Boeing subsidiary, designed and developed in accordance with Radio Technical Commission for Aeronautics Document No. RTCA/DO-178 dated January 1982, No. RTCA/DO-178A dated March 1985, or later as available, and installed by Boeing in aircraft covered by the applicable purchase agreement and (ii) specific software documents (Software Documentation) available to Customer from Boeing for the listed components and equipment. Two copies of the Computer Software Index will be furnished to Customer with the first aircraft of a model. Revisions to the Computer Software Index applicable to such model of aircraft will be issued to Customer as revisions are developed by Boeing for so long as Customer operates the aircraft. B3-2 Software Documentation will be provided to Customer upon written request. The charge to Customer for Software Documentation will be Boeing's price to reproduce the Software Documentation requested. Software Documentation will be prepared generally in accordance with ATA Specification No. 102 revised April 20, 1983, "Specification for Computer Software Manual" but Software Documentation will not include, and Boeing will not be obligated to provide, any code (including, but not limited to, original source code, assembled source code, or object code) on computer sensible media. 8. Supplier Technical Data. 8.1 For supplier-manufactured programmed airborne avionics components and equipment classified as Seller Furnished Equipment (SFE) or Seller Purchased Equipment (SPE) or Buyer Designated Equipment (BDE) which contain computer software designed and developed in accordance with Radio Technical Commission for Aeronautics Document No. RTCA/DO-178 dated January 1982, No. RTCA/DO-178A dated March 1985, or later as available, Boeing will request that each supplier of the components and equipment make software documentation available to Customer in a manner similar to that described in Article 7 above. 8.2 The provisions of this Article will not be applicable to items of BFE. 8.3 Boeing will furnish to Customer a document identifying the terms and conditions of the product support agreements between Boeing and its suppliers requiring the suppliers to fulfill Customer's requirements for information and services in support of the specific model of aircraft. 9. Buyer Furnished Equipment Data. Boeing will incorporate BFE information into the customized Materials providing Customer makes the information available to Boeing at least nine months prior to the scheduled delivery month of Customer's first aircraft of a specific model. Customer agrees to furnish the information in Boeing standard digital format if Materials are to be delivered in Boeing standard digital format. 10. Materials Shipping Charges. Boeing will pay the reasonable transportation costs of the Materials. Customer is responsible for any customs clearance charges, duties, and taxes. B3-3 11. Customer's Shipping Address. The Materials furnished to Customer hereunder are to be sent to: Hawaiian Airlines, Inc. 391 Aokea Street Honolulu, Hawaii 96819 Attention: Vice President - Maintenance Customer will promptly notify Boeing of any change to the address. B3-4 CUSTOMER SUPPORT DOCUMENT PART 4: ALLEVIATION OR CESSATION OF PERFORMANCE Boeing will not be required to provide any Materials, services, training or other things at a facility designated by Customer if any of the following conditions exist: 1. a labor stoppage or dispute in progress involving Customer; 2. wars or warlike operations, riots or insurrections in the country where the facility is located; 3. any condition at the facility which, in the reasonable opinion of Boeing, is detrimental to the general health, welfare or safety of its personnel or their families; 4. the United States Government refuses permission to Boeing personnel or their families to enter into the country where the facility is located, or recommends that Boeing personnel or their families leave the country; or 5. the United States Government refuses permission to Boeing to deliver Materials, services, training or other things to the country where the facility is located. After the location of Boeing personnel at the facility, Boeing further reserves the right, upon the occurrence of any of such events, to immediately and without prior notice to Customer relocate its personnel and their families. In the event of an alleviation or cessation of performance under this Part 4, Boeing and Customer shall discuss alternatives that would allow for continuation of Boeing's support under this Exhibit B. B4-1 CUSTOMER SUPPORT DOCUMENT PART 5: PROTECTION OF PROPRIETARY INFORMATION AND PROPRIETARY MATERIALS 1. General. All Materials provided by Boeing to Customer and not covered by a Boeing CSGTA or other agreement between Boeing and Customer defining Customer's right to use and disclose the Materials and included information will be covered by, and subject to the terms of this AGTA. Title to all Materials containing, conveying or embodying confidential, proprietary or trade secret information (Proprietary Information) belonging to Boeing or a third party (Proprietary Materials), will at all times remain with Boeing or such third party. Customer will treat all Proprietary Materials and all Proprietary Information in confidence and use and disclose the same only as specifically authorized in this AGTA. 2. License Grant. ____________________________, Boeing grants to Customer a worldwide, non-exclusive, non-transferable license to use and disclose Proprietary Materials in accordance with the terms and conditions of this AGTA. Customer is authorized to make copies of Materials (except for Materials bearing the copyright legend of a third party), and all copies of Proprietary Materials will belong to Boeing and be treated as Proprietary Materials under this AGTA. Customer will preserve all proprietary legends, and all copyright notices on all Materials and insure the inclusion of those legends and notices on all copies. 3. Use of Proprietary Materials and Proprietary Information. Customer is authorized to use Proprietary Materials and Proprietary Information for the purpose of: (a) operation, maintenance, repair, or modification of Customer's aircraft for which the Proprietary Materials and Proprietary Information have been specified by Boeing and (b) development and manufacture of training devices and maintenance tools for use by Customer. 4. Providing of Proprietary Materials to Contractors. Customer is authorized to provide Proprietary Materials to Customer's contractors for the sole purpose of maintenance, repair, or modification of Customer's aircraft for which the Proprietary Materials have been specified by Boeing. In addition, Customer may provide Proprietary Materials to Customer's contractors for the sole purpose of developing and manufacturing training devices and maintenance tools for Customer's use. Before providing Proprietary Materials to its contractor, Customer will first obtain a written agreement from the contractor by which the contractor agrees (a) to use the Proprietary Materials only on behalf of Customer, (b) to be bound by all of the restrictions and limitations of this Part 5, and (c) that Boeing is a third party beneficiary under the written agreement. Customer agrees to provide copies of all such written agreements to Boeing upon request and be liable to Boeing for any breach of those agreements by a contractor. A sample agreement acceptable to Boeing is attached as Appendix VII. B5-1 5. Providing of Proprietary Materials and Proprietary Information to Regulatory Agencies. When and to the extent required by a government regulatory agency having jurisdiction over Customer or an aircraft, Customer is authorized to provide Proprietary Materials and to disclose Proprietary Information to the agency for use in connection with Customer's operation, maintenance, repair, or modification of such aircraft. Customer agrees to take all reasonable steps to prevent the agency from making any distribution, disclosure, or additional use of the Proprietary Materials and Proprietary Information provided or disclosed. Customer further agrees to notify Boeing immediately upon learning of any (a) distribution, disclosure, or additional use by the agency, (b) request to the agency for distribution, disclosure, or additional use, or (c) intention on the part of the agency to distribute, disclose, or make additional use of Proprietary Materials or Proprietary Information. B5-2 EXHIBIT C to AIRCRAFT GENERAL TERMS AGREEMENT AGTA-HWI between THE BOEING COMPANY and Hawaiian Airlines, Inc. PRODUCT ASSURANCE DOCUMENT This document contains: Part 1: Exhibit C Definitions Part 2: Boeing Warranty Part 3: Boeing Service Life Policy Part 4: Supplier Warranty Commitment Part 5: Boeing Interface Commitment Part 6: Boeing Indemnities against Patent and Copyright Infringement C PRODUCT ASSURANCE DOCUMENT PART 1: EXHIBIT C DEFINITIONS Authorized Agent - Agent appointed by Customer to perform corrections and to administer warranties (see Appendix VI to the AGTA for a form acceptable to Boeing). Average Direct Hourly Labor Rate - the average hourly rate (excluding all fringe benefits, premium-time allowances, social charges, business taxes and the like) paid by Customer to its Direct Labor employees. Boeing Product - any system, accessory, equipment, part or Aircraft Software that is manufactured by Boeing or manufactured to Boeing's detailed design with Boeing's authorization. Correct - to repair, modify, provide modification kits or replace with a new product. Correction - a repair, a modification, a modification kit or replacement with a new product. Corrected Boeing Product - a Boeing Product which is free of defect as a result of a Correction. Direct Labor - Labor spent by Customer's direct labor employees to remove, disassemble, modify, repair, inspect and bench test a defective Boeing Product, and to reassemble, reinstall a Corrected Boeing Product and perform final inspection. Direct Materials - Items such as parts, gaskets, grease, sealant and adhesives, installed or consumed in performing a Correction, excluding allowances for administration, overhead, taxes, customs duties and the like. Source Control Drawing (SCD) - a Boeing document defining specifications for certain Supplier Products. Supplier - the manufacturer of a Supplier Product. Supplier Product - any system, accessory, equipment, part or Aircraft Software that is not manufactured to Boeing's detailed design. This includes but is not limited to parts manufactured to a SCD, all standards, and other parts obtained from non-Boeing sources. C1-1 PRODUCT ASSURANCE DOCUMENT PART 2: BOEING WARRANTY 1. Applicability. This warranty applies to all Boeing Products. Warranties applicable to Supplier Products are in Part 4. Warranties applicable to engines will be provided by Supplemental Exhibits to individual purchase agreements. 2. Warranty. 2.1 Coverage. Boeing warrants that at the time of delivery: (i) the aircraft will conform to the Detail Specification except for portions stated to be estimates, approximations or design objectives; (ii) all Boeing Products will be free from defects in material, process of manufacture and workmanship, including the workmanship utilized to install Supplier Products, engines and BFE, and; (iii) all Boeing Products will be free from defects in design, including selection of materials and the process of manufacture, in view of the state of the art at the time of design 2.2 Exceptions. The following conditions do not constitute a defect under this warranty: (i) conditions resulting from normal wear and tear; (ii) conditions resulting from Customer's misuse, abuse neglect or omissions; and (iii) conditions resulting from failure to properly service and maintain a Boeing Product . 3. Warranty Periods. 3.1 Warranty. The warranty period begins on the date of aircraft or Boeing Product delivery and ends: (i) after 48 months for Boeing aircraft models 777-200, -300 or 737-600, -700, -800, or new aircraft models designed and manufactured with similar, new technology; or, (ii) after 36 months for any other Boeing aircraft model. C2-1 3.2 Warranty on Corrected Boeing Products. The warranty period applicable to a Corrected Boeing Product, including the workmanship to Correct and install, resulting from a defect in material or workmanship is the remainder of the initial warranty period for the defective Boeing Product it replaced. The warranty period for a Corrected Boeing Product resulting from a defect in design is 18 months or the remainder of the initial warranty period, whichever is longer. The 18 month period begins on the date of delivery of the Corrected Boeing Product or date of delivery of the kit or kits furnished to Correct the Boeing Product. 3.3 Survival of Warranties. All warranty periods are stated above. The Performance Guarantees will not survive delivery of the aircraft. 4. Remedies. 4.1 Correction Options. Customer may, at its option, either perform a Correction of a defective Boeing Product or return the Boeing Product to Boeing for Correction. 4.2 Warranty Labor Rate. If Customer or its Authorized Agent Corrects a defective Boeing Product, Boeing will reimburse Customer for Direct Labor Hours at Customer's established Warranty Labor Rate. Customer's established Warranty Labor Rate will be the greater of the standard labor rate or 150% of Customer's Average Direct Hourly Labor Rate. The standard labor rate paid by Boeing to its customers is established and published annually. Prior to or concurrently with submittal of Customer's first claim for Direct Labor reimbursement, Customer may notify Boeing of Customer's then-current Average Direct Hourly Labor Rate, and thereafter notify Boeing of any material change in such rate. Boeing will require information from Customer to substantiate such rates. 4.3 Warranty Inspections. In addition to the remedies to Correct defects in Boeing Products, Boeing will reimburse Customer for the cost of Direct Labor to perform certain inspections of the aircraft to determine the occurrence of a condition Boeing has identified as a covered defect, provided: 4.3.1 the inspections _______________________________________ are recommended by a service bulletin or service letter issued by Boeing during the warranty period; and 4.3.2 such reimbursement will not apply to any inspections performed after a Correction is available to Customer. 4.4 Credit Memorandum Reimbursement. Boeing will make all reimbursements by credit memoranda which may be applied toward the purchase of Boeing goods and services. C2-2 4.5 Maximum Reimbursement. Unless previously agreed, the maximum reimbursement for Direct Labor and Direct Materials used to Correct a defective Boeing Product will not exceed 65% of Boeing's then-current sales price for a new replacement Boeing Product. If the estimate to correct a defective Boeing Product exceeds 65% of the replacement price of a new part, Boeing will either provide a credit to Customer at 65% of the replacement price of a new part or a new replacement part, at Customer's option. 5. Discovery and Notice. 5.1 For a claim to be valid: (i) the defect must be discovered during the warranty period; and (ii) Boeing Warranty must receive written notice of the discovery no later than 90 days after expiration of the warranty period. The notice must include sufficient information to substantiate the claim. 5.2 Receipt of Customer's or its Authorized Agent's notice of the discovery of a defect secures Customer's rights to remedies under this Exhibit C, even though a Correction is performed after the expiration of the warranty period. 5.3 Once Customer has given valid notice of the discovery of a defect, a claim should be submitted as soon as practicable after performance of the Correction. 5.4 Boeing may release service bulletins or service letters advising Customer of the availability of certain warranty remedies. When such advice is provided, Customer will be deemed to have fulfilled the requirements for discovery of the defect and submittal of notice under this Exhibit C as of the date specified in the service bulletin or service letter. 6. Filing a Claim. 6.1 Authority to File. Claims may be filed by Customer or its Authorized Agent. Appointment of an Authorized Agent will only be effective upon Boeing's receipt of the Authorized Agent's express written agreement, in a form satisfactory to Boeing, to be bound by and to comply with all applicable terms and conditions of this Aircraft General Terms Agreement. 6.2 Claim Information. 6.2.1 Claimant is responsible for providing sufficient information to substantiate Customer's rights to remedies under this Exhibit C. Boeing may reject a claim for lack of sufficient information. At a minimum, such information must include: C2-3 (i) identity of claimant; (ii) serial or block number of the aircraft on which the defective Boeing Product was delivered; (iii) part number and nomenclature of the defective Boeing Product; (iv) purchase order number and date of delivery of the defective spare part, as applicable (v) description and substantiation of the defect; (vi) date the defect was discovered; (vii) date the Correction was completed; (viii) the total flight hours or cycles accrued; (ix) an itemized account of direct labor hours expended in performing the Correction; and (x) an itemized account of any direct materials incorporated in the Correction. 6.2.2 Additional information may be required based on the nature of the defect and the remedies requested. 6.3 Boeing Claim Processing. 6.3.1 Any claim for a Boeing Product returned by Customer or its Authorized Agent to Boeing for Correction must accompany the Boeing Product. Any claim not associated with the return of a Boeing Product must be signed and submitted in writing directly by Customer or its Authorized Agent to Boeing Warranty. 6.3.2 Boeing will promptly review the claim and will give diligent efforts to give notification of claim approval or rejection within 30 days of receipt of such claim. If the claim is rejected, Boeing will provide a written explanation and reasonable substantiation of such rejection. 7. Corrections Performed by Customer or Its Authorized Agent. 7.1 Facilities Requirements. Provided Customer, its Authorized Agent or its third party contractor, as appropriate, are certified by the appropriate Civil Aviation Authority or Federal Aviation Authority, Customer or its Authorized Agent may, at its option, Correct defective Boeing Products at its facilities, or may subcontract Corrections to a third party contractor. C2-4 7.2 Technical Requirements. All Corrections done by Customer, its Authorized Agent or a third party contractor must be performed in accordance with Boeing's applicable service manuals, bulletins or other written instructions, using parts and materials furnished or approved by Boeing. 7.3 Reimbursement. 7.3.1 Boeing will reimburse Customer's reasonable costs of Direct Materials and Direct Labor (excluding time expended for overhaul) at Customer's Warranty Labor Rate to Correct a defective Boeing Product. Claims for reimbursement must contain sufficient information to substantiate Direct Labor hours expended and Direct Materials consumed. Customer or its Authorized Agent may be required to produce invoices for materials. 7.3.2 Reimbursement for Direct Labor hours to perform Corrections stated in a service bulletin will be based on the labor estimates in the service bulletin. 7.3.3 Boeing will reimburse Customer's freight charges associated with a Correction of a defect on a Boeing Product performed by its Authorized Agent or a third party contractor. 7.4 Disposition of Defective Boeing Products Beyond Economical Repair. 7.4.1 A defective Boeing Product found to be beyond economical repair (see Para. 4.5 Maximum Reimbursement) will be retained for a period of 60 days from the date Boeing receives Customer's claim. During the 60 day period, Boeing may request return of such Boeing Products for inspection and confirmation of a defect. 7.4.2 After the 60 day period, a defective Boeing Product with a value of U.S. $2000 or less may be scrapped without notification to Boeing. If such Boeing Product has a value greater than U.S. $2000, Customer must obtain confirmation of unrepairability by Boeing's on-site Customer Services Representative prior to scrapping. Confirmation may be in the form of the Representative's signature on Customer's claim or through direct communication between the Representative and Boeing Warranty. 8. Corrections Performed by Boeing. 