-----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, HfB2jwt9N3gEtxORkAP/fCOFBYu8RI9fnLQDhvaBolZvBrSmzX53XKUl1FcoKxg9 HvFRxfBgYi6X2Je/VI7Ozg== 0000950153-99-000364.txt : 19990402 0000950153-99-000364.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950153-99-000364 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICA WEST HOLDINGS CORP CENTRAL INDEX KEY: 0001029863 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 860847214 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12649 FILM NUMBER: 99580125 BUSINESS ADDRESS: STREET 1: 51 W THIRD STREET STREET 2: C/O AMERICA WEST AIRLINES CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6026930800 MAIL ADDRESS: STREET 1: 4000 E SKY HARBOR BLVD STREET 2: C/O AMERICA WEST AIRLINES CITY: PHOENIX STATE: AZ ZIP: 85034 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICA WEST AIRLINES INC CENTRAL INDEX KEY: 0000706270 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 860418245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12337 FILM NUMBER: 99580126 BUSINESS ADDRESS: STREET 1: 4000 E SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6026930800 MAIL ADDRESS: STREET 1: 4000 EAST SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 10-K405 1 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12649 AMERICA WEST HOLDINGS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0847214 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 111 WEST RIO SALADO PARKWAY (602) 693-0800 TEMPE, ARIZONA 85281 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED: ------------------------------------ ------------------------------------------ CLASS B COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE COMMISSION FILE NUMBER 1-10140 AMERICA WEST AIRLINES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0418245 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 4000 E. SKY HARBOR BOULEVARD (602) 693-0800 PHOENIX, ARIZONA 85034-3899 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED: -------------------------------------------- ------------------------------------------ CLASS B COMMON STOCK WARRANT, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: SENIOR UNSECURED NOTES DUE 2005 (TITLE OF CLASS) Indicate by check mark whether each of the registrants (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 (Section 229.405 under the Securities Exchange Act of 1934) is not contained herein, and will not be contained, to the best of each of the 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. X As of March 22, 1999, there were 37,842,770 shares of America West Holdings Corporation Class B Common Stock, $.01 par value, and 3,143,404 warrants to purchase America West Holdings Corporation Class B Common Stock, $.01 par value, from America West Airlines, Inc., respectively, issued and outstanding. As of such date, based on the closing sales price, 22,240,610 shares of Class B Common Stock, having an aggregate market value of approximately $417,011,437 were held by non-affiliates. For purposes of the above statement only, all directors and executive officers of the registrants are assumed to be affiliates. As of March 22, 1999, all outstanding equity securities of America West Airlines, Inc. were owned by America West Holdings Corporation. With respect to America West Airlines, Inc., 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 a court. Yes X No DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement related to America West Holdings Corporation's 1999 annual meeting of stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of America West Holdings Corporation's fiscal year ended December 31, 1998, are incorporated by reference into Part III of this Form 10-K. 2 AMERICA WEST AIRLINES, INC., A WHOLLY OWNED SUBSIDIARY OF AMERICA WEST HOLDINGS CORPORATION, MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION J(2). 3 TABLE OF CONTENTS
PAGE PART I Item 1. Business................................................................................................4 Item 2. Properties..............................................................................................21 Item 3. Legal Proceedings.......................................................................................21 Item 4. Submission of Matters to a Vote of Security Holders.....................................................21 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters...................................24 Item 6. Selected Consolidated Financial Data....................................................................26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................................40 Item 8A. Consolidated Financial Statements and Supplementary Data -- America West Holdings Corporation...........41 Item 8B. Financial Statements and Supplementary Data -- America West Airlines, Inc...............................66 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................................86 PART III Item 10. Directors and Executive Officers of the Registrants.....................................................86 Item 11. Executive Compensation..................................................................................86 Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................86 Item 13. Certain Relationships and Related Transactions..........................................................86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................87
Note Concerning Forward-Looking Information This Report contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "estimate," "project," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on the Company's results are competitive practices in the airline and travel industries generally and particularly in the Company's principal markets, the ability of the Company to meet existing financial obligations in the event of adverse industry or economic conditions or to obtain additional capital to fund future commitments and expansion, the Company's relationship with employees and the Company's ability to negotiate and the terms of future collective bargaining agreements and the impact of current and future laws and governmental regulations affecting the airline and travel industries and the Company's operations. For additional discussion of such risks see "Business -- Risk Factors," included in Item 1 of this Report on Form 10-K. Any forward-looking statements speak only as of the date such statements are made. 3 4 PART I This combined Form 10-K is filed by each of America West Holdings Corporation and its wholly owned subsidiary, America West Airlines, Inc. America West Holdings Corporation is referred to as "Holdings" or "the Company" or "our Company", and America West Airlines is sometimes referred to as "AWA" or "the Airline". The Leisure Company, the other wholly owned subsidiary of Holdings, is sometimes referred to as TLC. The term "we" is used to refer to management of the Company, the Airline or TLC, as the context requires. ITEM 1. BUSINESS FINANCIAL REVIEW Our Company reported record pretax income, net income and revenues for the fourth quarter and full year 1998. Diluted earnings per share in 1998 rose 47% to $2.40 compared with $1.63 in 1997. The Company's 1998 financial results are described in more detail in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." OVERVIEW OF OUR COMPANY'S BUSINESSES Holdings is the parent company of AWA and TLC. We believe that the holding company structure improves the Company's ability to manage separate business segments effectively and that Holdings provides a platform for further expansion of the Company's travel-related businesses. The Company intends to continue to evaluate investment and expansion opportunities that would allow it to capitalize on the key strengths and market positions of AWA and TLC. AWA is the ninth largest commercial airline carrier in the United States, operating through its principal hubs located in Phoenix, Arizona and Las Vegas, Nevada, and a mini-hub located in Columbus, Ohio. AWA is the lowest cost major airline in the United States. The Company's operating cost per available seat mile ("CASM") for 1998 was 7.29 cents, which was approximately 25% less than the average CASM of the other major domestic airlines. At December 31, 1998, the Airline served 57 destinations, including six destinations in Mexico and one in Canada, with a fleet of 111 aircraft and offered service to an additional 40 destinations through alliance arrangements with other airlines. In January 1998, TLC was established as a separate subsidiary of Holdings to grow the Company's leisure travel business. TLC arranges and sells leisure travel products that may include airfare, hotel accommodations, ground transportation, and a variety of other travel options. TLC's largest brand, America West Vacations, has significant strength in the Las Vegas destination market and also has presence in other vacation destinations such as Arizona, California, Florida, Mexico, and Canada. In 1998, TLC added or expanded product offerings including Hawaii and Caribbean destinations and specialty vacations that include golf and ski packages. TLC is also aggressively pursuing the retail vacation segment, with products such as cruises and all inclusive vacations that are specifically targeted at the direct consumer. Together, Holdings and its subsidiaries employed 12,204 people on December 31, 1998. STRATEGY The Company seeks to maximize shareholder value by capitalizing on the Company's key competitive strengths while maintaining financial flexibility. The principal elements of our strategy are to grow the Company's existing lines of business, to improve the Airline's unit revenues, to maintain the Airline's strategic cost advantage, and to ensure financial flexibility for the future. 4 5 GROW THE COMPANY'S EXISTING LINES OF BUSINESS AMERICA WEST AIRLINES. The Company intends to continue growing the Airline primarily by increasing frequencies to existing destinations from Phoenix and Las Vegas because it believes that significant opportunities to grow those hubs exist. The Phoenix and Las Vegas markets are among the fastest growing in the United States, and the Company believes that its Phoenix hub remains greatly undersized relative to its potential. In execution of this strategy, AWA has increased available seat miles ("ASMs") 25% over the past three years with the majority of this growth focused on strengthening AWA's position at Phoenix. Compared with 1998, system ASMs are expected to increase approximately 10% in 1999 and approximately 40% by 2002. The growth will be focused on adding frequencies from Phoenix to existing markets, primarily long-haul business routes. The Airline has expanded its reach outside of its core markets through alliances. AWA has codesharing arrangements with Continental Airlines, Mesa Airlines, British Airways, Northwest Airlines and EVA Airways of Taiwan. These alliances allow the Airline to expand its passenger bases without significant increases in capital or operating expense and in some cases, achieve cost savings through economies of scale and joint purchasing agreements. The Company believes that alliances are an efficient means of developing new markets and increasing travel opportunities for its customers. We plan to continue to pursue such relationships with both domestic and international carriers. THE LEISURE COMPANY. The Company also believes that there are significant opportunities to expand its profitable leisure travel business. Historically, TLC has packaged air travel provided by the Airline with hotel rooms, ground transportation, and other options under its America West Vacations brand. During 1998, several lines of business were significantly expanded or developed. First, TLC's specialty golf and ski products were expanded throughout the year with new destinations and new methods of distribution. In April, TLC launched a new leisure travel consolidator business called the FareBusters, which markets and sells affordable air-only products to both domestic and international destinations on several other air carriers. In September, TLC implemented its Destination Leisure brand, which offers vacation packages with air available on several air carriers and to expand its product reach into markets such as Hawaii. In October, TLC acquired The Vacation Store ("TVS"), a major cruise and Caribbean retailer with $29 million in 1998 gross revenues. IMPROVE THE AIRLINE'S UNIT REVENUES Due to AWA's leisure oriented hub markets in Phoenix and Las Vegas, the competitive nature of many of the western U.S. markets where the Airline flies, and the Airline's size relative to its competition, AWA's passenger revenue per available seat mile ("RASM") is approximately 20% less than the industry average. One of the Company's primary opportunities to improve profitability is to close that gap through three main efforts: growing in key business markets; investing in scheduling and revenue management systems; and improving the quality of the Airline's products. Our efforts have been successful to date as evidenced by 1998's results - AWA's passenger RASM improved by 2.1% over 1997, while the industry average fell by 0.4% over the same period. Looking forward, we believe that substantial opportunity exists to further improve unit revenues by continuing the strategic growth plan, completing an upgrade of the Company's yield management system in late 1999, improving operating performance and continuing to enhance the Airline's customer service, frequent flyer programs and onboard products. MAINTAIN STRATEGIC COST ADVANTAGE The Company is committed to maintaining AWA's low cost structure, which offers a significant competitive advantage over other major airlines. AWA has achieved this low cost structure primarily through employee productivity, favorable labor costs per ASM and industry-leading aircraft utilization. In 1998, the Company widened its strategic cost advantage versus the industry as AWA's CASM decreased 0.5 % while the industry average CASM increased by 0.2%. 5 6 ENSURE FINANCIAL FLEXIBILITY The airline and travel industries are cyclical in nature. Because of this, an important element of the Company's strategy is to maintain financial flexibility as protection against a downturn in the business cycle. A key component of this strategy is AWA's aircraft leasing plan. As of December 31, 1998, and through the end of 2003, leases for 54 aircraft will expire. As a result, if economic conditions change adversely during that period, the Airline can delay the growth of its fleet and its aircraft-related financial obligations by electing to not renew these aircraft leases. Another component of this strategy is the Company's compensation system, which includes a variable pay element based largely on the Company's operating income level. The Company further enhances its financial flexibility by maintaining a $100 million senior secured revolving credit facility with certain financial institutions. AMERICA WEST AIRLINES THE AIRLINE'S OPERATIONS AWA is the ninth largest commercial airline and the lowest cost major airline in the United States. The Airline reported approximately $2 billion in revenues in 1998, an increase in annual revenues of 5% over revenues reported in 1997 and 40% over those reported in 1994. The Airline operates through its hubs in Phoenix, Arizona and Las Vegas, Nevada and a mini-hub in Columbus, Ohio. At the end of 1998, the Airline operated a fleet of 111 aircraft flying approximately 600 flights each day and served 57 destinations directly and offered service to another 40 destinations through AWA's alliance agreements with other carriers. We seek to maximize AWA's market share and profitability by operating the Airline through a hub and spoke network, the strategy employed by all but one of the major airlines in the United States. AWA is the leading airline serving Phoenix based on ASMs and takeoffs and landings and the leading airline serving Las Vegas (where hub operations occur mostly at night) based on ASMs. We believe that the success of the Airline's operations in Phoenix and Las Vegas is due to a number of factors including: - Phoenix' size. Phoenix is the seventh largest city in the United States and its metropolitan area is the 16th largest in the country. - The attractiveness of Phoenix and Las Vegas as business and leisure destinations. - The size of those cities' airports. Phoenix Sky Harbor International Airport is the 5th largest airport in the United States based on takeoffs and landings and Las Vegas McCarran International Airport is the 12th largest airport in the country by that measure. - The geographically favorable location of those cities with convenient access to and connecting opportunities for passengers travelling to or from key southwest and west coast markets and vacation destinations in Mexico. - The relatively low operating costs incurred in those cities' metropolitan areas and at those airports. The Phoenix and Las Vegas metropolitan areas are among the fastest growing in the country. Moreover, we believe that our Phoenix hub remains greatly undersized compared to other airlines' hubs of similar or smaller populations and airport size. Therefore, we believe that the Airline's hubs are well positioned for the continued growth that is one of the key elements of our strategy. 6 7 The Airline is committed to providing quality customer service. As the result of initiatives developed to further that commitment, during 1998 the Airline: - For the second consecutive year, recorded the lowest rate of mishandled bags among United States major airlines as measured by the Department of Transportation ("DOT"). - For the second consecutive year, ranked No. 1 in customer satisfaction among the major airlines for flights of 500 miles or less in the 1998 Airline Customer Satisfaction -- U.S. Flights study conducted by Frequent Flyer Magazine and J.D. Power & Associates. ALLIANCES WITH OTHER AIRLINES AWA has alliance agreements with Continental Airlines, Mesa Airlines, British Airways, Northwest Airlines and EVA Airways of Taiwan, and has applied for United States government approval for another alliance arrangement with Air China. AWA's alliance agreement with Continental Airlines provides for codesharing arrangements, coordinating flight schedules, sharing ticket counter space and coordinating ground handling operations. The arrangement also allows AWA FlightFund (the Airline's frequent flyer program) members to earn credits for travel on Continental and for frequent flyer benefits earned by AWA customers to be redeemed for travel on Continental's system. By codesharing, each airline is able to offer additional destinations to its customers under its flight designator code without materially increasing operating expenses and capital expenditures. The arrangement also provides that AWA personnel handle Continental's ticket counter and ground operations at certain airports in the western and southwestern United States and that Continental's personnel handle those operations for AWA at certain airports in the east, midwest and south. Through its alliance arrangement with Continental, AWA offered service to an additional 17 destinations as of December 31, 1998 and achieves cost savings primarily through the consolidation of airport facilities and resources and elimination of duplicative costs for labor and equipment. The arrangements with Continental were extended in February 1999 to allow AWA to offer service to an additional 34 destinations, mostly in the eastern and southern United States. The code sharing arrangement the Airline had maintained with Mesa Airlines ("Mesa") since 1994 was terminated in March 1998 as the result of Mesa's failure to maintain agreed operating service standards. After negotiation and the provision of codesharing service pursuant to an interim arrangement, Mesa and the Airline entered into a new, restructured arrangement effective September 1998. Pursuant to the new arrangement, Mesa, operating as America West Express, provides regional feeder service to and from the Airline's Phoenix hub to destinations in the western United States and northern Mexico flying, principally, regional jets and large turboprop aircraft. In addition, Mesa operates America West Express regional jet service to and from the Airline's mini-hub in Columbus, Ohio to midwest and eastern business markets. Through its alliance arrangement with Mesa, AWA offered America West Express service to an additional 22 destinations as of December 31, 1998. The new alliance arrangement with Mesa provides for the Airline's management of coordinated flight schedules and all America West Express marketing and sales. All reservations are booked under the Airline's flight designator code. America West Express passengers connecting to or from an AWA flight can purchase one airfare for their entire trip. Since the restructuring of the alliance arrangements, Mesa's operating performance has improved significantly and Mesa has met the standards required under the relevant agreements. We believe that the contribution of the Mesa alliance to our Company's profitability has been and will continue to be significantly improved as the result of the restructuring of those arrangements. 7 8 AWA's alliance agreement with British Airways allows British Airways to offer connecting service to and from British Airways' flights to Phoenix, San Francisco and Columbus onward to certain destinations served by the Airline. The arrangement also allows AWA FlightFund members to earn credit for travel on British Airways and for frequent flyer benefits earned by AWA customers to be redeemed for travel on British Airways' system. Through AWA's alliance agreements with Northwest Airlines and EVA Airways, AWA provides connecting service from those airlines' Pacific routes to Las Vegas and Phoenix. If the alliance with Air China receives government approval and is implemented, AWA will provide connecting service to Las Vegas and Phoenix from Air China's Pacific routes. AIRLINE COMPETITION AND MARKETING The airline industry is highly competitive. Airlines compete on the basis of pricing, scheduling (frequency and flight times), on-time performance, frequent flyer programs and other services. AWA competes with a number of major airlines on medium and long haul routes to and from and through its hubs and with a number of carriers for short haul flights at its Phoenix and Las Vegas hubs and its Columbus mini-hub. AWA competes with other major full service airlines based on price and, due to its low cost structure, is able to compete with other low cost carriers in its short haul local markets. The entry of additional carriers in many of AWA's markets (as well as increased services by established carriers) could negatively impact AWA's results of operations. For additional discussion of industry competition and related government regulation, see "Risk Factors -- Competition and Industry Conditions" and, generally, "Government Regulations." Most tickets for travel on AWA are sold by travel agents. Travel agents generally receive commissions based on the price of tickets sold. AWA and other airlines often pay additional commissions in connection with special revenue programs, competing not only with respect to the price of tickets sold but also with respect to the amount of commissions paid. AWA pays to travel agents a base commission rate of 8%, not to exceed $50 per ticket. We believe that that commission structure, together with AWA's program of additional commissions in connection with special programs, is competitive with the commission programs of the other major United States airlines. Most tickets sold by travel agents are sold through computer reservation systems that are controlled by other airlines. Those computer reservation systems have, from time to time, significantly increased the cost of making reservations, which costs are born by airlines which subscribe to the computer reservation systems, including AWA. To address these issues, AWA has taken several actions. First, AWA implemented electronic or paperless ticketing to respond to customer needs and to reduce distribution costs for tickets booked directly through the Airline's reservation system and through travel agencies. During 1998, approximately 50% of the Airline's tickets were processed electronically, up from 34% during 1997. Second, AWA provides the ability for its customers to book tickets directly through the Airline's Internet site located at www.americawest.com, thus avoiding the more expensive computer reservation systems. Bookings through the Internet site were only 1% of total 1998 bookings. However, growth in this means of distribution continue to be dramatic with monthly bookings at the end of 1998 growing 300% over monthly bookings at the end of 1997. Federal regulations have been promulgated that are intended to diminish preferential scheduling displays and other practices with respect to computer reservation systems that place AWA and other similarly situated users at a competitive disadvantage to airlines controlling the systems. Those regulations are scheduled to expire in March 2000 and are presently under review by the DOT. The Airline is participating aggressively in the federal rule making process related to computer reservations systems. FREQUENT FLYER PROGRAM All major United States airlines offer frequent flyer programs to encourage travel on that airline and customer loyalty. AWA offers the FlightFund program which allows members to earn mileage credits by flying AWA and America West Express, by flying on certain partner airlines including Continental Airlines and British Airways and by using the services of a wide variety of other program participants such as hotels, rental car agencies and other specialty services. 8 9 Through the FlightFund Program, accumulated mileage credits can be redeemed for free travel on AWA and America West Express and certain partner airlines including Continental and British Airways and for first class upgrades on AWA. Use of mileage credits is subject to industry standard restrictions including blackout dates and expiration. The Airline must purchase space on other airlines to accommodate FlightFund redemption travel on those airlines. The Company accounts for the FlightFund program under the incremental cost method whereby travel awards are valued at the incremental cost of carrying one passenger based on expected redemptions. Those incremental costs are based on expectations of expenses to be incurred on a per passenger basis and include food, beverages, supplies, fuel, liability insurance and denied boarding compensation which are accrued as FlightFund members accumulate mileage credits. No profit or overhead margin is included in the accrual for those incremental costs. Non-revenue FlightFund travel accounted for 3.5%, 3.2% and 2.3% of total revenue passenger miles for the years ended December 31, 1998, 1997 and 1996, respectively. We do not believe that non-revenue FlightFund travel results in any significant displacement of revenue passengers. THE AIRLINE'S FLEET At December 31, 1998, the Airline operated a fleet of 111 aircraft having an average age of 10.9 years. The Airline's aircraft acquisition program will provide the aircraft necessary to allow the Airline to continue its strategic growth. Terminations of aircraft operating leases scheduled to occur over the next several years will allow the Airline flexibility to manage the growth of its fleet size and related financial obligations in response to unfavorable economic conditions. AWA owns or leases 18 Boeing 737s which originally did not meet the federally mandated noise requirements which must be satisfied for continued operation of the aircraft beyond December 31, 1999. AWA intends to operate 14 Boeing 737-200 Advanced aircraft after that deadline. As of December 31, 1998, AWA had modified five of those aircraft by installing "hushkits" and has committed to modify the remaining nine aircraft during 1999. One Boeing 737-100 aircraft and three Boeing 737-200 aircraft will be retired prior to the end of 1999. In 1999, the Airline intends to take delivery of 15 new aircraft and retire those 4 aircraft and expects to operate a fleet of 122 aircraft at the end of 1999 having an average age of 10.1 years. The Airline's fleet at the end of 1998 and as expected at the end of 1999 are described in the table below:
NUMBER 12/31 AVERAGE AGE (YRS.) 12/31 AIRCRAFT APPROX. ---------------------- ------------------------ TYPES NO. SEATS 1998 1999 1998 1999 ----- --------- ---- ---- ---- ---- B737-100 90 1 0 29.3 N/A B737-200 113 17 14 18.0 18.2 B737-300 132 46 46 11.2 12.2 B757-200 190 13 13 12.2 13.2 A319-100 124 3 10 0.1 0.4 A320-200 150 31 39 6.6 6.2
9 10 As of March 31, 1999, AWA had firm commitments to purchase or acquire by operating lease a total of 14 Airbus A319-100 and three Airbus A320-200 aircraft for delivery in 2000 and 2001. The Airline also has options to acquire an additional seven A320 aircraft for delivery in 2001 and 2002 and options to purchase an additional 40 Airbus single aisle aircraft (A319s, A320s or larger A321s) during 2001 to 2005. As of March 31, 1999, leases for 54 of the Airline's aircraft were scheduled to terminate between the beginning of 2000 and the end of 2003. The following table illustrates the Airline's committed orders, purchase options and scheduled lease terminations over 2000-2003: FIRM ORDERS 2000 2001 2002 2003 A319-100/A320-200 10 7 0 0 OPTIONS 2000 2001 2002 2003 A319/A320/321 0 13 10 8 SCHEDULED LEASE TERMINATIONS 2000 2001 2002 2003 Total 6 10 12 26 For further details on the Airline's commitments to acquire aircraft and financing strategies and capital requirements for aircraft, see "Risk Factors -- Leverage; Future Capital Requirements" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - --Liquidity and Capital Resources". THE AIRLINE'S EMPLOYEES AND LABOR RELATIONS The Airline's business is labor intensive with wages, salaries and benefits representing approximately 25% of the Airline's operating expenses during 1998. As of December 31, 1998, the Airline employed 9,185 full-time and 2,682 part-time employees, for a full time equivalent of 10,098 employees ("FTEs"). We believe that the Airline's workforce is very productive, compared to workforces employed at other major United States airlines. As AWA pursues its growth strategy, we believe that this productivity will be improved as economies of scale will allow the Airline to increase the size of its workforce proportionately less than the growth in number of aircraft or ASMs. The Airline's non-union employees are compensated on a pay-for-performance basis under which salaries and wages are determined in part by performance evaluations by an employee's superiors and peers. To encourage increased productivity, the Airline awards performance bonuses, referred to as AWArd Pay, to eligible, non-executive, non-union employees provided certain annually established targets are achieved. AWArd Pay bonuses could range from 5% of base pay if those targets are met to 25% of base pay if those targets are significantly exceeded. Following the Company's and the Airline's record financial results in 1998, the Airline paid record AWArd Pay performance bonuses equal to 12.65% of eligible employees' 1998 base pay. A large majority of the employees of the major airlines in the United States are represented by labor unions. There have been numerous attempts by unions to organize AWA's employees and we expect those organization efforts to continue in the future. As illustrated by the table below, several groups of AWA's employees have selected union representation and negotiated collective bargaining agreements with the Airline. We cannot predict the outcome of any continuing or future efforts to organize the Airline's employees or the terms of any future labor agreements or the effect, if any, on the Company's or AWA's operations or financial performance. For more discussion, see "Risk Factors - --Labor Relations." 10 11
EMPLOYEE APPROX. NO. OF CONTRACT CONTRACT GROUP EMPLOYEES UNION EFFECTIVE AMENDABLE ----- --------- ----- --------- --------- Pilots 1,400 Airline Pilots May 1995 May 2000 Association Dispatchers 60 Transportation March 1998 March 2003 Workers Union Maintenance 430 International October 1998 October 2003 Technicians and Brotherhood of Related Teamsters Flight Attendants 2,150 Association of May 1999* May 2004* Flight Attendants
* If ratified by membership. A tentative agreement was reached between the Airline and Association of Flight Attendants ("AFA") representing the Airline's flight attendants in March 1999. A membership ratification vote is scheduled for April 1999. All of the collective bargaining agreements and the tentative AFA agreement are consistent with our productivity objectives and cost advantage, include flexible work rules, and prohibit sympathy strikes. None of those contracts restrict management's ability to make key strategic decisions, including entering into or expanding alliances or considering acquisitions. In October 1998, the Transportation Workers Union ("TWU") filed an application to represent the Airline's approximately 2,000 fleet service workers. In January 1999, that work group voted by a margin of 53% to 47% to be represented by the TWU. Following the announcement of those election results, the Airline filed a claim of election interference against the TWU seeking a rerun election. The interference claim was filed with the National Mediation Board ("NMB"), the federal government agency that oversees labor relations in the airline industry. The NMB had not issued a decision by March 31, 1999. THE LEISURE COMPANY TLC'S OPERATIONS, PRODUCTS, MARKETING AND COMPETITION The Leisure Company is one of the leading leisure travel companies in the United States. TLC sells leisure and personal travel products such as air and ground transportation, land-based accommodations, cruises, all-inclusive vacation packages, and value-added services and amenities directly to the consumer and through travel agencies. TLC focuses on simple, high-volume, value-oriented products which are marketed on a national basis. The majority of TLC's sales are from vacations and tour packages for destinations in Nevada, Arizona, California, Florida, Mexico and Canada sold under TLC's largest brand, America West Vacations. In 1998 TLC expanded its product line to include cruise vacations and products limited to air transportation. In addition to the core wholesale brand family of America West Vacations products, TLC distributes products under multiple wholesale brands through affiliations with other airlines and suppliers to expand destination coverage. In 1998, TLC launched a new wholesale product under the name Destination Leisure and expanded TLC's tour packaging business to include destinations in Hawaii and the Caribbean. In 1998, TLC began retail sales of leisure travel products through the introduction of the Farebusters brand and acquisition of the assets and business of TVS, an established national travel retailer with 1998 revenues of $29 million specializing in cruise and resort vacations. We believe that the acquisition of TVS will allow TLC to create a successful national vacation only retail travel agency with operational efficiency, strong relationships with suppliers and modern marketing practices. 11 12 In addition to its retail and wholesale travel products sales, TLC provides travel fulfillment sales and services to other travel suppliers through TLC's call centers. The Leisure Company competes in a fragmented, consolidating industry that is highly competitive. Within the wholesale segment of TLC's business, competitors are vying for customers through national mass media and the arrangement of preferred supplier relationships. Wholesalers have been able to take advantage of a strong travel economy to reduce commissions to travel agents. Fewer competitors with stronger market positions are beginning to emerge. While lower commissions paid to travel agents benefits TLC's wholesale business, it adversely affects the profitability of TLC's leisure agency business. The industry also faces disintermediation as suppliers rely more on electronic distribution strategies aimed directly at consumers. TLC remains focused on simple, high-volume products which have traditionally provided high margins. TLC's strong position in Las Vegas, strong growth and knowledge of the cruise distribution industry and mass marketing effectiveness have helped create a successful positioning. TLC will continue to evaluate investment and expansion opportunities in the leisure travel industry. Currently, wholesale and retail travel sales are not subject to government regulation to any significant extent. TLC'S EMPLOYEES At December 31, 1998, TLC and TVS employed 337 full-time employees. TLC employees are compensated in a variety of different ways depending on their work, including hourly pay plus bonuses, in the case of the telephone sales representatives, hourly pay plus commissions, in the case of travel agents, and a pay for performance plan very similar to that described above for the Airline's employees. To encourage productivity, TLC awards performance bonuses to eligible, non-executive, non-union employees provided certain established targets are achieved. Those performance bonuses can range from 2.5% of base pay if those targets are met to 20% of base pay if those targets are materially exceeded. TLC paid performance bonuses equal to 10.43% of base pay to eligible employees for 1998. We expect to experiment with compensation arrangements of certain TLC work groups in 1999 in an effort to increase sales productivity and improve customer service. THE COMPANY'S FACILITIES Our Company's principal facilities include administrative office space located in Tempe and Phoenix, Arizona, reservations centers and other call centers located in Tempe, Reno, Nevada and Virginia Beach, Virginia and airport and airport related facilities associated with the Airline's hubs in Phoenix and Las Vegas and mini-hub in Columbus. As discussed below, several of those facilities recently have been or are in the process of being replaced or upgraded. The new facilities will support key elements of the Company's strategy and will accommodate the Airline's and TLC's planned growth, allow the Company to improve employee morale by replacing outdated working environments with improved facilities, reduce overall occupancy and administrative costs, facilitate synergies by consolidating functions and take advantage of improved and state of the art technologies and communications systems that could not have been deployed in the replaced facilities. As of December 31, 1998, the Company leased approximately 369,000 square feet of general office and administrative space in Tempe for Holdings', the Airline's and TLC's headquarters and administrative offices. As of March 31, 1999, our Company was in the process of moving those headquarters and principal administrative functions to a newly constructed nine story, 225,000 sq. ft. complex at the site of AWA's original headquarters facility in Tempe. The new facility is owned jointly by our Company and Carey Diversified LLC and leased by Holdings. The move is expected to be completed in April 1999, at which time leases for approximately 148,000 sq. ft. of space will be terminated and approximately 20,000 sq. ft. of space will be devoted to alternative uses. 12 13 In January 1999, the Airline closed its revenue accounting facilities in Tempe and Irvine, California and relocated those operations to a new 45,000 sq. ft. facility leased in Phoenix. The Airline operates a two-year old 53,000 sq. ft. reservations center in Tempe, a 10,000 sq. ft. reservations center in Reno and a 27,000 sq. ft. reservations center in Kansas City, Missouri, all of which are leased. In May 1999, AWA will move into a new 14,000 sq. ft. reservations facility in Reno and the existing facility in Reno will be closed. TLC operates a call center facility in Tempe and a retail and call center facility in Virginia Beach. AWA operates from Terminal 4 at Sky Harbor Airport and leases 28 gates, ticket counter space and administrative offices comprising an aggregate of approximately 252,000 sq. ft. of space. The Airline has agreed to lease, and the City of Phoenix has commenced construction on, a new concourse in Terminal 4 which will make available to the Airline an additional approximately 65,000 sq. ft. of concourse, ticket counter and office space and initially 12 and ultimately 14 additional gates. We expect the new concourse to open in October 1999. The Airline leases approximately 168,000 sq. ft. of space at Las Vegas McCarran International Airport, which includes 13 gates, ticket counter space and concourse areas. AWA leases approximately 30,000 sq. ft. and seven gates at Port Columbus International Airport. Space for ticket counters, gates and back offices has been obtained at each of the other airports operated by AWA personnel, either by lease from the airport operator or by sublease from another airline. Space and facilities at airports where AWA's operation is managed by Continental Airlines or Mesa Airlines is provided by those airlines as part of AWA's alliance arrangements. The Airline also owns a 475,000 sq. ft. maintenance and technical support facility at Sky Harbor Airport on land leased from the City of Phoenix, which includes four hangar bays, hangar shops, two flight simulator bays and pilot training facilities and warehouse and commissary facilities. We are studying a proposal for an approximately 128,000 sq. ft. new flight training center to accommodate AWA's pilot and flight attendant training, to be located in the Phoenix metropolitan area. We expect to make an announcement regarding that project later in 1999. If the project goes forward, we would expect it to be completed in 2001. GOVERNMENT REGULATIONS The airline industry is highly regulated as more fully described below. DOT OVERSIGHT AWA operates under a certificate of public convenience and necessity issued by the DOT. Although regulation of domestic routes and fares was abolished by the Airline Deregulation Act of 1978, the DOT retains the authority to alter or amend AWA's certificate or to revoke that certificate for intentional failure to comply with the terms and conditions of the certificate. In addition, the DOT has jurisdiction over international tariffs and pricing, international routes, computer reservation systems, domestic code share agreements, and economic and consumer protection matters such as advertising, denied boarding compensation, smoking and codeshare arrangements and has the authority to impose civil penalties for violation of the United States Transportation Code or DOT regulations. Congress is currently considering various proposals that would impose new consumer protection requirements on airlines. These proposals include, e.g., disclosure to passengers when a flight is overbooked, payment to passengers on an aircraft for excessive departure or arrival delay, prohibition on the issuance of non-refundable tickets and increased compensation for denied boarding and for lost or damaged baggage. As a result of competitive pressures AWA and other airlines would be limited in their ability to pass costs associated with compliance with such laws to passengers. We cannot forecast the cost impact of such measures if enacted. 13 14 FAA FUNDING In 1997 new aviation taxes were imposed through September 30, 2007 to provide funding for the Federal Aviation Administration ("FAA"). Included in the new law is a phase-in of a modified federal air transportation excise tax structure with a system that includes: a domestic excise tax starting at 9%, declining to 7.5% by 1999; a domestic segment tax starting at $1.00 and increasing to $3.00 by 2003; and an increase in taxes imposed on international travel that will be from $6.00 per international departure to an arrival and departure tax of $12.00 (each way). Both the domestic segment tax and the international arrival and departure tax are indexed for inflation. The legislation also includes a 7.5% excise tax on certain amounts paid to an air carrier for the right to provide mileage and similar awards (e.g., purchase of frequent flyer miles by a credit card company). As a result of competitive pressures, AWA and other airlines have been limited in their ability to pass on the cost of these taxes to passengers through fare increases. In December 1997, the National Civil Aviation Review Commission (the "NCARC") completed its Report to Congress on FAA funding and recommended implementation of a cost based user fee system for air carriers. Congress is presently considering the recommendations of the NCARC, which may result in enactment of a new funding mechanism. The Company cannot currently estimate the effect the new combination of ticket and segment taxes, or any change in those taxes as recommended by the NCARC, will have on its operating results. There can be no assurance that the new taxes or such changes will not have a material adverse effect on the Company's financial condition and results of operations. FUEL TAX In August 1993, the federal government increased taxes on fuel, including aircraft fuel, by 4.3 cents per gallon. The Company's annual operating expenses increased by approximately $16.6 million for 1998 because of such fuel tax increases. Total fuel taxes paid by the Company in 1998 were $24.5 million. PASSENGER FACILITY CHARGES During 1990, Congress enacted legislation to permit airport authorities, with prior approval from the DOT, to impose passenger facility charges ("PFCs") as a means of funding local airport projects. These charges, which are intended to be collected by the airlines from their passengers, are limited to $3.00 per enplanement, and to no more than $12.00 per round trip. Congress is currently considering the reauthorization of airport funding programs, which could include an increase in the current PFC cap. As a result of competitive pressure, AWA and other airlines have been limited in their ability to pass on the cost of the PFCs to passengers through fare increases. SLOT RESTRICTIONS At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's O'Hare International Airport and Ronald Reagan Washington National Airport, which have been designated "High Density Airports" by the FAA, there are restrictions on the number of aircraft that may land and take off during peak hours. In the future, these take-off and landing time slot restrictions and other restrictions on the use of various airports and their facilities may result in further curtailment of services by, and increased operating costs for, individual airlines, including AWA, particularly in light of the increase in the number of airlines operating at such airports. In general, the FAA rules relating to allocated slots at the High Density Airports contain provisions requiring the relinquishment of slots for non-use and permit carriers, under certain circumstances, to sell, lease or trade their slots to other carriers. All slots must be used on 80% of the dates during each two-month reporting period. Failure to satisfy the 80% use rate will result in loss of the slot which would revert to the FAA and be reassigned through a lottery arrangement. 14 15 Congress is considering legislation that may increase the availability of slots at all four High Density Airports. Should congressionally mandated slots become available, AWA would apply for such slots to increase its services at O'Hare, LaGuardia and National airports. AWA currently utilizes two slots at Kennedy Airport, four slots at LaGuardia Airport, 12 slots at O'Hare Airport and six slots at National Airport during the restricted periods. AWA utilizes these slots more than the requisite 80% use rate. Four of the slots at National Airport are subject to expiration in December 1999, and AWA intends to file a timely application for renewal. Approval of such application is discretionary by the FAA. In 1998 AWA was granted eight special exemption slots at O'Hare by the Secretary of Transportation for service between O'Hare and Phoenix and AWA has used these slots to increase service to O'Hare. PERIMETER RULE AT WASHINGTON'S RONALD REAGAN NATIONAL AIRPORT There is a federal prohibition on flights exceeding 1,250 miles operating from or to National Airport. This "perimeter rule" results in AWA being the only major airline that is unable to fly non-stop to and from National Airport and its principal hubs. Congress is considering legislation which would authorize the DOT to grant exceptions to the 1,250 mile perimeter rule for up to 12 flights per day. If such legislation is enacted, AWA intends to apply for the right to provide four Phoenix- National Airport trips and two Las Vegas- National Airport trips daily. NOISE ABATEMENT AND OTHER RESTRICTIONS The Airport Noise and Capacity Act of 1990 provides, with certain exceptions, that after December 31, 1999, no person may operate certain large civilian turbo-jet aircraft in the United States that do not comply with Stage III noise levels, which is the FAA designation for the quietest commercial jets. These regulations require carriers to phase out their noisier jets or equip them with hush kits to comply with noise abatement regulations. At December 31, 1998, AWA's fleet consisted of 111 aircraft, all of which meet Stage III noise reduction requirements except for 13 aircraft that meet the FAA's Stage II (but not Stage III) noise reduction requirements and must be retired or significantly modified prior to December 31, 1999. The Airline intends to install hush kits on a further nine aircraft and retire four aircraft at the end of 1999. The required capital expenditures for such modifications are currently estimated to be approximately $1 million per aircraft. Numerous airports served by AWA, including those at Boston, Burbank, Denver, Long Beach, Los Angeles, Minneapolis-St. Paul, New York City, Orange County, San Diego, San Francisco, San Jose and Washington, D.C., have imposed restrictions such as curfews, limits on aircraft noise levels, mandatory flight paths, runway restrictions and limits on the number of average daily departures, which limit the ability of air carriers to provide service to or increase service at such airports. AWA's Boeing 757-200s, Boeing 737-300s and Airbus A319s and A320s all comply with the current noise abatement requirements of the airports listed above. AIRCRAFT MAINTENANCE AND OPERATIONS AWA is subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety. The FAA has the authority to issue new or additional regulations. To ensure compliance with its regulations, the FAA conducts regular safety audits and requires AWA to obtain operating, airworthiness and other certificates, which are subject to suspension or revocation for cause. In addition, a combination of FAA and Occupational Safety and Health Administration regulations on both federal and state levels apply to all of AWA's ground-based operations. On July 15, 1998, AWA and the FAA entered into an agreement to settle disputes over alleged maintenance violations. Under the agreement, AWA did not admit any wrongdoing, has implemented certain changes in maintenance oversight and paid a civil penalty of $2.5 million. An additional civil penalty of $2.5 million will be forgiven upon implementation of the terms of the agreement. 15 16 AWA is also subject to the jurisdiction of the Department of Defense with respect to its voluntary participation in their Commercial Passenger Airlift program administered by the Air Force's Air Mobility Command. In October 1998 AWA successfully completed its biannual safety survey conducted by the Air Mobility Command. AGING AIRCRAFT MAINTENANCE The FAA issued several Airworthiness Directives ("ADs") in 1990 mandating changes to the older aircraft maintenance programs. These ADs were issued to ensure that the oldest portion of the nation's aircraft fleet remains airworthy and require structural modifications to or inspections of those aircraft. All of AWA's currently affected aircraft are in compliance with the aging aircraft mandates. AWA constantly monitors its fleet of aircraft to ensure safety levels that meet or exceed those mandated by the FAA and the DOT. ADDITIONAL SECURITY AND SAFETY MEASURES In 1996 and 1997 the President's Commission on Aviation Safety and Security issued recommendations and the U.S. Congress and the FAA adopted increased safety and security measures designed to increase airline passenger safety and security and protect against terrorist acts. Such measures have resulted in additional operating costs to the airline industry. Examples of increased safety and security measures include the introduction of a domestic passenger manifest requirement, increased passenger profiling, enhanced pre-board screening of passengers and carry-on baggage, positive bag match for profile selections, continuous physical bag search at checkpoints, additional airport security personnel, expanded criminal background checks for selected airport employees, significantly expanded use of bomb-sniffing dogs, certification of screening companies, aggressive testing of existing security systems, expansion of aging aircraft inspections to include non-structural components, development of objective methods for carriers to monitor and improve their own level of safety and installation of new ground proximity warning systems on all commercial aircraft. We cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements. ENVIRONMENTAL MATTERS The Company is subject to regulation under major environmental laws administered by federal, state and local agencies, including laws governing air, water and waste discharge activities. While the Company strives to comply with environmental laws and regulations, the Company has incurred and may incur costs to comply with applicable environmental laws, including soil and groundwater cleanup and other related response costs. We believe, however, that under current environmental laws and regulations these costs would not have a material adverse effect on the Company's financial condition and results of operations. The Comprehensive Environmental Response Compensation and Liability Act of 1980, also known as Superfund, and comparable state laws impose liability without regard to fault on certain classes of persons that may have contributed to the release or threatened release of a "hazardous substance" into the environment. These persons include the owner or operator of a facility and persons that disposed or arranged for the disposal of hazardous substances. Many airports in the United States, including Phoenix Sky Harbor International Airport, are the subject of Superfund investigations or state implemented groundwater investigations. AWA occupies facilities at some of these affected airports and is a member of a fuel handling consortium, which has experienced a fuel leak into ground water at Phoenix Sky Harbor International Airport. The Company does not believe that its operations have been included within the ambit of any of these investigations and does not believe that its expenses associated with the fuel leak at Phoenix Sky Harbor International Airport will be material. The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and we expect that the costs of compliance will continue to increase. 16 17 RISK FACTORS COMPETITION AND INDUSTRY CONDITIONS The airline industry is highly competitive and industry earnings are typically volatile. From 1990 to 1992, the airline industry experienced unprecedented losses due to high fuel costs, general economic conditions, intense price competition and other factors. Airlines compete on the basis of pricing, scheduling (frequency and flight times), on-time performance, frequent flyer programs and other services. The airline industry is susceptible to price discounting, which occurs when a carrier offers discounts or promotional fares to passengers. Discounted fares offered by one carrier are normally matched by competing carriers, which may have the effect of lowering the profit per passenger but not necessarily increasing the number of passengers who fly. In addition, in recent years several new carriers have entered the airline industry, and many of them have low-cost structures. In some cases, these new carriers have initiated or triggered price discounting. The entry of additional new carriers in many of the Airline's markets, as well as increased competition from or the introduction of new services by existing carriers, could have a material adverse effect on the Company's business, financial condition and operating results. Most of AWA's markets are highly competitive and are served by larger carriers with substantially greater financial resources than the Airline's. At AWA's Phoenix and Las Vegas hubs, the Airline's principal competitor is Southwest Airlines. A number of larger competitors have proprietary reservation systems, which gives them certain competitive advantages. The air travel business historically fluctuates in response to general economic conditions. The airline industry is sensitive to changes in economic conditions that affect business and leisure travel and is highly susceptible to unforeseen events that result in declines in air travel, including: - political instability - regional hostilities - recession - fuel price escalation - inflation - adverse weather conditions - labor instability - regulatory oversight If travel on the routes that the Airline serves decreases or if competition increases between carriers, the Company's business, financial condition and operating results could be materially adversely affected. TLC's business is also highly competitive. TLC competes with wholesalers and tour operators, some of which have substantially greater financial and other resources than TLC. The Company's results of operations for interim periods are not necessarily indicative of those for an entire year, because the travel business is subject to seasonal fluctuations. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline and leisure travel industries in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. THE COMPANY'S ABILITY TO BORROW FUNDS IN THE FUTURE As of December 31, 1998, the Company owed approximately $208 million of long-term debt (less current maturities). Much of this debt is secured by a large portion of the Company's assets, leaving a limited number of assets to use to obtain additional financing which may be needed if the Company encounters adverse industry conditions or a prolonged economic recession in the future. 17 18 In addition, as of December 31, 1998, the Airline had firm commitments to AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA") to purchase a total of 28 Airbus aircraft with thirteen to be delivered in 1999. AWA also has an option to purchase 50 more Airbus aircraft of which 10 are subject to reconfirmation by AWA. The aggregate net cost of firm commitments remaining under the aircraft order is approximately $1.0 billion, based on a 3.5 percent annual price escalation. We have arranged for financing from AVSA and other sources for more than two-thirds of these commitments, but will have to look to outside sources to finance the remaining commitments. We cannot guarantee that the Airline will be able to obtain enough capital to finance the remainder of the aircraft, and if the Airline defaults on commitments to purchase aircraft, the Company's business, financial condition and operating results could be materially adversely affected. LABOR RELATIONS In the recent past, labor unions have made several attempts to organize AWA's employees, and we expect that these efforts will continue. Certain groups of AWA's employees have chosen to be represented by a union. We cannot predict which, if any, other groups of employees may seek union representation or the Company's ability to negotiate or the terms of the outcome of collective bargaining agreements that will be negotiated in the future. If we are unable to negotiate acceptable collective bargaining agreements, the Airline might face union-initiated work actions, including strikes. Depending on the type and duration of work action endured the Company's business, financial condition and operating results could be materially adversely affected. CONTROL BY CERTAIN PRINCIPAL STOCKHOLDERS Currently, three stockholders collectively control more than 50% of the total voting power of the Company. These stockholders, TPG Partners, L.P., TPG Parallel I, L.P. and Air Partners II, L.P. are all controlled by the same company, TPG Advisors, Inc. We cannot guarantee that the controlling stockholders identified above will not try to influence the Company's business in a way that would favor their own personal interests to the detriment of the interests of other stockholders. FLUCTUATIONS IN FUEL COSTS Fuel is an important raw material used in the Airline's business, accounting for approximately 11% of total operating expenses in 1998. With the Airline's current level of fuel consumption, if jet fuel prices increase by one cent per gallon, the Company's annual operating results will decrease by $4.4 million for 1999. Among the unpredictable events that could effect the price and supply of jet fuel in the future are: - geopolitical developments - regional production patterns - environmental concerns In 1996, we implemented a fuel "hedging" program to manage the possible effect that fluctuating jet fuel prices could have on the Airline's business. The program primarily addresses the Airline's exposure to fuel requirements on the East Coast. West Coast jet fuel prices, however, tend to be more volatile than jet fuel prices in other areas of the United States and because AWA primarily serves the Western United States, the Airline purchases a substantially larger portion of its jet fuel requirements on the West Coast compared to its larger competitors. Accordingly, if the price of jet fuel increases substantially or the supply of jet fuel is inadequate in the future and we have not implemented adequate protection measures, the Company's business, financial condition and operating results could be materially adversely affected. AVIATION TICKET TAXES On August 5, 1997 President Clinton signed a new aviation ticket tax into law that is scheduled to remain in effect though September 30, 2007. As a result of the competitive environment in the passenger airline industry, we have been limited in our ability to pass on the additional costs of these taxes to passengers through fare increases. 18 19 SECURITY AND SAFETY MEASURES Congress has adopted increased safety measures designed to increase airline passenger security and protect against terrorist acts. Implementing these measures has increased operating costs for the airline industry as a whole. A report from Congress' Aviation Safety Commission recommends that airlines implement additional measures to improve the safety and security of air travel. We cannot predict which additional measures Congress will impose or the impact that implementing those measures will have on the Airline's costs or revenue, but it is possible that the impact could be significant. OTHER REGULATORY MATTERS The airline industry is heavily regulated. Both federal and state governments from time to time propose laws and regulations that would impose additional requirements and restrictions on airline operations. Depending on which and how many of these laws and regulations are enacted, the cost of operating an airline could increase significantly. We cannot predict what laws and regulations will be adopted or the changes and increased expense that they could cause. Accordingly, future legislative and regulatory acts could have a materially adverse effect on the Company's business, financial conditions or operating results. SUBSTANTIAL RESTRICTIONS IMPOSED AND PROMISES MADE IN CONNECTION WITH CURRENT LOAN AGREEMENTS AND DEBT INSTRUMENTS The Company has borrowed money pursuant to certain loan agreements and debt instruments with significant operating and financial restrictions. These agreements and instruments contain terms that may significantly restrict or prohibit our ability to take certain actions, including our ability: - to repay certain debts before they come due - to sell assets - to participate in certain mergers and acquisitions - to conduct future financings - to make needed capital expenditures - to implement certain measures that would better enable the Company to withstand future downturns in the airline industry or the economy in general In addition, several of these borrowing arrangements require the Company to satisfy certain benchmarks in respect of its financial position. The Company is currently in compliance with the restrictions and requirements referred to above, but any default would allow the Company's lenders to require repayment of the full amount of money borrowed, plus accrued and unpaid interest. If this were to occur, we cannot guarantee that the Company would have or be able to raise the funds needed to repay these debts. Finally, the Company may be obligated to offer to purchase certain amounts of the debts referred to above. Such obligations would arise if certain changes occur with respect to who controls the Company, or if the Company disposes of certain assets. YEAR 2000 COMPLIANCE PROGRAM AND RISKS The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. As a consequence, time-sensitive computer equipment and software may recognize a date using "00" as the year 1900 rather than the year 2000. Many of the Company's systems, including information and computer systems and automated equipment, will be affected by the Year 2000 issue. The Company is also heavily reliant on the FAA's management of the nation's air traffic control system, local authorities' management of the airports at which AWA operates, and vendors to provide goods (fuel, catering, etc.), services (telecommunications, data networks, satellites, etc.) and data (frequent flyer partnerships, alliances, etc.). 19 20 The Company has underway a Year 2000 Project (the "Project" or "Year 2000 Project") to identify the programs and infrastructure that could be affected by the Year 2000 issue and is implementing a plan to resolve the problems identified on a timely basis. The Project requires the Company to devote a considerable amount of internal resources and hire substantial external resources to assist with the implementation and monitoring of the Project, and will require the replacement of certain equipment and modification of certain software. The Company believes that its Year 2000 Project will be completed prior to any currently anticipated significant impact on the Company arising from the Year 2000 issue. The Project is divided into three main sections, including information technology ("IT") systems, embedded systems and third party compliance. The five phases of the IT and embedded systems sections include inventory, assessment, renovation, user testing and implementation. The inventory and assessment phases of the IT systems are substantially completed and the remaining phases of the IT systems are expected to be completed in the second quarter of 1999. The inventory phase of the embedded systems is substantially completed and the remaining phases are underway and are expected to be completed during the second and third quarters of 1999. The Company currently estimates that the total cost of its Year 2000 Project will be approximately $40 million, which will be funded from operating cash flows. These costs exclude approximately $7 million of normal system software and equipment upgrades and replacements which the Company anticipated incurring in the ordinary course of business regardless of the Year 2000 issue. As of December 31, 1998, the Company had incurred approximately $13 million of non-capital expenditures in connection with the Year 2000 Project. The Company expects that approximately $30 million of the costs have been or will be expensed as incurred and the Company has had or will have approximately $10 million of capital expenditures. The costs and expected completion date of the Company's Year 2000 Project are based on management's best estimates, and reflect assumptions regarding the availability and cost of personnel trained in this area, the compliance plans of third parties and similar uncertainties. However, due to the complexity and pervasiveness of the Year 2000 issue and in particular the uncertainty regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved, and actual results could differ materially from those anticipated. If the Company's plan to address the Year 2000 issue is not successfully or timely implemented, the Company may need to devote more resources to the process and additional costs may be incurred, which could have a material adverse effect on the Company's financial condition and results of operations. The failure to correct a material Year 2000 problem could result in an interruption in, or failure of, certain normal business activities or operations. While difficult to predict, we speculate that the most reasonably likely worst case Year 2000 scenario will result from the failure of third parties, including operators of airports and air traffic control systems, to resolve their Year 2000 compliance issue. The Company has initiated communications with such parties and significant suppliers and vendors with which the Company's systems interface and upon which the Company's business depends in an effort to reduce the adverse impact of the Year 2000 issue. There can be no assurance, however, that the systems of such third parties will be modified on a timely basis and such failure may have a material adverse effect on the Company's financial condition and results of operations. As a component of its Year 2000 Project, the Company is developing a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. The Company is developing contingency plans designed to enable it to continue operations, consistent with the highest standards of safety, in the event of such third party failures. VOLATILITY OF STOCK PRICE The stock market has experienced significant price and volume fluctuations that have affected the market prices of equity securities of companies in the airline industry and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Class B Common Stock of Holdings (the "Class B Common Stock") and Warrants to purchase Class B Common Stock (the "Warrants"). In addition, the market price of the Company's Class B Common Stock and Warrants is volatile and subject to fluctuations in response to quarterly variations in operating results, announcements of new services by the Company or its competitors, changes in financial estimates by securities analysts or other events or factors, many of which are beyond the Company's control. See "Item 5. Market for Registrants' Common Equity and Related Stockholder Matters." 20 21 ITEM 2. PROPERTIES For a description of the Company's properties, see Item 1 of Part I of this Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS Holdings and its subsidiaries are parties to various legal proceedings, including some purporting to be class actions, and some which demand large monetary damages or other relief which, if granted, would require significant expenditures. Holdings, its directors and certain of its stockholders have been named as defendants in lawsuits filed on behalf of Holdings' stockholders alleging various breaches of fiduciary duties in connection with the Board of Directors' response to unsolicited expressions of interest proposing potential acquisition of Holdings or similar transactions. In addition, the Company, Holdings and certain of Holdings' stockholders, executive officers and directors have been named as defendants in lawsuits alleging violations of the Securities Exchange Act of 1934, as amended, in connection with Holdings' public disclosures and certain activity in Holdings' stock during 1997 and 1998. The Company denies and is vigorously defending the claims set forth in these complaints. While the outcome of such lawsuits cannot be predicted with certainty, we currently expect that any liability arising from such matters, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the Company's business, financial condition and results of operation. Holdings and AWA are named defendants in a number of additional lawsuits and proceedings arising in the ordinary course of business. While the outcome of the contingencies, lawsuits or other proceedings cannot be predicted with certainty, we currently expect that any liability arising from such matters, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial condition and results of operations of the Company. AWA leases six aircraft which may be subject to a claim in an unspecified amount as a result of the Internal Revenue Service potentially disallowing investment tax credits and accelerated depreciation claimed by the lessor of such aircraft. Under the terms of indemnity agreements, if such tax benefits were fully or partially disallowed, AWA's monthly payment obligation under the agreements could be increased by up to approximately $15,000 per aircraft (approximately $1,080,000 per year for all six aircraft) for the period from 1991 to 2013. The payment increase applicable to periods prior to the determination of an indemnity obligation would be payable monthly over a 24-month period, with interest calculated at a specified prime rate. We are unable to predict whether the Internal Revenue Service will prevail in matters asserted against the lessor and, consequently, whether AWA will incur any liability in connection with such claims or the amount of any such liability, if incurred. Based on information and relevant documents available to the Company, however, we currently believe that it is unlikely that the disposition of these matters will have a material adverse effect on the Company's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 21 22 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information respecting the names, ages as of March 27, 1999, positions and offices with the Company of the executive officers of the Company. WILLIAM A. FRANKE, AGE 61. Chairman of the Board and Chief Executive Officer of Holdings; Chairman of the Board of AWA. Mr. Franke was named Chairman of the Board of Directors of AWA in September 1992. From January 1, 1994 to February 4, 1997, Mr. Franke served as AWA's Chief Executive Officer and from May 23, 1996 to February 4, 1997, he served as AWA's President. Mr. Franke has served in his present capacities with Holdings since January 1, 1997. In addition to his responsibilities at the Company, Mr. Franke serves as president of Franke & Company, Inc., a financial services company he has owned since May 1987 and as a managing partner of Newbridge Latin America L.P., a private equity fund. Mr. Franke serves as a director of Phelps Dodge Corp., Central Newspapers Inc., the Air Transport Association of America, Beringer Wine Estates, Inc., Mtel Latin America, Inc., Alpargatas S.A.I.C. and AerFi Group plc. RICHARD R. GOODMANSON, AGE 51. President and Director of Holdings; President, Chief Executive Officer and Director of AWA. Mr. Goodmanson joined AWA as Executive Vice President and Chief Operating Officer in June 1996 and became a member of the Company's Board of Directors effective on October 15, 1996. On February 4, 1997, Mr. Goodmanson was elected President of Holdings and President and Chief Executive Officer of AWA. From 1992 until 1996, Mr. Goodmanson served as Senior Vice President of Operations at Frito-Lay, Inc. From 1980 until 1992, Mr. Goodmanson was a principal at the consulting firm of McKinsey and Company, Inc. JOHN R. GAREL, AGE 40. President and Chief Executive Officer of The Leisure Company. Mr. Garel joined AWA in April 1995 as Senior Vice President - Marketing and Sales and was elected to his current position in July 1997. From 1993 until early 1995, Mr. Garel was the Chief Executive Officer of Cadmus Journal Services, a division of Cadmus Communications. From 1990 until 1992, Mr. Garel served as Vice President, Financial Planning and Analysis of Northwest Airlines and, thereafter, as Vice President, Market Development and Area Marketing. Prior to that, Mr. Garel worked for American Airlines in several management capacities. RONALD A. ARAMINI, AGE 53. Senior Vice President - Operations of AWA. Mr. Aramini joined AWA in September 1996. From October 1993 until September 1996, Mr. Aramini served as President and Chief Executive Officer of Allegheny Airlines, a Pennsylvania-based regional airline subsidiary of US Air Group, Inc. Before that, he served for three years at Air Wisconsin, including in positions as Vice President - Operations, Senior Vice President - Operations and President and Chief Executive Officer. Prior to his position at Air Wisconsin, Mr. Aramini served in various positions at Continental Airlines. BERNARD L. HAN, AGE 34. Senior Vice President - Planning of AWA. Mr. Han joined AWA in January 1996 as Vice President - Financial Planning and Analysis and was elected to his current position in May 1998. From 1991 through 1995, Mr. Han held management positions at Northwest Airlines in financial planning, yield management, fleet planning and corporate finance. Prior to that, Mr. Han worked for American Airlines in several financial management positions. 22 23 C.A. HOWLETT, AGE 55. Senior Vice President - Public Affairs of AWA and Holdings. Mr. Howlett joined AWA as Vice President - Public Affairs in January 1995. On January 1, 1997, he was appointed Vice President - Public Affairs of Holdings. He was elected to his present positions in February 1999. Prior to 1995, Mr. Howlett maintained a government relations practice as a principal at the law firm of Lewis and Roca in Phoenix. Mr. Howlett's prior work experience included senior positions with Salt River Project, the City of Phoenix and The White House where he served as special assistant to President Ronald Reagan for intergovernmental affairs. BRUCE A. JOHNSON, AGE 42. Senior Vice President - Human Resources of AWA. Mr. Johnson joined AWA in July 1997. From 1993 until July 1997, Mr. Johnson worked in a variety of capacities for Ryder Systems, including Vice President of Human Resources. Prior to 1993, Mr. Johnson's work experience included senior level human resource positions with IBM, SEQUA Corp., Frito-Lay and I.T.T. STEPHEN L. JOHNSON, AGE 42. Senior Vice President - Corporate Affairs of AWA and Holdings. Mr. Johnson joined the Company in February 1995 as Vice President - Legal Affairs. In December 1995, Mr. Johnson was elected to the position of Senior Vice President - Legal Affairs and in December 1997 was elected to his current positions. From 1993 to 1994, Mr. Johnson served as Senior Vice President and General Counsel to GE Capital Aviation Services Limited. From 1989 to 1993, Mr. Johnson was employed by GPA Group plc, from 1991 to 1993 as Senior Vice President and General Counsel to GPA's Leasing Division. Prior to joining GPA, Mr. Johnson was engaged in the private practice of law. EVON L. JONES, AGE 34. Senior Vice President and Chief Information Officer of Holdings and AWA. Mr. Jones joined the Company in November 1998. From 1995 until 1998, Mr. Jones served as Vice President - Global Financial Technologies of American Express Company. From 1994 until 1995, he was employed as an information technologies manager for Salomon Brothers. Prior to that, he served as Assistant Vice President - Derivative Technologies for Lehman Brothers. W. DOUGLAS PARKER, AGE 37. Senior Vice President and Chief Financial Officer of AWA and Holdings. Mr. Parker joined the Company in June 1995 as Chief Financial Officer. In July 1997, Mr. Parker's responsibilities were expanded to include oversight of AWA's schedule planning, pricing and yield management. From 1991 through June of 1995, Mr. Parker worked at Northwest Airlines, most recently as Vice President - Assistant Treasurer and Vice President - Financial Planning and Analysis. From 1986 through 1991, Mr. Parker served in various financial management positions at American Airlines. JACK RICHARDS, AGE 45. Chief Operating Officer of TLC. Mr. Richards joined the Company in April 1999, succeeding Mr. Short. From 1992 through 1998, Mr. Richards served as President and Chief Operating Officer of Adventure Tours USA. Prior to that, Mr. Richards held several management positions with American Trans Air, the last being Vice President Tour Operations. KEVIN P. SHORT, AGE 40. Chief Operating Officer of TLC. Mr. Short joined AWA in August 1996 as Vice President - Revenue Management. He joined TLC and was elected to his current position in June 1998. Prior to joining the Company, Mr. Short held various management positions with American Airlines, including one having general management responsibility for that Company's vacation packaging division. Mr. Short has announced his intention to leave TLC not later than June 1999 and will be succeeded by Mr. Richards. MICHAEL A. SMITH, AGE 45. Senior Vice President - Marketing and Sales of AWA. Mr. Smith joined AWA in November 1997. From 1977 through 1997, Mr. Smith served in various management positions with American Airlines, the last being managing director - European sales and marketing. MICHAEL R. CARREON, AGE 45. Vice President and Controller of AWA. Mr. Carreon joined AWA in December 1994 as Senior Director - Corporate Audit and in January 1996 was elected to his current position. From 1986 to 1994, Mr. Carreon held accounting and audit-related management positions at United Airlines. From 1981 through 1986, he served in the Audit Services Practice of Arthur Andersen & Co. in Chicago. KATHLEEN M. DOYLE, AGE 40. Vice President and General Counsel of AWA. Ms. Doyle joined AWA as Senior Director - Legal Affairs in September 1995 and was elected to her current position in December 1997. Prior to joining the Company, Ms. Doyle was engaged in the private practice of law, from 1989 to 1993 with the English law firm Freshfields (where she qualified as an English solicitor) and, prior to that, in the United States. 23 24 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective midnight December 31, 1996, AWA became a direct wholly owned subsidiary of Holdings. Each share of Class A Common Stock of AWA was exchanged for one share of Class A Common Stock of Holdings and each share of Class B Common Stock of AWA was exchanged for one share of Class B Common Stock of Holdings. As a result, Holdings became the successor issuer to AWA of the Class A and Class B Common Stock. Also, each Warrant, which previously entitled holders to purchase from AWA one share of Class B Common Stock of AWA, now entitles the holders to purchase from AWA one share of Class B Common Stock of Holdings. The Class A Common Stock of Holdings, par value $.01 per share (the "Class A Common Stock"), is not publicly traded. The Class B Common Stock, par value $.01 per share, and Warrants have been traded on the New York Stock Exchange under the symbol "AWA" and "AWAws," respectively, since August 26, 1994. The following table sets forth, for the periods indicated, the high and low sales prices of the Class B Common Stock and the Warrants as reported on the New York Stock Exchange.
CLASS B COMMON STOCK WARRANTS ------------ ---------------- HIGH LOW HIGH LOW ---- --- ---- --- Year Ended December 31, 1998 First Quarter............................................... 27 1/2 17 3/4 15 9/16 7 3/16 Second Quarter.............................................. 31 5/16 25 1/2 19 1/8 13 3/4 Third Quarter............................................... 30 3/8 12 5/16 18 3/16 3 1/2 Fourth Quarter.............................................. 17 11/16 9 9/16 7 7/8 3 Year Ended December 31, 1997 First Quarter............................................... 16 7/8 13 3/8 8 3/8 6 1/4 Second Quarter.............................................. 16 1/2 14 3/8 7 5/8 4 5/8 Third Quarter............................................... 16 12 6 3 3/4 Fourth Quarter.............................................. 18 15/16 13 1/2 7 11/16 4 1/2
As of December 31, 1998, there were four record holders of Class A Common Stock, approximately 11,832 record holders of Class B Common Stock and approximately 10,918 record holders of Warrants. Holdings has not paid cash dividends in any of the last three fiscal years and does not anticipate paying cash dividends in the foreseeable future. We expect that the Company will retain all available earnings generated by its operations for the development and growth of its business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Certain debt instruments of the Company restrict the Company's ability to pay cash dividends on its Common Stock and make certain other restricted payments (as defined therein). Under these restrictions, as of December 31, 1998, the Company's ability to pay dividends, together with any other restricted payments, would be limited to an aggregate of $148 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." In September 1995 the Company adopted a stock repurchase program. The program was amended in December 1995, August 1997 and August 1998. During 1995 through 1998, the Company purchased approximately 7.5 million shares of Class B Common Stock and 7.0 million Warrants. As of December 31, 24 25 1998, the program authorized the Company to purchase approximately 5.0 million shares of issued and outstanding Class B Common Stock and all of the remaining 3.3 million Warrants. AWA has 1,000 shares of Common Stock outstanding, all of which are owned by Holdings. There is no established public trading market for AWA's Common Stock. AWA's ability to pay cash dividends on its Common Stock is restricted by the debt instruments and in the manner described above. 25 26 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated data presented below under the captions "Consolidated Statements of Income Data" and "Consolidated Balance Sheet Data" as of and for the years ended December 31, 1998, 1997, 1996 and 1995 and the period August 26 through December 31, 1994, and the period January 1 through August 25, 1994 are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by KPMG LLP, independent certified public accountants. The selected consolidated data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the independent auditors' report. The independent auditors' report as of and for the years ended December 31, 1996, 1995 and the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994 contains an explanatory paragraph that states the consolidated financial statements of the Company upon its emergence from bankruptcy reorganization in 1994 ("Reorganized Company") reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the consolidated financial statements of the Reorganized Company are presented on a different basis than those of the predecessor company and, therefore, are not comparable in all respects.
REORGANIZED COMPANY PREDECESSOR COMPANY ------------------- ----------- ------- AUGUST 26 TO JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, AUGUST 25, 1998 1997 1996 1995 1994 1994 ---- ---- ---- ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF INCOME DATA: Operating revenues .............. $ 2,023,284 $ 1,874,956 $ 1,739,526 $ 1,550,642 $ 469,766 $ 939,028 Operating expenses .............. 1,814,221 1,713,130 1,670,860 1,395,910 430,895 831,522 Operating income ................ 209,063 161,826 68,666 154,732 38,871 107,506 Income (loss) before income taxes and extraordinary items (a) . 194,346 140,001 34,493 108,378 19,736 (201,209) Income taxes .................... 85,775 65,031 24,883 53,608 11,890 2,059 Income (loss) before extraordinary items .......... 108,571 74,970 9,610 54,770 7,846 (203,268) Extraordinary gain (loss) (b) ... -- -- (1,105) (984) -- 257,660 Net income ...................... 108,571 74,970 8,505 53,786 7,846 54,392 Earnings per share: (c) Basic: Before extraordinary items 2.58 1.68 .21 1.21 .17 n.m. Extraordinary items (b) . -- -- (.02) (.02) -- n.m. Net income ............... 2.58 1.68 .19 1.19 .17 n.m. Diluted: Before extraordinary items 2.40 1.63 .20 1.18 .17 n.m. Extraordinary items (b) . -- -- (.02) (.02) -- n.m. Net income ............... 2.40 1.63 .18 1.16 .17 n.m. Shares used for computation Basic ....................... 42,102 44,529 44,932 45,158 45,128 n.m. Diluted ..................... 45,208 46,071 47,733 46,327 45,183 n.m. CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD): Total assets .................... $ 1,525,030 $ 1,546,791 $ 1,597,650 $ 1,588,709 $ 1,545,092 $ -- Long-term debt, less current maturities ................... 207,906 272,760 330,148 373,964 465,598 -- Total stockholders' equity ...... 669,458 683,570 622,753 649,472 595,446 --
26 27 (a) Includes net expense incurred by the predecessor company in connection with its reorganization of $273.7 million for the period January 1 through August 25, 1994. (b) Includes (i) an extraordinary loss of $1.1 million in 1996 resulting from the partial prepayment of its 10 3/4% Senior Unsecured Notes; (ii) an extraordinary loss of $984,000 in 1995 resulting from the exchange of debt by the Company; and (iii) an extraordinary gain of $257.7 million in 1994 resulting from the discharge of indebtedness pursuant to the consummation of its plan of reorganization. (c) Historical per share data for the predecessor company is not meaningful because the Company has been recapitalized and has adopted fresh start reporting as of August 25, 1994. 27 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Holdings became the holding company for AWA effective midnight, December 31, 1996. In January 1998, TLC a subsidiary of Holdings' began operations as a new leisure travel company to develop and grow the Company's vacation package tour business. Holdings' primary business activity is ownership of all the capital stock of AWA and TLC. Management's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the consolidated financial statements of Holdings presented in Item 8A. Financial statements for AWA, Holdings' wholly owned subsidiary, are presented in Item 8B. 1998 IN REVIEW Record Financial Results In 1998 Holdings earned $108.6 million in consolidated net income, a 45% increase above the previous record year in 1997. Diluted earnings per share for the year were $2.40. The Company's EBITDAR (operating income before depreciation, amortization, rent and non-recurring charges) margin for 1998 was 30%, the highest of all major domestic airlines. The Company believes that EBITDAR margin, which is a non-GAAP measurement, is the best measure of relative airline operating performance. EBITDAR measures operating performance before depreciation and aircraft rentals. By excluding both rentals and depreciation, differences in the method of financing aircraft acquisitions are eliminated. Cash earnings are distorted by differences in financing aircraft as depreciation attributable to owned aircraft (including those acquired through finance leases) is added back to cash earnings while operating lease rentals are deducted. Operating profit is also flawed as a basis of comparison because both the depreciation and interest element of aircraft acquisitions are included in operating profit for aircraft acquired through operating leases. 1998 marks the fourth consecutive year the Company has led major domestic airlines in EBITDAR margin. While excluded from EBITDAR margin, depreciation, amortization and rent are components of operating expense which are significant in understanding and assessing the Company's financial performance. In addition, the Company's use of EBITDAR margin may not be comparable to similarly titled measures presented by other companies. Improved Revenue Performance Total operating revenues increased 5.0% to $2.0 billion in 1998 from the Company's previous record of $1.9 billion in 1997. On a year-over-year comparative basis, passenger revenue per available seat mile ("RASM") increased 2.1% to 7.65 cents in 1998. RASM for the other major domestic airlines decreased 0.4%. AWA's RASM improvement occurred despite a 5.5% increase in aircraft stage length due to additional flying in long-haul business markets and the lapse of a federal transportation excise tax for the period January 1 to March 6, 1997. Factors contributing to these 1998 gains included continued upgrading of the Company's revenue management process, improved airline scheduling systems which allowed the Company to optimize its scheduled flight times starting in the 1998 third quarter and a rational industry pricing environment. Low Unit Costs The Company has maintained its strategic cost advantage versus other major domestic airlines. In 1998, the Company's operating cost per available seat mile ("CASM") was 7.29 cents, a 0.5% decrease when compared with 1997. This was approximately 25% less than the average CASM of the other major domestic airlines which increased by 0.2%. The Company has achieved this low cost structure primarily through employee productivity, favorable labor costs per ASM and industry-leading aircraft utilization. 28 29 Debt Reduction/Equity Purchases Cash flows provided by operating activities in 1998 were used to reduce debt and repurchase equity: - - Total long-term debt (including current maturities) was reduced from $327 million at December 31, 1997 to $288 million at December 31, 1998, a reduction of 12%. Over the last four years, the Company has reduced total debt by approximately $243 million or 46%. - - In August 1998, the Company's Board of Directors approved the extension of the Company's stock repurchase program through December 31, 1999. The program authorizes the repurchase of up to 5.0 million shares of Class B Common Stock and all of AWA's publicly traded warrants. In 1998 the Company purchased $132 million of equity as part of this program. Since the program's inception in 1995, the Company has repurchased $193 million of equity. 1999 FIRST QUARTER OUTLOOK The Company expects to report record results for the first quarter of 1999. This will mark the sixth consecutive quarter of record results. The Company forecasts first quarter 1999 diluted earnings per share will be approximately $0.60 per share, versus the previous record of $0.53 per diluted share in the 1998 first quarter. The financial results of AWA have benefited from a strong domestic economy, a stable pricing environment and improvements in its revenue management and operational reliability. Although AWA's revenues were negatively impacted in the first quarter by passengers booking flights on other airlines due to uncertainties surrounding negotiations with its flight attendants (see Other Information - "Labor Relations"), this negative, one-time impact was substantially offset by traffic gained due to the pilot unrest at American Airlines, Inc. RESULTS OF OPERATIONS With commencement of TLC operations, Holdings 1998 operations consist of two distinct lines of business for financial reporting purposes. Management believes that a discussion of each of the business lines is appropriate to understand the Company's results of operations. Management also believes that an improved understanding of the Company's results can be gained by comparing the year ended December 31, 1998 to pro forma results for the years ended December 31, 1997 and 1996, respectively, which assume TLC had commenced operations as a subsidiary of Holdings on January 1, 1996. The unaudited pro forma statements of income presented herein have been prepared based upon certain pro forma adjustments to AWA's historical statements of income for the years ended December 31, 1997 and 1996. The 1997 and 1996 pro forma results are for information purposes only and are not necessarily indicative of what actually would have been achieved if TLC had functioned as a separate entity during such years. In addition, the pro forma information is not intended to be a projection of results that will be obtained in the future. Summary Holdings earned record consolidated net income of $108.6 million in 1998, a 45% increase over 1997's previous record consolidated net income of $75.0 million. Diluted earnings per share for the year ended December 31, 1998 were a record $2.40 compared to $1.63 for the year ended December 31, 1997. Consolidated income tax expense for financial reporting purposes was $85.8 million in 1998 compared to $65.0 million in 1997. In 1996, the Company recognized net income of $8.5 million which included a pretax, nonrecurring special charge of $65.1 million (see Note 14, "Nonrecurring Special Charge" in Notes to Consolidated Financial Statements) and income tax expense for financial reporting purposes of $24.9 million. The Company also incurred an extraordinary charge in 1996 of $1.1 million, net of income tax benefit of $918,000, for the prepayment of $25 million of its $75 million 10-3/4% Senior Unsecured Notes. Diluted earnings per share for 1996 were $0.18. Excluding the nonrecurring special charge, the Company would have recorded net income of $48.7 million or diluted earnings per share of $1.02. AWA The following discussion provides an analysis of AWA's results of operations and reasons for material changes therein for the years ended December 31, 1998, 1997 and 1996. 29 30 AMERICA WEST AIRLINES, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
Proforma (Unaudited) ---------------------------------- 1998 1997 1996 ---- ---- ---- Operating revenues: Passenger................................................ $1,858,551 $1,764,206 $1,637,762 Cargo.................................................... 45,551 51,699 46,519 Other ................................................... 64,612 59,051 55,245 -------- -------- ------- Total operating revenues............................. 1,968,714 1,874,956 1,739,526 -------- -------- ------- Operating expenses: Salaries and related costs............................... 448,049 410,292 378,860 Aircraft rents........................................... 244,088 223,423 202,237 Other rents and landing fees............................. 119,089 119,470 111,947 Aircraft fuel............................................ 194,360 243,423 233,522 Agency commissions....................................... 117,483 143,900 126,506 Aircraft maintenance materials and repairs............... 182,844 146,618 125,768 Depreciation and amortization............................ 49,026 48,158 52,383 Amortization of reorganization value in excess of amounts allocable to identifiable assets............. 19,896 22,444 23,929 Nonrecurring special charge.............................. -- -- 65,098 Other.................................................... 396,033 367,380 363,868 -------- -------- ------- Total operating expenses............................. 1,770,868 1,725,108 1,684,118 -------- -------- ------- Operating income.............................................. 197,846 149,848 55,408 -------- -------- ------- Nonoperating income (expenses): Interest income.......................................... 20,682 17,432 12,861 Interest expense, net.................................... (33,807) (39,110) (46,866) Gain (loss) on disposition of property and equipment..... (638) -- 1,288 Other, net............................................... 474 (222) (1,456) -------- -------- ------- Total nonoperating expenses, net..................... (13,289) (21,900) (34,173) -------- -------- ------- Income before income taxes and extraordinary item.... $184,557 $127,948 $21,235 ======== ======== =======
30 31 The table below sets forth selected operating data for AWA.