8.1 Freight Charges. Customer or its Authorized Agent will pay shipping charges to return a Boeing Product to Boeing. Boeing will reimburse Customer or its Authorized Agent for the charge for any item determined to be defective under this Aircraft General Terms Agreement. Boeing will pay shipping charges to return the Corrected Boeing Product. C2-5 8.2 Customer Instructions. The documentation shipped with the returned defective Boeing Product may include specific technical instructions for additional work to be performed on the Boeing Product. The absence of such instructions will evidence Customer's authorization for Boeing to perform all necessary Corrections and work required to return the Boeing Product to a serviceable condition. 8.3 Correction Time Objectives. 8.3.1 Boeing's objective for making Corrections is 10 working days for avionics and electronic Boeing Products, 30 working days for Corrections of other Boeing Products performed at Boeing's facilities, and 40 working days for Corrections of other Boeing Products performed at a Boeing subcontractor's facilities. The objectives are measured from the date Boeing receives the defective Boeing Product and a valid claim to the date Boeing ships the Correction. 8.3.2 If Customer has a critical parts shortage because Boeing has exceeded a Correction time objective and Customer has procured spare Boeing Products for the defective Boeing Product in quantities shown in Boeing's Recommended Spare Parts List (RSPL) or Spares Planning and Requirements Evaluation Model (M-SPARE), then Boeing will either expedite the Correction or provide an interchangeable Boeing Product on a no charge loan or lease basis until the Corrected Boeing Product is returned. 8.4 Title Transfer and Risk of Loss. 8.4.1 Title to and risk of loss of any Boeing Product returned to Boeing will at all times remain with Customer or any other title holder of such Boeing Product. While Boeing has possession of the returned Boeing Product, Boeing will have only such liabilities as a bailee for mutual benefit would have, but will not be liable for loss of use. 8.4.2 If a Correction requires shipment of a new Boeing Product, then at the time Boeing ships the new Boeing Product, title to and risk of loss for the returned Boeing Product will pass to Boeing, and title to and risk of loss for the new Boeing Product will pass to Customer. 9. Returning an Aircraft. 9.1 Conditions. An aircraft may be returned to Boeing's facilities for Correction only if: (i) Boeing and Customer agree a covered defect exists; (ii) Customer lacks access to adequate facilities, equipment or qualified personnel to perform the Correction; and C2-6 (iii) it is not practical, in Boeing's estimation, to dispatch Boeing personnel to perform the Correction at a remote site. 9.2 Correction Costs. Boeing will perform the Correction at no charge to Customer. Subject to the conditions of Article 10.1, Boeing will reimburse Customer for the costs of fuel, oil and landing fees incurred in ferrying the aircraft to Boeing and back to Customer's facilities. Customer will minimize the length of both flights. 9.3 Separate Agreement. Boeing and Customer will enter into a separate agreement covering return of the aircraft and performance of the Correction. Authorization by Customer for Boeing to perform additional work that is not part of the Correction must be received within 24 hours of Boeing's request. If such authorization is not received within 24 hours, Customer will be invoiced for work performed by Boeing that is not part of the Correction. 10. Insurance. The provisions of Article 8.2 "Insurance", of this AGTA, will apply to any work performed by Boeing in accordance with Customer's specific technical instructions, to the extent any legal liability of Boeing is based upon the content of such instructions. 11. Disclaimer and Release; Exclusion of Liabilities. 11.1 DISCLAIMER AND RELEASE. THE WARRANTIES, OBLIGATIONS AND LIABILITIES OF BOEING AND THE REMEDIES OF CUSTOMER IN THIS EXHIBIT C ARE EXCLUSIVE AND IN SUBSTITUTION FOR, AND CUSTOMER HEREBY WAIVES, RELEASES AND RENOUNCES, ALL OTHER WARRANTIES, OBLIGATIONS AND LIABILITIES OF BOEING AND ALL OTHER RIGHTS, CLAIMS AND REMEDIES OF CUSTOMER AGAINST BOEING, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT, MATERIALS, TRAINING, SERVICES OR OTHER THING PROVIDED UNDER THIS AGTA AND THE APPLICABLE PURCHASE AGREEMENT, INCLUDING, BUT NOT LIMITED TO: (A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS; (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (C) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OF BOEING; AND C2-7 (D) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY AIRCRAFT. 11.2 EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES. BOEING WILL HAVE NO OBLIGATION OR LIABILITY, WHETHER ARISING IN CONTRACT (INCLUDING WARRANTY), TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OF BOEING, OR OTHERWISE, FOR LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT, MATERIALS, TRAINING, SERVICES OR OTHER THING PROVIDED UNDER THIS AGTA AND THE APPLICABLE PURCHASE AGREEMENT. 11.3 Definitions. For the purpose of this Article, "BOEING" or "Boeing" is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each, and their respective directors, officers, employees and agents. C2-8 PRODUCT ASSURANCE DOCUMENT PART 3: BOEING SERVICE LIFE POLICY 1. Definitions. SLP Component - any of the primary structural elements (excluding industry standard parts) of the landing gear, wing, fuselage, vertical or horizontal stabilizer listed in the applicable purchase agreement for a specific model of aircraft that is installed in the aircraft at time of delivery or is purchased from Boeing by Customer as a spare part. The detailed SLP Component listing will be in Supplemental Exhibit SLP1 to each Purchase Agreement. 2. Service Life Policy. 2.1 SLP Commitment. If a failure or defect is discovered in a SLP Component within the time periods specified in Article 2.2 below, Boeing will, at a price calculated pursuant to Article 3 below, Correct the SLP Component. 2.2 SLP Policy Periods. 2.2.1 The policy period for SLP Components initially installed on an aircraft is 12 years after the date of delivery of the aircraft. 2.2.2 The policy period for SLP Components purchased from Boeing by Customer as spare parts is 12 years from delivery of such SLP Component or 12 years from the date of delivery of the last aircraft produced by Boeing of a specific model, whichever first expires. 3. Price. The price that Customer will pay for the Correction of a defective or failed SLP Component will be calculated pursuant to the following formula: P = CT 144 where: P = price to Customer for the replacement part C = SLP Component sales price at time of Correction C3-1 T = total age in months of the defective or failed SLP Component from the date of delivery to Customer to the date of discovery of such condition. 4. Conditions. Boeing's obligations under this Policy are conditioned upon the following: 4.1 Customer must notify Boeing in writing of the defect or failure within three months after it is discovered. 4.2 Customer must provide reasonable evidence that the claimed defect or failure is covered by this Policy and if requested by Boeing, that such defect or failure was not the result of (i) a defect or failure in a component not covered by this Policy, (ii) an extrinsic force, (iii) an act or omission of Customer, or (iv) operation or maintenance contrary to applicable governmental regulations or Boeing's instructions. 4.3 If return of a defective or failed SLP Component is practicable and requested by Boeing, Customer will return such SLP Component to Boeing at Boeing's expense. 4.4 Customer's rights and remedies under this Policy are limited to the receipt of a Correction at prices calculated pursuant to Article 3 above. 5. Disclaimer and Release; Exclusion of Liabilities. This Part 3 and the rights and remedies of Customer and the obligations of Boeing are subject to the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions of Article 11 of Part 2 of this Exhibit C. C3-2 PRODUCT ASSURANCE DOCUMENT PART 4: SUPPLIER WARRANTY COMMITMENT 1. Supplier Warranties and Supplier Patent and Copyright Indemnities. Boeing will use diligent efforts to obtain warranties and indemnities against patent and copyright infringement enforceable by Customer from Suppliers of Supplier Products (except for BFE and engines) installed on the aircraft at the time of delivery that were selected and purchased by Boeing, but not manufactured to Boeing's detailed design. Boeing will furnish copies of the warranties and patent and copyright indemnities to Customer contained in Supplier Product Support and Product Assurance Agreements, _____________________________ prior to the scheduled delivery month of the first aircraft under the initial purchase agreement to the AGTA. 2. Boeing Assistance in Administration of Supplier Warranties. Customer will be responsible for submitting warranty claims directly to Suppliers; however, if Customer experiences problems enforcing any Supplier warranty obtained by Boeing for Customer, Boeing will promptly conduct an investigation of the problem and assist Customer in the resolution of those claims. 3. Boeing Support in Event of Supplier Default. 3.1 If the Supplier defaults in the performance of a material obligation under its warranty, and Customer provides evidence to Boeing that a default has occurred, then Boeing will furnish the equivalent warranty terms as provided by the defaulting Supplier. 3.2 At Boeing's request, Customer will assign to Boeing, and Boeing will be subrogated to, its rights against the Supplier provided by the Supplier warranty. C4-1 PRODUCT ASSURANCE DOCUMENT PART 5: BOEING INTERFACE COMMITMENT 1. Interface Problems. An Interface Problem is defined as a technical problem in the operation of an aircraft or its systems experienced by Customer, the cause of which is not readily identifiable by Customer but which Customer believes to be attributable to either the design characteristics of the aircraft or its systems or the workmanship used in the installation of Supplier Products. In the event Customer experiences an Interface Problem, Boeing will, in consultation with Customer and without additional charge to Customer, promptly conduct an investigation and analysis to determine the cause or causes of the Interface Problem. Boeing will promptly advise Customer at the conclusion of its investigation of Boeing's opinion as to the causes of the Interface Problem and Boeing's recommendation as to corrective action. 2. Boeing Responsibility. If Boeing determines that the Interface Problem is primarily attributable to the design or installation of any Boeing Product, Boeing will Correct the design or workmanship to the extent of any then-existing obligations of Boeing under the provisions of the applicable Boeing Warranty or Boeing Service Life Policy. 3. Supplier Responsibility. If Boeing determines that the Interface Problem is primarily attributable to the design or installation of a Supplier Product, Boeing will assist Customer in processing a warranty claim against the Supplier. 4. Joint Responsibility. If Boeing determines that the Interface Problem is partially attributable to the design or installation of a Boeing Product and partially to the design or installation of a Supplier Product, Boeing will seek a solution to the Interface Problem through the cooperative efforts of Boeing and the Supplier and will promptly advise Customer of the resulting corrective actions and recommendations. 5. General. Customer will, if requested by Boeing, assign to Boeing any of its rights against any supplier as Boeing may require to fulfill its obligations hereunder. C5-1 6. Disclaimer and Release; Exclusion of Liabilities. This Part 5 and the rights and remedies of Customer and the obligations of Boeing herein are subject to the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES provisions of Article 11 of Part 2 of this Exhibit C. C5-2 PRODUCT ASSURANCE DOCUMENT PART 6: BOEING INDEMNITIES AGAINST PATENT AND COPYRIGHT INFRINGEMENT 1. Indemnity Against Patent Infringement. Boeing will defend and indemnify Customer with respect to all claims, suits and liabilities arising out of any actual or alleged patent infringement through Customer's use, lease or resale of any aircraft or any Boeing Product installed on an aircraft at delivery. 2. Indemnity Against Copyright Infringement. Boeing hereby indemnifies and holds harmless Customer from and against all claims, suits, __________________________________ and liabilities arising out of any actual or alleged copyright infringement through Customer's use, lease or resale of any Boeing created Materials and Aircraft Software installed on an aircraft at delivery. 3. Exceptions, Limitations and Conditions. 3.1 Boeing's obligation to indemnify Customer for patent infringement will extend only to infringements in countries which, at the time of the infringement, were party to and fully bound by either (a) Article 27 of the Chicago Convention on International Civil Aviation of December 7, 1944, or (b) the International Convention for the Protection of Industrial Property (Paris Convention). 3.2 Boeing's obligation to indemnify Customer for copyright infringement is limited to infringements in countries which, at the time of the infringement, are members of The Berne Union and recognize computer software as a "work" under The Berne Convention. 3.3 The indemnities provided under this Part 6 will not apply to any (i) BFE, (ii) engines, (iii) Supplier Product (iv) Boeing Product used other than for its intended purpose, or (v) Aircraft Software not created by Boeing. 3.4 Customer must deliver written notice to Boeing (i) within ____ days after Customer first receives notice of any suit or other formal action against Customer and (ii) within ___ days after Customer first receives any other allegation or written claim of infringement covered by this Part 6. C6-1 3.5 At any time, Boeing will have the right at its option and expense to: (i) negotiate with any party claiming infringement, (ii) assume or control the defense of any infringement allegation, claim, suit or formal action, (iii) intervene in any infringement suit or formal action , and/or (iv) attempt to resolve any claim of infringement by replacing an allegedly infringing Boeing Product or Aircraft Software with a noninfringing equivalent. 3.6 Customer will promptly furnish to Boeing all information, records and assistance within Customer's possession or control which Boeing reasonably considers relevant or material to any alleged infringement covered by this Part 6. 3.7 Except as required by a final judgment entered against Customer by a court of competent jurisdiction from which no appeals can be or have been filed, Customer will obtain Boeing's written approval prior to paying, committing to pay, assuming any obligation or making any material concession relative to any infringement covered by these indemnities. 3.8 ___________________________________________________________. 3.9 Boeing will have no obligation or liability under this Part 6 for loss of use, revenue or profit, or for any other incidental or consequential damages. The obligations of Boeing and remedies of Customer in this Part 6 are exclusive and in substitution for, and Customer hereby waives, releases and renounces all other indemnities, obligations and liabilities of Boeing and all other rights, claims and remedies of Customer against Boeing, express or implied, arising by law or otherwise, with respect to any actual or alleged patent, copyright OR OTHER INTELLECTUAL PROPERTY infringement or the like by any aircraft, AIRCRAFT SOFTWARE, MATERIALS, TRAINING, SERVICES or other thing provided under this AGTA and the applicaBLE PURCHASE AGREEMENT. 3.10 For the purposes of this Part 6, "BOEING or Boeing" is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each and their respective directors, officers, employees and agents. C6-2 EXHIBIT D to AIRCRAFT GENERAL TERMS AGREEMENT AGTA-HWI between THE BOEING COMPANY and Hawaiian Airlines, Inc. ESCALATION ADJUSTMENT AIRFRAME AND OPTIONAL FEATURES (For Model 717-200, 737-600, 737-700, 737-800 and 737-900, the Airframe Price Includes the Engine Price at its basic thrust level.) D EXHIBIT D ESCALATION ADJUSTMENT 1. Formula. Airframe and Optional Features price adjustments (Airframe Price Adjustment) are used to allow prices to be stated in current year dollars at the signing of the applicable purchase agreement and to adjust the amount to be paid by Customer at delivery for the effects of economic fluctuation. The Airframe Price Adjustment will be determined at the time of aircraft delivery in accordance with the following formula: Pa = (P+B)(L + M) - P Where: Pa = Airframe Price Adjustment. (For Model 717-200, 737-600, 737-700, 737-800 and 737-900, the Airframe Price includes the Engine Price at its basic thrust level.) L =.65 x ECI ---- ECIb where ECIb is the base year index (as set forth in Table 1 of the applicable purchase agreement) M =.35 x ICI --- ICIb where ICIb is the base year index (as set forth in Table 1 of the applicable purchase agreement) P = Airframe Price plus Optional Features Price (as set forth in the applicable purchase agreement). B =0.005 x (N/12) x (P) where N is the calendar month and year of scheduled Aircraft delivery minus the calendar month and year of the Base Price Year, both as shown in Table 1 of the applicable purchase agreement. ECI is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics "Employment Cost Index for workers in aerospace manufacturing - Wages and Salaries" (ECI code 3721W), calculated by establishing a three-month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) using the values for the fifth, sixth and seventh months prior to the month of scheduled delivery of the applicable aircraft. As the Employment Cost Index values are only released on a quarterly basis, the value released for the month of March will be used for the months of January and February; the value for June used for April and May; the value for September used for July and August; and the value for December used for October and November. D-1 ICI is a value determined using the U.S. Department of Labor, Bureau of Labor Statistics "Producer Prices and Price Index Industrial Commodities Index ", calculated as a 3-month arithmetic average of the released monthly values (expressed as a decimal and rounded to the nearest tenth) using the values for the 5th, 6th and 7th months prior to the month of scheduled delivery of the applicable aircraft. As an example, for an aircraft scheduled to be delivered in the month of January, the months June, July and August of the preceding year will be utilized in determining the value of ECI and ICI. Note: i. In determining the values of L and M, all calculations and resulting values will be expressed as a decimal rounded to the nearest ten-thousandth. ii. .65 is the numeric ratio attributed to labor in the Airframe Price Adjustment formula. iii. .35 is the numeric ratio attributed to materials in the Airframe Price Adjustment formula. iv. The denominators (base year indices) are the actual average values reported by the U.S. Department of Labor, Bureau of Labor Statistics (base year June 1989 = 100). The applicable base year and corresponding denominator will be provided by Boeing in the applicable purchase agreement. v. If the calculated sum of L + M is less than 1.0000, then the value of the sum is adjusted to 1.0000. 2. Values to be Utilized in the Event of Unavailability. 2.1 If the Bureau of Labor Statistics substantially revises the methodology used for the determination of the values to be used to determine the ECI and ICI values (in contrast to benchmark adjustments or other corrections of previously released values), or for any reason has not released values needed to determine the applicable Airframe Price Adjustment, the parties will, prior to the delivery of any such aircraft, select a substitute from other Bureau of Labor Statistics data or similar data reported by non-governmental organizations. Such substitute will result in the same adjustment, insofar as possible, as would have been calculated utilizing the original values adjusted for fluctuation during the applicable time period. However, if within 24 months after delivery of the aircraft, the Bureau of Labor Statistics should resume releasing values for the months needed to determine the Airframe Price Adjustment, such values will be used to determine any increase or decrease in the Airframe Price Adjustment for the aircraft from that determined at the time of delivery of the aircraft. D-2 2.2 Notwithstanding Article 2.1 above, if prior to the scheduled delivery month of an aircraft the Bureau of Labor Statistics changes the base year for determination of the ECI and ICI values as defined above, such re-based values will be incorporated in the Airframe Price Adjustment calculation. 