Year Ended December 31, Percent Percent Change Change 1998 1997 1996 1998-1997 1997-1996 ---- ---- ---- --------- --------- Aircraft (end of period)................... 111 102 101 8.8 1.0 Average daily aircraft utilization (hours). 12.0 12.3 11.8 (2.4) 4.2 Available seat mile (in millions).......... 24,307 23,568 21,625 3.1 9.0 Block hours (in thousands)................. 461 455 424 1.3 7.3 Average stage length (miles)............... 822 779 732 5.5 6.4 Average passenger journey (miles).......... 1,218 1,134 1,042 7.4 8.8 Revenue passenger mile (in millions)....... 16,374 16,204 15,321 1.0 5.8 Load factor (percent)...................... 67.4 68.8 70.9 (2.0) (3.0) Passenger enplanements (in thousands)...... 17,792 18,331 18,178 (2.9) 0.8 Yield per revenue passenger mile (cents)... 11.35 10.89 10.69 4.2 1.9 Revenue per available seat mile: Passenger (cents)..................... 7.65 7.49 7.57 2.1 (1.1) Total (cents)......................... 8.10 7.96 8.04 1.8 (1.0) Fuel consumption (gallons in millions)..... 387 377 351 2.7 7.4 Fuel price (cents per gallon).............. 50.3 64.6 66.5 (22.1) (2.9) Average number of full-time equivalent employees (end of period)............. 10,067 9,615 9,652 4.7 (0.4)
The table below sets forth the major components of CASM for AWA for the applicable years. CASM for 1997 and 1996 is based on pro forma 1997 and 1996 operating expenses.
Percent Percent Year Ended December 31, Change Change Proforma ----------------- 1998 1997 1996 1998-1997 1997-1996 ---- ---- ---- --------- --------- (in cents) Salaries and related costs....................... 1.84 1.74 1.75 5.9 (0.6) Aircraft rents................................... 1.01 .95 .94 5.9 1.4 Other rents and landing fees..................... .49 .51 .52 (3.4) (2.1) Aircraft fuel.................................... .80 1.03 1.08 (22.6) (4.4) Agency commissions............................... .48 .61 .59 (20.8) 4.4 Aircraft maintenance materials and repairs....... .75 .62 .58 20.9 7.0 Depreciation and amortization.................... .20 .20 .24 (1.3) (15.6) Amortization of reorganization values in excess. of amounts applicable to identifiable assets.. .08 .10 .11 (14.0) (14.0) Nonrecurring special charge...................... -- -- .30 -- (100.0) Other............................................ 1.64 1.56 1.68 5.2 (7.4) ---- ---- ---- 7.29 7.32 7.79 (0.5) (6.0) ==== ==== ====
31 32 1998 COMPARED WITH 1997 For 1998, AWA realized record operating income of $197.8 million, a 32.0% increase over the previous record $149.8 million of operating income recognized in 1997. Income before income taxes for 1998 was also a record $184.6 million compared to $127.9 million in 1997. These record results were achieved despite a significant increase in canceled flights during the 1998 third quarter as contact negotiations with the airline's mechanics, represented by the International Brotherhood of Teamsters ("IBT"), continued. In late July 1998 AWA undertook an aggressive recovery plan to improve operational performance. Also, in October 1998 AWA entered into a five-year collective bargaining agreement with the IBT. As a result of these factors, AWA experienced a significant reduction in cancellations in the fourth quarter of 1998. Total operating revenues for 1998 were $2.0 billion. Passenger revenues were $1.9 billion in 1998, an increase of $94.3 million or 5.4% from 1997. RASM in 1998 increased 2.1% to 7.65 cents from 7.49 cents driven by a 4.2% increase in revenue per passenger mile ("yield"). The increase in RASM and yield occurred despite a 5.5% increase in aircraft stage length due to increased flying to long-haul business markets and the lapse of a federal transportation excise tax for the period January 1 to March 6, 1997. Capacity, as measured by available seat miles ("ASMs") increased 3.1% in 1998 as compared to 1997 while load factor (the percentage of available seats that are filled with revenue passengers) decreased by 1.4 points to 67.4%. Cargo and other revenues for 1998 ($110.2 million) were relatively flat when compared to 1997. Operating expenses in 1998 increased $45.8 million, or 2.7% year-over-year while ASMs increased 3.1% in 1998 as compared to 1997. As a result, CASM decreased 0.5% to 7.29 cents in 1998 from 7.32 cents in 1997. Significant changes in the components of operating expense per ASM are explained as follows: - Salaries and related costs per ASM increased 5.9% primarily due to a $11.5 million increase in the accrual for AWArd Pay resulting from higher operating income in 1998. In addition, longevity-related salary increases required by the collective bargaining agreement with the airline's pilots and increased training increased pilot salaries in 1998 by $9.5 million (8.1%) compared to 1997. Payroll expense for maintenance-related personnel also increased by $5.0 million (21.0%) in 1998 as a result of higher headcount to address unsatisfactory operational performance in the third and fourth quarters of 1998 and the IBT contract, which included higher wage rates and a $1.4 million signing bonus. - Aircraft rent expense per ASM increased 5.9% due primarily to the net addition of nine leased aircraft to the fleet during 1998 as compared to 1997. - Other rents and landing fees expense per ASM decreased 3.4% in 1998 due to the 3.1% increase in ASMs. An increase in airport rents of $2.5 million was substantially offset by lower landing fees ($1.6 million) as landings decreased by 3.2%. - Aircraft fuel expense per ASM decreased 22.6% due to a 22.1% decrease in the average price per gallon of fuel to 50.3 cents in 1998 from 64.6 cents in 1997. - Agency commissions expense per ASM decreased 20.8% as the cost reductions associated with the change in agency commission rate from 10% to 8% in October 1997 and the institution of the $50 commission cap implemented on May 1, 1998 more than offset the effects of higher passenger revenues in 1998. - Aircraft maintenance materials and repairs expense per ASM increased 20.9% primarily due to a $25.6 million increase in capitalized maintenance amortization expense for 1998 when compared to 1997 and higher airframe maintenance costs ($9.7 million). 32 33 - Amortization of excess reorganization value expense per ASM decreased 14.0% as a result of the reduction in the unamortized balance of excess reorganization value due to the utilization of tax attributes of the pre-reorganized AWA. - Other operating expenses per ASM increased 5.2% to 1.64 cents from 1.56 cents primarily due to the effect in 1998 of non- salary related Year 2000 costs ($12.4 million) (see "Year 2000 Compliance Program and Risks" in Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Information), higher interrupted trip ($7.8 million) and crew accommodation ($4.6 million) expenses, the write-off of certain software applications ($4.5 million), and the $2.5 million FAA settlement (see "(d) FAA Settlement" in Note 12, "Commitments and Contingencies" in Notes to Consolidated Financial Statements). These increases were offset by reduced advertising costs ($10.4 million) and lower hull and traffic liability insurance rates ($5.1 million). Net non-operating expenses decreased $8.6 million to $13.3 million in 1998 from $21.9 million in 1997 as net interest expense decreased $5.3 million in 1998 primarily due to lower average outstanding debt and interest income increased $3.3 million due to higher cash and cash equivalent balances. 1997 COMPARED WITH 1996 In 1997, AWA realized operating income of $149.8 million. For 1996, AWA recognized operating income of $55.4 million which included a pretax, nonrecurring special charge of $65.1 million (see Note 14, "Nonrecurring Special Charge" in Notes to Consolidated Financial Statements). Excluding the nonrecurring special charge, AWA would have recorded operating income of $120.5 million in 1996. Income before income taxes and extraordinary item in 1997 was $127.9 million compared to $22.6 million in 1996. Total operating revenues were $1.9 billion in 1997 as compared to $1.7 billion in 1996. Passenger revenues for 1997 were $1.8 billion, an increase of 7.7% over the prior year. Cargo and other revenues increased 8.8% to $110.8 million in 1997. Capacity as measured by ASMs increased 9.0% in 1997 compared to 1996 as AWA continued its strategic growth plan. RPMs increased 5.8% in 1997 to 16.2 billion RPMs. Load factor for the 1997 period decreased 2.1 points to 68.8% as the capacity increase of 9.0% more than offset the 5.8% increase in RPMs. Yield increased 1.9%, and RASM decreased 1.1% in 1997 from 1996. In 1997 operating expenses increased $41.0 million or 2.4% when compared to 1996, which included a $65.1 million non-recurring special charge. Excluding the non-recurring special charge, operating expenses increased $106.1 million or 6.6% while ASMs increased 9.0% in 1997 as compared to 1996. Excluding the nonrecurring special charge, CASM decreased 2.3% in 1997 from 1996. Significant changes in the components of operating expense per available seat mile (excluding the nonrecurring special charge) are explained as follows: - Aircraft rents per ASM increased 1.4% primarily due to the net addition of one leased aircraft to the fleet in 1997 and higher rental rates for replacement aircraft. - Other rents and landing fees per ASM decreased 2.1% primarily due to the 9.0% increase in ASMs. - Aircraft fuel expense per ASM decreased 4.4% due to a 2.9% decrease in the average price per gallon of fuel (64.6 cents vs 66.5 cents) and the 9.0% increase in ASMs which was offset in part by a 7.4% increase in fuel consumption. - Agency commissions per ASM increased 4.4% primarily due to a higher mix of commissionable revenue. 33 34 - Aircraft maintenance materials and repairs expense per ASM increased 7.0% or $20.8 million due primarily to an increase in capitalized maintenance cost which has increased capitalized maintenance amortization expense by $26.5 million in 1997 compared to 1996. The unamortized balance of capitalized maintenance grew to $122.9 million as of December 31, 1997, an increase of $20.4 million from December 31, 1996. - Depreciation and amortization expense per ASM decreased 15.6% primarily due to the 9.0% increase in ASMs and certain ramp equipment being depreciated to net realizable value in 1996. - Amortization of reorganization value in excess of identifiable assets expense per ASM decreased 14.0% primarily due to the 9.0% increase in ASMs and to the reduction in the unamortized balance of excess reorganization value due to the utilization of tax attributes of the pre-reorganized Company, including net operating loss carryforwards ("NOL"), amounting to $60 million in 1997 and $16.7 million in 1996. - Other operating expenses per ASM decreased 7.4% to 1.56 cents from 1.68 cents per ASM primarily due to the 9.0% increase in ASMs and a $6.4 million decline in interrupted trip expense due to improved airline operating performance. Net nonoperating expenses decreased $12.3 million to $21.9 million in 1997 from $34.2 million in 1996. The 35.9% decrease in cost resulted primarily from a net decrease in interest expense of $7.8 million due to reduced levels of debt, and a $5 million reversal of previously accrued interest related to the restructuring of the aircraft order with AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA"). TLC The following discussion provides an analysis of TLC's operations and reasons for material changes therein. THE LEISURE COMPANY Statements of Income For the Years Ended December 31, 1998, 1997 and 1996 (in thousands)
Proforma (Unaudited) --------------------------- 1998 1997 1996 ---- ---- ---- Operating revenues............................................ $182,907 $210,762 $189,926 Cost of goods sold............................................ 128,143 158,011 140,183 -------- -------- -------- Net revenues.................................................. 54,764 52,751 49,743 Total operating expenses...................................... 39,486 40,026 36,485 -------- -------- -------- Operating income.............................................. 15,278 12,725 13,258 Nonoperating income (expense), net............................ 75 (1,387) (1,387) -------- -------- -------- Income before income taxes.................................... $15,353 $11,338 $11,871 ======= ======= =======
34 35 1998 COMPARED WITH 1997 TLC's income before taxes for 1998 was $15.4 million, up $4.0 million when compared to 1997 on a pro forma basis. Operating revenues fell $27.9 million due to AWA's improving yield profile, which resulted in less reliance on vacation package traffic and therefore lower volumes for TLC. This shortfall was offset by a reduction in cost of goods sold due to lower package volumes. Overall, net revenues increased by $2.0 million while total operating expenses were relatively unchanged in 1998 when compared to 1997. 1997 COMPARED WITH 1996 TLC's pro forma income before income taxes for 1997 was $11.3 million, a decrease of $0.5 million when compared to 1996 on a pro forma basis. Operating revenues increased $20.8 million or 11% due to a 12% increase in revenue per passenger. Cost of goods sold over this same period increased 12.7% due primarily to higher air costs resulting from a change in AWA's wholesale air strategy and the unfavorable year-over-year effect of a 10% federal transportation excise tax. During 1997 the ticket tax was effective from March 7, through December 31, 1997. In 1996 the tax was in effect from August 20, through December 31, 1996. Total operating expenses increased $3.5 million primarily due to increased salaries and related costs resulting from the growth strategy implemented for TLC LIQUIDITY AND CAPITAL RESOURCES Unrestricted cash and cash equivalents and short-term investments decreased to $135.8 million at December 31, 1998 from $172.3 million at December 31, 1997. Net cash provided by operating activities increased to $348.9 million in 1998 from $206.0 million in 1997, an increase of $142.9 million. This increase was principally due to higher net income and the period over period change in air traffic liability which grew 21.0% in the 1998 period as compared to a 19.1% decrease in the 1997 period. Net cash used in investing activities increased to $212.7 million in 1998 from $129.9 million in 1997. This increase was primarily due to the purchase of short-term investments totaling $27.5 million in 1998 compared to sales of $39.1 million of short-term investments in 1997. Net cash used in financing activities was $200.1 million for the year ended December 31, 1998 compared to $41.3 million in the 1997 period primarily due to the repurchase of Holdings Class B Common Stock and AWA warrants for $132.3 million and the repayment of $30 million of revolving credit facility debt. Operating with a working capital deficiency is common in the airline industry as tickets sold for transportation which has not yet been provided are classified as a current liability while the related income producing assets, the aircraft, are classified as non-current. The Company's working capital deficiency at December 31, 1998 is $233.2 million. As of December 31, 1998, the Company had $288.3 million of long-term debt (including current maturities) which consists primarily of principal amortization of notes payable secured by certain of the Company's aircraft. Management expects to fund these requirements with cash from operations or refinance these obligations, subject to availability and market conditions at such time. At December 31, 1998, AWA had firm commitments to AVSA to purchase a total of 28 Airbus aircraft, with 13 to be delivered in 1999. AWA also has an option to purchase 50 more Airbus aircraft of which 10 are subject to reconfirmation by AWA. The aggregate net cost of firm commitments remaining under the aircraft order is approximately $1.0 billion based on a 3.5% annual price escalation. In October 1998, America West Airlines 1998-1 Pass Through Trusts issued $190.5 million in Pass Through Trust Certificates in connection with the financing of six Airbus A319 aircraft and two Airbus A320 aircraft to be purchased from AVSA. The Pass Through Trust Certificates were issued by separate pass through trusts which will hold equipment notes issued upon delivery of the financed aircraft which will be secured by a security interest in such aircraft. The equipment notes will be issued in respect of, at AWA's election, a leveraged 35 36 lease financing or a mortgage financing of the relevant aircraft. The Pass Through Trust Certificates are not direct obligations of, or guaranteed by AWA. The combined effective interest rate on the financing is 6.99%. Three Airbus A319 aircraft that are the subject of this financing were delivered in the 1998 fourth quarter. The remaining aircraft will be delivered through August 1999. AWA has also arranged for financing from AVSA for approximately two-thirds of the firm commitment to purchase aircraft from AVSA. AWA intends to seek additional financing (which may include public debt financing or private financing) in the future when and as appropriate. There can be no assurance that sufficient funding will be obtained for all aircraft. A default by AWA under the AVSA purchase commitment could have a material adverse effect on AWA. As of December 31, 1998, AWA's fleet consisted of 111 aircraft of which 13 aircraft meet the FAA's Stage II (but not Stage III) noise reduction requirements and must be retired or significantly modified prior to the year 2000. In May 1998, AWA entered into an agreement to purchase 14 sets of 737 hush kits at an aggregate net cost of approximately $14 million to comply with Stage III requirements. Delivery of the hush kits began in May 1998 and will continue through the first quarter of 1999. As of December 31, 1998, five aircraft had been outfitted with a hush kit. Four non-compliant aircraft will be retired. Capital expenditures for the years ended December 31, 1998, 1997 and 1996 were approximately $177.0 million, $155.0 million and $155.7 million respectively. Capital expenditures for capitalized maintenance were $114.9 million, $86.5 million and $87.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. Capital expenditures for 1999 are expected to increase to approximately $225 million due principally to an increase in capitalized maintenance and expenditures for facilities, computer systems and equipment. The Company currently intends to fund such expenditures with cash from operations. The Company has agreed to lease a new concourse in Terminal 4 at Phoenix Sky Harbor International Airport which is expected to open in the fourth quarter of 1999. In connection with the new concourse, AWA will be required to fund the costs of certain leasehold improvements, which are estimated to approximate $15 million. The Company expects to finance these improvements through the issuance of special facility revenue bonds. The Company also anticipates that it will refinance its existing special facility revenue bonds (Series 1994 A Bonds) at that time (see "(b) Revenue Bonds" in Note 12, "Commitments and Contingencies" in Notes to Consolidated Financial Statements). On February 19, 1999 AWA borrowed $94.3 million, the total amount then available under its senior secured revolving credit facility (see Note 2, "Long-term Debt" in Notes to Consolidated Financial Statements), to provide additional liquidity in the event of service disruptions related to the Company's contract negotiations with its flight attendants. On March 20, 1999 the Company reported that it had reached a tentative agreement with the Association of Flight Attendants ("AFA") on a five-year collective bargaining agreement (see "Labor Relations" in Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Information). The Company intends to repay this amount on April 19, 1999 in accordance with the terms of the credit facility. OTHER INFORMATION Labor Relations In April 1998, AWA and the Transportation Workers Union ("TWU") entered into a five-year collective bargaining agreement covering the airline's approximately 60 dispatchers. In October 1998, AWA and the IBT entered into a five-year collective bargaining agreement covering the airline's approximately 430 mechanics and related personnel. 36 37 On March 20, 1999, the Company reported that it had reached a tentative agreement with the AFA, which represents AWA's approximately 2150 flight attendants, on a five-year collective bargaining agreement. The agreement is subject to membership approval and will be voted on by union members as soon as practicable. On March 22, 1999 the Company announced that based on the terms of this tentative agreement and current estimates of fuel prices, it expects AWA's 1999 CASM to increase approximately 1% versus 1998. Also in October 1998, the TWU filed an application with the NMB seeking certification as the bargaining representative for AWA's approximately 2000 fleet service workers. An election on this application was authorized by the NMB. In January 1999 the NMB advised that 53% of eligible voters cast ballots in favor of representation by the TWU. The Company has challenged the results of that election based on allegations of misconduct by union organizers. The NMB is currently investigating these allegations. The Company cannot predict the outcome or the form of this future collective bargaining agreement and therefore the effect, if any, on AWA's operations or financial performance. YEAR 2000 COMPLIANCE PROGRAM AND RISKS The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. As a consequence, time-sensitive computer equipment and software may recognize a date using "00" as the year 1900 rather than the year 2000. Many of the Company's systems, including information and computer systems and automated equipment, will be affected by the Year 2000 issue. The Company is also heavily reliant on the FAA's management of the nation's air traffic control system, local authorities' management of the airports at which AWA operates, and vendors to provide goods (fuel, catering, etc.), services (telecommunications, data networks, satellites, etc.) and data (frequent flyer partnerships, alliances, etc.). The Company has underway a Year 2000 Project (the "Project" or "Year 2000 Project") to identify the programs and infrastructure that could be affected by the Year 2000 issue and is implementing a plan to resolve the problems identified on a timely basis. The Project requires the Company to devote a considerable amount of internal resources and hire substantial external resources to assist with the implementation and monitoring of the Project, and will require the replacement of certain equipment and modification of certain software. The Company believes that its Year 2000 Project will be completed prior to any currently anticipated significant impact on the Company arising from the Year 2000 issue. The Project is divided into three main sections, including information technology ("IT") systems, embedded systems and third party compliance. The five phases of the IT and embedded systems sections include inventory, assessment, renovation, user testing and implementation. The inventory and assessment phases of the IT systems are substantially completed and the remaining phases of the IT systems are expected to be completed in the second quarter of 1999. The inventory phase of the embedded systems is substantially completed and the remaining phases are underway and are expected to be completed during the second and third quarters of 1999. The Company currently estimates that the total cost of its Year 2000 Project will be approximately $40 million, which will be funded from operating cash flows. These costs exclude approximately $7 million of normal system software and equipment upgrades and replacements which the Company anticipated incurring in the ordinary course of business regardless of the Year 2000 issue. As of December 31, 1998, the Company had incurred approximately $13 million of non-capital expenditures in connection with the Year 2000 Project. The Company expects that approximately $30 million of the costs have been or will be expensed as incurred and the Company has had or will have approximately $10 million of capital expenditures. The costs and expected completion date of the Company's Year 2000 Project are based on management's best estimates, and reflect assumptions regarding the availability and cost of personnel trained in this area, the compliance plans of third parties and similar uncertainties. However, due to the complexity and pervasiveness of the Year 2000 issue and in particular the uncertainty regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved, and actual results could differ materially from those anticipated. If the Company's plan to address the Year 2000 issue is not successfully or timely implemented, the Company may need to devote more resources to the process and additional costs may be incurred, which could have a material adverse effect on the Company's financial condition and results of operations. 37 38 The failure to correct a material Year 2000 problem could result in an interruption in, or failure of, certain normal business activities or operations. While difficult to predict, the Company speculates that the most reasonably likely worst case Year 2000 scenario will result from the failure of third parties, including operators of airports and air traffic control systems, to resolve their Year 2000 compliance issue. The Company has initiated communications with such parties and its significant suppliers and vendors with which its systems interface and upon which the Company's business depends in an effort to reduce the adverse impact of the Year 2000 issue. There can be no assurance, however, that the systems of such third parties will be modified on a timely basis and such failure may have a material adverse effect on the Company's financial condition and results of operations. As a component of its Year 2000 Project, the Company is developing a comprehensive analysis of the operational problems and costs (including loss of revenues) that would be reasonably likely to result from the failure by the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. The Company is developing contingency plans designed to enable it to continue operations, consistent with the highest standards of safety, in the event of such third party failures. INCOME TAXES At December 31, 1998, the Company had NOL, general business tax credit carryforwards and alternative minimum tax credit carryforwards of approximately $239.0 million, $12.7 million and $570,000, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a loss corporation has an "ownership change" within a designated testing period, its ability to use its NOL and tax credit carryforwards is subject to certain limitations. The Company is a loss corporation within the meaning of Section 382. The issuance of certain common stock by the Company pursuant to the plan of reorganization resulted in an ownership change within the meaning of Section 382. This ownership change has resulted in an annual limitation (the "Section 382 Limitation") upon the Company's ability to offset any post-change taxable income with pre-change NOL. The Company's Section 382 Limitation is $36.2 million per year. Should the Company generate insufficient taxable income in any 38 39 post-change taxable year to utilize fully the Section 382 Limitation of that year, any excess limitation will be carried forward to use in subsequent tax years, provided the pre-change NOL has not been exhausted and the carryforward period has not expired. The amount of the limitation may under certain circumstances be increased by the built-in gains in assets held by the Company at the time of the ownership change that are recognized in the five year period after the change. The alternative minimum tax credit may be carried forward indefinitely and is available to reduce future income tax payable. The Company's reorganization and the associated implementation of fresh start reporting in 1994 gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes. In large measure, it is these nondeductible expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, the Company's actual cash income tax liability (i.e., income taxes payable) of $39.1 million in 1998 is considerably lower than income tax expense shown for financial reporting purposes of $85.8 million. This difference in financial expense compared to actual income tax liability is in part attributable to the utilization of certain tax attributes of the predecessor company that serve to reduce AWA's actual income tax liability. GOVERNMENT REGULATIONS Congress is currently considering various proposals that would impose new consumer protection requirements on airlines. These proposals include, e.g. disclosure to passengers when a flight is overbooked, payment to passengers on an aircraft for excessive departure or arrival delay, prohibition on the issuance of non-refundable tickets and increased compensation for denied boarding and for lost or damaged baggage. As a result of competitive pressures AWA and other airlines would be limited in their ability to pass costs associated with compliance with such laws to passengers and the Company cannot forecast the cost impact of such measures if enacted. In 1997 new aviation taxes were imposed through September 30, 2007 to provide funding for the FAA. Included in the new law is a phase-in of a modified federal air transportation excise tax structure with a system that includes: a domestic excise tax starting at 9%, declining to 7.5% by 1999; a domestic segment tax starting at $1.00 and increasing to $3.00 by 2003; and an increase in taxes imposed on international travel that will be from $6.00 per international departure to an arrival and departure tax of $12.00 (each way). Both the domestic segment tax and the international arrival and departure tax are indexed for inflation. The legislation also includes a 7.5% excise tax on certain amounts paid to an air carrier for the right to provide mileage and similar awards (e.g., purchase of frequent flyer miles by a credit card company). As a result of competitive pressures, AWA and other airlines have been limited in their ability to pass on the cost of these taxes to passengers through fare increases. In December 1997, the National Civil Aviation Review Commission (the "NCARC") completed its Report to Congress on FAA funding and recommended implementation of a cost based user fee system for air carriers. Congress is presently considering the recommendations of the NCARC, which may result in enactment of a new funding mechanism. The Company cannot currently estimate the effect the new combination of ticket and segment taxes, or any change in those taxes as recommended by the NCARC, will have on its operating results. There can be no assurance that the new taxes or such changes will not have a material adverse effect on the Company's financial condition and results of operations. For additional information on government regulation and its effect on the Company see "Government Regulations" in Item 1, Business. FORWARD LOOKING INFORMATION This discussion contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate", "estimate", "project", "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on the Company's results are competitive practices in the airline and travel industries generally and particularly in the Company's principal markets, the ability of the Company to meet existing financial obligations in the event of adverse industry or economic conditions or to obtain additional capital to fund future commitments and expansion, the Company's relationship with employees and the terms of future collective bargaining agreements and the impact of current and future laws and governmental regulations affecting the airline and travel industries and the Company's operations. For additional discussion of such risks see "Business - Risk Factors," included in Item 1 of this Report on Form 10-K. Any forward-looking statements speak only as of the date such statements are made. 39 40 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK SENSITIVE INSTRUMENTS (a) Commodity Price Risk Aircraft fuel costs constitute approximately 11% of the Company's total operating expenses during 1998. At current consumption levels, a one cent per gallon change in the price of jet fuel would affect the Company's annual operating results by approximately $4.4 million in 1999. Accordingly, a substantial change in the price of jet fuel would have a significant impact on the Company's results of operations. In 1996, AWA implemented a fuel hedging program to manage the risk from fluctuating jet fuel prices. The program's objectives are to provide some protection against extreme, upward movements in the price of jet fuel and to protect AWA's ability to meet its annual fuel expense budget. Under the program, AWA may enter into certain protective cap and fixed price swap transactions with approved counterparties for future periods generally not exceeding 12 months. As of December 31, 1998, the Company had entered into fixed price swap transactions hedging approximately 35% of its projected 1999 fuel requirements including 51% related to the first quarter, 46% related to the second quarter, 23% related to the third quarter and 22% related to the fourth quarter. The use of such swap transactions in the Company's fuel hedging program could result in the Company not fully benefiting from certain declines in jet fuel prices. At December 31, 1998 the Company estimates that a 10% change in the price per gallon of jet fuel would have changed the fair value of the existing swap contracts by $5.5 million. As of March 17, 1999, approximately 43% of AWA's 1999 fuel requirements are hedged. (b) Interest Rate Risk The Company's exposure to interest rate risk relates primarily to its variable rate long-term debt obligations. At December 31, 1998, the Company's variable-rate long-term debt obligations represented approximately 16% of its total long-term debt. If interest rates increased 10% in 1999, the impact on the Company's results of operations would not be material. 40 41 ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - AMERICA WEST HOLDINGS CORPORATION Consolidated balance sheets of Holdings as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998, together with the related notes and the report of KPMG LLP, independent certified public accountants, are set forth on the following pages. 41 42 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders America West Holdings Corporation: We have audited the accompanying consolidated balance sheets of America West Holdings Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of America West Holdings Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Phoenix, Arizona March 10, 1999 42 43 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA)
1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents.............................................................. $ 108,360 $ 172,303 Short-term investments................................................................. 27,485 - Accounts receivable, less allowance for doubtful accounts of $3,545 in 1998 and $3,850 in 1997................................................. 96,381 87,538 Expendable spare parts and supplies, less allowance for obsolescence of $4,112 in 1998 and $2,495 in 1997.............................................. 31,147 27,135 Prepaid expenses....................................................................... 38,730 36,917 --------- --------- Total current assets......................................................... 302,103 323,893 --------- --------- Property and equipment: Flight equipment....................................................................... 931,134 783,384 Other property and equipment........................................................... 157,718 143,172 Equipment purchase deposits............................................................ 83,649 45,246 --------- --------- 1,172,501 971,802 Less accumulated depreciation and amortization......................................... 410,461 276,430 --------- --------- 762,040 695,372 --------- --------- Other assets: Restricted cash........................................................................ 35,262 57,158 Reorganization value in excess of amounts allocable to identifiable assets, net........ 336,772 363,268 Deferred income taxes.................................................................. 28,054 74,700 Other assets, net...................................................................... 60,799 32,400 --------- --------- 460,887 527,526 --------- --------- $1,525,030 $1,546,791 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt................................................... $ 80,439 $ 54,000 Accounts payable....................................................................... 112,563 140,908 Air traffic liability.................................................................. 209,525 173,149 Accrued compensation and vacation benefits............................................. 48,338 37,267 Accrued taxes.......................................................................... 43,489 36,064 Other accrued liabilities.............................................................. 40,905 44,554 --------- --------- Total current liabilities......................................................... 535,259 485,942 --------- --------- Long-term debt, less current maturities..................................................... 207,906 272,760 Deferred credits and other liabilities...................................................... 112,407 104,519 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value. Authorized 48,800,000 shares; no shares issued....... - - Class A common stock, $.01 par value. Authorized 1,200,000 shares; issued and outstanding 1,100,000 shares at December 31, 1998 and 1,200,000 shares at December 31, 1997................................................................. 11 12 Class B common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 45,280,199 shares in 1998, and 44,782,404 shares in 1997.............. 453 448 Additional paid-in capital............................................................. 556,508 565,546 Retained earnings...................................................................... 253,678 145,107 --------- --------- 810,650 711,113 Less: Cost of Class B common stock in treasury, 7,388,095 shares in 1998 and 1,486,168 shares in 1997...................................................... (141,192) (27,543) --------- --------- Total stockholders' equity................................................... 669,458 683,570 --------- --------- $1,525,030 $1,546,791 ========== ==========
See accompanying notes to consolidated financial statements. 43 44 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXCEPT PER SHARE DATA)
1998 1997 1996 ---- ---- ---- Operating revenues: Passenger.................................................. $ 1,858,551 $ 1,764,206 $ 1,637,762 Cargo...................................................... 45,551 51,699 46,519 Leisure Co. net revenues................................... 54,570 -- -- Other...................................................... 64,612 59,051 55,245 ----------- ----------- ----------- Total operating revenues................................ 2,023,284 1,874,956 1,739,526 ----------- ----------- ----------- Operating expenses: Salaries and related costs................................. 450,220 418,212 385,840 Aircraft rents............................................. 244,088 223,423 202,237 Other rents and landing fees............................... 119,091 119,470 111,947 Aircraft fuel.............................................. 194,360 243,423 233,522 Agency commissions......................................... 117,483 151,293 133,015 Aircraft maintenance materials and repairs................. 182,844 146,618 125,768 Depreciation and amortization.............................. 49,026 48,590 52,937 Amortization of reorganization value in excess of amounts allocable to identifiable assets................ 19,896 23,776 25,263 Nonrecurring special charge................................ -- -- 65,098 Leisure Co. expenses....................................... 39,486 -- -- Other...................................................... 397,727 338,325 335,233 ----------- ----------- ----------- Total operating expenses................................ 1,814,221 1,713,130 1,670,860 ----------- ----------- ----------- Operating income.............................................. 209,063 161,826 68,666 ----------- ----------- ----------- Nonoperating income (expenses): Interest income............................................ 13,105 10,646 12,861 Interest expense, net...................................... (26,050) (32,249) (46,866) Gain (loss) on disposition of property and equipment....... (638) (1,710) 1,288 Other, net................................................. (1,134) 1,488 (1,456) ----------- ----------- ----------- Total nonoperating expenses, net........................ (14,717) (21,825) (34,173) ----------- ----------- ----------- Income before income taxes and extraordinary item ...... 194,346 140,001 34,493 ----------- ----------- ----------- Income taxes.................................................. 85,775 65,031 24,883 ----------- ----------- ----------- Income before extraordinary item........................ 108,571 74,970 9,610 Extraordinary item, net of tax................................ -- -- (1,105) ----------- ----------- ----------- Net income.............................................. $ 108,571 $ 74,970 $ 8,505 =========== =========== =========== Earnings per share: Basic: Income before extraordinary item........................ $ 2.58 $ 1.68 $ .21 Extraordinary item...................................... -- -- (.02) ----------- ----------- ----------- Net income.............................................. $ 2.58 $ 1.68 $ .19 =========== =========== =========== Diluted: Income before extraordinary item........................ $ 2.40 $ 1.63 $ .20 Extraordinary item...................................... -- -- (.02) ----------- ----------- ----------- Net income.............................................. $ 2.40 $ 1.63 $ .18 =========== =========== =========== Shares used for computation: Basic...................................................... 42,102 44,529 44,932 =========== =========== =========== Diluted.................................................... 45,208 46,071 47,733 =========== =========== ===========
See accompanying notes to consolidated financial statements. 44 45 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income......................................................... $108,571 $ 74,970 $ 8,505 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 49,545 48,590 52,937 Amortization of capitalized maintenance......................... 89,347 66,143 39,679 Amortization of reorganization value............................ 21,496 23,776 25,263 Income taxes attributable to reorganization items and other..... - 59,444 23,091 Amortization of deferred credits................................ (6,798) (10,405) (11,563) Nonrecurring special charge..................................... - - 65,098 Extraordinary item and other.................................... 14,316 5,843 3,989 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net................. (8,091) 18,677 (37,121) Increase in expendable spare parts and supplies, net............ (4,012) (5,712) (3,793) Decrease (increase) in prepaid expenses......................... 93 10,551 (2,252) Decrease (increase) in other assets, net........................ 22,473 (32,464) (3,173) Increase (decrease) in accounts payable......................... (31,136) 25,450 26,301 Increase (decrease) in air traffic liability.................... 35,141 (40,907) 22,312 Increase (decrease) in accrued compensation and vacation benefits....................................... 11,072 7,182 (11,531) Increase (decrease) in accrued taxes............................ 55,913 (35,983) 37,688 Increase (decrease) in other accrued liabilities................ (1,554) (282) 8,315 Decrease in other liabilities................................... (7,435) (8,871) (13,411) -------- -------- -------- Net cash provided by operating activities.................... 348,941 206,002 230,334 -------- -------- --------- Cash flows from investing activities: Purchases of property and equipment............................. (176,996) (154,969) (155,742) Sale (purchase) of short-term investments....................... (27,485) 39,131 (39,131) Other........................................................... (8,268) (14,017) (4,082) -------- -------- --------- Net cash used in investing activities........................ (212,749) (129,855) (198,955) -------- -------- --------- Cash flows from financing activities: Proceeds from issuance of debt.................................. - 30,000 - Repayment of debt............................................... (72,245) (55,411) (79,216) Acquisition of treasury stock................................... (116,148) (2,434) (23,964) Acquisition of warrants......................................... (16,175) (13,342) (18,141) Other........................................................... 4,433 (156) 3,074 -------- -------- -------- Net cash used in financing activities........................ (200,135) (41,343) (118,247) -------- -------- -------- Net increase (decrease) in cash and cash equivalents............... (63,943) 34,804 (86,868) -------- -------- -------- Cash and cash equivalents at beginning of year..................... 172,303 137,499 224,367 -------- -------- -------- Cash and cash equivalents at end of year........................... $108,360 $172,303 $137,499 ======== ======== ======== Cash, cash equivalents and short-term investments at end of year... $135,845 $172,303 $176,630 ======== ======== ========
See accompanying notes to consolidated financial statements. 45 46 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXCEPT SHARE DATA)
CLASS A CLASS B ADDITIONAL CLASS B COMMON COMMON PAID-IN RETAINED TREASURY STOCK STOCK CAPITAL EARNINGS STOCK TOTAL ----- ----- ------- -------- ----- ----- BALANCE AT JANUARY 1, 1996............ $ 12 $ 441 $ 588,927 $ 61,632 $ (1,540) $ 649,472 ---------- ---------- --------- ---------- --------- ---------- Issuance of 12,725 shares and 314,001 shares of Class B common stock pursuant to the exercise of stock warrants and stock options - 3 3,071 - - 3,074 Issuance of 158,000 shares of Class B restricted stock................... - 2 2,761 - - 2,763 Purchase of 1,270,000 shares and return of 21,911 shares of Class B treasury stock.............................. - - 293 - (24,257) (23,964) Issuance of 50,000 shares of Class B treasury stock..................... - - 356 - 688 1,044 Repurchase of 2,187,475 warrants at $8.29 per warrant...... - - (18,141) - - (18,141) Net income............................ - - - 8,505 - 8,505 ---------- ---------- --------- ---------- --------- --------- BALANCE AT DECEMBER 31, 1996.......... 12 446 577,267 70,137 (25,109) 622,753 ---------- ---------- --------- ---------- --------- --------- Issuance of 5,534 shares and 140,167 shares of Class B common stock pursuant to the exercise of stock warrants and stock options - 2 1,452 - - 1,454 Issuance of 10,647 shares of Class B common stock............... - - 169 - - 169 Acquisition of 132,300 shares of Class B treasury stock..................... - - - - (2,434) (2,434) Issuance of 43 shares of Class B treasury stock..................... - - - - - Repurchase of 1,911,523 warrants at $6.98 per warrant...... - - (13,342) - - (13,342) Net income............................ - - - 74,970 - 74,970 ---------- ---------- --------- ---------- --------- --------- BALANCE AT DECEMBER 31, 1997.......... 12 448 565,546 145,107 (27,543) 683,570 ---------- ---------- --------- ---------- --------- --------- Issuance of 25,560 shares and 353,000 shares of Class B common stock pursuant to the exercise of stock warrants and stock options including tax benefit from the exercise of stock options of $1,873 - 4 6,702 - - 6,706 Issuance of 119,235 shares of Class B common stock............... - 1 1,683 - - 1,684 Acquisition of 100,000 shares of Class A treasury stock .................... (1) - (1,811) - - (1,812) Acquisition of 5,951,927 shares of Class B treasury stock............. - - - - (114,336) (114,336) Issuance of 50,000 shares of Class B treasury stock..................... - - 563 - 687 1,250 Repurchase of 2,906,867 warrants at $5.56 per warrant...... - - (16,175) - - (16,175) Net income............................ - - - 108,571 - 108,571 ---------- ---------- --------- ---------- --------- --------- BALANCE AT DECEMBER 31, 1998.......... $ 11 $ 453 $ 556,508 $ 253,678 $(141,192) $ 669,458 ========== ========== ========= ========== ========= =========
See accompanying notes to consolidated financial statements. 46 47 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Holdings became the holding company for AWA effective midnight, December 31, 1996. In January 1998, TLC began operations as a new leisure travel subsidiary of Holdings to develop and grow the Company's vacation package tour business. Holdings' primary business activity is ownership of all the capital stock of AWA and TLC. AWA is the ninth largest commercial airline carrier in the United States serving 57 destinations in the U.S., Canada and Mexico. (a) Basis of Presentation The consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries AWA and TLC (collectively, the "Company"). The Company's consolidated financial statements give effect to the formation of the holding company discussed above for all periods presented. All significant inter-company balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the current year's presentation. (b) Cash, Cash Equivalents and Short-term Investments Cash equivalents consist of all highly liquid debt instruments purchased with original maturities of three months or less. Short-term investments consist of cash invested in certain debt securities with original maturities greater than 90 days. The debt securities are classified as held to maturity and are carried at amortized cost which approximates fair value. (c) Expendable Spare Parts and Supplies Flight equipment expendable spare parts and supplies are valued at average cost. An allowance for obsolescence is provided, over the estimated useful life of the related aircraft and engines, for spare parts expected to be on hand at the date the aircraft are retired from service. (d) Property and Equipment Property and equipment are recorded at cost. Interest capitalized on advance payments for aircraft acquisitions and on expenditures for aircraft improvements are part of these costs. Interest capitalized for the years ended December 31, 1998 and 1997 was $4.1 million and $600,000, respectively. No interest was capitalized for the year ended December 31, 1996. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. The estimated useful lives for the Company's ground property and equipment range from three to 12 years for owned property and equipment and up to 30 years for the reservation and training center and technical support facilities. The estimated useful lives of the Company's owned aircraft, jet engines, flight equipment and rotable parts range from 11 to 22 years. Leasehold improvements relating to flight equipment and other property on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. 47 48 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Effective October 1, 1998, AWA extended the estimated depreciable service lives of certain owned Boeing 737-200 aircraft which will be modified to meet the Federal Aviation Administration's ("FAA") Stage III noise reduction requirements. This change increased the average depreciable life by approximately four years and reduced depreciation expense in the 1998 fourth quarter by $2.0 million. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired as defined by 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." (e) Restricted Cash Restricted cash includes cash deposits securing certain letters of credit. (f) Aircraft Maintenance and Repairs Routine maintenance and repairs are charged to expense as incurred. The cost of major scheduled airframe, engine and certain component overhauls are capitalized and amortized over the periods benefited and are included in aircraft maintenance materials and repairs expense. Additionally, an accrual for the estimated cost of scheduled airframe and engine overhauls required to be performed on leased aircraft prior to their return to the lessors has been recorded. (g) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight line basis over 20 years. Accumulated amortization at December 31, 1998, 1997 and 1996 was $113.6 million, $92.1 million and $68.4 million, respectively. In accordance with SFAS No. 121, the Company assesses the recoverability of this asset based upon expected future undiscounted cash flows and other relevant information. (h) Frequent Flyer Awards The Company maintains a frequent travel award program known as "FlightFund" that provides a variety of awards to program members based on accumulated mileage. The estimated cost of providing the free travel, using the incremental cost method as adjusted for estimated redemption rates, is recognized as a liability and charged to operations as program members accumulate mileage. (i) Deferred Credit-Operating Leases Rents for operating leases were adjusted to fair market value when the Company emerged from bankruptcy in 1994. The net present value of the difference between the stated lease rates and the fair market rates has been recorded as a deferred credit in the accompanying consolidated balance sheets. The deferred credit will be increased through charges to interest expense and decreased on a straight-line basis as a reduction in rent expense over the applicable lease periods. At December 31, 1998 and 1997, the unamortized balance of the deferred credit was $78.6 million and $85.3 million, respectively. 48 49 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (j) Passenger Revenue Passenger revenue is recognized when transportation is provided. Ticket sales for transportation which has not yet been provided are recorded as air traffic liability. Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense. (k) Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 1998, 1997 and 1996 was $20.6 million, $25.8 million and $26.6 million, respectively. (l) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the 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. (m) Stock Options The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method defined in SFAS No. 123 had been applied. (See Note 4, "Stock Options and Awards.") (n) Earnings Per Share ("EPS") On December 15, 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which standardizes the reporting for EPS into basic EPS and diluted EPS, and has restated all prior period EPS data to conform to SFAS No. 128. (o) New Accounting Standards In 1998 the Company adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-1 requires that certain internal and external costs be expensed or capitalized when incurred to develop or obtain software for internal use. Generally, costs incurred during the preliminary project and post-implementation/operation stages, as well as conversion and general and administrative costs, are to be expensed as incurred. Certain costs incurred during the application and development stage are to be capitalized. 49 50 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SOP 98-5 requires that the costs of start-up activities, which include start-up costs, organization costs, preopening costs, and preoperating costs be expensed as incurred. This SOP also amends certain provisions of SOP 88-1 "Accounting for Developmental and Preoperating Costs, Purchases and Exchanges of Take-off and Landing Slots, and Airframe Modifications" by requiring that preoperating costs relating to the integration of new types of aircraft be expensed as incurred. The effect of initially applying the provisions of SOP 98-1 and SOP 98-5 was not material to the accompanying financial statements. In June 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for all derivative instruments and hedging activities. SFAS No. 133 requires recognition of all derivatives as either assets or liabilities in the balance sheet at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedge"), a hedge of the exposure to variable cash flows of a forecasted transaction ("cash flow hedge"), or a hedge of the foreign currency exposure ("foreign currency hedge") of a net investment in a foreign operation or a foreign currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. In accounting for a fair value hedge, the derivative hedging instrument will be measured at fair value with the mark to fair value being recorded in earnings. In a cash flow hedge, the derivative hedging instrument will be measured at fair value with the effective portion of the gains or losses on the derivative hedging instrument initially being reported in other comprehensive income. The Company will adopt SFAS No. 133 in 2000. SFAS No. 133 is not expected to have a material effect on the Company's results of operations or financial position. (p) Use of Estimates Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 50 51 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1998 1997 ---- ---- (IN THOUSANDS) SECURED Notes payable, primarily fixed interest rates of 6.625% to 10.79%, averaging 9.44%, installments due 1999 through 2008.................................... $ 164,173 $ 194,008 Revolving credit facility, floating interest rates of one month LIBOR + 1.625%, averaging 7.59%, interest only due through 1999 (a).......... -- 30,000 Industrial development revenue bonds, variable interest rate of 3.3% to 4.95%, averaging 4.02%, due 2016 (b)................................................ -- 29,300 --------- --------- 164,173 253,308 --------- --------- UNSECURED 10 3/4% Senior Unsecured Notes, face amount of $50 million, interest only payment until due in 2005 (c)........................................... 48,612 48,197 Notes payable, interest rates of 90-day LIBOR +1.25%, averaging 6.52%, installments due through 1999......................................... 45,500 24,905 Industrial development bonds, fixed interest rate of 6.3% due 2023 (b).......... 29,300 -- Other........................................................................... 760 350 --------- --------- 124,172 73,452 --------- --------- Total long-term debt............................................................ 288,345 326,760 Less: current maturities....................................................... 80,439 54,000 --------- --------- $ 207,906 $ 272,760 ========= =========
- --------------- (a) AWA has a $100 million senior secured revolving credit facility with a group of financial institutions which expires in December 2002. The remaining four year term of the agreement is comprised of a one year revolving credit arrangement, with an option to extend the expiration date for one additional year or convert outstanding borrowings into a three year term loan. Borrowings under this credit facility will accrue interest at either the "base rate" (prime rate or the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate) or the "adjusted eurodollar rate" (LIBOR rate adjusted for certain reserve requirements in respect to "Eurodollar liabilities") plus the applicable margin based on Moody's rating of AWA's senior unsecured notes. The credit agreement is secured by certain assets of AWA. As of December 31, 1998, $92.7 million was available for borrowing based on the value of the assets pledged. There were no outstanding borrowings as of December 31, 1998. (b) In April 1998, AWA completed the refunding of its $29.3 million variable rate industrial development revenue bonds due 2016 ("old bonds") by issuing $29.3 million of 6.3 percent fixed rate industrial development revenue bonds due April 2023 ("new bonds"). Interest on the new bonds is payable semiannually (April 1 and October 1) and commenced on October 1, 1998. The new bonds are subject to optional redemption prior to the maturity date on or after April 1, 2008, in whole or in part, on any interest payment date at the following redemption prices: 102 percent on April 1 or October 1, 2008; 101 percent on April 1 or October 1, 2009; and 100 percent on April 1, 2010 and thereafter. As a result of the refinancing, $29.9 million of cash, which secured the irrevocable direct pay letter of credit that backed the old bonds, was released and available for general corporate purposes. 51 52 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (c) The 10 3/4% Senior Unsecured Notes mature on September 1, 2005 and interest is payable in arrears semi-annually. The 10 3/4% Senior Unsecured Notes may be redeemed at the option of the Company on or after September 1, 2001 at any time in whole or from time to time in part, at a redemption price equal to the following percentage of principal redeemed, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period beginning:
SEPTEMBER 1, PERCENTAGE ------------ ---------- 2000........................................ 105.375% 2001........................................ 103.583% 2002........................................ 101.792% 2003 and thereafter......................... 100.000%
Secured financings totaling $164.2 million are collateralized by assets, primarily aircraft and engines, with a net book value of $310.9 million at December 31, 1998. At December 31, 1998, the estimated maturities of long-term debt are as follows:
(IN THOUSANDS) 1999........................................... $80,439 2000........................................... 19,929 2001........................................... 19,805 2002........................................... 19,632 2003........................................... 19,632 Thereafter..................................... 128,908 -------- $288,345 ========
Certain of the Company's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios, limitations on investments and restricted payments including cash dividends, and other financial covenants with which the Company was in compliance at December 31, 1998. 3. CAPITAL STOCK Effective midnight, December 31, 1996, AWA became a wholly-owned subsidiary of Holdings and each share of AWA Class A and Class B Common Stock was exchanged for one share of Holdings Class A or Class B Common Stock. Holdings' Class B Common Stock is listed on the New York Stock Exchange. On August 25, 1994, AWA issued approximately 10.4 million warrants to purchase Class B Common Stock with an exercise price of $12.74 per share. The warrants are exercisable by the holders any time before August 25, 1999 and 10.4 million shares of Class B Common Stock were reserved for the exercise of these warrants. As of December 31, 1998, approximately 7.0 million warrants have been repurchased by AWA for approximately $47.7 million. As of December 31, 1998, 48,148 warrants have been exercised at $12.74 per share. As part of the holding company formation transaction, the AWA warrants became rights to acquire shares of Holdings Class B Common Stock. AWA has made arrangements for the issuance of Holdings Class B Common Stock upon the exercise of such warrants by purchasing an option from Holdings to acquire such stock. AWA issued a $62.4 million note payable to Holdings due December 31, 2005 with an interest rate of 11%. Subsequently, Holdings made a capital contribution to AWA by issuing a note payable to AWA for $62.4 million due December 31, 2045 with an interest rate of 10 7/8%. 52 53 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Preferred Stock The Company's Board of Directors by resolution may authorize the issuance of the Preferred Stock as a class, in one or more series, having the number of shares, designations, relative voting rights, dividend rights, liquidation and other preferences and limitations that the Board of Directors fixes, without any stockholder approval. No shares of Preferred Stock have been issued. Common Stock The holders of Class A Common Stock are entitled to fifty votes per share, and the holders of Class B Common Stock are entitled to one vote per share, on all matters submitted to a vote of common stockholders except that voting rights of non-U.S. citizens are limited. The Class A Common Stock is convertible into an equal number of Class B shares at any time at the election of the holders of the Class A Common Stock. Holders of Common Stock of all classes participate equally as to any dividends or distributions on the Common Stock, except that dividends payable in shares of Common Stock, or securities to acquire Common Stock, will be made in the same class of Common Stock as that held by the recipient of the dividend. Holders of Common Stock have no right to cumulate their votes in the election of directors. The Common Stock votes together as a single class, subject to the right to a separate class vote in certain instances required by law. 4. STOCK OPTIONS AND AWARDS Under the 1994 Incentive Equity Plan, as amended (the "Plan"), the Company's Board of Directors may grant stock options to officers and key employees. The maximum number of shares of Class B Common Stock authorized for issuance under the Plan is 7.5 million shares of which 1.3 million shares are available for grant at December 31, 1998. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant, generally become exercisable over a three-year period and expire if unexercised at the end of 10 years. Stock option activity during the years indicated is as follows:
WEIGHTED- NUMBER OF AVERAGE SHARES EXERCISE PRICE ------ -------------- Balance at December 31, 1995: 2,168,333 $ 11.03 Granted...................................... 2,058,000 $ 15.55 Exercised.................................... (314,001) $ 9.28 Canceled..................................... (374,332) $ 12.27 --------- -------- Balance at December 31, 1996: 3,538,000 $ 13.68 Granted...................................... 479,000 $ 15.54 Exercised.................................... (140,167) $ 9.87 Canceled..................................... (425,333) $ 13.74 --------- -------- Balance at December 31, 1997: 3,451,500 $ 14.09 --------- -------- Granted...................................... 1,861,000 $ 19.62 Exercised ................................... (353,000) $ 12.77 Canceled..................................... (180,500) $ 16.02 --------- -------- Balance at December 31, 1998: 4,779,000 $ 16.27 ========= ========
53 54 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED At December 31, 1998, options outstanding and exercisable by price range are as follows:
WEIGHTED WEIGHTED AVERAGE WEIGHTED OPTIONS AVERAGE RANGE OF OPTIONS REMAINING AVERAGE CURRENTLY EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE --------------- ----------- ---------------- -------------- ----------- ----- $ 8.00 - $12.00 1,600,000 7.6 $10.55 833,400 $ 9.96 $12.01 - $14.31 1,007,500 8.7 $13.35 363,500 $13.06 $14.32 - $20.88 1,065,000 7.8 $18.46 749,996 $18.37 $20.89 - $28.50 1,082,500 9.1 $24.99 46,000 $23.07 $28.51 - $29.19 24,000 9.4 $29.19 24,000 $29.19 --------- --- ------ --------- ------ 4,779,000 8.2 $16.27 2,016,896 $14.17 ========= === ====== ========= ======
The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $7.88, $5.39 and $6.48, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1998 - expected dividend yield of 0.0%, risk-free interest rate of 4.5%, volatility of 52.6% and an expected life of four years; 1997 - expected dividend yield of 0.0%, risk-free interest rate of 5.7%, volatility of 44.8% and an expected life of four years; 1996 - expected dividend yield 0.0%, risk-free interest rate of 6.3%, volatility of 43.13% and an expected life of four years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE DATA) Net income: As reported $108,571 $74,970 $ 8,505 ======== ======= ======= Pro forma $103,583 $72,214 $ 6,343 ======== ======= ======= Earnings per share: Basic As reported $ 2.58 $ 1.68 $ 0.19 ====== ====== ====== Pro forma $ 2.46 $ 1.62 $ 0.14 ====== ====== ====== Diluted As reported $ 2.40 $ 1.63 $ 0.18 ====== ====== ====== Pro forma $ 2.29 $ 1.57 $ 0.13 ====== ====== ======
Pro forma net income reflects only options granted during the years 1995 through 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Under the Plan, the Company granted 113,000 shares and 158,000 shares of Class B Common Stock as restricted stock to certain officers in 1998 and 1996, respectively. There were no grants of restricted stock in 1997. The Company recognized compensation expense of $1.1 million, $944,000 and $785,000 related to restricted stock in 1998, 1997 and 1996, respectively. At December 31, 1998, 295,667 shares of restricted stock were vested. 54 55 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Plan also provides for the issuance of restricted stock and grant of stock options to non-employee directors. The Company has granted options to purchase 186,000 shares of Class B Common Stock to members of the Board of Directors who are not employees of the Company. The options have a ten-year term and are exercisable six months after the date of grant. As of December 31, 1998, 144,000 options were outstanding and exercisable at prices ranging from $8.00 to $29.19 per share. On December 31, 1998 and 1997, non-employee directors were also granted Class B Common Stock pursuant to the Plan totaling 6,235 shares and 10,647 shares, respectively. 5. EMPLOYEE BENEFIT PLAN The Company has a 401(k) defined contribution plan, covering essentially all employees of the Company. Participants may contribute from 1 to 15% of their pretax earnings to a maximum of $10,000 in 1998. The Company's matching contribution is determined annually by the Board of Directors. The Company's contribution expense to the plan totaled $6.9 million, $6.1 million and $5.9 million in 1998, 1997 and 1996, respectively. 6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (a) Fair Value of Financial Instruments Cash Equivalents, Short-term Investments and Receivables The carrying amount approximates fair value because of the short-term nature of these instruments. Long-term Debt At December 31, 1998 and 1997, the fair value of long-term debt was approximately $292 million and $330 million, respectively, based on quoted market prices for the same or similar debt including debt of comparable remaining maturities. (b) Fuel Price Risk Management Under its fuel hedging program, the Company may enter into certain protective cap and fixed price swap transactions with approved counterparties for a period generally not exceeding twelve months. Gains and losses on such transactions are recorded as adjustments to fuel expense when the underlying fuel being hedged is used. As of December 31, 1998, the Company had entered into fixed price swap transactions hedging approximately 35% of its projected 1999 fuel requirements. The Company is exposed to credit risks in the event any counterparty fails to meet its obligations. The Company does not anticipate such non-performance as counterparties are selected based on credit ratings, exposure to any one counterparty is limited based on formal guidelines and the relative market positions with such counterparties are closely monitored. (c) Concentration of Credit Risk The Company does not believe it is subject to any significant concentration of credit risk. Most of the Company's receivables result from tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on AWA. These receivables are short-term, generally being settled shortly after the sale. 55 56 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 7. INCOME TAXES The Company recorded income tax expense (exclusive of extraordinary item) as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current Taxes: Federal...................................... $ 33,915 $ 2,483 $ 943 State........................................ 5,214 3,104 849 --------- --------- --------- Total current taxes.................... 39,129 5,587 1,792 --------- --------- --------- Deferred taxes.................................. 46,646 - - --------- --------- --------- Income taxes attributable to Reorganization items and other............... - 59,444 23,091 --------- --------- --------- Total income tax expense........................ $ 85,775 $ 65,031 $ 24,883 ========= ========= =========
The Company's emergence from bankruptcy reorganization in 1994 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. In large measure, it is these nondeductible (for income tax purposes) expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, the Company's actual cash income tax liability (i.e., income taxes payable) is considerably lower than income tax expense shown for financial reporting purposes. This difference in financial expense compared to actual income tax liability is in part attributable to the utilization of certain tax attributes of the predecessor company that serve to reduce the Company's actual income tax liability. In 1997 and 1996, the excess of financial expense over the Company's actual income tax liability was applied to reduce the balance of the Company's reorganization value in excess of amounts allocable to identifiable assets. For the year ended December 31, 1996, the Company recognized an income tax benefit of $918,000 arising from an extraordinary charge. Income tax expense, exclusive of extraordinary item, differs from amounts computed at the federal statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Income tax expense at U.S. statutory rate....... $68,021 $ 49,000 $ 12,073 State income taxes, net of federal income tax benefit.................................. 7,803 5,655 1,984 Nondeductible amortization of reorganization value in excess of amounts allocable to identifiable assets....................... 7,524 8,322 8,842 Other, net...................................... 2,427 2,054 1,984 ------- --------- --------- Total........................................ $85,775 $ 65,031 $ 24,883 ======= ========= =========
56 57 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED As of December 31, 1998, the Company has available net operating loss carryforwards ("NOL"), business tax credit carryforwards and alternative minimum tax credit carryforwards for Federal income tax purposes of approximately $239.0 million, $12.7 million and $570,000, respectively. The NOL expire during the years 2005 through 2009 while the business credit carryforwards expire during the years 1999 through 2006. However, such carryforwards are not fully available to offset federal (and in certain circumstances, state) alternative minimum taxable income. Further, as a result of a statutory "ownership change" (as defined for purposes of Section 382 of the Internal Revenue Code) that occurred as a result of the Company's reorganization in 1994, the Company's ability to utilize its NOL and business tax credit carryforwards may be restricted. The alternative minimum tax credit may be carried forward without expiration and is available to offset future income tax payable. Composition of Deferred Tax Items: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, the significant components of the Company's deferred tax assets and liabilities are a result of the temporary differences related to the items described as follows:
1998 1997 ---- ---- (IN THOUSANDS) Deferred income tax liabilities Property and equipment, principally depreciation and "fresh start" differences............................................................ $(131,518) $(122,164) --------- --------- Deferred tax assets Aircraft leases........................................................... 23,951 26,663 Frequent flyer accrual.................................................... 6,541 5,810 Net operating loss carryforwards.......................................... 91,587 144,396 Tax credit carryforwards.................................................. 13,272 16,585 Other..................................................................... 52,769 31,958 --------- --------- Total deferred tax assets.............................................. 188,120 225,412 --------- --------- Valuation allowance...................................................... (28,548) (28,548) --------- --------- Net deferred tax asset.............................................. $ 28,054 $ 74,700 ========= =========
SFAS No. 109, Accounting for Income Taxes, requires a "more likely than not" criterion be applied when evaluating the realizability of a deferred tax asset. In 1997 the Company reduced the valuation allowance by $59.9 million from its 1996 balance principally for the portion of its NOL (a predecessor company tax attribute) that it anticipates will, more likely than not, be utilized. The remaining valuation allowance of $28.5 million is necessary because at this time the Company has not determined it is more likely than not that the balance of the deferred tax assets will be fully realized. The Company continues to monitor the valuation allowance and will make adjustments as appropriate. If in future tax periods, the Company were to recognize additional tax benefits related to items attributable to the predecessor company such as net operating loss and other carryforwards, such benefits would be applied to reduce further reorganization value in excess of amounts allocable to identifiable assets. 57 58 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 8 SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information and non-cash investing and financing activities were as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Non-cash transactions: Notes payable issued for equipment purchase deposits $ 45,500 $ 10,500 $ 26,112 Notes payable canceled under the aircraft purchase agreement 12,596 36,019 - Equipment acquired through capital lease 230 - - Cash transactions: Interest paid, net of amounts capitalized 22,184 30,830 37,555 Income taxes paid 20,963 205 498
9. INVESTMENTS IN DEBT SECURITIES Cash equivalents and short-term investments as of December 31 are classified as follows:
1998 1997 ---- ---- (IN THOUSANDS) Debt securities issued by the U.S. Treasury and other U.S. government agencies..... $ 53,519 $ 39,214 Corporate notes.................................................................... 82,195 132,275 Other debt securities.............................................................. 131 149 -------- -------- 135,845 171,638 Cash............................................................................... - 665 -------- -------- Total cash, cash equivalents and short-term investments................. $135,845 $172,303 ======== ========
10. EXTRAORDINARY LOSS In June 1996, the Company had an extraordinary loss of $1.1 million net of an income tax benefit of $918,000 for the write-off of debt issuance costs relating to the prepayment of $25 million of its 10 3/4% Senior Unsecured Notes. 58 59 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 11. EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) BASIC EARNINGS PER SHARE Income before extraordinary item .................................... $ 108,571 $ 74,970 $ 9,610 Extraordinary item, net ............................................. -- -- (1,105) ------------ ------------ ------------ Income applicable to common stock ................................... $ 108,571 $ 74,970 $ 8,505 ============ ============ ============ Weighted average common shares outstanding .......................... 42,102,211 44,528,575 44,931,953 Basic earnings per share: Income before extraordinary item .................................. $ 2.58 $ 1.68 $ .21 Extraordinary item ................................................ -- -- (.02) ------------ ------------ ------------ Net income ........................................................ $ 2.58 $ 1.68 $ .19 ============ ============ ============ DILUTED EARNINGS PER SHARE Income before extraordinary item .................................... $ 108,571 $ 74,970 $ 9,610 Extraordinary item, net ............................................. -- -- (1,105) ------------ ------------ ------------ Income applicable to common stock ................................... $ 108,571 $ 74,970 $ 8,505 =========== ============ ============ Share computation: Weighted average common shares outstanding ........................ 42,102,211 44,528,575 44,931,953 Assumed exercise of stock options and warrants .................... 3,105,982 1,542,375 2,800,982 ------------ ------------ ------------ Weighted average common shares outstanding as adjusted ..................................... 45,208,193 46,070,950 47,732,935 ========== ========== ========== Diluted earnings per share: Income before extraordinary item .................................. $ 2.40 $ 1.63 $ .20 Extraordinary item ................................................ -- -- (.02) ------------ ------------ ------------ Net income ........................................................ $ 2.40 $ 1.63 $ .18 ============ ============ ===========
For the years ended December 31, 1998, 1997 and 1996, options of 1,843,391, 1,089,016 and 597,080, respectively, are not included in the computation of diluted EPS because the option exercise prices were greater than the average market price of common stock. (See Note 17, "Subsequent Events".) 59 60 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 12. COMMITMENTS AND CONTINGENCIES (a) Leases As of December 31, 1998, the Company had 92 aircraft under operating leases with remaining terms ranging from one year to approximately 21 years. The Company has options to purchase certain of the aircraft at fair market values at the end of the lease terms. Certain of the agreements require security deposits, minimum return provisions and maintenance reserve payments and provide the aircraft lessors with the option during the lease term to reset their respective rentals to the greater of the existing rentals being paid under the leases or the then current fair market rates. The Company also leases certain terminal space, ground facilities and computer and other equipment under noncancelable operating leases. At December 31, 1998, the scheduled future minimum cash rental payments under noncancelable operating leases with initial terms of more than one year are as follows:
(IN THOUSANDS) 1999..................................... $ 290,438 2000..................................... 278,996 2001..................................... 243,914 2002..................................... 216,850 2003..................................... 167,367 Thereafter............................... 914,568 ----------- $ 2,112,133 ===========
Rent expense (excluding landing fees) was approximately $330 million, $308 million and $281 million for the years ended December 31, 1998, 1997, and 1996, respectively. Collectively, the operating lease agreements require security deposits with lessors of $15.6 million and bank letters of credit of $19.8 million. The letters of credit are collateralized by $19.8 million of restricted cash as of December 31, 1998. (b) Revenue Bonds Special facility revenue bonds issued by a municipality have been used to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor International Airport in space which has been leased by the Company. Under the operating lease agreements with the airport, the Company is required to make rental payments sufficient to pay principal and interest when due on the bonds. Payment of principal and interest at 8.3% on the Series 1994A Bonds ends on January 1, 2006 and payment of principal and interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At December 31, 1998, the aggregate outstanding balance of Series 1994 Bonds was $11.1 million. (c) Aircraft Acquisitions At December 31, 1998, AWA had firm commitments to AVSA for a total of 19 Airbus A319-100 and 9 Airbus A320-200 aircraft with delivery through 2001 at a net cost of approximately $1.0 billion based on a 3.5% annual price escalation. An additional 10 A320s are scheduled for delivery in 2000 to 2002 and are subject to reconfirmation no later than 21 months prior to delivery. The agreements with AVSA provide, subject to certain conditions, aircraft and "backstop" financing assistance. The agreement also includes options to purchase an additional 40 A320 family aircraft during 2001 through 2005, and certain rights to convert firmly ordered A319s to A320s or larger A321 aircraft. 60 61 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Company has an agreement with International Aero Engines ("IAE") which provides for the purchase by the Company of seven new V2500-A5 spare engines scheduled for delivery through 2000 for use on certain of the A320 fleet. Such engines have an estimated aggregate cost of $49 million. The following table reflects estimated cash payments under the aircraft and engine purchase contracts. Actual payments may vary due to inflation factor adjustments and changes in the delivery schedule of the equipment. The estimated cash payments include progress payments that will be made in cash, as opposed to being financed under an existing progress payment financing facility.