2.3 In the event escalation provisions are made non-enforceable or otherwise rendered void by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to equitably adjust the Purchase Price of any affected aircraft to reflect an allowance for increases or decreases in labor compensation and material costs occurring since February of the price base year shown in the applicable purchase agreement which is consistent with the applicable provisions of paragraph 1 of this Exhibit D. 2.4 If within 12 months of Aircraft delivery, the published Index values are revised due to an acknowledged error by the Bureau of Labor Statistics, the Airframe Price Adjustment will be re-calculated using the revised Index values (this does not include those values noted as preliminary by the Bureau of Labor Statistics). A Credit Memo or Supplemental Invoice will be issued for the Airframe Price Adjustment difference. Interest charges will not apply for the period of original invoice to issuance of Credit Memo or Supplemental Invoice. Note: i. The values released by the Bureau of Labor Statistics and available to Boeing 30 days prior to the scheduled delivery month of an aircraft will be used to determine the ECI and ICI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment for the aircraft invoice at the time of delivery. The values will be considered final and no Aircraft Price Adjustments will be made after Aircraft delivery for any subsequent changes in published Index values, subject always to paragraph 2.4 above. ii.The maximum number of digits to the right of the decimal after rounding utilized in any part of the Airframe Price Adjustment equation will be 4, where rounding of the fourth digit will be increased to the next highest digit when the 5th digit is equal to 5 or greater. D-3 SAMPLE Insurance Certificate ============================================================================== BROKER'S LETTERHEAD ============================================================================== [ date ] Certificate of Insurance ISSUED TO: The Boeing Company Post Office Box 3707 Mail Stop 13-57 Seattle, Washington 98124 Attn: Manager - Aviation Insurance for Vice President - Employee Benefits, Insurance and Taxes CC: Boeing Commercial Airplane Group P.O. Box 3707 Mail Stop 75-38 Seattle, Washington 98124-2207 U.S.A. Attn: Vice President - Contracts NAMED INSURED: Hawaiian Airlines We hereby certify that in our capacity as Brokers to the Named Insured, the following described insurance is in force on this date: Insurer Policy No. Participation - ------- ---------- ------------- POLICY PERIOD: From [date and time of inception of the Policy(ies)] to [date and time of expiration]. GEOGRAPHICAL LIMITS: Worldwide (however, as respects "Aircraft Hull War and Allied Perils" Insurance, as agreed by Boeing). App. I1 SAMPLE Insurance Certificate AIRCRAFT INSURED: All Boeing manufactured aircraft owned or operated by the Named Insured which are the subject of the following purchase agreement(s), entered into between The Boeing Company and _________________ (hereinafter "Aircraft"): Purchase Agreement No. ____ dated ______ Purchase Agreement No. ____ dated ______ COVERAGES: 1. Aircraft "all risks" Hull (Ground and Flight) 2. Aircraft Hull War and Allied Perils (as per LSW 555, or its successor wording) 3. Airline Liability Including, but not limited to, Bodily Injury, Property Damage, Aircraft Liability, Liability War Risks, Passenger Legal Liability, Premises/Operations Liability, Completed Operations/Products Liability, Baggage Legal Liability (checked and unchecked), Cargo Legal Liability, Contractual Liability and Personal Injury. The above-referenced Airline Liability insurance coverage is subject to War and Other Perils Exclusion Clause (AV48B) but all sections, other than section (b) are reinstated as per AV52C, or their successor endorsements. LIMITS OF LIABILITY: To the fullest extent of the Policy limits that the Named Insured carries from the time of delivery of the first Aircraft under the first Purchase Agreement listed under "Aircraft Insured" and thereafter at the inception of each policy period, but in any event no less than the following: Combined Single Limit Bodily Injury and Property Damage: U.S.$ any one occurrence each Aircraft (with aggregates as applicable). (717-200) US$300,000,000 (737-500/600) US$350,000,000 (737-300/700) US$400,000,000 (737-400) US$450,000,000 (737-800) US$500,000,000 (757-200) US$525,000,000 (757-300) US$550,000,000 (767-200) US$550,000,000 (767-300) US$700,000,000 (767-400ERX) US$750,000,000 (777-200X) US$750,000,000 App. I2 SAMPLE Insurance Certificate (MD-11) US$800,000,000 (777-200/300) US$800,000,000 (777-300X) US$900,000,000 (747-400) US$900,000,000 (In regard to all other models and/or derivatives, to be specified by Boeing). (In regard to Personal Injury coverage, limits are US$25,000,000 any one offense/aggregate.) DEDUCTIBLES / SELF-INSURANCE Any deductible and/or self-insurance amount (other than standard market deductibles) are to be disclosed and agreed by Boeing. SPECIAL PROVISIONS APPLICABLE TO BOEING: It is certified that Insurers are aware of the terms and conditions of AGTA-HWI and the following purchase agreements: PA ______ dated _______ PA ______ dated _______ PA ______ dated _______ Each Aircraft manufactured by Boeing which is delivered to the Insured pursuant to the applicable purchase agreement during the period of effectivity of the policies represented by this Certificate will be covered to the extent specified herein. Insurers have agreed to the following: A. In regard to Aircraft "all risks" Hull Insurance and Aircraft Hull War and Allied Perils Insurance, Insurers agree to waive all rights of subrogation or recourse against Boeing in accordance with AGTA-HWI which was incorporated by reference into the applicable purchase agreement. B. In regard to Airline Liability Insurance, Insurers agree: (1) To include Boeing as an additional insured in accordance with Customer's undertaking in Article 8.2.1 of AGTA-HWI which was incorporated by reference into the applicable purchase agreement. App. I3 SAMPLE Insurance Certificate (2) To provide that such insurance will be primary and not contributory nor excess with respect to any other insurance available for the protection of Boeing; (3) To provide that with respect to the interests of Boeing, such insurance shall not be invalidated or minimized by any action or inaction, omission or misrepresentation by the Insured or any other person or party (other than Boeing) regardless of any breach or violation of any warranty, declaration or condition contained in such policies; (4) To provide that all provisions of the insurance coverages referenced above, except the limits of liability, will operate to give each Insured or additional insured the same protection as if there were a separate Policy issued to each. C. In regard to all of the above referenced policies: (1) Boeing will not be responsible for payment, set-off, or assessment of any kind or any premiums in connection with the policies, endorsements or coverages described herein; (2) If a policy is canceled for any reason whatsoever, or any substantial change is made in the coverage which affects the interests of Boeing or if a policy is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to Boeing for thirty (30) days (in the case of war risk and allied perils coverage seven (7) days after sending, or such other period as may from time to time be customarily obtainable in the industry) after receipt by Boeing of written notice from the Insurers or the authorized representatives or Broker of such cancellation, change or lapse; and (3) For the purposes of the Certificate, "Boeing" is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each and their respective directors, officers, employees and agents. Subject to the terms, conditions, limitations and exclusions of the relative policies. (signature) (typed name) (title) App. I4 SAMPLE Purchase Agreement Assignment THIS PURCHASE AGREEMENT ASSIGNMENT (Assignment) dated as of ________ 19__ between Hawaiian Airlines, a company organized under the laws of ________________ (Assignor) and ________________________, a company organized under the laws of ________________ (Assignee). Capitalized terms used herein without definition will have the same meaning as in the Boeing Purchase Agreement. Assignor and The Boeing Company, a Delaware corporation (Boeing), are parties to the Boeing Purchase Agreement, providing, among other things, for the sale by Boeing to Assignor of certain aircraft, engines and related equipment, including the Aircraft. Assignee wishes to acquire the Aircraft and certain rights and interests under the Boeing Purchase Agreement and Assignor, on the following terms and conditions, is willing to assign to Assignee certain of Assignor's rights and interests under the Boeing Purchase Agreement. Assignee is willing to accept such assignment. It is agreed as follows: 1. For all purposes of this Assignment, the following terms will have the following meanings: Aircraft -- one Boeing Model ______ aircraft, bearing manufacturer's serial number _______, together with all engines and parts installed on such aircraft on the Delivery Date. Boeing -- Boeing shall include Boeing Sales Corporation (a wholly-owned subsidiary of Boeing), a Guam corporation, and its successors and assigns. Boeing Purchase Agreement -- Purchase Agreement No. ________ dated as of ____________ between Boeing and Assignor, as amended, but excluding ______________, providing, among other things, for the sale by Boeing to Assignor of the Aircraft, as said agreement may be further amended to the extent permitted by its terms. The Purchase Agreement incorporated by reference Aircraft General Terms Agreement AGTA/____ (AGTA). Delivery Date -- the date on which the Aircraft is delivered by Boeing to Assignee pursuant to and subject to the terms and conditions of the Boeing Purchase Agreement and this Assignment. 2. Assignor does hereby assign to Assignee all of its rights and interests in and to the Boeing Purchase Agreement, as and to the extent that the same relate to the Aircraft and the purchase and operation thereof, except as and to the extent expressly reserved below, including, without limitation, in such assignment: [TO BE COMPLETED BY THE PARTIES.] App. II1 SAMPLE Purchase Agreement Assignment {EXAMPLES (a) the right upon valid tender to purchase the Aircraft pursuant to the Boeing Purchase Agreement subject to the terms and conditions thereof and the right to take title to the Aircraft and to be named the "Buyer" in the bill of sale for the Aircraft; (b) the right to accept delivery of the Aircraft; (c) all claims for damages arising as a result of any default under the Boeing Purchase Agreement in respect of the Aircraft; (d) all warranty and indemnity provisions contained in the Boeing Purchase Agreement, and all claims arising thereunder, in respect of the Aircraft; and (e) any and all rights of Assignor to compel performance of the terms of the Boeing Purchase Agreement in respect of the Aircraft.} Reserving exclusively to Assignor, however: {EXAMPLES (i) all Assignor's rights and interests in and to the Boeing Purchase Agreement as and to the extent the same relates to aircraft other than the Aircraft, or to any other matters not directly pertaining to the Aircraft; (ii) all Assignor's rights and interests in or arising out of any advance or other payments or deposits made by Assignor in respect of the Aircraft under the Boeing Purchase Agreement and any amounts credited or to be credited or paid or to be paid by Boeing in respect of the Aircraft; (iii) the right to obtain services, training, information and demonstration and test flights pursuant to the Boeing Purchase Agreement; and (iv) the right to maintain plant representatives at Boeing's plant pursuant to the Boeing Purchase Agreement.} Assignee hereby accepts such assignment. 3. Notwithstanding the foregoing, so long as no event of default or termination under [specify document] has occurred and is continuing, Assignee hereby authorizes Assignor, to the exclusion of Assignee, to exercise in Assignor's name all rights and powers of Customer under the Boeing Purchase Agreement in respect of the Aircraft. App. II2 4. For all purposes of this Assignment, Boeing will not be deemed to have knowledge of or need recognize the occurrence, continuance or the discontinuance of any event of default or termination under [specify document] unless and until Boeing receives from Assignee written notice thereof, addressed to its Vice President - Contracts, Boeing Commercial Airplane Group at P.O. Box 3707, Seattle, Washington 98124, if by mail, or to 32-9430 Answerback BOEINGREN RNTN, if by telex. Until such notice has been given, Boeing will be entitled to deal solely and exclusively with Assignor. Thereafter, until Assignee has provided Boeing written notice that any such events no longer continue, Boeing will be entitled to deal solely and exclusively with Assignee. Boeing may act with acquittance and conclusively rely on any such notice. 5. It is expressly agreed that, anything herein contained to the contrary notwithstanding: (a) prior to the Delivery Date Assignor will perform its obligations with respect to the Aircraft to be performed by it on or before such delivery, (b) Assignor will at all times remain liable to Boeing under the Boeing Purchase Agreement to perform all obligations of Customer thereunder to the same extent as if this Assignment had not been executed, and (c) the exercise by Assignee of any of the assigned rights will not release Assignor from any of its obligations to Boeing under the Boeing Purchase Agreement, except to the extent that such exercise constitutes performance of such obligations. 6. Notwithstanding anything contained in this Assignment to the contrary (but without in any way releasing Assignor from any of its obligations under the Boeing Purchase Agreement), Assignee confirms for the benefit of Boeing that, insofar as the provisions of the Boeing Purchase Agreement relate to the Aircraft, in exercising any rights under the Boeing Purchase Agreement, or in making any claim with respect to the Aircraft or other things (including, without limitation, Material, training and services) delivered or to be delivered pursuant to the Boeing Purchase Agreement, the terms and conditions of the Boeing Purchase Agreement, including, without limitation, the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES in Article 11 of Part 2 of Exhibit C to the Aircraft General Terms Agreement which was incorporated by reference into the Boeing Purchase Agreement and the insurance provisions in Article 8.2 of the Aircraft General Terms Agreement which was incorporated by reference into the Boeing Purchase Agreement therein, will apply to and be binding on Assignee to the same extent as if Assignee had been the original "Customer" thereunder. Assignee further agrees, expressly for the benefit of Boeing, upon the written request of Boeing, Assignee will promptly execute and deliver such further assurances and documents and take such further action as Boeing may reasonably request in order to obtain the full benefits of Assignee's agreements in this paragraph. 7. Nothing contained herein will subject Boeing to any liability to which it would not otherwise be subject under the Boeing Purchase Agreement or modify in any respect the contract rights of Boeing thereunder, or require Boeing to divest itself of title to or possession of the Aircraft or other things until delivery thereof and payment therefor as provided therein. App. II3 8. Notwithstanding anything in this Assignment to the contrary, after receipt of notice of any event of default or termination under [specify document], Boeing will continue to owe to Assignor moneys in payment of claims made or obligations arising before such notice, which moneys may be subject to rights of set-off available to Boeing under applicable law. Similarly, after receipt of notice that such event of default or termination no longer continues, Boeing will continue to owe to Assignee moneys in payment of claims made or obligations arising before such notice, which moneys may be subject to rights of set-off available to Boeing under applicable law. 9. Effective at any time after an event of default has occurred, and for so long as such event of default is continuing, Assignor does hereby constitute Assignee, Assignor's true and lawful attorney, irrevocably, with full power (in the name of Assignor or otherwise) to ask, require, demand, receive, and give acquittance for any and all moneys and claims for moneys due and to become due under or arising out of the Boeing Purchase Agreement in respect of the Aircraft, to the extent assigned by this Assignment. 10. Assignee agrees, expressly for the benefit of Boeing and Assignor that it will not disclose, directly or indirectly, any terms of the Boeing Purchase Agreement; provided, that Assignee may disclose any such information (a) to its special counsel and public accountants, (b) as required by applicable law to be disclosed or to the extent that Assignee may have received a subpoena or other written demand under color of legal right for such information, but it will first, as soon as practicable upon receipt of such requirement or demand, furnish an explanation of the basis thereof to Boeing, and will afford Boeing reasonable opportunity, to obtain a protective order or other reasonably satisfactory assurance of confidential treatment for the information required to be disclosed, and (c) to any bona fide potential purchaser or lessee of the Aircraft. Any disclosure pursuant to (a) and (c) above will be subject to execution of a confidentiality agreement substantially similar to this paragraph 10. 11. This Assignment may be executed by the parties in separate counterparts, each of which when so executed and delivered will be an original, but all such counterparts will together constitute but one and the same instrument. App. II4 12. This Assignment will be governed by, and construed in accordance with, the laws of [______________________]. __________________________ __________________________ as Assignor as Assignee By _______________________ By _______________________ Name: Name: Title: Title: [If the Assignment is further assigned by Assignee in connection with a financing, the following language needs to be included.] Attest: The undersigned, as [Indenture Trustee/Agent for the benefit of the Loan Participants/Mortgagee] and as assignee of, and holder of a security interest in, the estate, right, and interest of the Assignee in and to the foregoing Purchase Agreement Assignment and the Purchase Agreement pursuant to the terms of a certain [Trust Indenture/Mortgage] dated as of _____________, agrees to the terms of the foregoing Purchase Agreement Assignment and agrees that its rights and remedies under such [Trust Indenture/Mortgage] shall be subject to the terms and conditions of the foregoing Purchase Agreement Assignment, including, without limitation, paragraph 6. [Name of Entity], as Indenture Trustee/Agent By:____________________________ Name: Title: App. II5 SAMPLE Purchase Agreement Assignment 6 CONSENT AND AGREEMENT OF THE BOEING COMPANY THE BOEING COMPANY, a Delaware corporation (Boeing), hereby acknowledges notice of and consents to the foregoing Purchase Agreement Assignment (Assignment). Boeing confirms to Assignee that: all representations, warranties, indemnities and agreements of Boeing under the Boeing Purchase Agreement with respect to the Aircraft will, subject to the terms and conditions thereof and of the Assignment, inure to the benefit of Assignee to the same extent as if Assignee were originally named "Customer" therein. This Consent and Agreement will be governed by, and construed in accordance with, the law of the State of Washington, excluding the conflict of laws principles thereof. Dated as of ____________________, 199___. THE BOEING COMPANY By ________________________ Name: Title: Attorney-in-Fact Aircraft Manufacturer's Serial Number(s) ____________ App. II6 SAMPLE Post-Delivery Sale Notice Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 Attention: Vice President - Contracts Mail Stop 75-38 Ladies and Gentlemen: In connection with the sale by Hawaiian Airlines (Seller) to ________________ (Purchaser) of the aircraft identified below, reference is made to Purchase Agreement No. _____ dated as of ___________, 19__, between The Boeing Company (Boeing) and Seller (the Purchase Agreement) under which Seller purchased certain Boeing Model ________ aircraft, including the aircraft bearing Manufacturer's Serial No.