(IN THOUSANDS) 1999....................................... $ 464,072 2000....................................... 301,068 2001....................................... 179,288 ------------ $ 944,428 ============
In October 1998, America West Airlines 1998-1 Pass Through Trusts issued $190.5 million in Pass Through Trust Certificates in connection with the financing of six Airbus A319 aircraft and two Airbus A320 aircraft to be purchased from AVSA. The Pass Through Trust Certificates were issued by separate pass through trusts which will hold equipment notes issued upon delivery of the financed aircraft which will be secured by a security interest in such aircraft. The equipment notes will be issued in respect of, at AWA's election, a leveraged lease financing or a mortgage financing of the relevant aircraft. The Pass Through Trust Certificates are not direct obligations of, or guaranteed by AWA. The combined effective interest rate on the financing is 6.99 percent. Three Airbus A319 aircraft that are the subject of this financing were delivered in the 1998 fourth quarter. The remaining aircraft will be delivered through August 1999. (d) FAA Settlement In July 1998, AWA and the FAA entered into an agreement to settle disputes over alleged maintenance violations. Under the agreement, AWA did not admit any wrongdoing, has implemented certain changes in maintenance oversight and paid a civil penalty of $2.5 million. An additional civil penalty of $2.5 million will be forgiven upon implementation of the terms of the agreement. (e) Contingent Legal Obligations Holdings and AWA are named defendants in a number of additional lawsuits and proceedings arising in the ordinary course of business. While the outcome of the contingencies, lawsuits or other proceedings cannot be predicted with certainty, management currently expects that any liability arising from such matters, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial condition and results of operations of the Company. 61 62 ' AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. RELATED PARTY TRANSACTIONS In March 1997, AWA purchased 1.91 million of its publicly traded warrants from TPG and certain of its affiliates for approximately $13.3 million The Company has entered into various aircraft leasing arrangements with GPA Group plc ("GPA") at terms comparable to those obtained from third parties for similar transactions. The Company currently leases four aircraft from GPA and the rental payments for such leases amounted to $19.2 million, $31.9 million and $62.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, the Company was obligated to pay approximately $260 million under the GPA leases which expire at various dates through the year 2013. In June 1997, America West Airlines 1997-1 Pass Through Trusts issued $93.9 million of Pass Through Trust Certificates in connection with the refinancing of four Airbus A320 aircraft. The proceeds of the transaction were used to refinance the indebtedness incurred by the owners of the aircraft leased to AWA. Under the arrangements, the financial benefits of the transactions are shared among AWA, the equity investors in leverage leases covering the aircraft and U.S. subsidiaries of GPA, the original lessees under the restructured leases. As part of the Company's reorganization in 1994, Continental Airlines made an investment in the Company, and the Company entered into an alliance agreement related to code-sharing arrangements and ground handling operations. The Company paid Continental approximately $27.8 million, $25.2 million and $21.7 million and also received approximately $20.5 million, $13.4 million and $13 million in 1998, 1997 and 1996, respectively, from Continental pursuant to these agreements. Mr. John F. Fraser, chairman of the board of Air Canada, served as a director of the Company until May 20, 1998. The Company has a maintenance contract with Air Canada on terms comparable to those obtained from third parties for similar transactions. The Company's payments under the maintenance contract were $9.4 and $5.9 million in 1998 and 1997, respectively. 14. NONRECURRING SPECIAL CHARGE During the third quarter of 1996, the Company recorded a nonrecurring special charge of approximately $65.1 million. Approximately $49.7 million of the charge was associated with the Company's renegotiation of an aircraft purchase agreement with AVSA, the re-evaluation of the Company's facilities, and the completion of its plan for the disposition of certain aircraft inventories and equipment. The charge included $18.8 million for cancellation penalty payments and the write-off of capitalized interest on advance payments; a provision for maintenance costs on certain leased aircraft currently scheduled to be returned due to accelerated deliveries under the new AVSA agreement; $7.5 million to reduce the carrying value of certain under-utilized facilities and $23.4 million to write-down certain aircraft related inventories and equipment to estimated fair value. The remaining $15.4 million of the charge represented loss contingencies based on estimated settlements of pending and threatened litigation. 62 63 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 follows (in thousands of dollars except per share amounts):
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Operating revenues............................................ $483,216 $533,695 $499,268 $507,105 Operating income.............................................. 49,407 76,741 45,986 36,929 Nonoperating expense, net..................................... (5,151) (2,993) (2,244) (4,329) Income tax expense............................................ (19,118) (32,331) (21,878) (12,448) Net income.................................................... 25,138 41,417 21,864 20,152 Earnings per share: Basic....................................................... .57 .95 .52 .52 Diluted..................................................... .53 .86 .49 .51
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1997 Operating revenues............................................ $462,187 $477,756 $462,122 $472,891 Operating income.............................................. 33,463 50,583 36,984 40,796 Nonoperating expense, net..................................... (7,526) (7,819) (1,343) (5,137) Income tax expense............................................ (11,983) (19,756) (17,719) (15,573) Net income.................................................... 13,954 23,008 17,922 20,086 Earnings per share: Basic....................................................... .31 .52 .40 .45 Diluted..................................................... .30 .50 .40 .43
The sum of quarterly earnings per share amounts is not the same as annual earnings per share amounts due to rounding. 16 SEGMENT DISCLOSURES In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which established standards for the way public business enterprises report information about operating segments in annual financial statements. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. It also established standards for related disclosures about products and services, geographic areas, and major customers. 63 64 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Segment reporting financial data as of and for the years ended December 31, 1998, 1997 and 1996 follows (in thousands of dollars):
DECEMBER 31, 1998 ----------------- Airline TLC Other/Eliminations Total ------- --- ------------------- ----- Operating revenue $ 1,968,714 $54,764 $ (194) $ 2,023,284 Depreciation & amortization 49,026 519 - 49,545 Amortization of reorganization value 19,896 1,600 - 21,496 Operating income (loss) 197,846 15,278 (4,061) 209,063 Capital expenditures 176,337 659 176,996 Segment assets 1,594,644 57,823 (127,437) 1,525,030
DECEMBER 31, 1997 ----------------- Pro forma ------------------------------------------------ Airline TLC Other/Eliminations Total ------- --- ------------------ ----- Operating revenue $ 1,874,956 $52,751 $(52,751) $ 1,874,956 Depreciation & amortization 48,158 432 - 48,590 Amortization of reorganization value 22,444 1,332 - 23,776 Operating income (loss) 149,848 12,725 (747) 161,826 Capital expenditures 154,969 - - 154,969 Segment assets 1,498,514 48,817 (540) 1,546,791
DECEMBER 31, 1996 ----------------- Pro forma ------------------------------------------------ Airline TLC Other/Eliminations Total ------- --- ------------------ ----- Operating revenue $ 1,739,526 $49,743 $(49,743) $ 1,739,526 Depreciation & amortization 52,383 554 - 52,937 Amortization of reorganization value 23,929 1,334 - 25,263 Operating income (loss) 55,408 13,258 - 68,666 Capital expenditures 155,742 - - 155,742 Segment assets 1,562,582 35,095 (27) 1,597,650
64 65 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 17. SUBSEQUENT EVENTS (a) Warrant Buyback In January 1999, AWA repurchased 177,400 of its publicly traded warrants for $1.4 million. The equity repurchase was made pursuant to the Company's stock repurchase program encompassing up to 5.0 million shares of Class B Common Stock and all outstanding warrants. (b) Interest in Acquisition of AWA On January 20, 1999 the Company announced that it has been contacted by a number of airlines expressing interest in possible transactions ranging from a strategic alliance to a merger or similar business combination. On February 22, 1999 the Company announced that it had terminated consideration of expressions of interest in the acquisition of AWA. (c) Borrowing Under Credit Facility On February 19, 1999 AWA borrowed $94.3 million, the total amount available under its senior secured revolving credit facility (see Note 2, "Long-term Debt" in Notes to Consolidated Financial Statements), to provide additional liquidity in the event of service disruptions related to the Company's contract negotiations with its flight attendants. On March 20, 1999, after the date of the auditors' report, the Company reported that it had reached a tentative agreement with the Association of Flight Attendants on a five-year collective bargaining agreement. The Company intends to repay this amount on April 19, 1999 in accordance with the terms of the credit facility. 65 66 ITEM 8B. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - AMERICA WEST AIRLINES, INC. ("AWA") Balance sheets of AWA as of December 31, 1998 and 1997, and the related statements of income, cash flows and stockholder's equity for each of the years in the three-year period ended December 31, 1998, together with the related notes and the report of KPMG LLP, independent certified public accountants, are set forth on the following pages. 66 67 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder America West Airlines, Inc.: We have audited the accompanying balance sheets of America West Airlines, Inc. as of December 31, 1998 and 1997, and the related statements of income, cash flows and stockholder's equity for each of the years in the three-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 America West Airlines, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Phoenix, Arizona March 10, 1999 67 68 AMERICA WEST AIRLINES, INC. BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA)
1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents........................................................ $ 107,234 $ 171,638 Short-term investments........................................................... 27,485 - Accounts receivable, less allowance for doubtful accounts of $3,268 in 1998 and $3,850 in 1997............................................. 87,048 88,138 Advances to parent company and affiliate, net.................................... 116,128 - Expendable spare parts and supplies, less allowance for obsolescence of $4,112 in 1998 and $2,495 in 1997.......................................... 31,147 27,135 Prepaid expenses................................................................. 33,516 36,917 ---------- ---------- Total current assets.......................................................... 402,558 323,828 ---------- ---------- Property and equipment: Flight equipment................................................................. 931,134 783,384 Other property and equipment..................................................... 152,298 143,172 Equipment purchase deposits...................................................... 83,649 45,246 ---------- ---------- 1,167,081 971,802 Less accumulated depreciation and amortization................................... 408,065 276,430 ---------- ---------- 759,016 695,372 ---------- ---------- Other assets: Restricted cash.................................................................. 32,512 57,158 Reorganization value in excess of amounts allocable to identifiable assets, net.. 311,697 363,268 Deferred income taxes............................................................ 27,440 74,700 Other assets, net................................................................ 61,421 33,005 ---------- ---------- 433,070 528,131 ---------- ---------- $1,594,644 $1,547,331 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt............................................. $ 80,439 $ 54,000 Accounts payable................................................................. 102,105 140,908 Air traffic liability............................................................ 196,013 173,149 Accrued compensation and vacation benefits....................................... 47,081 37,277 Accrued taxes.................................................................... 40,809 36,376 Other accrued liabilities........................................................ 40,467 43,574 ---------- ---------- Total current liabilities..................................................... 506,914 485,284 ---------- ---------- Long-term debt, less current maturities............................................. 207,906 272,760 Deferred credits and other liabilities.............................................. 110,599 104,519 Commitments and contingencies Stockholder's equity: Class B common stock, $.01 par value. Authorized 1,000 shares; issued and outstanding 1,000 shares...................................................... - - Additional paid-in capital....................................................... 523,126 539,301 Retained earnings................................................................ 246,099 145,467 ---------- ---------- Total stockholder's equity................................................ 769,225 684,768 ---------- ---------- $1,594,644 $1,547,331 ========== ==========
See accompanying notes to financial statements. 68 69 AMERICA WEST AIRLINES, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- Operating revenues: Passenger............................................... $ 1,858,551 $ 1,764,206 $ 1,637,762 Cargo................................................... 45,551 51,699 46,519 Other................................................... 64,612 59,051 55,245 ----------- ----------- ----------- Total operating revenues........................... 1,968,714 1,874,956 1,739,526 ----------- ----------- ----------- Operating expenses: Salaries and related costs.............................. 448,049 418,212 385,840 Aircraft rents.......................................... 244,088 223,423 202,237 Other rents and landing fees............................ 119,089 119,470 111,947 Aircraft fuel........................................... 194,360 243,423 233,522 Agency commissions...................................... 117,483 151,293 133,015 Aircraft maintenance materials and repairs.............. 182,844 146,618 125,768 Depreciation and amortization........................... 49,026 48,590 52,937 Amortization of reorganization value in excess of amounts allocable to identifiable assets............. 19,896 23,776 25,263 Nonrecurring special charge............................. - - 65,098 Other................................................... 396,033 337,578 335,233 ----------- ----------- ----------- Total operating expenses............................. 1,770,868 1,712,383 1,670,860 ----------- ----------- ----------- Operating income............................................. 197,846 162,573 68,666 ------------ ------------ ----------- Nonoperating income (expenses): Interest income......................................... 20,682 17,432 12,861 Interest expense, net .................................. (33,807) (39,110) (46,866) Gain (loss) on disposition of property and equipment (638) (1,710) 1,288 Other, net.............................................. 474 1,488 (1,456) ----------- ----------- ----------- Total nonoperating expenses, net..................... (13,289) (21,900) (34,173) ----------- ----------- ----------- Income before income taxes and extraordinary item.... 184,557 140,673 34,493 ----------- ----------- ----------- Income taxes................................................. 81,541 65,343 24,883 ----------- ----------- ----------- Income before extraordinary item........................ 103,016 75,330 9,610 Extraordinary item, net of tax............................... - - (1,105) ------------ ----------- ----------- Net income.............................................. $ 103,016 $ 75,330 $ 8,505 =========== =========== ===========
See accompanying notes to financial statements. 69 70 AMERICA WEST AIRLINES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income....................................................... $ 103,016 $ 75,330 $ 8,505 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 49,026 48,590 52,937 Amortization of capitalized maintenance........................ 89,347 66,143 39,679 Amortization of reorganization value........................... 19,896 23,776 25,263 Income taxes attributable to reorganization items and other.... - 59,444 23,091 Amortization of deferred credits............................... (6,798) (10,405) (11,563) Nonrecurring special charge.................................... - - 65,098 Extraordinary item and other................................... 14,009 5,674 3,989 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable, net.................. (115,471) 18,077 (37,121) Increase in expendable spare parts and supplies, net............. (4,012) (5,712) (3,793) Decrease (increase) in prepaid expenses.......................... 904 10,551 (2,252) Decrease (increase) in other assets, net......................... 43,267 (33,042) (3,173) Increase (decrease) in accounts payable.......................... (38,803) 25,450 26,301 Increase (decrease) in air traffic liability..................... 22,864 (40,907) 22,312 Increase (decrease) in accrued compensation and vacation benefits......................................... 10,530 7,192 (11,531) Increase (decrease) in accrued taxes............................. 51,706 (35,671) 37,688 Increase (decrease) in other accrued liabilities................. (705) (1,262) 8,315 Decrease in other liabilities.................................... (7,435) (8,871) (13,411) ------------ ----------- ----------- Net cash provided by operating activities.................... 231,341 204,357 230,334 ------------ ----------- ----------- Cash flows from investing activities: Purchases of property and equipment.............................. (176,337) (154,969) (155,742) Sale (purchase) of short-term investments........................ (27,485) 39,131 (39,131) Other............................................................ (3,853) (14,017) (4,082) ------------ ----------- ----------- Net cash used in investing activities........................ (207,675) (129,855) (198,955) ------------ ----------- ----------- Cash flows from financing activities Proceeds from issuance of debt................................... - 30,000 - Repayment of debt................................................ (71,495) (55,411) (79,216) Acquisition of warrants.......................................... (16,175) (13,342) (18,141) Acquisition of treasury stock.................................... - - (23,964) Other............................................................ (400) (1,610) 3,074 ------------ ----------- ----------- Net cash used in financing activities.......................... (88,070) (40,363) (118,247) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents........... (64,404) 34,139 (86,868) ------------ ----------- ----------- Cash and cash equivalents at beginning of year..................... 171,638 137,499 224,367 ------------ ----------- ----------- Cash and cash equivalents at end of year........................... $ 107,234 $ 171,638 $ 137,499 ============ =========== =========== Cash, cash equivalents and short-term investments at end of year... $ 134,719 $ 171,638 $ 176,630 ============ =========== ===========
See accompanying notes to financial statements. 70 71 AMERICA WEST AIRLINES, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS EXCEPT SHARE DATA)
Class A Class B Additional Class B Common Common Paid-In Retained Treasury Stock Stock Capital Earnings Stock Total ----- ----- ------- -------- ----- ----- BALANCE AT JANUARY 1, 1996 .................. $ 12 $ 441 $ 588,927 $ 61,632 $ (1,540) $ 649,472 --------- --------- --------- --------- --------- --------- Issuance of 12,725 shares and 314,001 shares of Class B common stock pursuant to the exercise of stock warrants and stock options .................................. -- 3 3,071 -- -- 3,074 Issuance of 158,000 shares of Class B restricted stock ......................... -- 2 2,761 -- -- 2,763 Purchase of 1,270,000 shares and return of 21,911 shares of Class B treasury stock -- -- 293 -- (24,257) (23,964) Issuance of 50,000 shares of Class B treasury ...........................stock ... -- -- 356 -- 688 1,044 Repurchase of 2,187,475 warrants at $8.29 per warrant ........................ -- -- (18,141) -- -- (18,141) Net income .................................. -- -- -- 8,505 -- 8,505 Purchase of stock option from Holdings ...... -- -- (62,373) -- -- (62,373) Contribution of capital by Holdings ......... -- -- 62,400 -- -- 62,400 Reorganization as wholly-owned subsidiary of Holdings .................... (12) (446) (24,651) -- 25,109 -- --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1996 ................ -- -- 552,643 70,137 -- 622,780 --------- --------- --------- --------- --------- --------- Repurchase of 1,911,523 warrants at $6.98 per warrant -- -- (13,342) -- -- (13,342) Net income .................................. -- -- -- 75,330 -- 75,330 --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1997 ................ -- -- 539,301 145,467 -- 684,768 Repurchase of 2,906,867 warrants at $5.56 per warrant ............ -- -- (16,175) -- -- (16,175) Dividend to Holdings ........................ -- -- -- (2,384) -- (2,384) Net income .................................. -- -- -- 103,016 -- 103,016 --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1998 ................ $ -- $ -- $ 523,126 $ 246,099 $ -- $ 769,225 ========= ========= ========= ========= ========= =========
See accompanying notes to financial statements. 71 72 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES America West Holdings Corporation ("Holdings"), a Delaware corporation, became the holding company for America West Airlines, Inc. ("AWA"), effective midnight, December 31, 1996. Holdings' primary business activity is ownership of all the capital stock of AWA, the ninth largest commercial airline carrier in the United States serving 57 destinations in the U.S., Canada and Mexico. (a) Cash, Cash Equivalents and Short-term Investments Cash equivalents consist of all highly liquid debt instruments purchased with original maturities of three months or less. Short-term investments consist of cash invested in certain debt securities with original maturities greater than 90 days. The debt securities are classified as held to maturity and are carried at amortized cost which approximates fair value. (b) Expendable Spare Parts and Supplies Flight equipment expendable spare parts and supplies are valued at average cost. An allowance for obsolescence is provided, over the estimated useful life of the related aircraft and engines, for spare parts expected to be on hand at the date the aircraft are retired from service. (c) Property and Equipment Property and equipment are recorded at cost. Interest capitalized on advance payments for aircraft acquisitions and on expenditures for aircraft improvements are part of these costs. Interest capitalized for the years ended December 31, 1998 and 1997 was $4.1 million and $600,000, respectively. No interest was capitalized for the year ended December 31, 1996. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. The estimated useful lives for AWA's ground property and equipment range from three to 12 years for owned property and equipment and up to 30 years for the reservation and training center and technical support facilities. The estimated useful lives of AWA's owned aircraft, jet engines, flight equipment and rotable parts range from 11 to 22 years. Leasehold improvements relating to flight equipment and other property on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. Effective October 1, 1998, AWA extended the estimated depreciable service lives of certain owned Boeing 737-200 aircraft which will be modified to meet the Federal Aviation Administration's ("FAA") Stage III noise reduction requirements. This change increased the average depreciable life by approximately four years and reduced depreciation expense in the 1998 fourth quarter by $2.0 million. AWA records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired as defined by 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." (d) Restricted Cash Restricted cash includes cash deposits securing certain letters of credit. 72 73 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (e) Aircraft Maintenance and Repairs Routine maintenance and repairs are charged to expense as incurred. The cost of major scheduled airframe, engine and certain component overhauls are capitalized and amortized over the periods benefited and are included in aircraft maintenance materials and repairs expense. Additionally, an accrual for the estimated cost of scheduled airframe and engine overhauls required to be performed on leased aircraft prior to their return to the lessors has been recorded. (f) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight line basis over 20 years. Accumulated amortization at December 31, 1998, 1997 and 1996 was $112.0 million, $92.1 million and $68.4 million, respectively. In accordance with SFAS No. 121, AWA assesses the recoverability of this asset based upon expected future undiscounted cash flows and other relevant information. (g) Frequent Flyer Awards AWA maintains a frequent travel award program known as "FlightFund" that provides a variety of awards to program members based on accumulated mileage. The estimated cost of providing the free travel, using the incremental cost method as adjusted for estimated redemption rates, is recognized as a liability and charged to operations as program members accumulate mileage. (h) Deferred Credit-Operating Leases Rents for operating leases were adjusted to fair market value when AWA emerged from bankruptcy in 1994. The net present value of the difference between the stated lease rates and the fair market rates has been recorded as a deferred credit in the accompanying balance sheets. The deferred credit will be increased through charges to interest expense and decreased on a straight-line basis as a reduction in rent expense over the applicable lease periods. At December 31, 1998 and 1997, the unamortized balance of the deferred credit was $78.6 million and $85.3 million, respectively. (i) Passenger Revenue Passenger revenue is recognized when transportation is provided. Ticket sales for transportation which has not yet been provided are recorded as air traffic liability. Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense. (j) Advertising Costs AWA expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 1998, 1997 and 1996 was $16.2 million, $25.8 million and $26.6 million, respectively. (k) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the 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. 73 74 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (l) New Accounting Standards In 1998 AWA adopted American Institute of Certified Public Accountants Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-1 requires that certain internal and external costs be expensed or capitalized when incurred to develop or obtain software for internal use. Generally, costs incurred during the preliminary project and post-implementation/operation stages, as well as conversion and general and administrative costs are to be expensed as incurred. Certain costs incurred during the application and development stage are to be capitalized. SOP 98-5 requires that the costs of start-up activities, which include start-up costs, organization costs, preopening costs and preoperating costs, be expensed as incurred. This SOP also amends certain provisions of SOP 88-1 "Accounting for Developmental and Preoperating Costs, Purchases and Exchanges of Take-off and Landing Slots, and Airframe Modifications" by requiring that preoperating costs relating to the integration of new types of aircraft be expensed as incurred. The effect of initially applying the provisions of SOP 98-1 and SOP 98-5 was not material to the accompanying financial statements. In June 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for all derivative instruments and hedging activities. SFAS No. 133 requires recognition of all derivatives as either assets or liabilities in the balance sheet at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment ("fair value hedge"), a hedge of the exposure to variable cash flows of a forecasted transaction ("cash flow hedge"), or a hedge of the foreign currency exposure ("foreign currency hedge") of a net investment in a foreign operation or a foreign currency- denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. In accounting for a fair value hedge, the derivative hedging instrument will be measured at fair value with the mark to fair value being recorded in earnings. In a cash flow hedge, the derivative hedging instrument will be measured at fair value with the effective portion of the gains or losses on the derivative hedging instrument initially being reported in other comprehensive income. AWA will adopt SFAS No. 133 in 2000. SFAS No. 133 is not expected to have a material effect on AWA's results of operations or financial position. (m) Use of Estimates Management of AWA has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (n) Reclassification Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. 74 75 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 2. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1998 1997 ---- ---- (IN THOUSANDS) SECURED Notes payable, primarily fixed interest rates of 6.625% to 10.79%, averaging 9.44%, installments due 1999 through 2008.................................... $164,173 $194,008 Revolving credit facility, floating interest rates of one-month LIBOR +1.625%, averaging 7.59%, installments due through 1999 (a).............................. - 30,000 Industrial development revenue bonds, variable interest rate of 3.3% to 4.95%, averaging 4.02%, due 2016 (b).............................................. - 29,300 --------- --------- 164,173 253,308 --------- --------- UNSECURED 10 3/4% Senior Unsecured Notes, face amount of $50 million, interest only payments until due in 2005 (c).......................................... 48,612 48,197 Notes payable, interest rates of 90-day LIBOR +1.25%, averaging 6.52%, installments due through 1999......................................... 45,500 24,905 Industrial development bonds, fixed interest rate of 6.3% due 2023 (b).......... 29,300 - Other........................................................................... 760 350 --------- --------- 124,172 73,452 --------- --------- Total long-term debt............................................................ 288,345 326,760 Less: current maturities....................................................... 80,439 54,000 --------- --------- $ 207,906 $ 272,760 ========= =========
- --------------- (a) AWA has a $100 million senior secured revolving credit facility with a group of financial institutions which expires in December 2002. The remaining four-year term of the agreement is comprised of a one year revolving credit arrangement, with an option to extend the expiration date for one additional year or convert outstanding borrowings into a three year term loan. Borrowings under this credit facility will accrue interest at either the "base rate" (prime rate or the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate) or the "adjusted eurodollar rate" (LIBOR rate adjusted for certain reserve requirements in respect to "Eurodollar liabilities") plus the applicable margin based on Moody's rating of AWA's senior unsecured notes. The credit agreement is secured by certain assets of AWA. As of December 31, 1998, $92.7 million was available for borrowing based on the value of the assets pledged. There were no outstanding borrowings as of December 31, 1998. (b) In April 1998, AWA completed the refunding of its $29.3 million variable rate industrial development revenue bonds due 2016 ("old bonds") by issuing $29.3 million of 6.3 percent fixed rate industrial development revenue bonds due April 2023 ("new bonds"). Interest on the new bonds is payable semiannually (April 1 and October 1) and commenced on October 1, 1998. The new bonds are subject to optional redemption prior to the maturity date on or after April 1, 2008, in whole or in part, on any interest payment date at the following redemption prices; 102 percent on April 1 or October 1, 2008; 101 percent on April 1 or October 1, 2009; and 100 percent on April 1, 2010 and thereafter. As a result of the refinancing, $29.9 million of cash, which secured the irrevocable direct pay letter of credit that backed the old bonds, was released and available for general corporate purposes. 75 76 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (c) The 10 3/4% Senior Unsecured Notes mature on September 1, 2005 and interest is payable in arrears semi-annually. The 10 3/4% Senior Unsecured Notes may be redeemed at the option of AWA on or after September 1, 2001 at any time in whole or from time to time in part, at a redemption price equal to the following percentage of principal redeemed, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period beginning:
SEPTEMBER 1, PERCENTAGE ------------ ---------- 2000...................... 105.375% 2001...................... 103.583% 2002...................... 101.792% 2003 and thereafter....... 100.000%
Secured financings totaling $164.2 million are collateralized by assets, primarily aircraft and engines, with a net book value of $310.9 million at December 31, 1998. At December 31, 1997, the estimated maturities of long-term debt are as follows:
(IN THOUSANDS) 1999................................... $80,439 2000................................... 19,929 2001................................... 19,805 2002................................... 19,632 2003................................... 19,632 Thereafter............................. 128,908 -------- $288,345 ========
Certain of AWA's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios, limitations on investments and restricted payments including cash dividends, and other financial covenants with which AWA was in compliance at December 31, 1998. 3. CAPITAL STOCK Effective midnight, December 31, 1996, AWA became a wholly-owned subsidiary of Holdings and each share of AWA Class A and Class B Common Stock and options to purchase Class B Common Stock were exchanged for one share of Holdings Class A or Class B Common Stock and options to purchase Class B Common Stock. Holdings' Class B Common Stock is listed on the New York Stock Exchange. Warrants On August 25, 1994, AWA issued approximately 10.4 million warrants to purchase Class B Common Stock with an exercise price of $12.74 per share. The warrants are exercisable by the holders any time before August 25, 1999 and 10.4 million shares of Class B Common Stock were reserved for the exercise of these warrants. As of December 31, 1998, approximately 7.0 million warrants have been repurchased by AWA for approximately $47.7 million. As of December 31, 1998, 48,148 warrants have been exercised at $12.74 per share. As part of the holding company formation transaction, the AWA warrants became rights to acquire shares of Holdings Class B Common Stock. AWA has made arrangements for the issuance of Holdings Class B Common Stock upon the exercise of such warrants by purchasing an option from Holdings to acquire such stock. AWA issued a $62.4 million note payable to Holdings due December 31, 2005 with an interest rate of 11%. 76 77 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED Subsequently, Holdings made a capital contribution to AWA by issuing a note payable to AWA for $62.4 million due December 31, 2045 with an interest rate of 10 7/8%. AWA has the right on December 31, 2005 to repay all or a portion of the then outstanding principal balance of its note payable by offsetting by an equal amount the then outstanding principal balance of its note receivable and thus, these notes have been offset in the accompanying financial statements in accordance with applicable accounting standards. Common Stock The holders of common stock are entitled to one vote for each share of stock held by the holder. Holders of common stock have no right to cumulate their votes in the election of directors. The holders of common stock are entitled to receive, when and if declared by the Board of Directors, out of the assets of AWA which are by law available, dividends payable either in cash, in stock or otherwise. 4. EMPLOYEE BENEFIT PLAN AWA has a 401(k) defined contribution plan, covering essentially all employees of AWA. Participants may contribute from 1 to 15% of their pretax earnings to a maximum of $10,000 in 1998. The Company's matching contribution is determined annually by the Board of Directors. AWA's contribution expense to the plan totaled $6.8 million, $6.1 million and $5.9 million in 1998, 1997 and 1996, respectively. 5. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (a) Fair Value of Financial Instruments Cash Equivalents, Short-term Investments and Receivables The carrying amount approximates fair value because of the short-term nature of these instruments. Long-term Debt At December 31, 1998 and 1997, the fair value of long-term debt was approximately $292 million and $330 million, respectively, based on quoted market prices for the same or similar debt including debt of comparable remaining maturities. (b) Fuel Price Risk Management Under its fuel hedging program, AWA may enter into certain protective cap and fixed price swap transactions with approved counterparties for a period generally not exceeding twelve months. Gains and losses on such transactions are recorded as adjustments to fuel expense when the underlying fuel being hedged is used. As of December 31, 1998, AWA had entered into fixed price swap transactions hedging approximately 35% of its projected 1999 fuel requirements. AWA is exposed to credit risks in the event any counterparty fails to meet its obligations. AWA does not anticipate such non-performance as counterparties are selected based on credit ratings, exposure to any one counterparty is limited based on formal guidelines and the relative market positions with such counterparties are closely monitored. 77 78 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (c) Concentration of Credit Risk AWA does not believe it is subject to any significant concentration of credit risk. Most of AWA's receivables result from tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on AWA. These receivables are short-term, generally being settled shortly after the sale. 6. INCOME TAXES AWA recorded income tax expense (exclusive of extraordinary item) as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Current Taxes: Federal...................................... $ 29,322 $ 2,622 $ 943 State........................................ 4,959 3,277 849 --------- --------- --------- Total current taxes.................... 34,281 5,899 1,792 --------- --------- --------- Deferred taxes.................................. 47,260 - - --------- --------- --------- Income taxes attributable to reorganization items and other............... - 59,444 23,091 --------- --------- --------- Total income tax expense........................ $ 81,541 $ 65,343 $ 24,883 ========= ========= =========
AWA's emergence from bankruptcy reorganization in 1994 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. In large measure, it is these nondeductible (for income tax purposes) expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, AWA's actual cash income tax liability (i.e., income taxes payable) is considerably lower than income tax expense shown for financial reporting purposes. This difference in financial expense compared to actual income tax liability is in part attributable to the utilization of certain tax attributes of the predecessor company that serve to reduce AWA's actual income tax liability. In 1997 and 1996, the excess of financial expense over AWA's actual income tax liability was applied to reduce the balance of AWA's reorganization value in excess of amounts allocable to identifiable assets. For the year ended December 31, 1996, AWA recognized an income tax benefit of $918,000 arising from an extraordinary charge. Income tax expense, exclusive of extraordinary item, differs from amounts computed at the federal statutory income tax rate as follows: 78 79 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Income tax expense at U.S. statutory rate....... $64,595 $49,236 $12,073 State income taxes, net of federal income tax benefit.................................. 7,431 5,967 1,984 Nondeductible amortization of reorganization value in excess of amounts allocable to identifiable assets....................... 6,964 8,322 8,842 Other, net...................................... 2,551 1,818 1,984 ------- ------- ------- Total........................................ $81,541 $65,343 $24,883 ======= ======= =======
As of December 31, 1998, AWA has available net operating loss carryforwards ("NOL"), business tax credit carryforwards and alternative minimum tax credit carryforwards for Federal income tax purposes of approximately $239.0 million, $12.7 million and $570,000, respectively. The NOL expire during the years 2005 through 2009 while the business credit carryforwards expire during the years 1999 through 2006. However, such carryforwards are not fully available to offset federal (and in certain circumstances, state) alternative minimum taxable income. Further, as a result of a statutory "ownership change" (as defined for purposes of Section 382 of the Internal Revenue Code) that occurred as a result of AWA's reorganization in 1994, AWA's ability to utilize its NOL and business tax credit carryforwards may be restricted. The alternative minimum tax credit may be carried forward without expiration and is available to offset future income tax payable. Composition of Deferred Tax Items: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, the significant components of AWA's deferred tax assets and liabilities are a result of the temporary differences related to the items described as follows:
1998 1997 ---- ---- (IN THOUSANDS) Deferred income tax liabilities Property and equipment, principally depreciation and "fresh start" differences............................................................ $(131,518) $(122,164) --------- --------- Deferred tax assets Aircraft leases........................................................... 23,951 26,663 Frequent flyer accrual.................................................... 6,541 5,810 Net operating loss carryforwards.......................................... 91,587 144,396 Tax credit carryforwards.................................................. 13,272 16,585 Other..................................................................... 52,155 31,958 -------- -------- Total deferred tax assets.............................................. 187,506 225,412 -------- -------- Valuation allowance...................................................... (28,548) (28,548) -------- -------- Net deferred tax asset.............................................. $ 27,440 $ 74,700 ======== ========
79 80 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED Statement of Financial Accounting Standards ("SFAS"), No. 109, Accounting for Income Taxes requires a "more likely than not" criterion be applied when evaluating the realizability of a deferred tax asset. In 1997 AWA reduced the valuation allowance by $59.9 million from its 1996 balance principally for the portion of its NOL (a predecessor company tax attribute) that it anticipates will, more likely than not, be utilized. The remaining valuation allowance of $28.5 million is necessary because at this time AWA has not determined it is more likely than not that the balance of the deferred tax assets will be fully realized. AWA continues to monitor the valuation allowance and will make adjustments as appropriate. If in future tax periods, AWA were to recognize additional tax benefits related to items attributable to the predecessor company such as net operating loss and other carryforwards, such benefits would be applied to reduce further reorganization value in excess of amounts allocable to identifiable assets. 7. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information and non-cash investing and financing activities were as follows:
YEAR ENDED DECEMBER 31, ------------------- --- 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) Non-cash transactions: Notes payable issued for equipment purchase deposits...... $ 45,500 $ 10,500 $ 26,112 Notes payable canceled under the aircraft purchase agreement.................................... 12,596 36,019 - Equipment acquired through capital lease.................. 230 - - Cash transactions: Interest paid, net of amounts capitalized................. 22,184 30,830 37,555 Income taxes paid......................................... 20,963 205 498
8. INVESTMENTS IN DEBT SECURITIES Cash equivalents and short-term investments as of December 31 are classified as follows:
1998 1997 ---- ---- (IN THOUSANDS) Debt securities issued by the U.S. Treasury and other U.S. government agencies...... $ 52,393 $ 39,214 Corporate notes..................................................................... 82,195 132,275 Other debt securities............................................................... 131 149 -------- -------- Total cash equivalents and short-term investments........................ $134,719 $171,638 ======== ========
9. EXTRAORDINARY LOSS In June 1996, AWA had an extraordinary loss of $1.1 million net of an income tax benefit of $918,000 for the write-off of debt issuance costs relating to the prepayment of $25 million of its 10 3/4% Senior Unsecured Notes. 80 81 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 10. COMMITMENTS AND CONTINGENCIES (a) Leases As of December 31, 1998, AWA had 92 aircraft under operating leases with remaining terms ranging from one year to approximately 21 years. AWA has options to purchase certain of the aircraft at fair market values at the end of the lease terms. Certain of the agreements require security deposits, minimum return provisions and maintenance reserve payments and provide the aircraft lessors with the option during the lease term to reset their respective rentals to the greater of the existing rentals being paid under the leases or the then current fair market rates. AWA also leases certain terminal space, ground facilities and computer and other equipment under noncancelable operating leases. At December 31, 1998, the scheduled future minimum cash rental payments under noncancelable operating leases with initial terms of more than one year are as follows:
(IN THOUSANDS) 1999....................................... $ 290,438 2000....................................... 278,996 2001....................................... 243,914 2002....................................... 216,850 2003....................................... 167,367 Thereafter................................. 914,568 ------------ $ 2,112,133 ============
Rent expense (excluding landing fees) was approximately $330 million, $308 million and $281 million for the years ended December 31, 1998, 1997 and 1996, respectively. Collectively, the operating lease agreements require security deposits with lessors of $15.6 million and bank letters of credit of $19.8 million. The letters of credit are collateralized by $19.8 million of restricted cash as of December 31, 1998. (b) Revenue Bonds Special facility revenue bonds issued by a municipality have been used to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor International Airport in space which has been leased by AWA. Under the operating lease agreements with the airport, AWA is required to make rental payments sufficient to pay principal and interest when due on the bonds. Payment of principal and interest at 8.3% on the Series 1994A Bonds ends on January 1, 2006 and payment of principal and interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At December 31, 1998, the aggregate outstanding balance of Series 1994 Bonds was $11.1 million. (c) Aircraft Acquisitions At December 31, 1998, AWA had firm commitments to AVSA for a total of 19 Airbus A319-100 and 9 Airbus A320-200 aircraft with delivery through 2001 at a net cost of approximately $1.0 billion based on a 3.5% annual price escalation. An additional 10 A320s are scheduled for delivery in 2000 to 2002 and are subject to reconfirmation no later than 21 months prior to delivery. The agreements with AVSA provide, subject to certain conditions, aircraft and "backstop" financing assistance. The agreement also includes options to purchase an additional 40 A320 family aircraft during 2001 through 2005, and certain rights to convert firmly ordered A319s to A320s or larger A321 aircraft. reconfirmation no later than 21 months prior to delivery. The agreements with AVSA provide, subject to certain conditions, aircraft and "backstop" financing assistance. The agreement also includes options to purchase an additional 40 A320 family aircraft during 2001 through 2005, and certain rights to convert firmly ordered A319s to A320s or larger A321 aircraft. 81 82 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED AWA has an agreement with International Aero Engines ("IAE") which provides for the purchase by AWA of seven new V2500-A5 spare engines scheduled for delivery through 2000 for use on certain of the A320 fleet. Such engines have an estimated aggregate cost of $49 million. The following table reflects estimated cash payments under the aircraft and engine purchase contracts. Actual payments may vary due to inflation factor adjustments and changes in the delivery schedule of the equipment. The estimated cash payments include progress payments that will be made in cash, as opposed to being financed under an existing progress payment financing facility.