(s) ______________________ (the Aircraft). The Purchase Agreement incorporated by reference Aircraft General Terms Agreement AGTA-HWI (AGTA). Capitalized terms used herein without definition will have the same meaning as in the Purchase Agreement. Seller has sold the Aircraft, including in that sale the transfer to Purchaser of all remaining rights related to the Aircraft under the Purchase Agreement. To accomplish this transfer of rights, as authorized by the provisions of the Purchase Agreement: (1) Purchaser acknowledges it has reviewed the Purchase Agreement and agrees to be bound by and comply with all applicable terms and conditions of the Purchase Agreement, including, without limitation, the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES in Article 11 of Part 2 of Exhibit C to the AGTA and the insurance provisions in Article 8.2 of the AGTA. Purchaser further agrees upon the written request of Boeing, to promptly execute and deliver such further assurances and documents and take such further action as Boeing may reasonably request in order to obtain the full benefits of Purchaser's agreements in this paragraph; and (2) Seller will remain responsible for any payments due Boeing as a result of obligations relating to the Aircraft incurred by Seller to Boeing prior to the effective date of this letter. App. III1 SAMPLE Post-Delivery Sale Notice We request that Boeing acknowledge receipt of this letter and confirm the transfer of rights set forth above by signing the acknowledgment and forwarding one copy of this letter to each of the undersigned. Very truly yours, Hawaiian Airlines Purchaser By______________________ By ______________________ Its_____________________ Its _____________________ Dated___________________ Dated ___________________ Receipt of the above letter is acknowledged and transfer of rights under the Purchase Agreement with respect to the Aircraft is confirmed, effective as of this date. THE BOEING COMPANY By______________________ Its Attorney-in-Fact _____________________ Dated___________________ Aircraft Manufacturer's Serial Number ____________ App. III2 SAMPLE Post-Delivery Lease Notice Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 Attention: Vice President - Contracts Mail Stop 75-38 Ladies and Gentlemen: In connection with the lease by Hawaiian Airlines (Lessor) to ___________ (Lessee) of the aircraft identified below, reference is made to Purchase Agreement No. ____ dated as of ________, 19__, between The Boeing Company (Boeing) and Lessor (the Purchase Agreement) under which Lessor purchased certain Boeing Model _______ aircraft, including the aircraft bearing Manufacturer's Serial No.(s) ___________________ (the Aircraft). The Purchase Agreement incorporated by reference Aircraft General Terms Agreement AGTA-HWI (AGTA). Capitalized terms used herein without definition will have the same meaning as in the Purchase Agreement. Lessor has leased the Aircraft, including in that lease the transfer to Lessee of all remaining rights related to the Aircraft under the Purchase Agreement. To accomplish this transfer of rights, as authorized by the provisions of the Purchase Agreement: (1) Lessor authorizes Lessee to exercise, to the exclusion of Lessor, all rights and powers of Lessor with respect to the remaining rights related to the Aircraft under the Purchase Agreement. This authorization will continue until Boeing receives written notice from Lessor to the contrary, addressed to Vice President - Contracts, Mail Stop 75-38, Boeing Commercial Airplane Group, P.O. Box 3707, Seattle, Washington 98124-2207. Until Boeing receives such notice, Boeing is entitled to deal exclusively with Lessee with respect to the Aircraft under the Purchase Agreement. With respect to the rights and obligations of Lessor under the Purchase Agreement, all actions taken or agreements entered into by Lessee during the period prior to Boeing's receipt of this notice are final and binding on Lessor. Further, any payments made by Boeing as a result of claims made by Lessee will be made to the credit of Lessee. (2) Lessee accepts the authorization above, acknowledges it has reviewed the Purchase Agreement and agrees to be bound by and comply with all applicable terms and conditions of the Purchase Agreement including, without limitation, the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES in Article 11 of Part 2 of Exhibit C AGTA and the insurance provisions in Article 8.2 of the AGTA. Lessee further agrees, upon the written request of Boeing, to promptly execute and deliver such further assurances and documents and take such further action as Boeing may reasonably request in order to obtain the full benefits of Lessee's agreements in this paragraph. App. IV1 SAMPLE Post-Delivery Lease Notice (3) Lessor will remain responsible for any payments due Boeing as a result of obligations relating to the Aircraft incurred by Lessor to Boeing prior to the effective date of this Notice. We request that Boeing acknowledges receipt of this letter and confirm the transfer of rights set forth above by signing the acknowledgment and forwarding one copy of this letter to each of the undersigned. Very truly yours, Hawaiian Airlines Purchaser By______________________ By ______________________ Its_____________________ Its _____________________ Dated___________________ Dated ___________________ Receipt of the above letter is acknowledged and transfer of rights under the Purchase Agreement with respect to the Aircraft is confirmed, effective as of this date. By______________________ Its_____________________ Dated___________________ Aircraft Manufacturer's Serial Number ____________ App. IV2 SAMPLE Purchaser's/Lessee's Agreement Boeing Commercial Airplane Group P. O. Box 3707 Seattle, Washington 98124-2207 Attention Vice President - Contracts Mail Stop 75-38 Ladies and Gentlemen: In connection with the sale/lease by Hawaiian Airlines (Seller/Lessor) to _______________________ (Purchaser/Lessee) of the aircraft identified below, reference is made to the following documents: (i) Purchase Agreement No. _____ dated as of ___________, 19__, between The Boeing Company (Boeing) and Seller/Lessor (the Purchase Agreement) under which Seller/Lessor purchased certain Boeing Model ________ aircraft, including the aircraft bearing Manufacturer's Serial No.(s) ______________________ (the Aircraft); and (ii) Aircraft Sale/Lease Agreement dated as of ___________, 19__, between Seller/Lessor and Purchaser/Lessee (the Aircraft Agreement) under which Seller/Lessor is selling/leasing the Aircraft. Capitalized terms used herein without definition will have the same meaning as in the Aircraft Agreement. 1. Seller/Lessor has sold/leased the Aircraft under the Aircraft Agreement, including therein a form of exculpatory clause protecting Seller/Lessor from liability for loss of or damage to the aircraft, and/or related incidental or consequential damages, including without limitation loss of use, revenue or profit. 2. Disclaimer and Release; Exclusion of Liabilities 2.1 In accordance with Seller/Lessor's obligation under Article 9.5 of AGTA-HWI which was incorporated by reference into the Purchase Agreement, Purchaser/Lessee hereby agrees that: 2.2 DISCLAIMER AND RELEASE. IN CONSIDERATION OF THE SALE/LEASE OF THE AIRCRAFT, PURCHASER/LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES ALL WARRANTIES, OBLIGATIONS AND LIABILITIES OF BOEING AND ALL OTHER RIGHTS, CLAIMS AND REMEDIES OF PURCHASER/LESSEE AGAINST BOEING, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT, BOEING PRODUCT, MATERIALS, TRAINING, SERVICES OR OTHER THING PROVIDED UNDER THE AIRCRAFT AGREEMENT, INCLUDING, BUT NOT LIMITED TO: App. V1 SAMPLE Purchaser's/Lessee's Agreement (A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS; (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (C) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OF BOEING; AND (D) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY AIRCRAFT. 2.3 EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES. BOEING WILL HAVE NO OBLIGATION OR LIABILITY, WHETHER ARISING IN CONTRACT (INCLUDING WARRANTY), TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OF BOEING, OR OTHERWISE, FOR LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT, MATERIALS, TRAINING, SERVICES OR OTHER THING PROVIDED UNDER THE AIRCRAFT AGREEMENT. 2.4 Definitions. For the purpose of this paragraph 2, "BOEING" or "Boeing" is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each, and their respective directors, officers, employees and agents. Hawaiian Airlines Purchaser/Lessee (Seller/Lessor) By______________________ By ______________________ Its_____________________ Its _____________________ Dated___________________ Dated ___________________ App. V2 SAMPLE Owner Appointment of Agent - Warranties Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 Attention: Vice President - Contracts Mail Stop 75-38 Ladies and Gentlemen: 1. Reference is made to Purchase Agreement No. ____ dated as of __________, 19__, between The Boeing Company (Boeing) and Hawaiian Airlines (Customer) (the Purchase Agreement), under which Customer purchased certain Boeing Model ________ aircraft including the aircraft bearing Manufacturer's Serial No.(s) _____________ (the Aircraft). The Purchase Agreement incorporated by reference Aircraft General Terms Agreement AGTA-HWI (AGTA). Capitalized terms used herein without definition will have the same meaning as in the Purchase Agreement. To accomplish the appointment of an agent, Customer confirms: A. Customer has appointed ____________________ as agent (Agent) to act directly with Boeing with respect to the remaining warranties under the Purchase Agreement and requests Boeing to treat Agent as Customer for the administration of claims with respect to such warranties; provided however, Customer remains liable to Boeing to perform the obligations of Customer under the Purchase Agreement. B. Boeing may continue to deal exclusively with Agent concerning the matters described herein unless and until Boeing receives written notice from Customer to the contrary, addressed to Vice President - Contracts, Mail Stop 75-38, Boeing Commercial Airplane Group, P.O. Box 3707, Seattle, Washington 98124-2207, U.S.A. With respect to the rights and obligations of Customer under the Purchase Agreement, all actions taken by Agent or agreements entered into by Agent during the period prior to Boeing's receipt of such notice are final and binding on Customer. Further, any payments made by Boeing as a result of claims made by Agent will be made to the credit of Agent unless otherwise specified when each claim is submitted. C. Customer will remain responsible for any payments due Boeing as a result of obligations relating to the Aircraft incurred by Customer to Boeing prior to the effective date of this Notice. App. VI1 SAMPLE Owner Appointment of Agent - Warranties We request that Boeing acknowledge receipt of this letter and confirm the appointment of Agent as stated above by signing the acknowledgment and forwarding one copy of this letter to each of the undersigned. Very truly yours, Hawaiian Airlines By_________________ App. VI2 SAMPLE Owner Appointment of Agent - Warranties AGENT'S AGREEMENT Agent accepts the appointment as stated above, acknowledges it has reviewed the Purchase Agreement and agrees that, in exercising any rights or making any claims thereunder, Agent will be bound by and comply with all applicable terms and conditions of the Purchase Agreement including, without limitation, the DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES in Article 11 of Part 2 of Exhibit C to the AGTA. Agent further agrees, upon the written request of Boeing, to promptly execute and deliver such further assurances and documents and take such further action as Boeing may reasonably request in order to obtain the full benefits of the warranties under the Purchase Agreement. Very truly yours, Agent By______________________ Its_____________________ Dated___________________ Receipt of the above letter is acknowledged and the appointment of Agent with respect to the above-described rights under the Purchase Agreement is confirmed, effective as of this date. THE BOEING COMPANY By______________________ Its_____________________ Dated___________________ Aircraft Manufacturer's Serial Number __________ App. VI3 SAMPLE Contractor Confidentiality Agreement Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 Attention: Vice President - Contracts Mail Stop 75-38 Ladies and Gentlemen: This Agreement is entered into between ____________________ (Contractor) and Hawaiian Airlines (Customer) and will be effective as of the date stated below. In connection with Customer's provision to Contractor of certain Materials, Proprietary Materials and Proprietary Information, reference is made to Purchase Agreement No. _____ dated as of _______ , 19___ between The Boeing Company (Boeing) and Customer. Capitalized terms used herein without definition will have the same meaning as in the Purchase Agreement. Boeing has agreed to permit Customer to make certain Materials, Proprietary Materials and Proprietary Information relating to Customer's Boeing Model ________ aircraft, Manufacturer's Serial Number ______, Registration No. ________ (the Aircraft) available to Contractor in connection with Customer's contract with Contractor (the Contract) to maintain/repair/modify the Aircraft. As a condition of receiving the Proprietary Materials and Proprietary Information, Contractor agrees as follows: 1. For purposes of this Agreement: "Aircraft Software" means software that is installed and used in the operation of an Aircraft. "Materials" are defined as any and all items that are created by Boeing or a third party, which are provided directly or indirectly from Boeing and serve primarily to contain, convey or embody information. Materials may include either tangible embodiments (for example, documents or drawings), or intangible embodiments (for example, software and other electronic forms) of information but excludes Aircraft Software. "Proprietary Information" means any and all proprietary, confidential and/or trade secret information owned by Boeing or a Third Party which is contained, conveyed or embodied in Proprietary Materials. "Proprietary Materials" means Materials that contain, convey, or embody Proprietary Information. "Third Party" means anyone other than Boeing, Customer and Contractor. App. VII1 SAMPLE Contractor Confidentiality Agreement 2. Boeing has authorized Customer to grant to Contractor a worldwide, non-exclusive, personal and nontransferable license to use Proprietary Materials and Proprietary Information, owned by Boeing, internally in connection with performance of the Contract or as may otherwise be authorized by Boeing in writing. Contractor will keep confidential and protect from disclosure to any person, entity or government agency, including any person or entity affiliated with Contractor, all Proprietary Materials and Proprietary Information. Individual copies of all Materials are provided to Contractor subject to copyrights therein, and all such copyrights are retained by Boeing or, in some cases, by Third Parties. Contractor is authorized to make copies of Materials (except for Materials bearing the copyright legend of a Third Party) provided, however, Contractor preserves the restrictive legends and proprietary notices on all copies. All copies of Proprietary Materials will belong to Boeing and be treated as Proprietary Materials under this Agreement. 3. Contractor specifically agrees not to use Proprietary Materials or Proprietary Information in connection with the manufacture or sale of any part or design. Unless otherwise agreed with Boeing in writing, Proprietary Materials and Proprietary Information may be used by Contractor only for work on the Aircraft for which such Proprietary Materials have been specified by Boeing. Customer and Contractor recognize and agree that they are responsible for ascertaining and ensuring that all Materials are appropriate for the use to which they are put. 4. Contractor will not attempt to gain access to information by reverse engineering, decompiling, or disassembling any portion of any software provided to Contractor pursuant to this Agreement. 5. Upon Boeing's request at any time, Contractor will promptly return to Boeing (or, at Boeing's option, destroy) all Proprietary Materials, together with all copies thereof and will certify to Boeing that all such Proprietary Materials and copies have been so returned or destroyed. 6. To the extent required by a Government Entity having jurisdiction over Contractor, Customer or the Aircraft, Contractor is authorized to provide Proprietary Materials and disclose Proprietary Information to such Government Entity for the such Government Entity's use in connection with Contractor's, authorized use of such Proprietary Materials and/or Proprietary Information in connection with Contractor's maintenance, repair, or modification of the Aircraft. Contractor agrees to take reasonable steps to prevent such agency from making any distribution or disclosure, or additional use of the Proprietary Materials and Proprietary Information so provided or disclosed. Contractor further agrees to promptly notify Boeing upon learning of any (i) distribution, disclosure, or additional use by such agency, (ii) request to such Government Entity for distribution, disclosure, or additional use, or (iii) intention on the part of such Government Entity to distribute, disclose, or make additional use of the Proprietary Materials or Proprietary Information. As used herein, "Government Entity" means (i) any national government, political subdivison thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any thereof is subject or in whose activities any of the above is a participant. App. VII2 SAMPLE Contractor Confidentiality Agreement 7. Boeing is a third-party beneficiary under this Agreement, and Boeing may enforce any and all of the provisions of the Agreement directly against Contractor. Contractor hereby submits to the jurisdiction of the Washington state courts and the United States District Court for the Western District of Washington with regard to any claims Boeing may make under this Agreement. It is agreed that Washington law (excluding Washington's conflict-of-law principles) governs this Agreement. 8. No disclosure or physical transfer by Boeing or Customer to Contractor, of any Proprietary Materials or Proprietary Information covered by this Agreement will be construed as granting a license, other than as expressly set forth in this Agreement or any ownership right in any patent, patent application, copyright or proprietary information. 9. The provisions of this Agreement will apply notwithstanding any markings or legends, or the absence thereof, on any Proprietary Materials. 10. This Agreement is the entire agreement of the parties regarding the ownership and treatment of Proprietary Materials and Proprietary Information, and no modification of this Agreement will be effective as against Boeing unless in writing signed by authorized representatives of Contractor, Customer and Boeing. 11. Failure by either party to enforce any of the provisions of this Agreement will not be construed as a waiver of such provisions. If any of the provision of this Agreement is held unlawful or otherwise ineffective by a court of competent jurisdiction, the remainder of the Agreement will remain in full force. ACCEPTED AND AGREED TO this Date: _____________________, 19___ Hawaiian Airlines Contractor By__________________________ By __________________________ Its_________________________ Its _________________________ App. VII3 EX-10.11 7 EXHIBIT 10.11 PURCHASE AGREEMENT NUMBER 2252 between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Relating to Model 717-22A Aircraft TABLE OF CONTENTS SA ARTICLES NUMBER 1. Quantity, Model and Description 2. Delivery Schedule 3. Price 4. Payment 5. Miscellaneous TABLE 1. Aircraft Information Table EXHIBIT A. Aircraft Configuration B. Aircraft Delivery Requirements and Responsibilities SUPPLEMENTAL EXHIBITS BFE1. BFE Variables CS1. Customer Support Variables EE1. Engine Escalation/Engine Warranty and Patent Indemnity SLP1. Service Life Policy Components LETTER AGREEMENTS Standard: 2252-1 Customer Support Matters 2252-2 Spares Initial Provisioning Confidential: 6-1166-EMM-0251 Aircraft Performance Guarantees 6-1166-EMM-0252 Promotional Support 6-1166-EMM-0253 Business Matters 6-1166-EMM-0254 Purchase Rights Aircraft and Aircraft Model Substitution 6-1166-EMM-0255 Deferred Advance Payments 6-1166-EMM-0272 Liquidated Damages for Non-Excusable Delay 6-1166-EMM-0299 Other Matters 6-1166-EMM-0300 Financing Matters 6-1166-EMM-0301 Spares Commitments ii Purchase Agreement No. 2252 between McDonnell Douglas Corporation and Hawaiian Airlines, Inc. ------------------------------ This Purchase Agreement No. 2252 (Purchase Agreement) dated as of _________________between McDonnell Douglas Corporation (MDC), a wholly-owned subsidiary of The Boeing Company (Boeing), and Hawaiian Airlines, Inc. (Customer) relating to the purchase and sale of Model 717-22A aircraft incorporates the terms and conditions of the Aircraft General Terms Agreement dated as of _________________between Boeing and Hawaiian Airlines, Inc., identified as AGTA-HWI (AGTA). Article 1. Quantity, Model and Description. The aircraft to be delivered to Customer will be designated as Model 717-22A aircraft (the Aircraft). MDC will manufacture and sell to Customer Aircraft conforming to the configuration described in Exhibit A, which is part of this Purchase Agreement, in the quantities listed in Table 1 to this Purchase Agreement. Article 2. Delivery Schedule. The scheduled months of delivery of the Aircraft are listed in the attached Table 1, which is part of this Purchase Agreement. Exhibit B, which is part of this Purchase Agreement, describes certain responsibilities for both Customer and MDC in order to accomplish the delivery of the Aircraft. Article 3. Price. 3.1 Aircraft Basic Price. The Aircraft Basic Price is listed in Table 1 in subject to escalation dollars. 3.2 Advance Payment Base Prices. The Advance Payment Base Prices listed in Table 1 were calculated utilizing the latest escalation factors available to Boeing on the date of this Purchase Agreement projected to the month of scheduled delivery. 1 3.3 MDC has not yet established the Aircraft Basic Price for Aircraft scheduled to be delivered after December 31, 2004. The prices listed in Table 1 for such Aircraft are only to provide Customer with an estimate of the applicable Advance Payment Base Prices. Accordingly, the Aircraft Basic Price for such Aircraft will be the sum of the Airframe Price, Optional Features Prices and the Engine Price first published by Boeing for the same model of aircraft and engines to be delivered after December 31, 2004. Article 4. Payment. 4.1 MDC acknowledges receipt of a deposit in the amount shown in Table 1 for each Aircraft (Deposit). 4.2 The standard advance payment schedule for the Model 717-22A aircraft requires Customer to make certain advance payments, expressed as a percentage of the Advance Payment Base Price of each Aircraft beginning with a payment of 1%, less the Deposit, on the effective date of this Purchase Agreement. Additional advance payments for each aircraft are due on the first business day of the months listed in the attached Table 1. Notwithstanding such standard schedule, the advance payment terms applicable to this Purchase Agreement are set forth in Letter Agreement 6-1166-EMM-0255. 4.3 For any Aircraft whose scheduled month of delivery is less than 24 months from the date of this Purchase Agreement, the total amount of advance payments due for payment upon signing of this Purchase Agreement will include all advance payments which are past due in accordance with the standard advance payment schedule set forth in paragraph 4.2 above. 4.4 Customer will pay the balance of the Aircraft Price of each Aircraft at delivery. Article 5. Miscellaneous. 5.1 Aircraft Information Table. Table 1 consolidates information contained in Articles 1, 2, 3 and 4 with respect to (i) quantity of Aircraft, (ii) applicable Detail Specification, (iii) month and year of scheduled deliveries, (iv) Aircraft Basic Price, (v) applicable escalation factors and (vi) Advance Payment Base Prices and advance payments and their schedules. 5.2 Buyer Furnished Equipment Variables. Supplemental Exhibit BFE1 contains vendor selection dates, on dock dates and other variables applicable to the Aircraft. 2 5.3 Customer Support Variables. Supplemental Exhibit CS1 contains the variable information applicable to information, training services and other things furnished by MDC in support of the Aircraft. 5.4 Engine Escalation Variables. Supplemental Exhibit EE1 contains the applicable engine escalation formula, the engine warranty and the engine patent indemnity for the Aircraft. 5.5 Service Life Policy Component Variables. Supplemental Exhibit SLP1 lists the airframe and landing gear components covered by the Service Life Policy for the Aircraft. 5.6 Negotiated Agreement; Entire Agreement. This Purchase Agreement, including the provisions of Article 8.2 of the AGTA relating to insurance, and Article 11 of Part 2 of Exhibit C of the AGTA relating to DISCLAIMER AND RELEASE and EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES, has been the subject of discussion and negotiation and is understood by the parties; the Aircraft Price and other agreements of the parties stated in this Purchase Agreement were arrived at in consideration of such provisions. This Purchase Agreement, including the AGTA, contains the entire agreement between the parties and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written, and may be changed only in writing signed by authorized representatives of the parties. DATED AS OF DECEMBER 31, 1999 Hawaiian Airlines, Inc. MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/______________________ By /S/____________________ Its_________________________ Its _______________________ By /S/______________________ Its_________________________ 3 Table 1 to Purchase Agreement No. 2252 Aircraft Delivery, Description, Price and Advance Payments P.A. No. 2252 REDACTED IN ITS ENTIRETY Page 1 AIRCRAFT CONFIGURATION between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Exhibit A to Purchase Agreement Number 2252 AIRCRAFT CONFIGURATION Dated relating to MODEL 717-22A AIRCRAFT The Detail Specification is MDC Detail Specification CS 7172E dated as of February 15, 1999 as amended to incorporate the Specification Change Notices (SCNs) listed below, including the effects on Manufacturer's Empty Weight (MEW). The Detail Specification may be further amended in accordance with the provisions of Article 4 of the AGTA. The Aircraft Basic Price reflects and includes all effects of such SCNs, except such Aircraft Basic Price does not include the price effects of any Buyer Furnished Equipment or Buyer Designated Equipment. A-1 Hawaiian Airlines 717-200 Configuration - -------------------------------------------------------------------------------- Option Number Title PRICE in 7/98$, STE - -------------------------------------------------------------------------------- G0100D023 Selectable Program Options _____ Note: A version of G0100C007E will be prepared once buyer selects specific program options - -------------------------------------------------------------------------------- G0201D012 Incorporation of Finish Specification F-109-64.4 for ____ Hawaiian Airlines 717-200 Note: A version of G0201C007 will be prepared once buyer selects specific interior finish color, upholstery and exterior scheme. - -------------------------------------------------------------------------------- G0320D014 Increase Maximum Landing Weight From 102,000 to 110,000 lb ____ - -------------------------------------------------------------------------------- G1300S002 Revision To Manufacturer's Empty Weight (1000 lb Weight ____ Reduction), October 12, 1999 - -------------------------------------------------------------------------------- G2122C001C Installation of a Gasper Booster Fan System ____ - -------------------------------------------------------------------------------- G2311C003B Installation of Complete Provisions for a Single ARINC ____ 719/753 HF Voice/Data Communications System - -------------------------------------------------------------------------------- G2312C002E Installation of a Third ARINC 716/750 VHF Communications ____ System Utilizing Existing Partial Provisions - -------------------------------------------------------------------------------- G2324C004D Installation of a Seller-Furnished ARINC 744A Full Format ____ Printer - -------------------------------------------------------------------------------- G2324C008A Installation of a Communications Management Unit (CMU) ____ Mark 2 Utilizing Existing Partial Provisions - -------------------------------------------------------------------------------- G2332C003A Installation of a Matsushita Prerecorded Announcement ____ System With Boarding Music - -------------------------------------------------------------------------------- G2460C001B Installation of Spare Wires (Category I, II, IV) ____ - -------------------------------------------------------------------------------- G2500D041 Installation of a 123-Passenger Mixed Class Interior ____ Arrangement for Hawaiian Airlines Note: A version of SCN G2500C027B will be created to install a custom 123-passenger Mixed Class Interior for Hawaiian Airlines - -------------------------------------------------------------------------------- G2500C029 Custom Airline Soft Good Finish Materials _____ G2500DTBD Note: A version of G2500C029 will be prepared once buyer defines the soft good finish material. * Price will be adjusted based on choice of soft goods. - -------------------------------------------------------------------------------- G2513S005 Installation of the Data Stowage Compartment in Lieu of ____ That Specified, September 28, 1999 - -------------------------------------------------------------------------------- A-2 Hawaiian Airlines 717-200 Configuration - -------------------------------------------------------------------------------- Option Number Title PRICE in 7/98$, STE - -------------------------------------------------------------------------------- G2523D005 Certification of a New Seat Program (Non Standard ____ Supplier/BE Aerospace) Note: A version of G2523C004A will be prepared to reflect Hawaiian Airlines selection of new BE/Aerospace seat program. - -------------------------------------------------------------------------------- G2524C005 Installation of a Forward Left Hand Windscreen ____ - -------------------------------------------------------------------------------- G2524C007 Installation of a Soft Class Divider (Fixed Location) ____ - -------------------------------------------------------------------------------- G2524C010 Installation of a Right Hand Windscreen With the Removal ____ of the G2 Galley - -------------------------------------------------------------------------------- G2525C003 Installation of Asymmetrical Bagracks ____ - -------------------------------------------------------------------------------- G2531C002A Definition of Interior Option AL1: Removal of Aft LH ____ Lavatory and Installation of Aft LH Galley (Selectable Power-Water-Drain) - -------------------------------------------------------------------------------- G2531D016 Certification of a New Galley Program (Non Standard ____ Supplier/Driessen) Note: A version of G2531C015A will be prepared to reflect selection of new Driessen galley program. - -------------------------------------------------------------------------------- G2540C002 Definition of Interior Option FL1: Removal of Forward LH ____ Lavatory - -------------------------------------------------------------------------------- G2540C003A Installation of Partial Provisions for Forward LH Lavatory ____ - -------------------------------------------------------------------------------- G2541C013 Installation of Handicap Facilities in the Aft RH Lavatory ____ - -------------------------------------------------------------------------------- G2551S011 Editorial Revisions of CS7172 to Specify Lower Cargo ____ Compartment Type Requirements, dated August 30, 1999 - -------------------------------------------------------------------------------- G2800S002 Revision of CS7172 Fuel Requirements to Delete JP-4 and ____ Commercial Aviation Kerosene Type B from the Fuel Listing, July 30, 1999 - -------------------------------------------------------------------------------- G3131C009 Installation of an Allied Signal FDAMS/DFDAU Unit ____ (Aircraft Condition Monitoring System) - -------------------------------------------------------------------------------- G3344C002B Installation of Wing Tip Mounted Logo Lights Utilizing ____ Existing Partial Provisions - -------------------------------------------------------------------------------- G3513S005 Revision to CS7172Appendix I (update of Puritan Bennett ____ Full-face Oxygen part number), dated June 16, 1999 - -------------------------------------------------------------------------------- G3520C002A Installation of 4-Person Oxygen Insert Assemblies Above ____ Each Triple Passenger Seat Assembly and 3-Person Oxygen Insert Assemblies Above Each Double Passenger Seat Assembly - -------------------------------------------------------------------------------- A-3 Hawaiian Airlines 717-200 Configuration - -------------------------------------------------------------------------------- Option Number Title PRICE in 7/98$, STE - -------------------------------------------------------------------------------- G5115C006 Addition of Polyurethane Finish to Lower Fuselage (Color ____ TBD) - -------------------------------------------------------------------------------- G5724S001 Editorial Revision to CS7172 to clarify 717-200 Vortilon ____ Installation Requirements, dated July 9, 1999 - -------------------------------------------------------------------------------- G9900DTBD Selection of Buyer-Furnished Equipment (CS7172 Appendix I ____ Listing) Note: A SCN will be prepared once the Buyer defines Part Numbers and equipment category Note: A SCN will be prepared once buyer selects BFE part numbers from CS7172E Appendix I Listing. - -------------------------------------------------------------------------------- Total Price total contingent on firm 13 airplane sale ____ - -------------------------------------------------------------------------------- A-4 AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Exhibit B to Purchase Agreement Number 2252 B Exhibit B to Purchase Agreement No. 2252 AIRCRAFT DELIVERY REQUIREMENTS AND RESPONSIBILITIES relating to MODEL 717-22A AIRCRAFT Both MDC and Customer have certain documentation and approval responsibilities at various times during the construction cycle of Customer's Aircraft that are critical to making the delivery of each Aircraft a positive experience for both parties. This Exhibit B documents those responsibilities and indicates recommended completion deadlines for the actions to be accomplished. B-1 1. GOVERNMENT DOCUMENTATION REQUIREMENTS. Certain actions are required to be taken by Customer in advance of the scheduled delivery month of each Aircraft with respect to obtaining certain government issued documentation. 1.1 Airworthiness and Registration Documents. Not later than 10 months prior to delivery of each Aircraft, Customer will notify MDC of the registration number to be painted on the side of the Aircraft. In addition, and not later than 3 months prior to delivery of each Aircraft, Customer will, by letter to the regulatory authority having jurisdiction, authorize the temporary use of such registration numbers by MDC during the pre-delivery testing of the Aircraft. Customer is also responsible for furnishing any Temporary or Permanent Registration Certificates required by any governmental authority having jurisdiction to be displayed aboard the Aircraft after delivery. 1.2 Certificate of Sanitary Construction. 1.2.1 U.S. Registered Aircraft. Prior to delivery, MDC will obtain from the United States Public Health Service, a United States Certificate of Sanitary Construction to be displayed aboard each Aircraft after delivery to Customer. 1.3 Confirmation of No Prior Registration. MDC will instruct the FAA to confirm to Customer's applicable regulatory agency that the Aircraft has not been previously registered in the United States subject to Customer's written request to provide such confirmation no later that 45 days prior to delivery. 2. Insurance CertificateS. Unless provided earlier, Customer will provide to MDC at the time of delivery of each Aircraft, a copy of the requisite annual insurance certificate in accordance with the requirements of Article 8 of the AGTA. B-2 Exhibit B to Purchase Agreement No. 2252 3 NOTICE OF FLYAWAY CONFIGURATION. 3.1 Ownership Placards. If requested by Customer, MDC will fabricate and install ownership placards on the airframe and/or engines subject to Customer providing the following information to MDC no later than 30 days prior to delivery: (i) the legend to appear on the ownership placards, and (ii) the placard installation location such as on the airframe only, the engines only, or on both the airframe and engines. 3.2 Delivery Requirements. Not later than 7 days prior to delivery of the Aircraft, Customer will provide to MDC a configuration letter stating the requested "flyaway configuration" of the Aircraft for its ferry flight. This configuration letter should include: (i) the quantity of fuel to be loaded on the Aircraft prior to the ferry flight and any scheduled post-delivery flight training; (ii) the cargo to be loaded on the Aircraft including quantity, description, weight, part number and value of each item, (iii) any BFE equipment to be removed prior to flyaway and returned to MDC BFE stores for installation on Customer's subsequent Aircraft; (iv) a complete list, including name, title, job function, citizenship and passport number, of the crew members and non-revenue passengers that will be aboard the ferry flight; and (v) a complete ferry flight itinerary. 4. DELIVERY ACTIONS BY MDC. 4.1 Schedule of Inspections. All FAA, MDC, Customer and, if required, U.S. Customs Bureau inspections will be scheduled by MDC for completion prior to delivery or departure of the Aircraft. Customer will be informed of such schedules as soon as practicable by MDC. 4.2 Schedule of Demonstration Flights. All FAA and Customer demonstration flights will be scheduled by MDC for completion prior to delivery of the Aircraft. B-3 Exhibit B to Purchase Agreement No. 2252 4.3 Schedule for Customer's Flight Crew. MDC will inform Customer of the date that a flight crew is required for acceptance routines associated with delivery of the Aircraft no later than 30 days prior to the scheduled month of aircraft delivery 4.4 Fuel Provided by MDC. MDC will provide to Customer, without charge, the amount of fuel shown in U.S. gallons in the table below for the model of Aircraft being delivered and full capacity of engine oil at the time of delivery or prior to the ferry flight of the Aircraft. Aircraft Model Fuel Provided 717 ______ 4.5 Flight Crew and Passenger Consumables. MDC will provide reasonable quantities of food, coat hangers, towels, toilet tissue, drinking cups and soap for the first segment of the ferry flight for the Aircraft. 4.6 Delivery Papers, Documents and Data. MDC will have available at the time of delivery of the Aircraft certain delivery papers, documents and data for execution and delivery. If title for the Aircraft will be transferred to Customer through a MDC sales subsidiary and if the Aircraft will be registered with the FAA, MDC will pre-position in Oklahoma City, Oklahoma, for filing with the FAA at the time of delivery of the Aircraft an executed original Form 8050-2, Aircraft Bill of Sale, indicating transfer of title to the Aircraft from MDC's sales subsidiary to Customer. 4.7 Delegation of Authority. If specifically requested in advance by Customer, MDC will present a certified copy of a Resolution of Boeing's Board of Directors, designating and authorizing certain persons to act on its behalf in connection with delivery of the Aircraft. 5. DELIVERY ACTIONS BY CUSTOMER. 5.1 Financing Arrangements. As soon as practicable, Customer will advise MDC of any special financing arrangements in connection with the delivery including Customer's intent to assign the Aircraft to a third party at time of title transfer. 5.2 BFE Value. No later than 90 days prior to delivery, Customer will provide a BFE invoice reflecting the total amount of BFE installed on the Aircraft. 5.3 Fuel Receipt. At delivery Customer will execute a fuel receipt acknowledging the amount of fuel loaded on the Aircraft prior to the ferry flight. Boeing will invoice Customer for this fuel less the amount provided at no charge as set forth in paragraph 4.4 above. B-4 Exhibit B to Purchase Agreement No. 2252 5.4 Aircraft Radio Station License. At delivery Customer will provide its Aircraft Radio Station License to be placed on board the Aircraft following delivery. 