(IN THOUSANDS) 1999....................................... $ 464,072 2000....................................... 301,068 2001....................................... 179,288 ------------ $ 944,428 ============
In October 1998, America West Airlines 1998-1 Pass Through Trusts issued $190.5 million in Pass Through Trust Certificates in connection with the financing of six Airbus A319 aircraft and two Airbus A320 aircraft to be purchased from AVSA. The Pass Through Trust Certificates were issued by separate pass through trusts which will hold equipment notes issued upon delivery of the financed aircraft which will be secured by a security interest in such aircraft. The equipment notes will be issued in respect of, at AWA's election, a leveraged lease financing or a mortgage financing of the relevant aircraft. The Pass Through Trust Certificates are not direct obligations of, or guaranteed by AWA. The combined effective interest rate on the financing is 6.99 percent. Three Airbus A319 aircraft that are the subject of this financing were delivered in the 1998 fourth quarter. The remaining aircraft will be delivered through August 1999. (d) FAA Settlement In July 1998, AWA and the FAA entered into an agreement to settle disputes over alleged maintenance violations. Under the agreement, AWA did not admit any wrongdoing, has implemented certain changes in maintenance oversight and paid a civil penalty of $2.5 million. An additional civil penalty of $2.5 million will be forgiven upon implementation of the terms of the agreement. (e) Contingent Legal Obligations Holdings and AWA are named defendants in a number of additional lawsuits and proceedings arising in the ordinary course of business. While the outcome of the contingencies, lawsuits or other proceedings cannot be predicted with certainty, management currently expects that any liability arising from such matters, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial condition and results of operations of AWA. 82 83 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 11. RELATED PARTY TRANSACTIONS In March 1997, AWA purchased 1.91 million of its publicly traded warrants from TPG Partners, L.P. and certain of its affiliates for approximately $13.3 million. AWA has entered into various aircraft leasing arrangements with GPA Group plc ("GPA") at terms comparable to those obtained from third parties for similar transactions. AWA currently leases four aircraft from GPA and the rental payments for such leases amounted to $19.2 million, $31.9 million and $62.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. As of December 31, 1998, AWA was obligated to pay approximately $260 million under the GPA leases which expire at various dates through the year 2013. In June 1997, America West Airlines 1997-1 Pass Through Trusts issued $93.9 million of Pass Through Trust Certificates in connection with the refinancing of four Airbus A320 aircraft. The proceeds of the transaction were used to refinance the indebtedness incurred by the owners of the aircraft leased to AWA. Under the arrangements, the financial benefits of the transactions are shared among AWA, the equity investors in leverage leases covering the aircraft and U.S. subsidiaries of GPA, the original lessees under the restructured leases. As part of AWA's reorganization in 1994, Continental Airlines made an investment in AWA, and AWA entered into an alliance agreement related to code-sharing arrangements and ground handling operations. AWA paid Continental approximately $27.8 million, $25.2 million and $21.7 million and also received approximately $20.5 million, $13.4 million and $13 million in 1998, 1997 and 1996, respectively, from Continental pursuant to these agreements. Mr. John F. Fraser, chairman of the board of Air Canada, served as a director of AWA until May 20, 1998. AWA has a maintenance contract with Air Canada on terms comparable to those obtained from third parties for similar transactions. AWA's payments under the maintenance contract were $9.4 and $5.9 million in 1998 and 1997, respectively. AWA provides air transportation and certain administrative services to The Leisure Company, a wholly owned subsidiary of Holdings that was formed on January 1, 1998. The cost of air transportation and administrative services are negotiated on an arms length basis. In 1998, AWA had net air transportation sales to TLC of $61.6 million and received $1.9 million under the services agreement. 12. NONRECURRING SPECIAL CHARGE During the third quarter of 1996, AWA recorded a nonrecurring special charge of approximately $65.1 million. Approximately $49.7 million of the charge was associated with AWA's renegotiation of an aircraft purchase agreement with AVSA, the re-evaluation of AWA's facilities, and the completion of its plan for the disposition of certain aircraft inventories and equipment. The charge included $18.8 million for cancellation penalty payments and the write-off of capitalized interest on advance payments; a provision for maintenance costs on certain leased aircraft currently scheduled to be returned due to accelerated deliveries under the new AVSA agreement; $7.5 million to reduce the carrying value of certain under-utilized facilities and $23.4 million to write-down certain aircraft related inventories and equipment to estimated fair value. The remaining $15.4 million of the charge represented loss contingencies based on estimated settlements of pending and threatened litigation. 83 84 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 13. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 follows (in thousands of dollars):
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Operating revenues ........................................... $470,953 $519,489 $485,424 $492,848 Operating income ............................................. 47,823 73,792 41,447 34,784 Nonoperating expense, net..................................... (4,891) (2,222) (2,076) (4,100) Income tax expense ........................................... (18,540) (31,381) (20,078) (11,542) Net income ................................................... 24,392 40,189 19,293 19,142
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1997 Operating revenues ........................................... $462,187 $477,756 $462,122 $472,891 Operating income ............................................. 33,463 50,583 36,984 41,543 Nonoperating expense, net..................................... (7,545) (7,837) (1,362) (5,156) Income tax expense ........................................... (11,974) (19,749) (17,708) (15,912) Net income ................................................... 13,944 22,997 17,914 20,475
14. SEGMENT DISCLOSURES In 1998 AWA adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which established standards for the way public business enterprises report information about operating segments in annual financial statements. Generally, financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. It also established standards for related disclosures about products and services, geographic areas, and major customers. AWA is one reportable operating segment. Accordingly, the segment reporting financial data required by SFAS No. 131 is included in the accompanying balance sheets and statements of income. 84 85 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 15. SUBSEQUENT EVENTS (a) Warrant Buyback In January 1999, AWA repurchased 177,400 of its publicly traded warrants for $1.4 million. The equity repurchase was made pursuant to Holdings' stock repurchase program encompassing all outstanding warrants. (b) Interest in Acquisition of AWA On January 20, 1999 Holdings announced that it had been contacted by a number of airlines expressing interest in possible transactions ranging from a strategic alliance to a merger or similar business combination. On February 22, 1999 the Company announced that it had terminated consideration of expressions of interest in the acquisition of AWA. (c) Borrowing Under Credit Facility On February 19, 1999 AWA borrowed $94.3 million, the total amount then available under its senior secured revolving credit facility (see Note 2, "Long-term Debt" in Notes to Financial Statements), to provide additional liquidity in the event of service disruptions related to the Company's contract negotiations with its flight attendants. On March 20, 1999, after the date of the auditors' report, AWA reported that it had reached a tentative agreement with the Association of Flight Attendants on a five-year collective bargaining agreement. The Company intends to repay the amount on April 19, 1999 in accordance with the terms of the credit facility. 85 86 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 respecting continuing directors and nominees of the Company is set forth under the caption "Election of Directors" in Holdings' Proxy Statement relating to its 1999 Annual Meeting of Stockholders and is incorporated by reference into this Form 10-K Report. The Proxy Statement will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K Report, the Proxy Statement is not being filed as a part hereof. Information respecting executive officers of Holdings is set forth at Part I of this Report. Information respecting compliance with Section 16(a) of the Exchange Act is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated by references into this Form 10-K Report. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation required by Item 11 is set forth under the captions "Executive Compensation", "Stock Option Grants and Exercises", "Employment Agreements" and "Compensation Committee Interlocks" in the Proxy Statement and is incorporated by reference into this Form 10-K Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management required by Item 12 is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and is incorporated by reference into this Form 10-K Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions required by Item 13 is set forth under the captions "Employment Agreements" and "Certain Transactions" in the Proxy Statement and is incorporated by reference into this Form 10-K Report. 86 87 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements. The following financial statements and the Independent Auditors' Reports are filed in Part II, Item 8A and 8B of this report on the pages indicated: America West Holdings Corporation Independent Auditors' Report - page 42. Consolidated Balance Sheets - December 31, 1998 and 1997 - page 43. Consolidated Statements of Income-Years ended December 31, 1998, 1997 and 1996 - page 44. Consolidated Statements of Cash Flows-Years ended December 31, 1998, 1997 and 1996 - page 45. Consolidated Statements of Stockholders' Equity-Years ended December 31, 1998, 1997 and 1996 - page 46. Notes to Consolidated Financial Statements - page 47. America West Airlines. Inc. Independent Auditors' Report - page 67. Balance Sheets - December 31, 1998 and 1997 - page 68. Statements of Income - Years ended December 31, 1998, 1997 and 1996 - page 69. Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 - page 70. Statements of Stockholder's Equity - Years ended December 31, 1998, 1997 and 1996 - page 71. Notes to Financial Statements - page 72. (b) Reports on Form 8-K None. (c) Exhibits EXHIBIT NUMBER TITLE 2.2 Agreement and Plan of Merger, dated as of December 19, 1996, by and among America West Holdings Corporation ("Holdings"), America West Airlines, Inc. ("AWA") and AWA Merger, Inc., with an effective date and time as of midnight on December 31, 1996 - Incorporated by reference to Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 87 88 EXHIBIT NUMBER TITLE 3.1 Restated Certificate of Incorporation of AWA (included in Exhibit 2.2 above). 3.2 Restated Bylaws of AWA - Incorporated by reference to AWA's Annual Report on Form 10-K dated December 31, 1994. 3.3 Section 4.18 of the Restated Bylaws of AWA (included in Exhibit 2.2 above). 3.4 Certificate of Incorporation of Holdings (filed with the Secretary of State of the State of Delaware on December 13, 1996) - Incorporated by reference to Exhibit 3.1 of Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.5 Bylaws of Holdings - Incorporated by reference to Exhibit 3.2 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.1 Indenture for 10 3/4% Senior Unsecured Notes due 2005 - Incorporated by reference to Exhibit 4.1 to AWA's Form S-4 (No. 33-61099). 4.2 Form of Senior Note (included as Exhibit A to Exhibit 4.1 above). 4.3 Warrant Agreement dated August 25, 1994 between AWA and First Interstate, N.A., as Warrant Agent - Incorporated by reference to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August 25, 1994. 4.4 Form of Warrant (included as Exhibit A to Exhibit 4.3 above). 4.5 Supplemental Warrant Agreement dated effective as of December 31, 1996 between AWA and Harris Trust Company of California, as Warrant Agent - Incorporated by reference to Exhibit 4.3 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.7 Stock Option Agreement dated effective as of December 31, 1996, between Holdings and AWA Incorporated by reference to Exhibit 4.5 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.8 Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P. and other holders - Incorporated by reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K dated August 25, 1994. 4.9 Assumption of Certain Obligations Under Registration Rights Agreement executed by Holdings for the benefit of TPG Partners, L.P., TPG Parallel 1, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc., Belmont Capital Partners II, L.P. and Belmont Fund, L.P. - Incorporated by reference to Exhibit 4.7 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.10 Form of Pass Through Trust Agreement, dated as of November 26, 1996, between AWA and Fleet National Bank, as Trustee - Incorporated by reference to Exhibit 4.1 to AWA's Report on Form 8-K dated November 26, 1996. 4.12 Form of Pass Through Trust Agreement, dated as of June 17, 1997, between AWA and Fleet National Bank, as Trustee - Incorporated by reference to Exhibit 4.5 to AWA's Registration Statement on Form S-3 (No. 33-327351). 4.13 Forms of Pass Through Trust Agreements, dated as of October 6, 1998, between AWA and Wilmington Trust Company, as Trustee - Incorporated by reference to Exhibits 4.4, 4.5, 4.6, 4.7, 4.8 and 4.9 to AWA's Registration Statement on Form S-4 (No. 333-71615). 10.1 Alliance Agreements dated August 25, 1994 between AWA and Continental Airlines, Inc. including the Master Ground Handling Agreement, the Reciprocal Frequent Flyer Participation Agreement, the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement, the Reciprocal Club Usage Agreement and the Memorandum of Understanding Concerning Technology Transfers-Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 88 89 EXHIBIT NUMBER TITLE 10.11 Airport Use Agreement dated July 1, 1989 among the City of Phoenix, The Industrial Development Authority of the City of Phoenix, Arizona and AWA ("Airport Use Agreement") - Incorporated by reference to Exhibit 10-D(9) to AWA's Annual Report on Form 10-K for the year ended December 31, 1989. 10.12 First Amendment dated August 1, 1990 to Airport Use Agreement - Incorporated by reference to Exhibit 10-(D)(9) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.19 Management Rights Agreement dated August 25, 1994 between TPG Partners L.P., TPG Genpar, L.P. and AWA - Incorporated by reference to Exhibit 10.47 to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. *10.20(1) Amended and Restated V2500 Support Contract dated as of October 7, 1998 between AWA and IAE International Aero Engines AG and Side Letters Nos. 1 and 2 thereto. *+10.21 Amended and Restated America West 1994 Incentive Equity Plan. *+10.23 Employment Agreement dated as of February 17, 1998 among Holdings, AWA, The Leisure Company and William A. Franke. +10.24 Employment Agreement dated as of February 15, 1997 among Holdings, AWA and Richard R. Goodmanson. - Incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.25(1) Airbus A320/A319 Purchase Agreement dated September 12, 1997 between AVSA S.A.R.L and AWA including Letter Agreements Nos. 1-10 - Incorporated by reference to Exhibit 10.26 to Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.26 Revolving Credit Agreement dated as of December 12, 1997 among AWA and The Industrial Bank of Japan; Limited, Los Angeles Agency as Agent for the Banks. - Incorporated by reference by Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.28(1) Amendment No. 1 dated March 31, 1998 to Airbus A320/A319 Purchase Agreement dated September 12, 1997 between AVSA S.A.R.L. and AWA - Incorporated by reference to Exhibit 10.28 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.29 Financing Agreement dated April 1, 1998 between the Industrial Development Authority of the City of Phoenix, Arizona and AWA - Incorporated by reference to Exhibit 10.29 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.30 Indenture of Trust dated April 1, 1998 from the Industrial Development Authority of the City of Phoenix, Arizona to Norwest Bank, Arizona N.A. - Incorporated by reference to Exhibit 10.30 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. *10.31 Amendment No. 1 to Code Sharing Agreement dated June 29, 1994 between AWA and Continental Airlines, Inc. *10.32(1) Amendment No. 2 dated as of December 9, 1998 to the A319/A320 Purchase Agreement between AVSA S.A.R.L. and AWA. *10.33 Amendment to Employment Agreement, dated as of January 15, 1999 among Holdings, AWA, The Leisure Company and William A. Franke. *10.34 Second Amendment to Airport Use Agreement dated as of August 25, 1995. *21.1 Subsidiaries of Holdings. *23.1 Consent of KPMG LLP. 24.1 Power of Attorney, pursuant to which amendments to this Annual Report on Form 10-K may be filed, is included on the signature pages of this Annual Report on Form 10-K. *27.1 Financial Data Schedule. - America West Holdings Corporation *27.2 Financial Data Schedule. - America West Airlines, Inc. 89 90 * Filed herewith. + Represents a management contract or compensatory plan or arrangement. (1) The Company has sought confidential treatment for portions of the referenced exhibit. (d) Financial Statement Schedules. America West Holdings Corporation Independent Auditors' Report on Schedule and Consent - page 95 __. Schedule II: Valuation and Qualifying Accounts - page 96. America West Airlines, Inc. Independent Auditors' Report on Schedule - page 97. Schedule II: Valuation and Qualifying Accounts - page 98. All other information and schedules have been omitted as not applicable or because the required information is included in the financial statements or notes thereto. 90 91 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, America West Holdings Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICA WEST HOLDINGS CORPORATION Date: March 30, 1999 By: /s/ William A. Franke --------------------------- William A. Franke, Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY We, the undersigned, directors and officers of America West Holdings Corporation, do hereby severally constitute and appoint William A. Franke, W. Douglas Parker and Stephen L. Johnson and each or any of them, our true and lawful attorneys and agents, 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 the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, 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 of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March __, 1999.
SIGNATURE TITLE /s/ William A. Franke Chairman of the Board and Chief Executive Officer ------------------------------ (Principal Executive Officer) William A. Franke /s/ Richard R. Goodmanson President and Director ------------------------------ Richard R. Goodmanson /s/ W. Douglas Parker Senior Vice President and Chief Financial Officer ------------------------------ (Principal Financial and Accounting Officer) W. Douglas Parker /s/ Frederick W. Bradley, Jr. Director ------------------------------ Frederick W. Bradley, Jr. /s/ James G. Coulter Director ------------------------------
91 92
SIGNATURE TITLE James G. Coulter /s/ John L. Goolsby Director ------------------------------ John L. Goolsby /s/ Walter T. Klenz Director ------------------------------ Walter T. Klenz /s/ Richard C. Kraemer Director ------------------------------ Richard C. Kraemer /s/ Denise M. O'Leary Director ------------------------------ Denise M. O'Leary /s/ Richard P. Schifter Director ------------------------------ Richard P. Schifter /s/John F. Tierney Director ------------------------------ John F. Tierney
92 93 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, America West Airlines, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICA WEST AIRLINES, INC. Date: March 30, 1999 By: /s/ William A. Franke ---------------------------- William A. Franke, Chairman of the Board POWER OF ATTORNEY We, the undersigned, directors and officers of America West Airlines, Inc., do hereby severally constitute and appoint William A. Franke, W. Douglas Parker and Stephen L. Johnson and each or any of them, our true and lawful attorneys and agents, 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 the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and to file the same with- all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as be or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, 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 of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March __, 1999.
SIGNATURE TITLE /s/ William A. Franke Chairman of the Board --------------------------------- William A. Franke /s/ Richard R. Goodmanson President, Chief Executive Officer and Director (Principal --------------------------------- Executive Officer) Richard R. Goodmanson /s/ W. Douglas Parker Senior Vice President and Chief Financial Officer --------------------------------- (Principal Financial Officer) W. Douglas Parker /s/ Michael R. Carreon Vice President and Controller --------------------------------- (Principal Accounting Officer) Michael R. Carreon /s/ Frederick W. Bradley, Jr. Director ---------------------------------
93 94
SIGNATURE TITLE Frederick W. Bradley, Jr. /s/ James G. Coulter Director --------------------------------- James G. Coulter /s/ John L. Goolsby Director --------------------------------- John L. Goolsby /s/ Walter T. Klenz Director --------------------------------- Walter T. Klenz /s/ Richard C. Kraemer Director --------------------------------- Richard C. Kraemer /s/ Denise M. O'Leary Director --------------------------------- Denise M. O'Leary /s/ Richard P. Schifter Director --------------------------------- Richard P. Schifter /s/John F. Tierney Director --------------------------------- John F. Tierney
94 95 INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT The Board of Directors and Stockholders America West Holdings Corporation: The audits referred to in our report dated March 10, 1999, included the related consolidated financial statement schedule as listed in Item 14(d) for the years ended December 31, 1998, 1997 and 1996, included herein. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to incorporation by reference in the Registration Statements (Form S-8 No. 33-60555), (Form S-3 No. 333-51107) and (Form S-3 No. 333-02129) of America West Holdings Corporation of our report dated March 10, 1999, relating to the consolidated balance sheets of America West Holdings Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998 and the related consolidated financial statement schedule, which report appears in the December 31, 1998, annual report on Form 10-K of America West Holdings Corporation. KPMG LLP Phoenix, Arizona March 30, 1999 95 96 AMERICA WEST HOLDINGS CORPORATION SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD ----------- --------- --------- ---------- --------- Allowance for doubtful receivables: Year ended December 31, 1998............... $ 3,850 $3,412 $ 3,717 $ 3,545 ======== ====== ========== ======= Year ended December 31, 1997............... $ 3,091 $3,000 $ 2,241 $ 3,850 ======== ====== ========== ======= Year ended December 31, 1996............... $ 2,515 $2,950 $ 2,374 $ 3,091 ======== ====== ========== ======= Allowance for obsolescence: Year ended December 31, 1998............... $ 2,495 $1,699 $ 82 $4,112 ======== ====== ========== ======= Year ended December 31, 1997............... $ 1,713 $1,159 $ 377 $ 2,495 ======== ====== ========== ======= Year ended December 31, 1996............... $ 2,115 $1,523 $ 1,925 $ 1,713 ======== ====== ========== =======
96 97 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholder America West Airlines, Inc.: The audits referred to in our report dated March 10, 1999, included the related financial statement schedule as listed in Item 14(d) for the years ended December 31, 1998, 1997 and 1996, included herein. 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. KPMG LLP Phoenix, Arizona March 10, 1999 97 98 AMERICA WEST AIRLINES, INC. SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD ----------- --------- --------- ---------- --------- Allowance for doubtful receivables: Year ended December 31, 1998............... $ 3,850 $3,000 $ 3,582 $ 3,268 ======== ====== ======= ======= Year ended December 31, 1997............... $ 3,091 $3,000 $ 2,241 $ 3,850 ======== ====== ======= ======= Year ended December 31, 1996............... $ 2,515 $2,950 $ 2,374 $ 3,091 ======== ====== ======= ======= Allowance for obsolescence: Year ended December 31, 1998............... $ 2,495 $1,699 $ 82 $ 4,112 ======== ====== ======= ======= Year ended December 31, 1997............... $ 1,713 $1,159 $ 377 $ 2,495 ======== ====== ======= ======= Year ended December 31, 1996............... $ 2,115 $1,523 $ 1,925 $ 1,713 ======== ====== ======= =======
98 99 INDEX TO EXHIBITS EXHIBIT NUMBER TITLE 2.1 Plan of Reorganization of America West Airlines, Inc. ("AWA"), as amended under Chapter 11 of the Bankruptcy Code, as amended - Incorporated by reference to Exhibit I of AWA's Current Report on Form 8-K dated August 25, 1994. 2.2 Agreement and Plan of Merger, dated as of December 19, 1996, by and among America West Holdings Corporation ("Holdings"), AWA and AWA Merger, Inc., with an effective date and time as of midnight on December 31, 1996 - Incorporated by reference to Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.1 Restated Certificate of Incorporation of AWA (included in Exhibit 2.2 above). 3.2 Restated Bylaws of AWA - Incorporated by reference to AWA's Annual Report on Form 10-K dated December 31, 1994. 3.3 Section 4.18 of the Restated Bylaws of AWA (included in Exhibit 2.2 above). 3.4 Certificate of Incorporation of Holdings (filed with the Secretary of State of the State of Delaware on December 13, 1996) - Incorporated by reference to Exhibit 3.1 of Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.5 Bylaws of Holdings - Incorporated by reference to Exhibit 3.2 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.1 Indenture for 10 3/4% Senior Unsecured Notes due 2005 - Incorporated by reference to Exhibit 4.1 to AWA's Form S-4 (No. 33-61099). 4.2 Form of Senior Note (included as Exhibit A to Exhibit 4.1 above). 4.3 Warrant Agreement dated August 25, 1994 between AWA and First Interstate, N.A., as Warrant Agent - Incorporated by reference to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August 25, 1994. 4.4 Form of Warrant (included as Exhibit A to Exhibit 4.3 above). 4.5 Supplemental Warrant Agreement dated effective as of December 31, 1996 between AWA and Harris Trust Company of California, as Warrant Agent - Incorporated by reference to Exhibit 4.3 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.7 Stock Option Agreement dated effective as of December 31, 1996, between Holdings and AWA Incorporated by reference to Exhibit 4.5 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.8 Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P. and other holders - Incorporated by reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K dated August 25, 1994. 4.9 Assumption of Certain Obligations Under Registration Rights Agreement executed by Holdings for the benefit of TPG Partners, L.P., TPG Parallel 1, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc., Belmont Capital Partners II, L.P. and Belmont Fund, L.P. - Incorporated by reference to Exhibit 4.7 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.10 Form of Pass Through Trust Agreement, dated as of November 26, 1996, between AWA and Fleet National Bank, as Trustee - Incorporated by reference to Exhibit 4.1 to AWA's Report on Form 8-K dated November 26, 1996. 4.12 Form of Pass Through Trust Agreement, dated as of June 17, 1997, between AWA and Fleet National Bank, as Trustee - Incorporated by reference to Exhibit 4.5 to AWA's Registration Statement on Form S-3 (No. 33-327351). 4.13 Forms of Pass Through Trust Agreements, dated as of October 6, 1998, between AWA and Wilmington Trust Company, as Trustee - Incorporated by reference to Exhibits 4.4, 4.5, 4.6, 4.7, 4.8 and 4.9 to AWA's Registration Statement on Form S-4 (No. 333-71615). 10.1 Alliance Agreements dated August 25, 1994 between AWA and Continental Airlines, Inc. including the Master Ground Handling Agreement, the Reciprocal Frequent Flyer Participation Agreement, the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement, the Reciprocal Club Usage Agreement and the Memorandum of Understanding Concerning Technology Transfers-Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 100 EXHIBIT NUMBER TITLE +10.6 America West Airlines Management Resignation Allowance Guidelines, as amended, dated November 18, 1993 - Incorporated by Reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.11 Airport Use Agreement dated July 1, 1989 among the City of Phoenix, The Industrial Development Authority of the City of Phoenix, Arizona and AWA - Incorporated by reference to Exhibit 10-D(9) to AWA's Annual Report on Form 10-K for the year ended December 31, 1989. 10.12 First Amendment dated August 1, 1990 to Airport Use Agreement - Incorporated by reference to Exhibit 10-(D)(9) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.19 Management Rights Agreement dated August 25, 1994 between TPG Partners L.P., TPG Genpar, L.P. and AWA - Incorporated by reference to Exhibit 10.47 to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.20(1) Amended and Restated V2500 Support Contract dated as of October 7, 1998 between AWA and IAE International Aero Engines AG and Side Letters Nos. 1 and 2 thereto. +10.21 Amended and Restated America West 1994 Incentive Equity Plan. +10.23 Employment Agreement dated as of February 15, 1997 among Holdings, AWA and William A. Franke. -Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. +10.24 Employment Agreement dated as of February 15, 1997 among Holdings, AWA and Richard R. Goodmanson. - Incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.25(1) Airbus A320/A319 Purchase Agreement dated September 12, 1997 between AVSA S.A.R.L and AWA including Letter Agreements Nos. 1-10 - Incorporated by reference to Exhibit 10.26 to Holdings' Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.26 Revolving Credit Agreement dated as of December 12, 1997 among AWA and The Industrial Bank of Japan; Limited, Los Angeles Agency as Agent for the Banks. +10.27 [Description of employment agreement among Holdings, AWA and William A. Franke - Incorporated by reference to the "Employment Agreements" sections in Holdings' Proxy Statement for the 1998 Annual Meeting of Stockholders.] 10.28(1) Amendment No. 1 dated March 31, 1998 to Airbus A320/A319 Purchase Agreement dated September 12, 1997 between AVSA S.A.R.L. and AWA - Incorporated by reference to Exhibit 10.28 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.29 Financing Agreement dated April 1, 1998 between the Industrial Development Authority of the City of Phoenix, Arizona and AWA - Incorporated by reference to Exhibit 10.29 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.30 Indenture of Trust dated April 1, 1998 from the Industrial Development Authority of the City of Phoenix, Arizona to Norwest Bank, Arizona N.A. - Incorporated by reference to Exhibit 10.30 to Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.31 Amendment No. 1 to Code Sharing Agreement dated June 29, 1994 between AWA and Continental Airlines, Inc. 10.32(1) Amendment No. 2 dated as of December 9, 1998 to the A319/A320 Purchase Agreement between AVSA S.A.R.L. and AWA. *21.1 Subsidiaries of Holdings. *23.1 Consent of KPMG LLP. 24.1 Power of Attorney, pursuant to which amendments to this Annual Report on Form 10-K may be filed, is included on the signature pages of this Annual Report on Form 10-K. *27.1 Financial Data Schedule. *27.2 Restated Financial Data Schedule. 101 * Filed herewith. + Represents a management contract or compensatory plan or arrangement. (1) The Company has sought confidential treatment for portions of the referenced exhibit. EX-10.20 2 EX-10.20 1 Exhibit 10.20 AMENDED AND RESTATED V2500(R) SUPPORT CONTRACT BETWEEN IAE INTERNATIONAL AERO ENGINES AG AND AMERICA WEST AIRLINES, INC. 7 OCTOBER 1998 2 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS........................................................2 ARTICLE II SALE OF PURCHASED ITEMS............................................3 2.1 Intent and Agreement to Purchase...................................3 2.2 Type Approval and Changes in Specification.........................4 2.3 Inspection and Acceptance..........................................5 2.4 Delivery, Shipping, Title and Risk of Loss or Damage...............6 2.5 Price..............................................................6 2.6 Payment............................................................6 ARTICLE III SPARE PARTS PROVISIONS.............................................7 3.1 Intent and Term....................................................7 3.2 ATA Standards......................................................8 3.3 Use of Procurement Data............................................8 3.4 Stocking of Spare Parts............................................8 3.5 Lead Times.........................................................8 3.6 Ordering Procedure.................................................9 3.7 Modifications to Spare Parts.......................................9 3.8 Inspection........................................................10 3.9 Delivery and Packing..............................................10 3.10 Prices............................................................11 3.11 Payment...........................................................11 3.12 Purchase by AWA from Others.......................................12 3.13 Special Tools, Ground Equipment and Consumable Stores.............12 3.14 Conflict..........................................................13 ARTICLE IV WARRANTIES, GUARANTEES AND LIABILITIES............................13 ARTICLE V PRODUCT SUPPORT SERVICES..........................................15 ARTICLE VI MISCELLANEOUS.....................................................15 6.1 Delay in Delivery.................................................15 6.2 Patents...........................................................16 6.3 Credit Reimbursement..............................................18 6.4 Non-Disclosure and Non-Use........................................18 i. 3 TABLE OF CONTENTS (CONTINUED) PAGE 6.5 Taxes.............................................................19 6.6 Amendment.........................................................20 6.7 Assignment........................................................20 6.8 Headings..........................................................20 6.9 Law...............................................................20 6.10 Notices...........................................................20 6.11 Exclusion of Other Provisions and Previous Understandings.........21 EXHIBIT A AIRCRAFT DELIVERY SCHEDULE EXHIBIT B PURCHASED ITEMS, PRICE, ESCALATION FORMULA, AND DELIVERY SCHEDULE EXHIBIT C CONTRACT SPECIFICATIONS C-1 V2524-A5 TURBOFAN ENGINE MODEL SPECIFICATION C-2 V2527-A5 TURBOFAN ENGINE MODEL SPECIFICATION C-3 V2533-A5 TURBOFAN ENGINE MODEL SPECIFICATION EXHIBIT D PRODUCT SUPPORT PLAN EXHIBIT E WARRANTIES, GUARANTEES AND PLANS E-1 ENGINE AND PARTS SERVICE POLICY E-2 NACELLE AND PARTS SERVICE POLICY E-3 WARRANTY FOR SPECIAL TOOLS AND GROUND EQUIPMENT E-4 PARTS COST GUARANTEE E-5 RELIABILITY GUARANTEE E-6 INFLIGHT SHUTDOWN GUARANTEE E-7 DELAY AND CANCELLATION GUARANTEE E-8 FUEL CONSUMPTION RETENTION GUARANTEE E-9 EXHAUST GAS TEMPERATURE GUARANTEE ii. 4 AMENDED AND RESTATED V2500(R) SUPPORT CONTRACT BETWEEN IAE INTERNATIONAL AERO ENGINES AG AND AMERICA WEST AIRLINES, INC. THIS RESTATED AND AMENDED CONTRACT (as amended) is made this 7th day of October l998 between IAE INTERNATIONAL AERO, a joint stock company organized and existing ENGINES AG, under the laws of Switzerland, with a place of business at 400 Main Street, M/S 121-10, East Hartford, Connecticut, 06108, U.S.A. (hereinafter called "IAE") and AMERICA WEST AIRLINES, INC. a corporation organized and existing under the laws of the United States of America, whose registered office is at 4000 East Sky Harbor Boulevard, Sky Harbor International Airport, Phoenix, Arizona 85034, U.S.A. (hereinafter called "AWA"). (This Restated and Amended Contract, as amended, hereinafter referred to as the "Contract"). WHEREAS: A. AWA and AVSA have entered into an Airbus A319/320/321 Purchase Agreement dated as of September 12, 1997 (together with all exhibits thereto and all letter agreements currently existing or hereafter entered into that by their terms constitute part of such purchase agreement, and as such purchase agreement may be amended, modified or supplemented from time to time, the "New Purchase Agreement") which covers, among other matters: (a) The sale by AVSA and the purchase by AWA of (i) twenty-two (22) firm new A319 aircraft powered by new V2524-A5 Propulsion Systems ("Firm A319 Aircraft"), and (ii) seven (7) firm new A320 aircraft, powered by new V2527-A5 Propulsion Systems ("Firm A320-Aircraft"); the Firm A319 Aircraft and the Firm A320 Aircraft hereafter referred to as the "Firm Aircraft"; and, (b) The sale by AVSA and the purchase by AWA of twelve (12) new A320 aircraft powered by new V2527-A5 Propulsion Systems, [***] the scheduled delivery date of such aircraft (the"Growth A320 Aircraft") and, (c) An option for AWA to purchase forty (40) new A320 family aircraft in any combination of new A319 aircraft, powered by new V2524-A5 Propulsion Systems ("Option A319 Aircraft"), new A320 aircraft, powered by new V2527-A5 Propulsion Systems ("Option A320 Aircraft"), and new A321-200 aircraft, powered by new V2533-A5 Propulsion Systems ("Option A321 Aircraft", Option A319 Aircraft, Option A320 Aircraft, and Option A321 Aircraft, collectively, or where the context so requires individually, hereafter referred to as the "Option Aircraft"; and, B. IAE and AWA entered into V2500 Support Contract dated December 23, 1994 in respect of the purchase by AWA of twenty-four (24) new A320-200 aircraft to be powered by IAE V2527-A5 engines and the support of such V2527-A5 engines (the "Support Contract"); - ---------- [*] indicates Redacted material 1. 5 C. IAE and AWA hereby agree to amend and restate the terms of the Support Contract to reflect the purchase by AWA of additional Airbus V2500-A5 powered A320 family aircraft pursuant to the New Purchase Agreement; D. IAE is prepared to supply to AWA V2500-A5 spare engines, modules, spare parts, special tools, ground equipment, product support services and consumable stores for the support and operation of the V2500 Propulsion Systems pursuant to the terms set forth herein. NOW THEREFORE IT IS AGREED AS FOLLOWS: ARTICLE I DEFINITIONS In this Contract, unless the context otherwise requires: 1.1 "AIRCRAFT" means the Firm Aircraft, Growth A320 Aircraft and Option Aircraft, being acquired by AWA as set out in Exhibit A to the Contract. 1.2 "AIRCRAFT MANUFACTURER" means Airbus Industrie. 1.3 "AVSA" means AVSA S.A.R.L., a societe a responsibilite limitee organized and existing under the laws of the Republic of France, having its registered office located at 2, Rond-Point Maurice Bellonte, 31700 Blagnac France. 1.4 "BASIC CONTRACT PRICE" means the basic price of each item of the Purchased Items as specified in Exhibit B to this Contract. 1.5 "CERTIFICATION AUTHORITY" means the United States of America Federal Aviation Administration of the Department of Transportation ("FAA"). 1.6 "CHANGE ORDER" shall have the meaning set forth in Article 2.2.1. 1.7 "CURRENT RULES" shall have the meaning set forth in Article 2.2.4. 1.8 "ENGINE(S)" means the IAE V2524-A5, V2527-A5, and V2533-A5 aero engines described in the applicable Specification. 1.9 "INSTALLATION ITEMS" means Engines, modules, accessories, exhaust systems, nacelles and all ancillary equipment therefor described in the Specification which are being supplied pursuant to this Contract for installation in the Aircraft. 1.10 "LEAD TIME" means the period between acceptance by IAE of an order of AWA and commencement of delivery. 1.11 "NON-INSTALLATION ITEMS" means jigs, tools, handling and transportation equipment and all equipment whatsoever to be supplied pursuant to this Contract for use with the Installation Items and not for installation in the Aircraft. 2. 6 1.12 "Other Supplies" means special tools, ground equipment and consumable stores (e.g. oils, greases, dyes and penetrants). 1.13 "PROCUREMENT DATA" means information supplied by IAE to AWA about Spare Parts required to replenish the said initial stock. 1.14 "PURCHASED ITEMS" means those Installation Items and Non-Installation Items specified in Exhibit B to this Contract. 1.15 "PURCHASE PRICE" shall have the meaning set forth in Article 2.5. 1.16 "S.A.L.E. AIRCRAFT" shall mean the five (5) A320 aircraft powered by V2527-A5 Propulsion systems leased by AWA from Singapore Aircraft Leasing Enterprise Pte. Ltd. as follows: [***] [***] [***] 1.17 "SERVICE BULLETINS" means those service bulletins containing advice and instructions issued by IAE to AWA from time to time in respect of Engines. 1.18 "SPARE PARTS" means spare parts for V2500 engines excluding the items listed in the Specification as being items of supply by AWA. 1.19 "SPECIFICATION" means the IAE Contract Specification No. IAE S24A5, IAE Specification No. IAE S27A5, and IAE Specification No. IAE S33A5 which form Exhibit C to this Contract. 1.20 "SUPPLIES" means Installation Items, Non-Installation Items, Spare Parts and any goods or services supplied pursuant to this Contract. 