5.5. Aircraft Flight Log. At delivery Customer will provide the Aircraft Flight Log for the Aircraft. 5.6 Delegation of Authority. Customer will present to MDC at delivery of the Aircraft an original or certified copy of Customer's Delegation of Authority designating and authorizing certain persons to act on its behalf in connection with delivery of the specified Aircraft. 5.7 Affidavit of Arrival. No later than 14 days after delivery, Customer will submit to Boeing an Affidavit of Arrival indicating the date and airport at which the ferry flight was completed. B-5 BUYER FURNISHED EQUIPMENT VARIABLES between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Supplemental Exhibit BFE1 to Purchase Agreement Number 2252 BFE1 BUYER FURNISHED EQUIPMENT VARIABLES relating to MODEL 717-22A AIRCRAFT This Supplemental Exhibit BFE1 contains vendor selection dates, on-dock dates and other variables applicable to the Aircraft. 1. Supplier Selection. Customer will: 1.1 Select and notify MDC of the suppliers of the following BFE items by the following dates: Galley System November 24, 1999 Seats (passenger) November 24, 1999 2. On-dock Dates Within 30 days of executing a definitive agreement for the aircraft, MDC will provide to Customer a BFE Requirements On-Dock/Inventory Document (BFE Document) or an electronically transmitted BFE Report which may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions relating to the in-sequence installation of BFE. For planning purposes, a preliminary BFE on-dock schedule is set forth below: BFE1-1 CUSTOMER SUPPORT VARIABLES between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Supplemental Exhibit CS1 to Purchase Agreement Number 2252 CS1 CUSTOMER SUPPORT VARIABLES relating to MDC MODEL 717-22A AIRCRAFT Customer and MDC will conduct planning conferences approximately 12 months before delivery of the first Aircraft, or as otherwise agreed, to develop and schedule a customized Customer Support Program to be furnished by MDC in support of the Aircraft. The customized Customer Services Program will be based upon and equivalent to the entitlements summarized below. Part 1: Maintenance and Flight Training Programs; Operations Engineering Support 1. Maintenance Training. 1.1 Airplane General Familiarization Course; 1 class of 24 students; 1.2 Mechanical/Power Plant Course; 2 classes of 15 students; 1.3 Electrical Systems Course; 2 classes of 15 students; 1.4 Avionics Systems Course; 2 classes of 15 students; 1.5 Composite Repair Course for Technicians; 1 class of 8 students; 1.6 Corrosion Prevention and Control Course; 1 class of 10 students; 1.7 Airplane Rigging Course; 1 class of 6 students; 1.8 Training materials will be provided to each student. In addition, one set of training materials used in MDC's training program, including visual aids, Computer Based Training Courseware, instrument panel wall charts, text/graphics, video programs, etc. will be provided for use in Customer's own training program. Items will be provided without revision service. CS1-1 2. Flight Training. 2.1 Transition training for 8 flight crews (16 pilots) The training will consist of ground school (utilizing computer based training), fixed base simulator, full flight simulator and actual aircraft training on Customer's Aircraft. 2.2 Flight Dispatcher training; 2 classes of 6 students; 2.3 Flight Attendant training; 2 classes of 12 students; 2.4 Performance Engineer Training; will be provided at MDC's facility. 2.5 One copy of the Flight Crew Operating Manual (FCOM) will be provided to each student, without revision service. In addition, one set of training materials as used in MDC's training program, including visual aids, Computer Based Training Courseware, instrument panel prints, text/graphics, video programs, etc. will be provided. 2.6 Additional Flight Operations Services: a. MDC flight crew personnel to assist in ferrying the first aircraft to Customer's main base; b. Instructor pilots for 90 instructor pilot days for revenue service training assistance, exclusive of flight tests, acceptance flights and ferry flights; c. An instructor pilot to visit Customer 6 months after revenue service training to review Customer's flight crew operations for a 2 week period. CS1-2 3. Planning Assistance. 3.1 Maintenance and Ground Operations. a) Maintenance Program Planning - Provide technical assistance in planning aircraft maintenance requirements and documentation. b) Ground Support Equipment Planning - Recommend ground support equipment necessary for operation of the aircraft and provide a summary of ground support equipment suitable for use in maintenance and servicing. c) Maintenance Engineering Operations Review - Upon request, MDC will conduct a maintenance operations review consisting of assistance to analyze Customer's current maintenance and engineering operational requirements, reliability and maintenance specifications, maintenance costs and reliability accounting practices. The objective of such review is to improve the interactions of operations, engineering, maintenance and logistics for improved operational effectiveness. MDC will provide the findings and recommendations in a report to the Customer. This service will be available until one year after delivery of the last Aircraft. 3.2 Spares. a) Recommended Spares Parts List (RSPL) Customized RSPL, data and documents will be provided to identify spare parts required for Customer's support program. b) Illustrated Parts Catalog (Provisioning IPC) A customized Provisioning IPC in accordance with ATA 100 will be provided. c) Provisioning Training Provisioning training will be provided for Customer's personnel at MDC's facilities, where documentation and technical expertise are available. Training is focused on the initial provisioning process and calculations reflected in the MDC RSPL. d) Spares Provisioning Conference A provisioning conference will be conducted, normally at MDC's facilities where technical data and personnel are available. CS1-3 4. Technical Publications Data The following matrix segregates pro-forma documents into two categories: customized and non-customized. The documents reflected here are those identified in the 717 "Customer Support Worksheet", 4 October 1999 Revision. If requested by Customer, and to the extent practicable, manuals listed herein will be provided to Customer no later than 30 days prior to delivery of the aircraft. A. Maintenance Engineering Data Customized Non-Customized - ---------- -------------- 1. ________________________ 1. Access Door Diagrams & Data Sheets 2. Aircraft Recovery Manual 3. Component Description & Location List 4. FAA Maintenance Review Board Report 5. Maintenance Facility and Equipment Planning Manual 6. On-Aircraft Maintenance Planning Report 7. Special Tool & Equipment Drawings 8. Support Equipment Summary 9. Aircraft Zoning Report 10. Structural Diagrams Reference Manual B. Technical Publications Data Customized Non-Customized - ---------- -------------- 1. Flight Crew Operating Manual 1. Seller Overhaul/Component Maintenance 2. Aircraft Maintenance Manual Manuals 3. Systems Schematics Manual 2. Illustrated Tool & Equipment Lists 4. Wiring Diagram Manual 3. Nondestructive Test Manual 5. Illustrated Parts Catalog 4. Nondestructive Testing Standards Practice Manual 6. Fault Isolation Manual 5. Structural Repair Manual 7. Fault Reporting Manual 6. Service Bulletins 7. Service Bulletin Index 8. Standard Wiring Practices Manual 9. Spares Interchangeability Manual 10. Cross Reference Index CS1-4 C. Engineering Data Customized Non-Customized - ---------- -------------- 1. FAA Approved Airplane Flight 1. Aircraft Characteristics for Airport Manual Planning 2. Dispatch Deviation Guide 2. Design Handbook 3. On-Board Wiring Diagram Book 3. Douglas Material Specifications 4. Weight & Balance Manual, 4. Douglas Process Material Index Chapter 1 5. Douglas Process Standards Manual 5. Weight & Balance Manual, 6. Drafting Manual Chapter 2 7. Drawing Section List 6. Weight & Balance Manual, 8. Engineering Drawings Chapters 1 & 2 (On-Board 9. Flying Qualities Report Copy) 10. Approved Equivalent Parts List 7. Weight Compliance Report 11. Master Minimum Equipment List 12. Douglas Standards Manual 13. Mater Component List 14. Flight Planning Performance Manual 15. Performance Engineer's Manual 16. Airworthiness Limitation Instructions 17. Standard Computerized Airplane Performance (SCAP) Module for Takeoff and Landing D. Spares Data Customized Non-Customized - ---------- -------------- 1. Overhaul Manual/Component Maintenance Manual Index 2. Product Support Supplier Directory 3. Product Support Supplier Agreements Manual 4. Supplier Technical Data 5. Technical Data Report D. Flight Technical Customized Non-Customized - ---------- -------------- 1. Operational Performance Software CS1-5 ENGINE ESCALATION, ENGINE WARRANTY AND PATENT INDEMNITY between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Supplemental Exhibit EE1 to Purchase Agreement Number 2252 EE1 ENGINE ESCALATION, ENGINE WARRANTY AND PATENT INDEMNITY relating to MODEL 717-22A AIRCRAFT 1. ENGINE ESCALATION. No separate engine escalation methodology is defined for the 717-200 Aircraft. Pursuant to the AGTA, the engine prices for these Aircraft are included in and will be escalated in the same manner as the Airframe. 2. ENGINE WARRANTY AND PRODUCT SUPPORT PLAN. MDC has obtained from BMW Rolls-Royce GmbH the right to extend to Customer the provisions of BMW Rolls-Royce Warranty Agreement "BR715 Engine Warranty Agreement" (hereafter referred to as "Warranty Agreement") subject, however to Customer's acceptance of the conditions set forth therein. Accordingly, MDC hereby extends to Customer and Customer hereby accepts that the provisions of the Warranty Agreement shall apply to Engines installed in the Aircraft at the time of delivery, provided that the Customer may, by notice given to MDC and BMW Rolls-Royce prior to delivery of the Aircraft, elect to substitute for the Warranty Agreement any corresponding warranty included either in a General Terms Agreement currently effective between Customer and BMW Rolls-Royce or in a contract for the sale by BMW Rolls-Royce to Customer of engines. In consideration for such extension, Customer hereby releases and discharges MDC from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of said installed engines and releases and discharges BMW Rolls-Royce from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of said installed engines except as otherwise expressly assumed by BMW Rolls-Royce in such Warranty Agreement. Copies of this Warranty Agreement may be obtained directly from BMW Rolls-Royce. EE1-1 SERVICE LIFE POLICY COMPONENTS between MCDONNELL DOUGLAS CORPORATION and Hawaiian Airlines, Inc. Supplemental Exhibit SLP1 to Purchase Agreement Number 2252 SLP1 SERVICE LIFE POLICY COMPONENTS relating to MDC MODEL 717 AIRCRAFT This is the listing of SLP Components for the Aircraft which relate to Part 3, Boeing Service Life Policy of Exhibit C, Product Assurance Document to the AGTA and is a part of Purchase Agreement No. 2252. 1. Pylons (a) Front engine mount yoke (b) Spars (including spar caps, webs and stiffeners) (c) Front engine mount to pylon attach fitting (d) Aft engine mount to pylon attach fitting (e) Upper and lower skin and stiffeners between spars (f) Pylon to fuselage attach angles and fittings 2. Wings (a) Front and rear spars (including spar caps, webs and stiffeners) (b) Upper and lower stringers and skin between spars (c) Landing gear bulkhead and landing gear attach fitting (d) Bulkhead at side of fuselage, including trapezoidal panel (e) Ribs in the wing (f) Wing to fuselage attach tee (g) Wing flap attach fittings 3. Fuselage Frames, plating, longerons and pressure bulkheads, but excluding all non-load carrying access doors. 4. Empennage (a) Vertical stabilizer spars and skin between spars (b) Aft fuselage vertical stabilizer carry-through structure (c) Horizontal stabilizer spars, integral skin and stringers between spars, and pivot fittings SLP1 5. Landing Gear Components (1) Main Gear (a) Cylinder (b) Piston/axle (c) Side brace (upper and lower) (d) Fixed side brace (e) Orifice support tube (f) Torque links (2) Nose Gear (a) Housing (b) Piston (c) Axle (d) Orifice support tube (e) Cylinder (f) Torque links (g) Cross tube (h) Drag links (upper and lower) NOTE: The Service Life Policy does not cover any bearings, bolts, bushings, clamps, brackets, actuating mechanisms or latching mechanisms used in or on the Covered Components. Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Customer Services Matters Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Maintenance Training. Customer and Boeing agree that Boeing shall provide the following training according to a mutually agreed schedule in lieu of the maintenance training specified in paragraphs 1.1 through 1.7 of Supplemental Exhibit CS1 to the Purchase Agreement. For courses conducted in Honolulu, Customer agrees to provide round-trip air transportation and hotel accomodations for all instructors, at no additional cost to Boeing. Boeing agrees to provide all other related per diem expenses (excluding hotel accomodations) for instructors conducting training in Honolulu. a. ________________________________________________________ b. ________________________________________________________ c. ________________________________________________________ d. ________________________________________________________ e. ________________________________________________________ f. ________________________________________________________ g. ________________________________________________________ Hawaiian Airlines, Inc. 2252-1 Page 2 12/16/99 h. ________________________________________________________ i. ________________________________________________________ j. ________________________________________________________ k. ________________________________________________________ l. ________________________________________________________ m. ________________________________________________________ 2. Flight Training. Customer and MDC agree that MDC shall provide the following training in addition to the flight training specified in paragraph 2 of Supplemental Exhibit CS1 to the Purchase Agreement. a. _______________________________________________ b. _______________________________________________ ___________________________________ ___________________________________ 3. Training in Honolulu. In accordance with paragraph 1.2 of Part B of AGTA-HWI MDC will conduct all training at MDC's training facility in Long Beach unless otherwise set forth above or agreed. If Customer wishes to have any additional training conducted at its facilities in Honolulu, the provisions of paragraph 4 of Part 1, Exhibit B of AGTA-HWI shall apply. 4. Confidential Treatment. Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by MDC as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of MDC, disclose this Letter Agreement or any information contained herein to any other person or entity. Hawaiian Airlines, Inc. 2252-1 Page 3 12/16/99 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ ----------------------- Its Attorney-In-Fact ----------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 Hawaiian Airlines, Inc. By /S/ ----------------------- Its ----------------------- By /S/ ----------------------- Its ----------------------- 2252-2 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Spares Initial Provisioning Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement is entered into on the date below, and amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Applicability. This letter will apply to initial provisioning for the Model 717-22A Aircraft purchased by Customer under the Purchase Agreement. 2. Initial Provisioning Meeting. MDC will conduct an initial provisioning meeting (Initial Provisioning Meeting) with Customer to establish mutually agreeable procedures to accomplish Customer's initial provisioning of spare parts for the Aircraft. The parties will agree, during the Initial Provisioning Meeting on the operational data to be provided by Customer for MDC's use in preparing its quantity recommendations for initial provisioning of spare parts for the Aircraft, exclusive of special tools, ground support equipment, engines and engine parts (Provisioning Items). Such operational data to be provided by Customer will be the data described in Chapter 6 of Boeing Manual D6-81834, entitled "Spares Provisioning Products Guide" (Boeing Spares Provisioning Products Guide) which will be furnished to Customer prior to the Initial Provisioning Meeting. The parties will also agree on the provisioning documentation to be provided by MDC as described in Boeing Spares Provisioning Products Guide (such data will be hereinafter referred to collectively as the "Provisioning Data"). MDC will provide instruction in the use of the initial provisioning documentation. This instruction will be provided in conjunction with the Initial Provisioning Meeting. In addition, the parties will discuss spares ordering procedures and other matters related to the provisioning for the Aircraft. The time and location for such Initial Provisioning Meeting will be mutually agreed upon between the parties; however, MDC and Customer will use their best efforts to convene such meeting within 30 days after execution of the Purchase Agreement. Hawaiian Airlines, Inc. 2252-2 Page 2 of 7 3. Initial Provisioning Documentation. 3.1 Provisioning Data. MDC will furnish Provisioning Data to Customer on or about February 15, 2000. The Provisioning Data will be as complete as possible and will cover Provisioning Items selected by MDC for review by Customer for initial provisioning for the Aircraft. The Provisioning Data will set forth the prices for Provisioning Items which are Boeing Spare Parts and such prices will be firm and remain in effect until the date or dates set forth below in Paragraph 4.1, Boeing Spare Parts, by which orders must be placed with Boeing. Boeing will, from time to time, until a date approximately 90 days following delivery of the last Aircraft or until the delivery configuration of each of the Aircraft is reflected in the Provisioning Data, whichever is later, furnish to Customer revisions to the Provisioning Data. 3.2 Provisioning IPC. Boeing will, on or about February 15, 2000, furnish to Customer a Boeing Illustrated Parts Catalog (IPC), hereinafter referred to as the "Provisioning IPC". The Provisioning IPC will be as complete as possible and will cover Provisioning Items selected by Boeing for review by Customer for initial provisioning for the Aircraft. Boeing will, from time to time, until a date approximately one year following delivery of the last Aircraft, or until the delivery configuration of each of the Aircraft is reflected in the Provisioning IPC, whichever is later, furnish to Customer revisions to the Provisioning IPC. 3.3 Buyer Furnished Equipment (BFE) Provisioning Data. 3.3.1 MDC's Responsibility. MDC will include BFE end items in the Provisioning Data and Provisioning IPC for BFE installed on Customer's Aircraft provided such equipment has been installed on other Aircraft by MDC and MDC has data on the BFE. 3.3.2 Customer's Responsibility. Customer will be responsible for ensuring BFE data is provided to MDC by the BFE supplier in a format acceptable to MDC for BFE not covered by 3.3.1 above. If the data is not provided to MDC in a timely manner and in a format acceptable to MDC , such BFE equipment will not be included in MDC 's Provisioning Data or IPC. 3.4 Other Data. MDC will submit to Customer listings of Raw Materials, Standard Parts and Bulk Materials to be used by Customer in the maintenance and repair of the Aircraft. 4. Purchase from MDC of Spare Parts as Initial Provisioning for the Aircraft. Hawaiian Airlines, Inc. 2252-2 Page 3 of 7 4.1 Boeing Spare Parts. Customer will place orders for Provisioning Items by March 16, 2000; provided, however, that in those instances where MDC submits any revision to the Provisioning Data, Customer will place orders for Boeing Spare Parts covered by such revision within 60 days following the date of such submittal. At Customer's request, MDC will process "controlled shipments" by shipping full or partial quantities of an order on a schedule specified by Customer, provided the final shipment is made no later than 24 months after receipt of the order. 4.2 Supplier Provisioning Items. Customer may place orders with Boeing for Provisioning Items which are manufactured by suppliers or to their detailed design and are covered by the Provisioning Data as initial provisioning for the Aircraft. The price to Customer for any such supplier Provisioning Item will be ____ of the supplier's quoted price to MDC therefor. If Customer elects to purchase such supplier Provisioning Items from Boeing, Customer will place its orders therefor in accordance with the provisions of Paragraph 4.1, Boeing Spare Parts. 