1.21 "VENDOR PARTS" means Spare Parts described in Procurement Data which are not manufactured pursuant to the detailed design and order of IAE. ARTICLE II SALE OF PURCHASED ITEMS 2.1 INTENT AND AGREEMENT TO PURCHASE. 2.1.1 AWA has entered into the New Purchase Agreement with AVSA for the purchase of [***] - ---------- [*] indicates Redacted material 3. 7 [***] 2.1.2 IAE agrees to sell and AWA agrees to purchase from IAE the following Purchased Items for delivery according to the delivery schedule set forth in Exhibit B to this Contract: [***] new V2527-A5 spare Engines; and [***] new V2524-A5 spare Engines. The parties acknowledge that the spare Engine described as and designated Purchased Item No. 1 on Exhibit B has been purchased by and delivered to AWA. 2.1.3 [***] 2.1.4 The parties hereby agree that this Restated and Amended V2500 Support Contract amends the V2527-A5 Support Contract between IAE and AWA dated 23 December 1994, including all side letters and amendments thereto. 2.2 TYPE APPROVAL AND CHANGES IN SPECIFICATION. 2.2.1 The Purchased Items will be manufactured to the standards set forth in the Specification. After the date of this Contract, the Purchased Items may be varied from time to time by change orders in writing which shall set forth in detail: 2.2.1.1 The changes to be made in the Purchased Items; and 2.2.1.2 The effect (if any) of such changes on the Specification (including but not limited to performance and weight), on interchangeability of the Purchased Items in the airframe, on prices and on dates of delivery of the Purchased Items (a "Change Order"). Change Orders shall not be binding on either party until signed by IAE and AWA but upon being so signed shall constitute amendments to this Contract. 2.2.2 IAE may make any changes in the Purchased Items which do not adversely affect the Specification (including, but not limited to, performance and weight), - ---------- [*] indicates Redacted material 4. 8 interchangeability of the Purchased Items in the airframe, prices or dates of delivery of the Purchased Items. In the case of such permitted changes, a Change Order shall not be required. IAE will provide notification of all such changes to AWA prior to delivery. 2.2.3 At the time of delivery of the Purchased Items, IAE shall ensure that there is in existence a Type Certificate from the Certification Authority in accordance with the provisions of the Specification. 2.2.4 The Specification has, however, been drawn with a view to the requirements of the Certification Authority referred to in the Specification and the official interpretations of such requirements in existence at the date of this Contract (such requirements and interpretations being hereinafter referred to as "Current Rules"). Subject to Article 2.2.2 above, IAE and AWA agree that they will execute an appropriate Change Order in respect of any change required to the Purchased Items to enable such Purchased Items to conform to the requirements of the Certification Authority and the official interpretations of such requirements in force at the date of delivery of such Purchased Items. 2.2.5 The price of any Change Order is to be borne: 2.2.5.1 [***]; and 2.2.5.2 [***] 2.3 INSPECTION AND ACCEPTANCE. 2.3.1 Conformance to the Specification of Purchased Items which are Installation Items will be assured by IAE through the maintenance of procedures, systems and records approved by the Certification Authority. Conformance documentation (an Export Certificate of Airworthiness or a Certificate of Conformity, as the case may be) will be issued and signed by personnel authorized for such purposes. 2.3.2 Conformance to the Specification of Purchased Items which are Non-Installation Items will be assured by IAE conformance documentation. 2.3.3 Upon delivery pursuant to Article 2.4.1 below and the issuance of an Export Certificate of Airworthiness or a Certificate of Conformity pursuant to Article 2.3.1 or Article 2.3.2 above, AWA shall be deemed to have accepted the Purchased Items and that the Purchased Items conform to the Specification. IAE shall, subject to the permission of the appropriate governmental authorities, arrange for AWA to have reasonable access to the appropriate premises in order to examine the Purchased Items prior to the issue of conformance documentation and to witness Engine acceptance tests. - ---------- [*] indicates Redacted material 5. 9 2.3.4 [***] 2.3.5 [***] 2.4 DELIVERY, SHIPPING, TITLE AND RISK OF LOSS OR DAMAGE. 2.4.1 IAE will deliver the Purchased Items at Phoenix, Arizona, USA in accordance with the delivery schedule set out in Exhibit B to this Contract. [***] 2.4.2 Upon such delivery, good title to and risk of loss of or damage to the Purchased Items shall pass to AWA. 2.4.3 AWA will notify IAE at least four (4) weeks before the time for delivery of the Purchased Items of its instructions as to the marking and shipping of the Purchased Items. 2.5 PRICE. The Purchase Price for each of the Purchased Items shall be the Basic Contract Price, amended pursuant to Article 2.2 above, and escalated in accordance with the escalation formula contained in Exhibit B to this Contract. 2.6 PAYMENT. 2.6.1 Unless otherwise mutually agreed by the parties, AWA will make payment in United States Dollars as follows: 2.6.1.1 Upon signature of this Contract or issuance of a purchase order, AWA shall pay to IAE a deposit of [***] of the Estimated Purchase Price of the Purchased Items. 2.6.1.2 [***] before the scheduled delivery of each of the Purchased Items, AWA shall pay to IAE a further deposit of [***] of the Estimated Purchase Price of such item. 2.6.1.3 [***] before the scheduled delivery of each of the Purchased Items, AWA shall pay to IAE a further deposit of [***] of the Estimated Purchase Price of such item. 2.6.1.4 Upon delivery or immediately prior to the delivery of each of the Purchased Items, AWA shall pay to IAE the balance of the Purchase Price of such item. - ---------- [*] indicates Redacted material 6. 10 2.6.2 IAE shall have the right to require AWA to make additional deposits in respect of price changes arising from the provisions of Article 2.2 above on a similar basis to that specified in Article 2.6.l above. 2.6.3 AWA undertakes that IAE shall receive the full amount of payments falling due under this Article 2.6, without any withholding or deduction whatsoever, subject to those covenants and exceptions set forth in Article 6.5.4 below. 2.6.4 All payments under this Article 2.6 shall be made by cable or telegraphic transfer and shall be deposited not later than the due date of payment with the following bank for the account of IAE: Fleet Bank, National Association 175 Water Street New York, NY 10038-4924 Account No.2-982-00819-9 ABA No. 021200339 2.6.5 For the purpose of this Article 2.6 "payment" shall only be deemed to have been made to the extent cleared or good value funds are received in the numbered IAE bank account specified in sub-Article 2.6.4 above. 2.6.6 [***] 2.6.7 For the purpose of this Article 2.6, the "Estimated Purchase Price" of any of the Purchased Items shall be calculated in accordance with the following formula: [***] ARTICLE III SPARE PARTS PROVISIONS 3.1 INTENT AND TERM. 3.1.1 For as long as AWA owns or operates one or more Aircraft in regular commercial service, IAE shall provide that adequate supplies of Spare Parts are available for sale to AWA under this Contract. In consideration thereof, IAE shall sell to AWA and, except as hereinafter provided, AWA shall buy from IAE AWA requirements of the following Spare Parts: - ---------- [*] indicates Redacted material 7. 11 3.1.1.1 All Spare Parts manufactured pursuant to the detailed design and order of IAE where IAE is the only source from which AWA can purchase such Spare Parts in an unused condition and in quantities sufficient to meet AWA's requirements; and 3.1.1.2 Vendor Parts for which direct supply arrangements between the manufacturers of such Vendor Parts and AWA have not been established. AWA shall notify IAE in writing not less than [***] before scheduled delivery that AWA intends to purchase such Vendor Parts from IAE. 3.1.2 In an emergency, IAE shall sell to AWA Vendor Parts which it is not obliged to sell under this Contract, but which it has in stock or otherwise has reasonably available to it. 3.2 ATA STANDARDS. The parties to this Contract shall comply with the requirements of ATA Specifications 200/2000 and 300, provided that either of the parties shall be entitled to negotiate reasonable changes in those procedures or requirements of the said specifications which, if complied with exactly, would result in an undue operating burden or unnecessary economic penalty. 3.3 USE OF PROCUREMENT DATA. 3.3.1 IAE has furnished AWA with Procurement Data complying with ATA Specification 200/2000 and shall revise the said Procurement Data as a matter of routine thereafter. 3.3.2 Procurement Data shall be used to enable AWA to continue to order Spare Parts to support the Installation Items. 3.4 STOCKING OF SPARE PARTS. Upon request, AWA shall provide IAE with information reasonably required to enable IAE to organize the manufacture and stocking of Spare Parts efficiently. 3.5 LEAD TIMES. 3.5.1 Save as herein provided, replenishment Spare Parts shall be delivered within the Lead Time specified in the IAE Spare Parts Catalog. 3.5.2 If any order for replenishment Spare Parts shall call for a quantity materially in excess of AWA's normal requirements, IAE shall use its best efforts to complete such order, provided however, that IAE shall have the right to notify AWA and IAE may request a special delivery schedule. If AWA confirms that the full quantity ordered is required, delivery of the order shall be effected at delivery dates specified by IAE and the Lead Times provided by this Article shall not apply. - ---------- [*] indicates Redacted material 8. 12 3.5.3 In an emergency, IAE shall use its best efforts to deliver Spare Parts, including certain major Spare Parts referred to in Article 3.5.2 above, within the time limits specified by AWA. The action to be taken on such orders shall be advised as follows within the following time periods from IAE's receipt of notice that a situation described below exists: 3.5.3.1 AOG orders - within [***]; 3.5.3.2 other emergency orders - within [***]; 3.5.3.3 orders for items of which AWA is out-of-stock - within [***]. 3.6 ORDERING PROCEDURE. 3.6.1 Orders for Spare Parts shall be placed by AWA from time to time as may be appropriate. AWA shall give IAE as much notice as possible of any change in its operation, including, but not limited to, changes in maintenance or overhaul arrangements affecting its requirements of Spare Parts, including Vendor Parts. 3.6.2 IAE shall promptly acknowledge receipt of each order for Spare Parts in accordance with ATA Specification 200/2000 procedure. Unless qualified, such acknowledgment, subject to variation in accordance with Article 3.5.3 above, shall constitute an acceptance of the order under the terms of this Contract. 3.6.3 Subject to Article 3.l0.2 below, IAE shall accept "control shipdates" as defined in ATA Specification 200 in orders for Spare Parts provided that such dates allow IAE its applicable Lead Times in making shipment and are not subject to cancellation by AWA at less than twelve (12) calendar months' notice. 3.6.4 If IAE notifies AWA that certain Spare Parts are packed in standard package quantities (hereinafter called "SPQ's") or that a minimum sales quantity (hereinafter called "MSQ") applies, AWA's subsequent orders for such Spare Parts shall be for SPQ's or multiples thereof with a minimum of one MSQ. 3.6.5 Unless AWA shall have specified "Total Quantity Required" on its orders, IAE shall be entitled to consider an order for inexpensive Spare Parts complete if at least [***] of the quantity ordered is delivered. For the purpose of this Article the term "inexpensive" shall mean a price listed in the IAE Spare Parts Catalog at less than [***], but shall be subject to review by IAE from time to time. 3.6.6 AWA shall provide IAE with full shipping instructions applicable to standard replenishment orders for Spare Parts to be placed by AWA. 3.7 MODIFICATIONS TO SPARE PARTS. 3.7.1 IAE shall be entitled to make modifications or changes to the Spare Parts ordered by AWA hereunder. IAE shall promptly inform AWA by means of Procurement Data and Service Bulletins when such modified Spare Parts (or Spare Parts introduced by a repair - ---------- [*] indicates Redacted material 9. 13 scheme) become available for supply hereunder. Notification of such availability shall be given to AWA before delivery. 3.7.2 Modified Spare Parts may be supplied unless the modifications stated in Service Bulletins, in the recommended or optional category, are considered by AWA to be unacceptable and AWA so states in writing to IAE within [***] of the transmittal date of a Service Bulletin, in which case AWA shall be entitled to place a single order for AWA's anticipated total requirement of pre-modified Spare Parts, at a price and delivery schedule to be agreed. 3.7.3 Unless AWA notifies IAE in writing under the provisions of Article 3.7.2 hereof, IAE may supply at the expense of AWA a modification of any Spare Part ordered (including any additional Spare Part needed to ensure interchangeability), provided that the said modification has received the approval of the Certification Authority. The delivery of such Spare Parts shall begin on dates indicated by Service Bulletin. The delivery schedule shall be agreed at the time when orders for modifications are accepted by IAE. 3.7.4 If Spare Parts required for incorporation of a modification are not ordered as a kit, AWA's orders must distinguish them from normal replacement Spare Parts in accordance with ATA Specification 200/2000. 3.8 INSPECTION. 3.8.1 Conformance to the Specification of Installation Items will be assured by IAE through the maintenance of procedures, systems and records approved by the Certification Authority. Conformance documentation will be issued and signed by personnel authorized for such purpose. 3.8.2 Conformance of Non-Installation Items will be assured by IAE conformance documentation. 3.8.3 Upon the issue of conformance documentation in accordance with Articles 3.8.1 or 3.8.2 above, AWA shall be deemed to have accepted the Installation Items and Non-Installation Items and that such Items conform to specification. 3.9 DELIVERY AND PACKING. 3.9.1 IAE shall deliver Spare Parts and Other Supplies ex-works, the IAE point of manufacture. Shipping documents and invoices shall be in accordance with ATA Specification 200. 3.9.2 Upon such delivery, good title to and risk of loss of or damage to the said Spare Parts and Other Supplies shall pass to AWA. 3.9.3 In accordance with ATA Specification 200/2000 requirements, AWA shall advise IAE at time of order of its instructions as to the marking and shipping of the Spare Parts and Other Supplies. - ---------- [*] indicates Redacted material 10. 14 3.9.4 The packaging of Spare Parts shall be in accordance with ATA Specification 300 Category 2 standard and shall be free of charge to AWA. Category 1 standard packaging if required by AWA shall be paid for by AWA. 3.10 PRICES. 3.10.1 Subject to Article 3.5.2 above, prices of all Spare Parts shall be quoted in U.S. Dollars, in the IAE Spare Parts Price Catalog and Procurement Data. Such prices shall represent net unit prices, ex-works the IAE point of manufacture. 3.10.2 Prices applicable to each order placed by AWA hereunder shall be the prices [***] 3.10.3 [***] 3.10.4 On request by AWA, prices of Spare Parts or other materials not included in the Spare Parts Price Catalog shall be quoted within a reasonable time by IAE, not to exceed thirty (30) days. 3.11 PAYMENT. 3.11.1 Payment for all purchases under this Article 3 shall be made by AWA to IAE within thirty (30) days after the date of delivery. 3.11.2 AWA undertakes that IAE shall receive payment in U.S. Dollars of the full amount of payments falling due under this Article 3.11, without any withholding or deduction whatsoever, subject to those covenants and exceptions set forth in Article 6.5.4 below. 3.11.3 All payments under this Article 3.11 shall be made by cable or telegraphic transfer to, and shall be deposited not later than the due date of payment with: Fleet Bank, National Association 175 Water Street New York, NY 10038-4924 Account No. 2-982-00819-9 ABA No. 021200339 3.11.4 For the purpose of this Article 3.11, payment shall only be deemed to have been made to the extent cleared or good value funds are received in the numbered IAE bank account specified in sub-Article 3.11.2 above. - ---------- [*] indicates Redacted material 11. 15 3.12 PURCHASE BY AWA FROM OTHERS. 3.12.1 AWA may purchase from another A320-200 operator Spare Parts, which by virtue of Article 3.1 above are required to be purchased from IAE: 3.12.1.1 [***] 3.12.1.2 [***] 3.12.1.3 [***] 3.12.2 Subject to the conditions specified below, in the following circumstances AWA may obtain from established and approved sources, other than IAE or other A320-200 operators, Spare Parts which by virtue of Article 3.1 above are required to be purchased from IAE: 3.12.2.1 [***]; or 3.12.2.2 [***]; or 3.12.2.3 where IAE identifies a Spare Part as a standard part. AWA's rights under sub-Article 3.12.2 above are subject to AWA being unable to satisfy its requirements for Spare Parts under the provisions of sub-Article 3.12.1 above. 3.12.3 Nothing in this Article 3.12 shall be deemed to extend the obligations of IAE or to diminish the limitations upon such obligations under the Warranties referred to in sub-Articles 4.1 and 4.2 below. 3.12.4 Notwithstanding any extension of the time of delivery in accordance with the provisions of Article 6.1.1 below, AWA shall be entitled to cancel all or part of any order on IAE for Spare Parts which, pursuant to the terms of Articles 3.12.2.1 and 3.12.2.2 are purchased from another source by giving reasonable notice of cancellation of the said order. 3.12.5 In the event that AWA purchases Spare Parts under this Article 3.12, AWA shall give written notice to IAE of the extent of such purchase supported by any other technical information which IAE may reasonably require. 3.13 SPECIAL TOOLS, GROUND EQUIPMENT AND CONSUMABLE STORES. IAE may sell Other Supplies to AWA subject to the terms and conditions of this Contract, but the detailed procedures of this Contract with regard to Procurement Data, prices, - ---------- [*] indicates Redacted material 12. 16 stocking and Lead Time shall not apply. Technical data for special tools and ground equipment shall be in accordance with ATA Specification 101. 3.14 CONFLICT. In the event of any conflict between the provisions of this Contract and the provisions of ATA Specifications 101, 200/2000 and 300, the provisions of this Contract shall prevail. ARTICLE IV WARRANTIES, GUARANTEES AND LIABILITIES 4.1 IAE warrants to AWA that at the time of delivery of the Supplies sold hereunder such Supplies will be free of defects in material and manufacture and will conform to IAE's applicable specifications as stipulated in this Contract (provided however, that any deviation from the applicable specification which in AWA's reasonable business judgment is not material and not substantial will be waived by AWA). Except as otherwise provided herein or in any exhibits or Side Letters hereto, IAE's liability and AWA's remedies under this warranty are limited to [***] 4.2 In addition, IAE grants and AWA accepts the following: 4.2.1 V2500 Engine and Parts Service Policy as set forth in Exhibit E-1 4.2.2 V2500 Nacelle and Parts Service Policy as set forth in Exhibit E-2 4.2.3 V2500 Non-Installation Items Warranty as set forth in Exhibit E-3 4.2.4 V2500 Parts Cost Guarantee as set forth in Exhibit E-4 4.2.5 Reliability Guarantee as set forth in Exhibit E-5 4.2.6 Inflight Shutdown Guarantee as set forth in Exhibit E-6 4.2.7 Delay and Cancellation Guarantee as set forth in Exhibit E-7 4.2.8 Fuel Consumption Retention Guarantee as set forth in Exhibit E-8 - ---------- [*] indicates Redacted material 13. 17 4.2.9 Exhaust Gas Temperature Guarantee as set forth in Exhibit E-9 The Service Policies, Warranties and Guarantees referred to in this Article 4.2 are hereinafter called the "Warranties." The above Service Policies, Warranties and Guarantees together form Exhibit E to this Contract. 4.3 The parties agree that those of the Warranties set out in Exhibit E-1 pursuant to Article 4.2.1 and Exhibit E-2 pursuant to Article 4.2.2, wherein AWA may be referred to as the "Operator", shall also apply to any equipment which falls within the categories of equipment referred to in the Warranties manufactured, supplied or inspected by IAE howsoever and whenever (whether before, on or after the date first above written) acquired by AWA from whatsoever source including but not limited to any V2500 aero engines and any associated equipment therefor, and any parts for such engines and associated equipment which form part of any aircraft acquired from the manufacturer. 4.4 The Warranties are personal to AWA and the obligations of IAE thereunder shall only apply insofar as AWA has acquired and operates the Supplies covered thereunder. Notwithstanding anything to the contrary in Exhibits E-4 through E-9, if AWA subleases any of the Aircraft to a FAA or other government certified commercial air carrier while maintaining ultimate responsibility for maintenance and Warranty administration of the Aircraft, the Warranties will continue to apply so long as the Aircraft are operated under similar or better operating conditions and the other conditions of the Warranties are fulfilled, subject to the terms and conditions of the Warranties. 4.5 AWA shall inform any person to whom it intends to sell, lease, loan or otherwise dispose of any of the Supplies or equipment referred to in Article 4.3 above that such person may obtain from IAE a direct warranty agreement incorporating those of the Warranties set out in Articles 4.2.1 and 4.2.2. AWA shall also use its reasonable endeavors to ensure that such person shall enter into a direct warranty agreement with IAE prior to delivery of any of the Supplies or such equipment to such person. 4.6 IAE and AWA agree that the intent of the Warranties provided in Article 4.2 is to provide specified benefits or remedies to AWA as a result of specified events. It is not the intent however to duplicate benefits or remedies provided to AWA by IAE or another source, e.g., another equipment manufacturer or lessor, as a result of the same event. Therefore, the terms of the Warranties notwithstanding, if the terms of the Warranties should make duplicate benefits available to AWA from IAE or any third party, AWA may elect to receive the benefits under the Warranties or under any other applicable guarantee, sales warranty, service policy or any special benefit of any kind as a result of the same event, but not both. 4.7 AWA accepts that the Warranties granted to AWA under Articles 4.1, 4.2 and 4.3 above together with the express remedies provided to AWA in respect of the Supplies in accordance with this Contract are [***] - ---------- [*] indicates Redacted material 14. 18 [***] 4.8 IAE and AWA agree that this Article 4 has been the subject of discussion and negotiation, is fully understood by the parties and the [***] in this Contract are arrived at in consideration of: 4.8.1 the [***] and 4.8.2 the [***] above. ARTICLE V PRODUCT SUPPORT SERVICES 5.1 IAE will make available to AWA the Product Support Services described in Exhibit D to this Contract. Except when identified in such Exhibit as requiring separate contractual arrangements, such Product Support Services shall be supplied at no additional charge to AWA and subject to the provisions of this Contract. IAE may delegate the performance of product support services to an affiliated company. ARTICLE VI MISCELLANEOUS 6.1 DELAY IN DELIVERY. 6.1.1 If IAE is hindered or prevented from delivering any of the Supplies within the time for delivery specified in this Contract (as such time may be extended pursuant to the provisions of this Contract) by reason of any cause beyond the reasonable control of IAE, the time for delivery shall be extended by a period equal to the period for which delivery shall have been so hindered or prevented, and [***] 6.1.2 If, by reason of any of the causes embraced by Article 6.1.1 above, IAE is hindered or prevented from delivering any goods (which are the same as and include the Supplies except for Purchased Items) to purchasers (including AWA) [***] - ---------- [*] indicates Redacted material 15. 19 [***] 6.1.3 Should IAE inexcusably delay delivery of any item of the Supplies beyond the time for delivery specified in this Contract (as such time may be extended pursuant to the provisions of this Contract), then [***] 6.1.4 The right of AWA to claim damages [***] 6.1.5 Should IAE delay delivery of any item of the Supplies beyond the time for delivery specified in this Contract (as such time may be extended pursuant to the provisions of this Contract) for [***] 6.1.6 Should IAE delay for any reason delivery of any of the Purchased Items beyond the time for delivery specified in this Contract (as such time may be extended pursuant to the provisions of this Contract), [***] 6.2 PATENTS. 6.2.1 IAE shall, subject to the conditions set out in this Article and as the sole liability of IAE, indemnify AWA in respect of any claim arising from and related to the infringement of any patent, copyright, trademark, service mark, trade secret or other property right (together, a "industrial property right") by use of any of the Supplies: - ---------- [*] indicates Redacted material 16. 20 (1) to the extent of [***] thereof in the case of any actual or alleged infringement by any Supply or the use thereof (a) any Swiss, British, Japanese, German or American industrial property right, or (b) any industrial property rights issued under the laws of any other country that is bound by the Convention on International Civil Aviation of 7th December l944 or has in full force and effect industrial property right laws that recognize and give adequate protection to industrial property rights issued under the laws of other countries; [***]; and (2) to the extent of [***] thereof in case of any actual or alleged infringement by any Supply or the use thereof of any industrial property right issued under the laws of any country not covered by (1) above; [***] 6.2.2 AWA will give immediate notice in writing to IAE of any such claim whereupon IAE shall have the right at its own expense to assume the defense of or to dispose of or to settle such claim in its sole discretion, except that no such disposition or settlement that contains an admission of liability shall directly admit liability on behalf of AWA, and AWA will give IAE all reasonable assistance and will not by any act or omission [***] 6.2.3 IAE shall have the right to substitute for any allegedly infringing Supplies substantially equivalent non-infringing supplies otherwise complying with the terms of this Contract. 6.2.4 In the event that the use of the Supplies is enjoined, IAE shall, at its expense and option either: 6.2.4.1 substitute substantially equivalent non-infringing Supplies; 6.2.4.2 procure for AWA the right to continue using the Supplies; or 6.2.4.3 modify the Supplies as to make them non-infringing. 6.2.5 The indemnity contained in Article 6.2.1 above shall [***] - ---------- [*] indicates Redacted material 17. 21 [***] 6.3 CREDIT REIMBURSEMENT. [***] 6.4 NON-DISCLOSURE AND NON-USE. 6.4.1 IAE and AWA each hereby agree for the benefit of each other, that it will treat the terms of this Contract as confidential, and will not without the prior written consent of the other, disclose or cause to be disclosed the terms hereof and any Information received hereunder to any third party other than its attorneys, accountants and professional advisors. The expression "Information" in this Article 6.4.1 includes but is not limited to all oral or written information, know-how, data, reports, drawings and specification, and all provisions of this Contract. 6.4.2 IAE and AWA shall be responsible for the observance of the provisions of Article 6.4.1 above by their respective employees, attorneys, accountants and professional advisors. 6.4.3 The provisions of Article 6.4.1 above for Information shall not apply to any information which is or becomes generally known in the aero engine industry nor shall the provisions of Article 6.4.1 above prevent any necessary disclosure of Information to enable AWA itself to operate, maintain or overhaul Supplies. 6.4.4 With respect to Supplies ordered by AWA for delivery to a destination outside the U.S.A., AWA shall be responsible for obtaining any required authorization including an Export License, Import License, Exchange Permit or any other governmental authorization (collectively referred to herein as "Governmental Authorization") required in connection with the transactions contemplated under this Contract. AWA shall restrict disclosure of all - ---------- [*] indicates Redacted material 18. 22 information and data furnished in connection with receipt of appropriate Governmental Authorization and shall comply with any conditions imposed by such Government Authorization. 6.4.5 In the event that any of the "Information" as described in Article 6.4.1 is required or requested to be disclosed by AWA or IAE by governmental, judicial or regulatory agency order, or as a result of compliance with any law, each of AWA and IAE agrees to limit the disclosure to only those portions of the Information specifically required to be disclosed, and to maintain the confidentiality of as much of the Information as legally possible. 6.4.6 Notwithstanding any of the foregoing, AWA may subcontract administration of Warranties provided hereunder to a third party and disclose to that third party Information necessary to administer the Warranties. AWA will, prior to such disclosure, ensure that the third party has agreed to non-disclosure and non-use provisions substantially similar to this Article 6.4. 6.4.7 Notwithstanding any of the foregoing, [***] 6.5 TAXES. 6.5.1 Subject to Article 6.5.2 below, IAE shall pay all imposts, duties, fees, taxes and other like charges levied by the governments of the United Kingdom, the United States of America, the Federal Republic of Germany, Japan and Italy or any agency thereof in connection with the Supplies prior to their delivery. 6.5.2 Except as stated in Article 6.5.3, all amounts stated to be payable by AWA pursuant to this Contract exclude any value added tax, sales tax or similar taxes. In the event that the supply of goods or services under this Contract is chargeable to any value added tax, sales tax or similar taxes, such tax will be borne by AWA. 6.5.3 [***] Notwithstanding the forgoing, AWA shall not be responsible for any taxes imposed on the income, revenues, gross receipts, capital gains or net worth of IAE or like charges. Furthermore, IAE will be responsible for any interest, penalties or fines imposed upon AWA because of IAE's failure to file any information return after requested in writing by AWA to do so or should any representations made by IAE in this Contract or documents required in Article 6.5.4 prove to be false and misleading. 6.5.4 IAE represents that all amounts to be payable by AWA under this Contract are, at the time of the execution of this Contract and will continue throughout the term of this Contract, to be considered as income effectively connected with IAE's United States trade or business. IAE will furnish to AWA, upon execution of this Contract and every year thereafter, a - ---------- [*] indicates Redacted material 19. 23 completed IRS Form 4224 and W-9, or such other document required by law to certify that the payments are exempt from withholding tax. If for any reason AWA is required by law to withhold tax, the payments required to be made under this Contract to IAE shall be reduced by the amount of such withholding. 6.6 AMENDMENT. This Contract shall not be amended in any way other than by agreement in writing, entered into by the parties hereto after the date of this Contract, which is expressly stated to amend this Contract. 6.7 ASSIGNMENT. Neither party may assign any of its rights or obligations hereunder without the written consent of the other party (except that IAE may assign its rights to receive money hereunder). Any assignment made in violation of this Article 6.7 shall be null and void. 6.8 HEADINGS. The Article headings and the Index do not form a part of this Contract and shall not govern or affect the interpretation of this Contract. 6.9 LAW. This Contract shall be subject to and interpreted and construed in accordance with the laws of the State of New York, United States of America. The parties hereto hereby agree that all actions or proceedings arising out of this Contract shall be litigated in United States District Court for the Southern District of New York. The parties hereto hereby expressly submit and consent in advance to such jurisdiction and venue in any action or proceeding commenced by either party in such jurisdiction, agree that jurisdiction and venue is proper in such court, and hereby waive personal service of the summons and complaint, or other process or papers issued herein and agree that such service of the summons and complaint may be made by registered mail, return receipt requested, addressed to either party, at the address set forth in Article 6.10 hereof. Each party waives any claim that any such jurisdiction, is an inconvenient forum or an improper forum based on lack of venue. The choice of forum set forth herein shall not be deemed to preclude the enforcement by either party of any judgment in any other appropriate jurisdiction. 6.10 NOTICES. All notices and requests required or authorized hereunder shall be given in writing either by personal delivery or by commercial courier or mail or by facsimile transmission to the addresses set forth below. The date upon which any such notice or request is so personally delivered or delivered by commercial courier or mail, or if such notice or request is given by facsimile transmission, the date upon which received unless a facsimile transmission is received outside of business hours, in which case it shall be deemed received on the next succeeding business day, shall be deemed to be the effective date of such notice or request. 20. 24 IAE shall be addressed at: IAE International Aero Engines AG 400 Main Street M/S 121-10 East Hartford, Connecticut 06108 Fax: 860-565-5220 Attention: Business Director & Chief Legal Officer and AWA shall be addressed at: America West Airlines, Inc. Phoenix Sky Harbor International Airport 4000 East Sky Harbor Boulevard Phoenix, Arizona 85034 Fax: (602) 693-5904 Attention: Senior Vice President - Legal Affairs or at such other address or to such other person as the party receiving the notice or request may designate from time to time. 6.11 EXCLUSION OF OTHER PROVISIONS AND PREVIOUS UNDERSTANDINGS. 6.11.1 This Contract (including all Exhibits hereto and as may be amended in writing by the parties) contains the only provisions between the parties governing the sale and purchase of the Supplies (excepting any obligations to finance Aircraft) and shall apply to the exclusion of any other provisions on or attached to or otherwise forming part of any order form of AWA, or any acknowledgment or acceptance by IAE, or of any other document which may be issued by either party relating to the sale and purchase of the Supplies. 6.11.2 The parties agree that neither of them have placed any reliance whatsoever on any representations, agreements, statements or understandings made prior to the signature of this Contract, whether orally or in writing, relating to the Supplies, other than those expressly incorporated in this Contract, which has been negotiated on the basis that its provisions represent their entire agreement relating to the Supplies and shall supersede all such representations, agreements, statements and understandings. 21. 25 IN WITNESS WHEREOF the parties hereto have caused this Contract to be signed on their behalf by the hands of their authorized officers the day and year first before written: IAE INTERNATIONAL AERO ENGINES AG AMERICA WEST AIRLINES, INC. By: /s/ Barry Eccleston By: /s/ Ronald A. Armini -------------------- ----------------------- Name: Barry Eccleston Name: Ronald A. Armini ------------------ --------------------- Title: President & CEO Title: Sr. V.P. Operations ----------------- -------------------- 22. 26 EXHIBIT A AIRCRAFT DELIVERY SCHEDULE FIRM A319 AIRCRAFT: TWENTY-TWO (22) A319 AIRCRAFT DELIVERY DATE A319 AIRCRAFT DELIVERY DATE One (1) October 1998 Two (2) November 2000 Two (2) December 1998 One (1) December 2000 Two (2) July 1999 One (1) January 2001 One (1) August 1999 One (1) March 2001 One (1) September 1999 Two (2) April 2001 Two (2) November 1999 One (1) May 2001 One (1) December 1999 One (1) July 2001 One (1) September 2000 One (1) August 2001 One (1) October 2000 FIRM A320 AIRCRAFT: SEVEN (7) A320 AIRCRAFT DELIVERY DATE A320 AIRCRAFT DELIVERY DATE One (1) February 1999 One (1) February 2000 One (1) May 1999 One (1) May 2000 One (1) August 1999 One (1) August 2000 One (1) November 1999 RECONFIRMED A320 AIRCRAFT: TWELVE (12) One (1) October 2000 One (1) August 2001 One (1) November 2000 One (1) September 2001 One (1) January 2001 One (1) October 2001 One (1) March 2001 One (1) November 2001 One (1) May 2001 One (1) January 2002 One (1) July 2001 One (1) February 2002 OPTION AIRCRAFT (40): Any combination of eight (8) A319, A320, and A321 aircraft for delivery each calendar year between 1 January 2001 and to 31 December 2005. 1. 27 EXHIBIT B PURCHASED ITEMS, PRICE, ESCALATION FORMULA AND DELIVERY SCHEDULE BASIC CONTRACT PRICE U.S. DOLLARS (JULY 1998) PURCHASED ITEM NO. QTY. DELIVERY DATE 1. V2527-A5 spare Engine 4,210,000 1 February 1998 2. V2527-A5 spare Engine 4,210,000 1 December 1998 3. V2527-A5 spare Engine 4,210,000 1 August 1999 4. V2527-A5 spare Engine 4,210,000 1 November 1999 5. V2527-A5 spare Engine 4,210,000 1 January 2000 6. V2527-A5 spare Engine 4,210,000 1 November 2000 7. V2524-A5 spare Engine 3,675,000 1 December 2000 8. V2524-A5 spare Engine 3,675,000 1 March 2001 9. V2524-A5 spare Engine 3,675,000 1 June 2001 Additional spare Engines shall be scheduled for delivery pursuant to Article 2.1.3 of the Contract. ESCALATION FORMULA 1. Any Basic Contract Price or other Sum expressed to be subject to escalation from a Base Month to a month of delivery or other date of determination will be subject to adjustment in accordance with the following formula: P = Pb ( 0.60 L + 0.30 M + 0.10 E ) Lo Mo Eo Where: P = The Invoiced Purchase Price or Escalated Sum rounded to the nearest dollar. 1. 28 Pb = The Basic Contract Price or other Sum. Lo = The "Average Hourly Earnings of Aircraft Engine and Engine Parts Production Workers" SIC Code 3724 published by the Bureau of Labor Statistics in the U.S. Department of Labor for the month preceding the Base Month by four months. L = The "Average Hourly Earnings of Aircraft Engine and Engine Parts Production Workers" SIC Code 3724 for the month preceding the month of delivery or other date of determination by four months. Mo = The "Producer Price Index, Code 10, For Metals and Metal Products" published by the Bureau of Labor Statistics in the U.S. Department of Labor for the month preceding the Base Month by four months. M = The "Producer Price Index, Code 10, For Metals and Metal Products" for the month preceding the month of delivery or other date of determination by four months. Eo = The "Producer Price Index, Code 5, For Fuel and Related Products and Power" published by the Bureau of Labor Statistics in the U.S. Department of Labor for the month preceding the Base Month by four months. E = The "Producer Price Index, Code 5, For Fuel and Related Products and Power" for the month preceding the month of delivery or other date of determination by four months. 2. The values of the factors 0.60 L and 0.30 M and 0.10 E L M E respectively, shall be determined to the nearest fourth decimal place. If the fifth decimal is five or more, the fourth decimal place shall be raised to the next higher number. 3. If the U.S. Department of Labor substantially revises the methodology of calculation of the indexes referred to in this Exhibit B or discontinues any of these indexes, IAE will advise AWA of the discontinuation. After consultation with AWA, IAE will apply a substitute for the revised or discontinued index, such substitute index to lead in application to the same adjustment result, insofar as possible, as would have been achieved by continuing the use of the original index as it may have fluctuated had it not been revised or discontinued. Appropriate revision of the formula will be made to accomplish this result. Should AWA disagree with IAE's selection, AWA agrees to make payments to IAE for all but the sum related to the use of the new indexes. Both parties agree to negotiate in good faith to substitute indexes. 4. The Basic Contract prices contained in this Exhibit B are subject to escalation from a Base Month of July 1988 to the month of delivery using Lo, Mo and Eo values for March 1988. 2. 29 5. If the application of the formula contained in this Exhibit B results in a Purchase Price which is lower than the Basic Contract Price, the Basic Contract Price will be deemed to be the Purchase Price for such Supplies. 3. 30 EXHIBIT C CONTRACT SPECIFICATIONS EXHIBIT C-1 V2500 TURBOFAN ENGINE MODEL SPECIFICATION Commercial Type Certificate To Be Obtained Model V2524 - A5 by IAE from FAA Spec. No. IAE S24A5 SEA LEVEL RATINGS (With Ideal Inlet and Exhaust Systems - See GENERAL NOTES) Net Thrust lb --------------------------------- Takeoff Rating (Static) 23,500 Maximum Continuous Rating 21,400 DESCRIPTION Type - An axial flow, two spool, turbofan engine with fan and multistage compressors driven by multistage reaction turbines and designed for operation with fixed area mixed exhaust system. Installation Drawing No. TBD. The Engine Installation Drawing shows the Engine envelope and provides dimensions and data for the engine installation interfaces. FUEL AND OIL Fuel - Specification MIL-T-5624, MIL-T-83133 or ASTM-D-1655 Oil - Specification MIL-L-23699 Type II Oil Consumption, Maximum (As measured over a 10-Hour Period) 0.15 US gal/hr STANDARD EQUIPMENT INCLUDED IN ENGINE PRICE FUEL SYSTEM AND CONTROL SYSTEM COMPRISING: LP/HP Fuel Pump, Fuel Filter Element, Fuel Temperature Sensor, Fuel Diverter/Back to Tank Valve, Fuel Distribution Valve, P2T2 Relay Box, Electronic Engine Control, Dedicated Generator, P4.9 Sensors and Manifold, Fuel Metering Unit, Fuel Supply Pipe. IGNITION SYSTEM COMPRISING: Ignition Exciter, Igniter Plug, Ignition Lead (2 each). 