4.3 Ground Support Equipment and Special Tools. Customer may place orders with Boeing for ground support equipment (GSE) and special tools manufactured by suppliers which Customer determines it will initially require for maintenance, overhaul and servicing of the Aircraft and/or engines. The price to Customer for such GSE or special tools will be _____________________ of the supplier's quoted price to Boeing therefor. If Customer elects to purchase such GSE and special tools from Boeing, Customer will place its orders therefor by the date set forth in Paragraph 4.1, Boeing Spare Parts or such later date as the parties may mutually agree. 4.4 Spare Engines and Engine Spare Parts. Customer may place orders with Boeing for spare engines and/or engine spare parts which Customer determines it will initially require for support of the Aircraft or for maintenance and overhaul of the engines. The price to Customer for such spare engines or such engine spare parts, will be ____ of the engine manufacturer's quoted price to Boeing for the engine, and ____ of the engine manufacturer's quoted price to Boeing for the engine spare parts. If Customer elects to purchase such spare engines or engine spare parts through Boeing, Customer will place its orders on a date to be mutually agreed upon during the Initial Provisioning Meeting. 4.5 QEC Kits. Responsibility for engine support and QEC kits belongs to the engine manufacturer BRR, and B.F. Goodrich (formerly Rohr) respectively. Boeing will, if requested by Buyer, review data provided by said manufacturers. Hawaiian Airlines, Inc. 2252-2 Page 4 of 7 4.6 Payment for Provisioning Items. The payment provisions of the Customer Services General Terms Agreement (CSGTA) between Boeing and Customer will be applicable to Provisioning Items ordered by Customer from Boeing for the Aircraft. 5. Delivery. MDC will, insofar as reasonably possible, deliver to Customer the Spare Parts ordered by Customer in accordance with the provisions of this letter on dates reasonably calculated to conform to Customer's anticipated needs in view of the scheduled deliveries of the Aircraft. Customer and MDC will agree upon the date to begin delivery of the Provisioning Spare Parts ordered in accordance with this letter. Where appropriate, MDC will arrange for shipment of such Spare Parts, which are manufactured by suppliers, directly to Customer from the applicable supplier's facility. The routing and method of shipment for initial deliveries and all subsequent deliveries of such Spare Parts will be as mutually agreed between MDC and Customer. 6. Substitution for Obsolete Spare Parts. 6.1 Obligation to Substitute. In the event that, prior to delivery of the first Aircraft pursuant to the Purchase Agreement, any Spare Part purchased by Customer from MDC in accordance with this letter is rendered obsolete or unusable due to the redesign of the Aircraft or of any accessory, equipment or part therefor, (other than a redesign at Customer's request), MDC will deliver to Customer new and usable Spare Parts in substitution for such obsolete or unusable Spare Parts and Customer will return the obsolete or unusable Spare Parts to MDC. MDC will credit Customer's account with MDC with the price paid by Customer for any such obsolete or unusable Spare Part and will invoice Customer for the purchase price of any such substitute Spare Part delivered to Customer. 6.2 Delivery of Obsolete Spare Parts and Substitutes Therefor. Obsolete or unusable Spare Parts returned by Customer pursuant to this Item will be delivered to Boeing at its Seattle Distribution Center, or such other destination as Boeing may reasonably designate. Spare Parts substituted for such returned obsolete or unusable Spare Parts will be delivered to Customer at Boeing's Seattle Distribution Center, or such other Boeing shipping point as Boeing may reasonably designate. Boeing will pay the freight charges for the shipment from Customer to Boeing of any such obsolete or unusable Spare Part and for the shipment from Boeing to Customer of any such substitute Spare Part. 7. Repurchase of Provisioning Items. 7.1 Obligation to Repurchase. During a period commencing 1 year after delivery of the first Aircraft under the Purchase Agreement, and ending ____ years after delivery of the last aircraft, (provided such delivery occurs no later than December 2001), Boeing will, upon receipt of Customer's written request and subject to the exceptions in Paragraph 7.2, Exceptions, repurchase unused and undamaged Provisioning Items which (i) were recommended by MDC in the Provisioning Data as initial provisioning for the Aircraft, (ii) were purchased by Customer from Boeing, and (iii) are surplus to Customer's needs. Hawaiian Airlines, Inc. 2252-2 Page 5 of 7 7.2 Exceptions. Boeing will not be obligated under Paragraph 7.1, Obligation to Repurchase, to repurchase any of the following: (i) quantities of Provisioning Items in excess of those quantities recommended by Boeing in the Provisioning Data for the Aircraft, (ii), Bulk Material Kits, Raw Material Kits, Service Bulletin Kits, Standards Kits and components thereof (except those components listed separately in the Provisioning Data), (iii) Provisioning Items for which an order was received by Boeing more than 5 months after delivery of the last Aircraft, (iv) Provisioning Items which have become obsolete or have been replaced by other Provisioning Items as a result of (a) Customer's modification of the Aircraft or (b) design improvements by Boeing or the supplier (other than Provisioning Items which have become obsolete because of a defect in design if such defect has not been remedied by an offer by Boeing or the supplier to provide no charge retrofit kits or replacement parts which correct such defect), and (v) Provisioning Items which become excess as a result of a change in Customer's operating parameters, provided to MDC pursuant to the Initial Provisioning meeting in Paragraph 2, which were the basis of MDC 's initial provisioning recommendations for the Aircraft. 7.3 Notification and Format. Customer will notify MDC, in writing, when Customer desires to return Provisioning Items which Customer's review indicates are eligible for repurchase by Boeing under the provisions of this Repurchase of Provisioning Items paragraph. Customer's notification will include a detailed summary, in part number sequence, of the Provisioning Items Customer desires to return. Such summary will be in the form of listings, tapes, diskettes or other media as may be mutually agreed between MDC and Customer, and will include part number, nomenclature, purchase order number, purchase order date and quantity to be returned. Within 5 business days after receipt of Customer's notification, Boeing will advise Customer, in writing, when Boeing's review of such summary will be completed. 7.4 Review and Acceptance by Boeing. Upon completion of Boeing's review of any detailed summary submitted by Customer pursuant to Paragraph 7.3, Boeing will issue to Customer a Material Return Authorization (MRA) for those Provisioning Items Boeing agrees are eligible for repurchase in accordance with this Repurchase of Provisioning Items paragraph. Boeing will advise Customer of the reason that any spare part included in Customer's detailed summary is not eligible for return. Boeing's MRA will state the date by which Provisioning Items listed in the MRA must be redelivered to Boeing and Customer will arrange for shipment of such Provisioning Items accordingly. Hawaiian Airlines, Inc. 2252-2 Page 6 of 7 7.5 Price and Payment. The price of each Provisioning Item repurchased by Boeing pursuant to this Repurchase of Provisioning Items paragraph will be an amount equal to ____ of the original invoice price thereof. In the case of Provisioning Items manufactured by a supplier which were purchased pursuant to Paragraph 4, Purchase from MDC of Spare Parts as Initial Provisioning for the Aircraft, hereof the repurchase price will not include Boeing's ____ handling charge. MDC will pay the repurchase price by issuing a credit memorandum in favor of Customer which may be applied against amounts due MDC for the purchase of aircraft, Spare Parts, services or data. 7.6 Delivery of Provisioning Items. Provisioning Items repurchased by Boeing pursuant to this Repurchase of Provisioning Items paragraph will be delivered to Boeing F.O.B. at its Seattle Distribution Center, or such other destination as Boeing may reasonably designate. Customer will pay the freight charges for the shipment from Customer to Boeing of any such Provisioning Items. 8. Obsolete Spare Parts and Surplus Provisioning Items - Title and Risk of Loss. Title to and risk of loss of any obsolete or unusable Spare Parts returned to Boeing pursuant to Paragraph 6, Substitution for Obsolete Spare Parts, will pass to Boeing upon delivery thereof to Boeing. Title to and risk of loss of any Spare Part substituted for an obsolete or unusable Spare Part pursuant to Paragraph 6, Substitution for Obsolete Spare Parts, will pass to Customer upon delivery thereof to Customer. Title to and risk of loss of any Provisioning Item repurchased by Boeing pursuant to Paragraph 7, Repurchase of Provisioning Items, will pass to Boeing upon delivery thereof to Boeing. With respect to the obsolete or unusable Spare Parts which may be returned to Boeing and the Spare Parts substituted therefor, pursuant to Paragraph 6, and the Provisioning Items which may be repurchased by Boeing, pursuant to Paragraph 7, the party which has risk of loss of any such Spare Part or Provisioning Item will have the responsibility of providing any insurance coverage for it desired by such party. 9. Supplier Support. Boeing has entered, or anticipates entering, into product support agreements with suppliers (Boeing Suppliers) of major system components manufactured by such Suppliers to be installed on the Aircraft (Supplier Components). Such product support agreements commit, or are expected to commit, the Boeing Suppliers to provide to Boeing's customers and/or such customer's designees support services with respect to the Supplier Components which can be reasonably expected to be required during the course of normal operation. This support includes but is not limited to shelf-stock of certain spare parts, emergency spare parts, timely delivery of spare parts, and technical data related to the Supplier Components. Copies of such product support agreements will be provided to Customer on or about December 15, 1999, unless requested earlier by Customer , in Boeing Document D6-56115, Volumes 1 and 2. In the event Customer has used due diligence in attempting to resolve any difficulty arising in normal business transactions between Customer and a Boeing Supplier with respect to product support for a Supplier Component manufactured by such Supplier and if such difficulty remains unresolved, MDC will, if requested by Customer, assist Customer in resolving such difficulty. Assistance will be provided by the Customer Supplier Services organization. Hawaiian Airlines, Inc. 2252-2 Page 7 of 7 10. Termination for Excusable Delay. In the event of termination of the Purchase Agreement with respect to any Aircraft pursuant to Article 7 of the AGTA, such termination will, if Customer so requests by written notice received by Boeing within 15 days after such termination, also discharge and terminate all obligations and liabilities of the parties as to any Spare Parts which Customer had ordered pursuant to the provisions of this letter as initial provisioning for such Aircraft and which are undelivered on the date Boeing receives such written notice. Very truly yours, MCDONNELL DLUGLAS CORPORATION A wholly-owned subsidiary of THE BOEING COMPANY By /S/ ------------------------- Its Attorney-In-Fact ------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ By /S/ ------------------------- ------------------------- Its Its ------------------------- ------------------------- Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Aircraft Performance Guarantees Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. MDC agrees to provide Customer with the performance guarantees in the Attachment. These guarantees are exclusive and expire upon delivery of the Aircraft to Customer. Customer agrees not to disclose this Letter Agreement, attachments, or any other information related to this Letter Agreement without prior written consent by MDC, except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i)any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any therof is subject or in whose activities any of the above is a participant. Hawaiian Airlines, Inc. 6-1166-EMM-0251 Page 2 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ ------------------------------- Its Attorney-In-Fact ------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 Hawaiian Airlines, Inc. By /S/ ------------------------------- Its ------------------------------- By /S/ ------------------------------- Its ------------------------------- Attachment to Letter Agreement No. 6-1166-EMM-0251 BR715-A1-30 Engines Page 1 REDACTED IN ITS ENTIRETY. Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Promotional Support Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. MDC agrees to make available to Customer an aggregate of $__________ (the Promotional Funds) for Customer's marketing and promotion programs associated with the introduction of the Aircraft into service with Customer. Of the Promotional Funds, $__________ will be made available on or after the date the first Aircraft is delivered to Customer, and $__________ will be made available on or after the date each subsequent Aircraft is delivered to Customer. The Promotional Funds may be used to pay for various promotional programs with respect to any or all of the Aircraft including, without limitation: marketing research; tourism development; corporate identity; direct marketing; videotape, or still photography; planning, design and production of collateral materials; management of promotion programs and advertising campaigns. By way of example, upon the delivery of the second Aircraft to Customer, assuming that Customer has not presented any receipts for payment prior to such date, Customer would be able to present to MDC for payment receipts totalling $__________ for programs relating to the introduction of either or both Aircraft or related to the introduction of the new fleet of Aircraft. MDC's obligation to provide the Promotional Funds will commence upon execution of the Purchase Agreement and will terminate __________ from the date the last firm Aircraft is delivered to Customer, as such date may be extended as a result of Excusable Delay (as such term is defined in the AGTA) on the part of MDC. Payments to Customer of Promotional Funds then available will be made to Customer within thirty (30) days after Customer's presentation to MDC of invoices or paid receipts evidencing the incurrence by Customer of costs for such promotional programs, whether incurred before or after the delivery of any Aircraft. If there are any unused Promotional Funds upon the expiration of MDC's obligation to provide the Promotional Funds, there will be no cash payments or other support in lieu thereof. Hawaiian Airlines, Inc. 6-1166-EMM-0252 Page 2 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ ------------------------------- Its Attorney-In-Fact ------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 Hawaiian Airlines, Inc. By /S/ ------------------------------- Its ------------------------------- By /S/ ------------------------------- Its ------------------------------- Hawaiian Airlines, Inc. 6-1166-EMM-0253 Page 1 of 4 6-1166-EMM-0253 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Business Matters Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. In consideration of Customer's purchase of the Aircraft, MDC will provide the following incentives: 1. ___________________. __________________________________________________________________ __________________________________________________________________ 2. ___________________. __________________________________________________________________ __________________________________________________________________ 3. ___________________. __________________________________________________________________ 4. ___________________. __________________________________________________________________ Hawaiian Airlines, Inc. 6-1166-EMM-0253 Page 2 of 4 5. ___________________. __________________________________________________________________ Such credit memorandum is applicable to each of the thirteen firm aircraft listed in Table 1 to the Purchase Agreement, and may be used by Customer for purchase of Boeing proprietary spare parts, other Boeing goods and services, or applied toward final payment for the respective Aircraft, but may not be used for advance payments. In the event the documents listed above are not signed by the time and date specified, MDC's offer to provide the Executive Closing Credit Memorandum will be withdrawn. 6. ___________________. __________________________________________________________________ 7. Terms and Application of Credit Memoranda The credit memoranda described herein are applicable to the Aircraft only and require purchase of the Aircraft as described in Table 1. Except as specifically otherwise provided for in paragraph 2 above, the credit memoranda set forth above may be used by Customer toward the purchase of Boeing proprietary spare parts, goods and services or, applied toward final payment of the purchase price of the Aircraft at the time of delivery, but may not be applied toward advance payments. 8. Assignment. The Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer in consideration of Customer becoming the operator of the Aircraft, and cannot be assigned, in whole or in part, without the prior written consent of MDC. 9. Confidential Treatment. Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by MDC as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of MDC, disclose this Letter Agreement or any information contained herein to any other person or entity , except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i) any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any thereof is subject or in whose activities any of the above is a participant. Hawaiian Airlines, Inc. 6-1166-EMM-0253 Page 2 of 4 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ ----------------------------------- Its Attorney-In-Fact ----------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 Hawaiian Airlines, Inc. By /S/ ----------------------------------- Its ----------------------------------- By /S/ ----------------------------------- Its ----------------------------------- Attachment to: 6-1166-EMM-300 Advance Payments Summary BOEING PROPRIETARY Redacted in its entirety. 6-1166-EMM-0254 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Purchase Rights Aircraft and Aircraft Model Substitution. Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Purchase Rights Aircraft In addition to the thirteen firm Aircraft, MDC is pleased to offer Customer rights to purchase up to seven (7) additional 717-200 aircraft (Purchase Rights Aircraft). For each Purchase Rights Aircraft Customer firmly purchases, one new Purchase Rights Aircraft will be offered to Customer, up to an aggregate of seven Purchase Rights Aircraft. - ------------------------------------------------------------------ - ------------------------------------------------------------------ - ------------------------------------------------------------------ All Purchase Right Aircraft are STAP (subject to available position). Customer agrees to provide written notice to MDC of Purchase Right exercise twenty-four months prior to its requested aircraft delivery. Upon written request by Customer, Boeing will advise availability of delivery positions. 2. Assignment The Purchase Rights described in this Letter Agreement are provided as an accommodation to Customer in consideration of Customer becoming the operator of the Aircraft, and cannot be assigned, in whole or in part, without the prior written consent of MDC. Hawaiian Airlines, Inc. 6-1166-EMM-0254 Page 2 of 3 3. Right to Substitute New Derivative Model 717 Aircraft. Currently MDC does not offer, or have firm plans to offer, a derivative aircraft of the Model 717-200 aircraft. Customer has requested the right to substitute the purchase of Model 717 derivative aircraft, in the event MDC should offer such derivative aircraft, for Purchase Right Aircraft No. 3 through No. 7, described in paragraph 1. above. In the event MDC decides to offer to manufacture and sell a Model 717 derivative aircraft and subject to certain lead time constraints, new model introduction, production and configuration issues, aircraft price, business terms and delivery schedule being mutually agreed upon by MDC and Customer during detailed contractual discussions, Customer is hereby granted a right of model substitution between the Model 717 derivative aircraft and Purchase Right Aircraft No. 3 through No. 7. The timing requirement for Customer's notification of substitution for Purchase Right Aircraft No. 3 through No. 7 will require further discussion at the technical level; but in any event such notification shall be no later than December 31, 2003. Customer's substitution right and MDC's obligation in this Letter Agreement is further conditioned upon Customer and MDC executing a definitive agreement for the purchase of one or more Purchase Rights Aircraft (for Purchase Rights Aircraft No.3 and on). 4. Confidential Treatment. Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by MDC as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of MDC, disclose this Letter Agreement or any information contained herein to any other person or entity , except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i) any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any therof is subject or in whose activities any of the above is a participant. Hawaiian Airlines, Inc. 6-1166-EMM-0254 Page 2 of 3 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ ------------------------------ Its Attorney-In-Fact ------------------------------ ACCEPTED AND AGREED TO this Date: December 31, 1999 Hawaiian Airlines, Inc. By /S/ ------------------------------ Its ------------------------------ By /S/ ------------------------------ Its ------------------------------ 6-1166-EMM-272 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Liquidated Damages - Non-Excusable Delay Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. Definition of Terms: Non-Excusable Delay: Delay in delivery of any Aircraft beyond the last day of the delivery month established in the Purchase Agreement by any cause that is not an Excusable Delay pursuant to Article 7 of the AGTA. 1. Liquidated Damages MDC agrees to pay Customer liquidated damages for each day of Non-Excusable Delay in excess of _______ (collectively the Non-Excusable Delay Payment Period) at a rate of $_______ per day (Liquidated Damages). The total amount of such Liquidated Damages will not exceed an aggregate sum of $____________ per aircraft. 2. Interest In addition to the Liquidated Damages in Paragraph 1, MDC will pay to Customer interest (Interest) commencing _______ after the Scheduled Delivery as follows: The daily Interest shall be the product of the daily interest rate (computed by dividing the interest rate in effect for each day by 365 days, or 366 days, as the case may be) times the entire amount of advance payments received by MDC for such Aircraft. The interest rate will be the _______________ as published in the Wall Street Journal, Western Edition. Such rate used for this calculation will be the rate in effect on the scheduled delivery date and reset every 90 days thereafter. Such Interest will be calculated on a simple interest basis and paid in full at actual delivery. Hawaiian Airlines, Inc. 6-1166-EMM-272 Page 2 of 3 3. Right of Termination. Customer will not have the right to refuse to accept delivery of any Aircraft because of a Non-Excusable Delay unless and until the aggregate duration of the Non-Excusable Delay for such Aircraft exceeds ________ (Non-Excusable Delay Period). After such Non-Excusable Delay Period, either party may terminate the Purchase Agreement as to such Aircraft by written or telegraphic notice given to the other. 4. Termination If the Purchase Agreement is terminated with respect to any Aircraft for a Non-Excusable Delay, MDC will, in addition to paying Liquidated Damages as described above, promptly repay to Customer the entire amount of the advance payments received by MDC for such Aircraft, without interest. 5. Exclusive Remedies The Liquidated Damages and Interest payable in accordance with Paragraphs 1 and 2 of this Letter Agreement, and Customer's right to terminate pursuant to this Letter Agreement are Customer's exclusive remedies for a Non-Excusable Delay and are in lieu of all other damages, claims, and remedies of Customer arising at law or otherwise for any Non-Excusable Delay in the Aircraft delivery. Customer hereby waives and renounces all other claims and remedies arising at law or otherwise for any such Non-Excusable Delay. 6. Confidential Treatment Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by MDC as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of MDC, disclose this Letter Agreement or any information contained herein to any other person or entity, except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i)any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any therof is subject or in whose activities any of the above is a participant. Hawaiian Airlines, Inc. 6-1166-EMM-272 Page 3 of 3 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact -------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ -------------------------------- Its -------------------------------- By /S/ -------------------------------- Its -------------------------------- 6-1166-EMM-297 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Guarantee Agreement ("Guarantee") between The Boeing Company ("Guarantor") and Hawaiian Airlines, Inc. ("Beneficiary"). Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) Reference is made to Purchase Agreement No. 2252 dated as of December 31, 1999 (as amended and supplemented) (the "Purchase Agreement") between McDonnell Douglas Corporation ("Obligor"), a wholly owned subsidiary of Guarantor, and Beneficiary. Guarantor guarantees to Beneficiary the due and punctual performance and observance by Obligor of all the obligations and liabilities of Obligor under the Purchase Agreement (the Obligations) according to the terms of the Purchase Agreement, and in the event of nonpayment or performance, agrees to pay or perform or cause such payment or performance to be made upon notice of such nonpayment or nonperformance, in each case after any applicable notice requirements. Guarantor shall not be liable to pay, perform or cause the performance of any Obligation unless Beneficiary makes written demand upon Obligor for the payment or performance of an Obligation then due and owing and concurrently provides Guarantor with a copy of such written demand at the address below, and such Obligation is not paid or performed in full within twenty (20) days of such demand. Guarantor shall have a minimum period of thirty (30) days to begin any performance or such longer period as Guarantor requires to undertake such performance provided that all times during such period Guarantor continues to use diligent efforts to complete such performance. Guarantor waives any right to require that any right to take action against Obligor (other than the written demand and twenty (20) day notice period for performance Hawaiian Airlines, Inc. Page 2 of 3 described above) be initiated or exhausted prior to action being taken against Guarantor. All notices to Boeing under this letter agreement shall be sent to Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 U.S.A. Courier to: Building 25-20 1901 Oakesdale Ave. SW Renton, Wa. 98055 USA Attention: Vice President - Contracts Mail Code 21-34 Facsimile: (425) 237-1706 Guarantor's obligations hereunder shall continue in full force and effect until the complete and final performance of the Obligations. This Guarantee may not be assigned without the written consent of Guarantor. This Guarantee will be governed by the law of the State of Washington, exclusive of Washington's conflicts of laws rules. This Guarantee and any provision hereof may be waived, amended, modified or supplemented as between Beneficiary and Guarantor only by an agreement or instrument in writing executed by Guarantor and Beneficiary. This Guarantee contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior understandings or agreements, whether written or oral. CONFIDENTIAL TREATMENT. Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by Boeing as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the Hawaiian Airlines, Inc. Page 3 of 3 prior written consent of Boeing, disclose this Letter Agreement or any information contained herein to any other person or entity. ACCEPTED AND AGREED TO this Date: December 31, 1999 THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact ----------------------------------- Hawaiian Airlines, Inc. By /S/ ---------------------------------- Its ----------------------------------- By /S/ ---------------------------------- Its ----------------------------------- 6-1166-EMM-299 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Other Matters Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Delivery Schedule. ------------------------------------------------------------ The provisions of Letter Agreement 6-1166-EMM-0272 would not be applicable in the event Customer requests a further delay in delivery beyond the revised delivery date. 2. Confidential Treatment Customer understands that certain commercial and financial information contained in this Letter Agreement are considered by MDC as confidential. Customer agrees that it will treat this Letter Agreement and the information contained herein as confidential and will not, without the prior written consent of MDC, disclose this Letter Agreement or any information contained herein to any other person or entity, except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i) any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any therof is subject or in whose activities any of the above is a participant. Hawaiian Airlines, Inc. 6-1166-EMM-299 Page 2 of 2 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact -------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ -------------------------------- Its -------------------------------- By /S/ -------------------------------- Its -------------------------------- HAWAIIAN AIRLINES, INC. 6-1166-EMM-0300 Page 1 6-1166-EMM-0300 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Financing Matters Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. _______________________. _______________________________________________ _______________________________________________ If a definitive agreement on financing of the 717 aircraft has not been signed by Boeing and Customer on or before January 15 21, 2000, either party will have the right to terminate the purchase of the aircraft by written or telegraphic notice given to the other within 10 days after such date. In the event the parties have not reached agreement by January 15 21, but wish to continue discussions, Boeing may, at it's option, slide the first two aircraft deliveries (February and March 2001) into 2002, and in addition, reschedule other aircraft deliveries as necessary. 2. Effect of Termination If there is any termination under the above provisions or for any of the following reasons: __________________________________________________, then all rights and obligations of Boeing and Customer with respect to the Aircraft will terminate and be without further force and effect, except that Boeing will promptly refund to Customer, without interest, all applicable advance payments and the Deposit received by Boeing from Customer pursuant to the Purchase Agreement with respect to the Aircraft. HAWAIIAN AIRLINES, INC. 6-1166-EMM-0300 Page 2 Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact -------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ -------------------------------- Its -------------------------------- By /S/ -------------------------------- Its -------------------------------- Attachment (2 pages) Attachment to: 6-1166-EMM-300 Advance Payments Summary BOEING PROPRIETARY Redacted in its entirety. 6-1166-EMM-0301 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Spares Commitment Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Spares Commitment Boeing contractually commits to our customers that we will manufacture, procure and maintain inventory levels of Boeing proprietary spare parts in quantities sufficient to meet our customer's needs. This commitment will continue as long as the aircraft is being operated in air transport service. Boeing has entered into Product Support Agreements with most of our suppliers which require such suppliers to maintain levels of vendor spare parts inventory sufficient to meet the repetitive demands of our customers. These product support agreements will continue as long as five of the applicable model aircraft are operated in commercial transport service anywhere in the world. Currently, Boeing stocks vendor, Boeing proprietary and standards parts valued at approximately $200 Million (almost 12,000 different part numbers) in our new Torrance, California spares facility, located a short distance from Los Angeles International airport. Boeing is committed to the 717 Program, and we are confident we will produce many of these aircraft. ______________________________________ o ______________________________________ o ______________________________________ o ______________________________________ Hawaiian Airlines, Inc. 6-1166-EMM-0301 Page 2 2. Confidential Treatment Customer agrees not to disclose this Letter Agreement, attachments, or any other information related to this Letter Agreement without prior written consent by MDC, except to the extent that such disclosure is required by law or by any Government Entity (as such term is defined below), provided that Customer gives reasonable notice to MDC so as to enable MDC to seek appropriate protective orders or, if possible, challenge the requirement of such disclosure. As used herein, "Government Entity" means (i)any national government, political subdivision thereof, or local jurisdiction therein, (ii) any instrumentality, board, commission, court, or agency of any of the above, however constituted, and (iii) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any therof is subject or in whose activities any of the above is a participant. Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact -------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ -------------------------------- Its -------------------------------- By /S/ -------------------------------- Its -------------------------------- 6-1166-EMM-0322 Hawaiian Airlines, Inc. Honolulu International Airport P.O. Box 30008 Honolulu, HI 96820-0008 Subject: Board Approval Reference: Purchase Agreement No. 2252 (the Purchase Agreement) between McDonnell Douglas Corporation (MDC) and Hawaiian Airlines, Inc. (Customer) relating to Model 717-22A aircraft (the Aircraft) This Letter Agreement amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement have the same meaning as in the Purchase Agreement. 1. Board Approval Customer and MDC signed a definitive agreement for the purchase of the Aircraft on December 31,1999, subject to a definitive agreement on the financing of the Aircraft and Hawaiian Airlines Board of Directors approval of the transaction by January 21, 2000. Customer has requested an extension to the board approval date to February 25, 2000. Customer has made deposits and advance payments in the amount of $_____________ as of February 1, 2000. __________________________ If board approval of the 717 aircraft purchase has not been granted on or before February 25, 2000, either party will have the right to terminate the purchase of the aircraft by written or telegraphic notice given to the other within 10 days after such date. In the event Hawaiian Airlines Board of Directors approval has not been granted by February 25, 2000, but the parties wish to continue discussions, Boeing may, at it's option, reschedule the first two aircraft deliveries (February and March 2001) into 2002, and in addition, reschedule other aircraft deliveries as necessary. HAWAIIAN AIRLINES, INC. 6-1166-EMM-0322 Page 2 2. Effect of Termination If there is any termination under the above provisions due to the failure of the Board of Directors of Hawaiian Airlines to approve the Purchase Agreement and the financing terms between Hawaiian Airlines and Boeing for the purchase of up to 20 717-200 aircraft by February 25, 2000, then all rights and obligations of Boeing and Customer with respect to the Aircraft will terminate and be without further force and effect, except that Boeing will promptly refund to Customer, without interest, all applicable advance payments and the Deposit received by Boeing from Customer pursuant to the Purchase Agreement with respect to the Aircraft. Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY Very truly yours, MCDONNELL DOUGLAS CORPORATION a wholly-owned subsidiary of THE BOEING COMPANY By /S/ -------------------------------- Its Attorney-In-Fact -------------------------------- ACCEPTED AND AGREED TO this Date: December 31, 1999 HAWAIIAN AIRLINES, INC. By /S/ -------------------------------- Its -------------------------------- By /S/ -------------------------------- Its -------------------------------- Attachment (2 pages) ATTACHMENTS REDACTED IN ITS ENTIRETY. EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23-1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements (Form S-8 Nos. 033-064299, 333-09667, 333-09669, 333-09671, 333-09673, 333-26179, and 333-63575) of Hawaiian Airlines, Inc. of our report dated March 21, 2000, with respect to the financial statements and schedule of Hawaiian Airlines, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Honolulu, Hawaii March 21, 2000 EX-23.2 9 EXHIBIT 23.2 Accountants' Consent The Board of Directors Hawaiian Airlines, Inc.: We consent to incorporation by reference in Registration Statement Nos. 033-64299, 333-09667, 333-09669, 333-09671, 333-09673, 333-26179, and 333-63575 on Form S-8 of Hawaiian Airlines, Inc. of our reports dated March 11, 1999, relating to the balance sheet of Hawaiian Airlines, Inc. as of December 31, 1998, and the related statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 1998, and relating to the financial statement schedule of Hawaiian Airlines, Inc. for the two-year period ended December 31, 1998, which reports appear in the December 31, 1999 annual report on Form 10-K of Hawaiian Airlines, Inc. /s/ KPMG LLP Honolulu, Hawaii March 29, 2000 EX-24 10 EXHIBIT 24 POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints John L. Garibaldi, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with all exhibits thereto, and other documents in connections therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that all attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act 1934, this report has been signed below by the following persons in the capacities and on the dates indicated below. SIGNATURE TITLE DATE /s/ JOHN W. ADAMS Chairman of the March 30, 2000 - ------------------------------- Board of Directors John W. Adams /s/ PAUL J. CASEY President and March 30, 2000 - ------------------------------- Chief Executive Officer Paul J. Casey (Principal Executive Officer) /s/ JOHN L. GARIBALDI Executive Vice President March 30, 2000 - ------------------------------- and Chief Financial Officer John L. Garibaldi (Principal Financial and Accounting Officer) /s/ TODD G. COLE Director March 30, 2000 - ------------------------------- Todd G. Cole /s/ ROBERT G. COO Director March 30, 2000 - ------------------------------- Robert G. Coo /s/ JOSEPH P. HOAR Director March 30, 2000 - ------------------------------- Joseph P. Hoar /s/ RENO F. MORELLA Director March 30, 2000 - ------------------------------- Reno F. Morella SIGNATURE TITLE DATE /s/ ARTHUR J. PASMAS Director March 30, 2000 - ------------------------------------ Arthur J. Pasmas /s/ SAMSON PO'OMAIHEALANI Director March 30, 2000 - ------------------------------------ Samson Po'omaihealani /s/ EDWARD Z. SAFADY Director March 30, 2000 - ------------------------------------ Edward Z. Safady /s/ SHARON L. SOPER Director March 30, 2000 - ------------------------------------ Sharon L. Soper /s/ THOMAS J. TRZANOWSKI Director March 30, 2000 - ------------------------------------ Thomas J. Trzanowski EX-27 11 EXHIBIT 27
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 63,631 0 25,421 500 13,965 118,663 77,813 12,541 239,137 120,442 26,648 0 0 410 65,716 239,137 488,877 488,877 529,414 529,414 1,696 0 1,071 39,913 11,418 28,495 0 0 772 29,267 0.72 0.72
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