1. 31 AIR SYSTEM COMPRISING: No. 4 Bearing Compartment Heat Exchanger, HP/LP Active Clearance Control Valve, Active Clearance Control Valve Actuator, LP Compressor Bleed Valve Master Actuator, LP Compressor Bleed Valve Slave Actuator, Variable Stator Vane Actuator, HP Compressor Bleed Valves, HP Compressor Bleed Valve Solenoids. ENGINE INDICATING SYSTEM COMPRISING: Exhaust Gas Temperature (EGT) Thermocouples, EGT Harness and Junction Box. PRELIMINARY OIL SYSTEM COMPRISING: Oil Tank, Air Cooled Oil Cooler, Fuel Cooled Oil Cooler, Pressure Oil Filter Element, Air Cooled Oil Cooler Modulating Valve, Scavenge Oil Filter Housing Assembly and Element, No. 4 Bearing Compartment Scavenge Valve, No. 4 Bearing Scavenge Pressure Transducer, IDG Fuel Cooled Oil Cooler. MISCELLANEOUS: Electrical EEC Harnesses - Fan and Core, Nose Spinner, PART - Drains, If Intertwined With Engine parts, Airframe Accessory Mounting Pads and Drives, PART - - Brackets on Working Flanges for attachment of Aircraft Equipment and EBU, PART - - IDG Piping, where Intertwined with Engine Parts. ADDITIONAL EQUIPMENT Available at Increased Price Shipping Stand Storage Bag Condition Monitoring Instrumentation Items of ADDITIONAL EQUIPMENT should be ordered at the time of engine procurement in order to assure availability of this equipment at the time of engine shipment. GENERAL NOTES The specified Sea Level Static Ratings are ideal and are based on US Standard Atmosphere 1962 conditions, the specified fuel and oil, an ideal inlet pressure recovery, no fan or compressor air bleed or load on accessory drives, a mixed exhaust system having no internal pressure losses and with a mixed primary nozzle velocity coefficient equal to 1.0. Takeoff rating is the maximum thrust certified for takeoff operation. The specified takeoff thrust is available at and below ISA + 56oF (+31oC) ambient temperature. 2. 32 Maximum Continuous Rating is the maximum thrust certified for continuous operation. The specified thrust is available at and below ISA + 18oF (+10oC) ambient temperature. Maximum Climb Rating is the maximum thrust approved for normal climb operation. Maximum Cruise Rating is the maximum thrust approved for normal cruise operation. Unless otherwise specified, engines will be supplied with the STANDARD EQUIPMENT listed. The Electrical Power Generator Fuel Cooled Oil Cooler and any drains, brackets and Electrical Power Generator piping, and other external hardware supplied with the Engine are certified by the FAA-NER to FAR Part 33 requirements. EXHIBIT C-2 V2500 TURBOFAN ENGINE MODEL SPECIFICATION FAA Commercial Type Certificate E40NE Model V2527 - A5 Spec. No. IAE S27A5 SEA LEVEL RATINGS (With Ideal Inlet and Exhaust Systems - See GENERAL NOTES) Net Thrust lb ------------------------------- Takeoff Rating (Static) 24,800 Takeoff Rating (at 0.2 Mn) 22,020 Maximum Continuous Rating 22,240 DESCRIPTION Type - An axial flow, two spool, turbofan engine with fan and multistage compressors driven by multistage reaction turbines and designed for operation with fixed area mixed exhaust system. Installation Drawing No. 4W6199. The Engine Installation Drawing shows the Engine envelope and provides dimensions and data for the engine installation interfaces. FUEL AND OIL Fuel - Specification MIL-T-5624, MIL-T-83133 or ASTM-D-1655 Oil - Specification MIL-L-23699 Type II Oil Consumption, Maximum (As measured over a 10-Hour Period) 0.15 US gal/hr 3. 33 STANDARD EQUIPMENT Included in Engine Price (Partial List Comprised of Major Items) FUEL SYSTEM AND CONTROL SYSTEM: LP/HP Fuel Pump, Fuel Filter Element, Fuel Temperature Sensor, Fuel Diverter/Back to Tank Valve, Fuel Distribution Valve, P2T2 Relay Box, Electronic Engine Control (EEC), Dedicated Generator, P4.9 Sensors and Manifold, Fuel Metering Unit, Fuel Supply Pipe, Fuel Nozzles. IGNITION SYSTEM: Ignition Exciter, Igniter Plug, Ignition Lead (2 each) (without power source). AIR SYSTEM: No. 4 Bearing Compartment Heat Exchanger, HP/LP Active Clearance Control Valve, Active Clearance Control Valve Actuator, LP Compressor Bleed Valve Master Actuator, LP Compressor Bleed Valve Slave Actuator, Variable Stator Vane Actuator, HP Compressor Bleed Valves, HP Compressor Bleed Valve Solenoids, HPT Cooling Valve and Solenoid. ENGINE INDICATING SYSTEM: Exhaust Gas Temperature (EGT) Thermocouples, EGT Harness and Junction Box, No. 4 Bearing Scavenge Pressure Transducer, Fuel Filter and Scavenge Differential Pressure Switches, Scavenge Oil Temperature Sensor, Oil Pressure Transmitter, Low Oil Pressure Switch, Vibration Transducers and Harness, Oil Quantity Transmitter, Magnetic Chip Detectors, Fuel Flowmeter. OIL SYSTEM: Oil Tank, Air Cooled Oil Cooler, Fuel Cooled Oil Cooler, Pressure Oil Filter Element, Air Cooled Oil Cooler Modulating Valve, Scavenge Oil Filter Housing Assembly and Element, No. 4 Bearing Compartment Scavenge Valve, Electrical Power Generator Fuel Cooled Oil Cooler. MISCELLANEOUS: EEC Harnesses - Fan and Core, Ignition Supply Harness, General Service Harness, Nose Spinner, Core Fuel Drains, Airframe Accessory Mounting Pads and Drives, Various Brackets on working flanges for attachment of Nacelle and Aircraft Equipment Electrical Power Generator Piping to Cooler, P2T2 Probe. 4. 34 ADDITIONAL EQUIPMENT Available at Increased Price Shipping Stand Engine Condition Monitoring Instrumentation Storage Bag Items of ADDITIONAL EQUIPMENT should be ordered at the time of Engine procurement in order to assure availability of this equipment at the time of Engine shipment. GENERAL NOTES The specified Sea Level Static Ratings are ideal and are based on US Standard Atmosphere 1962 conditions, the specified fuel and oil, an ideal inlet pressure recovery, no fan or compressor air bleed or load on accessory drives, a mixed exhaust system having no internal pressure losses and with a mixed primary nozzle velocity coefficient equal to 1.0. Takeoff rating is the maximum thrust certified for takeoff operation. The specified takeoff thrust is available at and below ISA + 56oF (+31oC) ambient temperature. Maximum Continuous Rating is the maximum thrust certified for continuous operation. The specified thrust is available at and below ISA + 18oF (+10oC) ambient temperature. Maximum Climb Rating is the maximum thrust approved for normal climb operation. Maximum Cruise Rating is the maximum thrust approved for normal cruise operation. Unless otherwise specified, engines will be supplied with the STANDARD EQUIPMENT listed. The Electrical Power Generator Fuel Cooled Oil Cooler and any drains, brackets and Electrical Power Generator piping, and other external hardware supplied with the Engine are certified by the FAA-NER to FAR Part 33 requirements. EXHIBIT C-3 V2500 TURBOFAN ENGINE MODEL SPECIFICATION FAA Commercial Type Certificate E40NE Model V2533 - A5 Spec. No. IAE S33A5 5. 35 SEA LEVEL STATIC RATINGS (With Ideal Inlet and Exhaust Systems - See GENERAL NOTES) Net Thrust lb -------------------------------- Takeoff Rating 31,400 Maximum Continuous Rating 26,950 DESCRIPTION Type - An axial flow, two spool, turbofan engine with fan and multistage compressors driven by multistage reaction turbines and designed for operation with fixed area mixed exhaust system. Installation Drawing No. 4W6199. The Engine Installation Drawing shows the Engine envelope and provides dimensions and data for the engine installation interfaces. FUEL AND OIL Fuel - Specification MIL-T-5624, MIL-T-83133 or ASTM-D-1655 Oil - Specification MIL-L-23699 Type II Oil Consumption, Maximum (As measured over a 10-Hour Period) 0.15 US gal/hr STANDARD EQUIPMENT Included in Engine Price (Partial List Comprised of Major Items) FUEL SYSTEM AND CONTROL SYSTEM: LP/HP Fuel Pump, Fuel Filter Element, Fuel Temperature Sensor, Fuel Diverter/Back to Tank Valve, Fuel Distribution Valve, P2T2 Relay Box, Electronic Engine Control (EEC), Dedicated Generator, P4.9 Sensors and Manifold, Fuel Metering Unit, Fuel Supply Pipe, Fuel Nozzles. IGNITION SYSTEM: Ignition Exciter, Igniter Plug, Ignition Lead (2 each) (without power source). AIR SYSTEM: No. 4 Bearing Compartment Heat Exchanger, HP/LP Active Clearance Control Valve, Active Clearance Control Valve Actuator, LP Compressor Bleed Valve Master Actuator, LP Compressor Bleed Valve Slave Actuator, Variable Stator Vane Actuator, HP Compressor Bleed Valves, HP Compressor Bleed Valve Solenoids, HPT Cooling Valve and Solenoid. 6. 36 ENGINE INDICATING SYSTEM: Exhaust Gas Temperature (EGT) Thermocouples, EGT Harness and Junction Box, No. 4 Bearing Scavenge Pressure Transducer, Fuel Filter and Scavenge Differential Pressure Switches, Scavenge Oil Temperature Sensor, Oil Pressure Transmitter, Low Oil Pressure Switch, Vibration Transducers and Harness, Oil Quantity Transmitter, Magnetic Chip Detectors, Fuel Flowmeter. OIL SYSTEM: Oil Tank, Air Cooled Oil Cooler, Fuel Cooled Oil Cooler, Pressure Oil Filter Element, Air Cooled Oil Cooler Modulating Valve, Scavenge Oil Filter Housing Assembly and Element, No. 4 Bearing Compartment Scavenge Valve, Electrical Power Generator Fuel Cooled Oil Cooler. MISCELLANEOUS: EEC Harnesses - Fan and Core, Ignition Supply Harness, General Service Harness, Nose Spinner, Core Fuel Drains, Airframe Accessory Mounting Pads and Drives, Various Brackets on working flanges for attachment of Nacelle and Aircraft Equipment Electrical Power Generator Piping to Cooler, P2T2 Probe. ADDITIONAL EQUIPMENT Available at Increased Price Storage Bag Shipping Stand Engine Condition Monitoring Instrumentation Items of ADDITIONAL EQUIPMENT should be ordered at the time of Engine procurement in order to assure availability of this equipment at the time of Engine shipment. GENERAL NOTES The specified Sea Level Static Ratings are ideal and are based on US Standard Atmosphere 1962 conditions, the specified fuel and oil, an ideal inlet pressure recovery, no fan or compressor air bleed or load on accessory drives, a mixed exhaust system having no internal pressure losses and with a mixed primary nozzle velocity coefficient equal to 1.0. Takeoff rating is the maximum thrust certified for takeoff operation. The specified takeoff thrust is available at and below ISA + 27oF (15oC) ambient temperature. Maximum Continuous Rating is the maximum thrust certified for continuous operation. The specified thrust is available at and below ISA + 18oF (10oC) ambient temperature. Maximum Climb Rating is the maximum thrust approved for normal climb operation. Maximum Cruise Rating is the maximum thrust approved for normal cruise operation. 7. 37 Unless otherwise specified, engines will be supplied with the STANDARD EQUIPMENT listed. The Electrical Power Generator Fuel Cooled Oil Cooler and any drains, brackets and Electrical Power Generator piping, and other external hardware supplied with the Engine are certified by the FAA-NER to FAR Part 33 requirements. 8. 38 EXHIBIT D PRODUCT SUPPORT 1. 39 PRODUCT SUPPORT FOR THE V2500 ENGINE IAE INTERNATIONAL AERO ENGINES AG 2. 40 EXHIBIT D PRODUCT SUPPORT FOR THE V2500 ENGINE IAE INTERNATIONAL AERO ENGINES AG I. INTRODUCTION International Aero Engines AG (IAE) will make the following support personnel and services available to the V2500 engine customer: Flight Operations Engineering, Customer Performance Engineering, Field Representatives, Customer Maintenance Support, Product Support Engineering, Powerplant Maintenance Engineering, Field Operations Data Analysis, Human Engineering, Repair Services, Warranty Administration, Maintenance Facilities Planning, Tooling and Support Equipment Services, Product Support Technical Publications, Customer Training, Spare Parts Support and Engine Overhaul and Repair Service Centers. To make these support services readily available to you, our customer, in the most efficient manner the Customer Support Group has been established and assigned primary responsibility within IAE for customer contact and communications. A Manager, Customer Support Engineer is assigned to maintain direct liaison with each individual Customer. A description of the various product support services available to each customer follows. IAE reserves the right to withdraw or modify the services described herein at any time at its sole discretion. No such withdrawal or modification shall diminish the level of services and support which the Customer may be entitled to receive with respect to V2500 engines for which an acceptable order has been placed with IAE or with respect to aircraft with installed V2500 engines for which a firm and unconditional order has been placed with the aircraft manufacturer, prior to the announcement of any such withdrawal or modification. II. CUSTOMER SUPPORT GROUP CUSTOMER SUPPORT MANAGER The Customer Support Manager provides a direct liaison between the airline customer's Engineering, Maintenance, Logistics and Financial organizations and the corresponding functions within IAE. The Customer Support Manager assigned to each airline is responsible for coordinating and monitoring the effort of the Product Support Department functional organization to achieve timely and responsive support for the airline. The Customer Support Manager provides the following specific services to the airline customer: - Technical recommendations and information. - Refurbishment, Modification and Conversion program planning assistance. 3. 41 - Coordination of customer repair, maintenance and logistics requirements with the appropriate Product Support functional groups. - Assist with preparation of all engine warranty/service policy claims as may be requested by AWA. The Customer Support Manager will represent the airline customer in IAE internal discussions to ensure that the best interests of the customer and IAE are considered when making recommendations to initiate a program, change or improvement in the V2500 engine. FIELD REPRESENTATIVES IAE Field Representatives provide the following services to the airline customer: - 24 Hour Support - Maintenance Action Recommendations - Daily Reporting on Engine Technical Problems - On-The-Job Training to include hands-on maintenance task as requested by AWA - Service Policy Preparation Assistance - Prompt Communication with IAE In addition to the two full time dedicated IAE Field Representatives already identified, IAE will work with AWA, once AWA outstation requirements are identified, to establish a Customer Support Plan to provide adequate introductory coverage for the V2500. ENGINE MAINTENANCE SUPPORT SERVICE Field Representatives assist airline customer personnel in the necessary preparation for engine operation and maintenance. The Representative, teamed with Customer Support Manager will work closely with the airplane manufacturer's field support team particularly during the initial period of aircraft operation. Field Representatives are in frequent contact with the IAE offices on technical matters. Information and guidance received from the home office is transmitted promptly to the airline which allows the airline to share in all related industry experience. The practice permits immediate use of the most effective procedures and avoidance of unsuccessful techniques. The IAE office contact ensures that IAE Field Representatives know, in detail, the latest and most effective engine maintenance procedures and equipment being used for maintenance and overhaul of V2500 engines. They offer technical information and 4. 42 recommendations to airlines personnel on all aspects of maintenance, repair, assembly, balancing, testing, and spare parts support of IAE. ON-THE-JOB TRAINING Field Representatives will conduct on-the-job training for the airline's maintenance personnel. This training continues until the maintenance personnel have achieved the necessary level of proficiency. Training of new maintenance personnel will be conducted on a continuing basis. SERVICE POLICY ADMINISTRATION Field Representatives will provide administrative and technical assistance in the application of the IAE Engine and Parts Service Policy to ensure expeditious and accurate processing of airline customer claims. CUSTOMER TRAINING IAE Customer Training offers airline customers the following support: - Technical Training at Purpose Built Facilities - On-site Technical Training - Technical Training Consulting Service - Training Aids and Materials TRAINING PROGRAM The IAE Customer Training Center will have an experienced full-time training staff which conducts formal training programs for airline customers' maintenance, training and engineering personnel. The standard training programs are designed to prepare customer personnel, prior to the delivery of the first aircraft, to operate and maintain the installed engines. Standard courses in engine operation, line maintenance, heavy maintenance, performance and trouble-shooting are also available throughout the production life of the engine. The courses utilize the latest teaching technology, training aids and student handouts. Customer Training will coordinate the scheduling of specific courses as required. The following is the curriculum of standard courses for IAE. On-site technical training, technical training consulting services and customized courses may be provided upon customer request and subject to separate contractual arrangements. MAINTENANCE AND PROVISIONING PLANNER'S COURSE This two day course is designed specifically for experienced gas turbine personnel who will be responsible for planning and provisioning for maintenance on the V2500 engine. Discussions are concentrated in the following subject areas: 5. 43 - Engine construction features internal and external hardware. - Engine systems operation, major components accessibility for removal/replacement. - Maintenance concepts, repair and replacement requirements and special tooling. The course is normally conducted in conjunction with two to three days of consultations with IAE Spare Parts personnel or Support Equipment Personnel to acquaint the customer with that Group's procedures and services including computerized services. STAFF ORIENTATION This course is designed to familiarize key staff, supervisory and operations planning personnel with engine construction features, fundamental systems operation, performance characteristics, operational procedures and general maintenance practices. FLIGHT CREW FAMILIARIZATION This course is designed to provide flight crew personnel with classroom familiarization training in the following subject areas: - Basic Engine Design Features - Engine Systems and Airframe Interface - Ground Operational Procedures - Malperformance Analysis Concepts V2500 GENERAL FAMILIARIZATION This course is designed to provide training for customer maintenance planning, engineering and instructor personnel in the following subject areas: - Construction Features - Applied Performance - Engine Systems - Installed/Uninstalled Operation - Maintenance Concepts Note: This course contains no "hands-on" training. 6. 44 ENGINE TROUBLESHOOTING This course designed to develop the skills of V2500 experienced personnel in detecting, analyzing and correcting malfunctions in the V2500 engine systems and the engine/airframe interfaces. Classroom and shop training are provided in the following subject areas: - Troubleshooting Philosophy - Systems Review - Systems Troubleshooting - Systems/Component Isolation Procedures - Performance Parameter Analysis - Practical Application of Troubleshooting Procedures V2500 FAMILIARIZATION AND NON-FLIGHT PERFORMANCE This course is designed specifically for power plant engineering, condition monitoring and instructor personnel. Performance characteristics are studied in-depth with consideration given to basic performance losses attributable to module deterioration. It does not include specific, in-depth, module performance analysis. LINE MAINTENANCE AND TROUBLESHOOTING This course is designed for key line maintenance and troubleshooting personnel who have not received previous formal training on the V2500 engine. The classroom phases provide the student with the information essential for timely completion of line maintenance activities. The training focuses on the following subject areas: - Engine Description - Systems operation - Applied Performance - Ground Operations - Troubleshooting Procedures - Practical Phase Line Maintenance Tasks V2500 FAMILIARIZATION AND MODULAR MAINTENANCE Provides experienced heavy maintenance personnel with engine modular disassembly and assembly training. The training is concentrated in the following subject areas: 7. 45 - Engine Description Overview - Engine Systems Overview - Heavy Maintenance Tasks* * Course duration and "hands-on" coverage are contingent on the availability of an engine and required tooling. III. CUSTOMER SERVICES The Customer Services Group is dedicated to providing prompt and accurate assistance to you, our V2500 airline customer. The Customer Services Group provides the following categories of Assistance and Support to the V2500 airline customer: - Engine Warranty Services - Maintenance Center Support - Maintenance Facilities Planning Service - Tooling and Support Equipment Services - Product Support Technical Publications - Lease Engine Program Support ENGINE WARRANTY SERVICES Engine Warranty Services will provide the following support for the V2500 engine airline customer: - Prompt administration of claims concerning Engine Warranty, Service Policy, other support programs and Guarantee Plans. - Investigation of part condition and part failure. - Material provisioning administration for Controlled Service Use programs and other material support. PROMPT ADMINISTRATION Each airline customer is assigned a Warranty Analyst whose job is to provide individual attention and obtain prompt and effective settlements of Warranty and Service Policy claims. A typical claim properly submitted is generally settled, including issuance of applicable credit memo, within thirty days. Experience generated by much of the data derived from such claims often enables IAE to monitor trends in operating experience and to address and often eliminate potential problems. 8. 46 INVESTIGATION AND REPORTS Parts returned to IAE pursuant to the terms of the Service Policy are investigated in appropriate detail to analyze and evaluate part condition and cause of part failure. A report of findings is prepared and forwarded to the airline customer and to all IAE departments involved. In the case of vendor parts, the vendor is promptly informed. Reports often include recommendations to preclude repetition of the problem. CONTROLLED SERVICE USE PROGRAMS AND MATERIAL SUPPORT IAE shall assume responsibility for the planning, sourcing, scheduling and delivery of Controlled Service Use material, warranty replacement material, service campaign, material and program support material subject to the terms of special contracts with customers. Urgent customer shipments, both inbound and outbound, are monitored, traced, routed and expedited as required. The receipt and movement of customer owned material returned to IAE is carefully controlled, thus assuring an accurate accounting at all times. MAINTENANCE CENTER SUPPORT IAE will arrange for the establishment of Maintenance Centers which will be available to accomplish repairs, modifications and conversions, as well as the complete overhaul of the V2500 engine subject to IAE's standard terms and conditions for such work. Through the use of the IAE established Maintenance Centers and its capabilities, an operator can minimize or eliminate the need for investment in engine support areas depending on the level of maintenance he elects the Maintenance Center to perform. Savings in specific engine support areas, such as spare parts inventory, maintenance and test tooling, support equipment and test facilities, can be demonstrated. Use of the Maintenance Center can also minimize the need for off-wing maintenance and test personnel with their associated overhead. MAINTENANCE FACILITIES PLANNING SERVICE Maintenance Facilities Planning Service offers the following support to IAE customer: - General Maintenance Facility Planning Publications - Customized Facility Plans - Maintenance Facility and Test Cell Planning Consultation Services Maintenance Facilities Planning Service provides general and customized facility planning data and consultation services. Facility Planning Manuals for the V2500 engine will present the maintenance tasks, facility equipment and typical departments floor plans showing arrangement of equipment required to accomplish the tasks for all levels of maintenance. The Facility Equipment Manual is a catalogue of standard facility equipment such as lathes, process tanks, hoists, cranes, etc., which is suitable for use in the maintenance and testing of IAE engines. 9. 47 Customized facility planning services and consulting services are offered subject to separate contractual arrangements. Customized facility plans are developed to meet the requirements of customers' specific fleet sizes, activities and growth plans. The plans identify floor space, facility equipment, utilities and manpower requirements. on-site surveys are conducted as a part of customized plan development to determine the adaptability of existing facilities and equipment for the desired maintenance program. These plans provide floor plan layouts to show recommended locations for work stations, major equipment, marshaling and storage areas, workflow patterns, and structural and utility requirements to accommodate all the engine models that are maintained in the customer's shop. The Maintenance Facilities Planning Service also provides consultant services which are specifically related to the development of engine test cells, and the adaptation of existing maintenance facilities to accommodate expanding production requirements and/or new or additional IAE models. TOOLING AND SUPPORT EQUIPMENT SERVICES The Tooling and Support Equipment Services Group assists the customer by providing the following services: - Support Equipment Manufacturing/Procurement Documentation - Engine Accessory Test Equipment and Engine Transportation Equipment Specifications - Support Equipment Logistics Planning Assistance SUPPORT EQUIPMENT DOCUMENTATION The tooling and Support Equipment Services Group designs the special support equipment required to disassemble, assemble, inspect, repair and test IAE engines. Special support equipment design drawings and Support Equipment Master Data Sheets, which describe how to use the support equipment, are supplied to customers in the form of 35mm aperture cards. Support equipment designs are kept current with engine growth, and tool Bulletins are issued to customers as part of continuing configuration management service. Updated Design and Master Data Sheets Aperture Cards and Tool Bulletins are periodically distributed to all IAE customers. ENGINE ACCESSORY TEST EQUIPMENT AND ENGINE TRANSPORTATION EQUIPMENT REQUIREMENTS Engine accessory test equipment and engine transportation equipment general requirements and specifications are defined and made available to IAE customers. If requested, the Tooling and Support Equipment Group will assist customers in the definition of engine accessory test and engine transportation equipment required for specific IAE needs. 10. 48 SUPPORT EQUIPMENT LOGISTICS PLANNING ASSISTANCE The Tooling and Support Equipment Group will provide, at the customer's request, special support equipment lists which reflect the customer's unique requirements such as mix of engine models and desired level of maintenance to aid in support equipment requirements planning. PRODUCT SUPPORT TECHNICAL PUBLICATIONS IAE and its subcontractors provide the required publications and maintenance information as described below to support the maintenance and modification requirements of the airline customer. The publications are prepared in general accordance with Air Transport Association of America (ATA) Specification No. 100 and will be available to the airline customer prior to the delivery of the first aircraft. Customization services and media options will be available for procurement at established prices. ON-WING MAINTENANCE DATA IAE supplies the airplane manufacturer with all the necessary information required to perform "On-Aircraft" engine maintenance, troubleshooting, and servicing. This information is developed through close coordination between the airplane manufacturer and IAE and is integrated by the airplane manufacturer into his maintenance publications. TECHNICAL PUBLICATIONS Listed and described below are the publications that will be provided to support the airline customer's maintenance program: ENGINE MANUAL The Engine Manual is a document which will be structured in accordance with ATA 100 section 2-13-0 with JEMTOSS applied in accordance with section 2-13-14. Potential customer applications will be applied. The manual will provide in one place the technical data requirements for information needed to maintain the engine and the maximum potential number of parts that could, regardless of design responsibility, remain with the engine when it is removed from the airplane. Additionally the manual shall include coverage of interrelated parts (e.g. thrust reverser, cowlings, mounts, etc.) that whilst they can stay with the airplane when the engine is removed can be removed for maintenance purpose in lieu of individual component maintenance manuals. Customized Engine Manuals can be prepared to incorporate customer originated material related to data or procedures originated by or peculiar to a specific IAE customer. Such customized Manuals are provided by separate contractual arrangements. Customer material authorized by the appropriate Airworthiness Authorities can be incorporated into customized Manuals and will be identified in the margin by the customer's initials. 11. 49 STANDARD PRACTICES MANUAL The Standard Practices Manual supplements the Engine Manual by providing, in a single document, all IAE recommended or approved general procedures covering general torques, riveting, lockwiring, cleaning policy, inspection policy standard repairs, etc., and marking of parts. ILLUSTRATED PARTS CATALOG The Illustrated Parts Catalog will be structured in accordance with ATA 2-14-0 and is a document which is used in conjunction with the Engine Manual for the identification and requisitioning of parts and assemblies. Its ATA structure is to be compatible with the Engine Manual Structure. Additionally the manual shall include coverage of interrelated parts (e.g. thrust reverser, cowlings, mounts, etc.) that whilst they can stay with the airplane when the engine is removed can be removed for maintenance purpose in lieu of individual component maintenance manuals. IAE PROPRIETARY COMPONENT MAINTENANCE MANUALS These manuals will be structured in accordance with ATA 2-5-0 and will cover data for chapters other than 71, 72, and 78. SUBCONTRACTOR COMPONENT MAINTENANCE MANUALS These manuals will be structured in accordance with ATA 2-5-0 and are prepared directly by the accessory manufacturers. All accessory data is subject to IAE prepublication review and approval. ENGINE AND ACCESSORY COMPONENT SERVICE BULLETINS Each Engine and Accessory Component Service Bulletin will be produced in accordance with ATA 2-7-0. They will cover planning information, engine or component effectivity, reason for Bulletin, recommended compliance, manpower requirements, and tooling information relating to parts repair or modification. Subcontractor prepared Accessory Component Service Bulletins are reviewed by IAE prior to issuance. Alert Service Bulletins will be issued on all matters requiring the urgent attention of the airline customer and will generally be limited to items affecting safety. The Bulletin will contain all the necessary information to accomplish the required action. OPERATING INSTRUCTIONS Engine operating instructions are presented in the form of General Operating Instructions supplemented by V2500 Specific Engine Operating Instructions which provide operating information, procedures, operating curves and engine limits. 12. 50 FACILITIES PLANNING AND FACILITY EQUIPMENT MANUALS The Facilities Planning Manual outlines the requirements for engine/component overhaul, maintenance, and test facilities in terms of basic operations, processes, time studies and equipment. The Facility Equipment Manual lists and describes the facility equipment used for engine maintenance, overhaul and repair. SUPPORT EQUIPMENT NUMERICAL INDEX The Indexes, prepared for each major engine model, provide a listing, in numeric sequence, by maintenance level, of all IAE ground support equipment required to maintain and overhaul the engine. The Listings are cross-indexed to the applicable engine dash model and to the chapter and section of the Engine Manual. PUBLICATIONS INDEX This index contains a listing of available technical manuals covering components of the V2500 Nacelle. SERVICE BULLETIN INDEX This index will be in a format and on a revision schedule as determined by IAE. COMPUTER SOFTWARE MANUAL Data, will be supplied in accordance with ATA 102 revision 2 except where such data are prohibited due to proprietary or Government restrictions. REVISION SERVICES Regular, temporary, and "as required" revisions to technical publications will be made during the service life of IAE equipment. The utilization of advanced techniques and equipment provides the airline customer with expedited revision service. DISTRIBUTION MEDIA OPTIONS IAE will provide IAE technical publications to the airline customer on roll microfilm at 24:1 reduction or magnetic tape. Media options such as microfilm at 36:1 reduction, microfiche, and two side or one-sided paper copy of reproducible quality will be available for procurement at established prices. LEASE ENGINE PROGRAM SUPPORT An engine lease program will be made available to V2500 Airline Customers subject to IAE's standard terms and conditions of lease. Pool spares will be stationed at selected locations to assure emergency protection against aircraft-on-ground (AOG) situations or to provide supplemental support during "zero spares" conditions. The lease engines will be incorporate the highest maintenance standards and configuration levels. Availability will be subject to prior 13. 51 demand, however, the program logistics will be continually reviewed to assure the most effective deployment of available pool engines. IV. TECHNICAL SUPPORT GROUP The Technical Support Group provides the following categories of Technical Support to the airline customer: - Product Support Engineering - Powerplant Maintenance Engineering - Customer Performance Engineering - Diagnostic System Engineering - Human Engineering - Flight Operations Engineering - Repair Services - Field Operations Data Analysis PRODUCT SUPPORT ENGINEERING Product Support Engineering is responsible for the overall technical support to the customers. The following services are provided: - Technical Problem Identification/Corrective Action Implementation - Technical Communication - Engine conversion Program Definition and Management - Engine Upgrade and Commonality Studies - Engine Hardware Retrofit Programs - Controlled Service Use Programs and Material Support - Engine Maintenance Management Plans - Engine Incident Investigation Assistance TECHNICAL SUPPORT Technical information supplied through IAE Field Representatives, Customer Support Managers, customer correspondence and direct meetings with airlines' representatives permits 14. 52 assessment of the factors involved in technical problems and their impact on engine reliability and operating costs. Resolution of these problems is coordinated with responsible groups within IAE and the necessary corrective action is defined. In certain situations the corrective action involves the establishment of Service Evaluation programs for proposed modifications, and the establishment of warranty assistance programs in conjunction with the IAE Warranty Administration Department. Product Support Engineering will assist customers in the implementation of recommended corrective action and improvements principally through official IAE technical communications, and direct customer contact. TECHNICAL COMMUNICATIONS Product Support Engineering is responsible for the release of technical communications. Primary communication modes involves release of limits and procedures through engine and maintenance manual revisions and the requirements associated with engine upgrade and/or conversion, durability and performance improvements, and problem resolution through Service Bulletins is provided by All Operator Letters and/or wires or direct technical written response to individual customer inquiries. ENGINE CONVERSION PROGRAMS Product Support Engineering defines minimum configuration levels for conversion of service engine models. They serve to assist the customer with the implementation of conversion programs into existing fleets by providing preliminary planning cost estimates and technical planning information regarding tooling, material and instructional requirements. Conversion programs are monitored for problem areas and Product support Engineering initiates and implements corrective action as may be necessary. ENGINE HARDWARE RETROFIT PROGRAMS Engine campaigns are carried out to provide retrofit of engine hardware configuration when required on delivered engines. This involves assisting in the marshaling of hardware, special tools, manpower and the scheduling of engine and material to campaign sites. ENGINE MAINTENANCE MANAGEMENT PLANS Planning documents, tailored for individual operators, are developed to serve as Engine Maintenance Management Program criteria. These are directed toward the objective of ensuring cost-effective operation with acceptable post-repair test performance, providing engine reliability to achieve maximum time between shop visits, and minimizing the adverse effects to operation of inflight shutdowns and delays/cancellations. Through the institution of specific maintenance recommendations, proper engine performance, durability, and hot section parts lives can be achieved. ENGINE INCIDENT INVESTIGATION ASSISTANCE Assistance is provided to an airline in conducting engine incident investigations in responding to the requirements of the appropriate Air Worthiness authority. 15. 53 LINE MAINTENANCE AND TROUBLESHOOTING Line Maintenance and Troubleshooting Seminars can be conducted at the IAE Training Center with the objective of improving line maintenance effectiveness fleetwide. Specialized training on V2500 line maintenance and troubleshooting can be provided through on-site workshops by special contractual arrangement. Troubleshooting support is provided primarily through powerplant troubleshooting procedures which are published in IAE and airframe manufacturers manuals. When an airline encounters an engine problem and corrective action taken has not been effective, more direct support in troubleshooting and maintenance can also be provided to the customers line maintenance personnel. Instructions on V2500 powerplant troubleshooting and maintenance can also be provided to customers line maintenance personnel. AIRLINE SHOP MAINTENANCE Reviews of shop practices and procedures of individual airlines can be conducted to determine the most efficient and cost-effective methods for maintenance and repair of the V2500 in the environment in which the airline must maintain that engine. POWERPLANT MAINTENANCE ENGINEERING Powerplant Maintenance Engineering covers responsibility for maximizing engine maintainability, establishing maintenance concepts and requirements and providing maintenance support plant for IAE. This group provided the following services: - Definition of Maintenance Tasks and Resource Requirements - Planning Guides MAINTENANCE ENGINEERING Powerplant Maintenance Engineering conducts design reviews and comprehensive maintenance analysis of new engine designs and engine design changes to maximize engine maintainability consistent with performance, reliability, durability and life cycle cost considerations. Maintenance concepts, requirements and tasks are established to minimize maintenance costs. This group represents the customer's maintainability interests in internal IAE operations and upon request will assist the customer in resolving specific maintenance task problems. PROGRESSIVE MAINTENANCE PLANNING Powerplant Maintenance Engineering also provides Planning Guides based upon Maintenance Task Analysis. The guides present engine maintenance requirements, their subordinate tasks and the required resources to accomplish on-aircraft engine maintenance and the off-aircraft repair of engines by modular section/build group replacement. Maintenance requirements are also presented for the refurbishment of modular section/build group by parts replacement, the complete repair of parts, the refurbishment of accessory components and for 16. 54 engine testing. The data in the Planning Guides is presented in a manner that is primarily intended to assist new operators by providing a phased introduction of new engines into their shops and to capitalize on the design maintainability features for the engine when they are developing their maintenance plans. Powerplant Maintenance Engineering will assist new operators in planning a gradual, technically feasible, and economically acceptable expansion from line maintenance of installed engines through the complete repair of parts and accessory components. CUSTOMER PERFORMANCE ENGINEERING Customer Performance Engineering provides for the following types of technical assistance to the airline customer: - Engine Performance Analysis Computer Programs for Test Cell Use - Test Cell Correlation Analysis and Correction Factors - Engine Stability Procedures and Problem Analysis Although much of the above support is provided in the form of procedures, data and recommendations in various publications, the group also answers inquiries of a performance nature which are forwarded to IAE by individual customers. ENGINE PERFORMANCE ANALYSIS Technical support is provided in a number of areas related to operational suitability including the development of the test requirements and performance limits for the Adjustment and Test Section of the Engine Manual. Computer programs that will assist the operator in analyzing engine performance using test cell data can be provided subject to IAE then current standard license fees and Terms and Conditions. TEST CELL CORRELATION Technical assistance is provided to the customer for developing appropriate corrections to be used for specific test configurations at customer owned test cell facilities. Reports are provided presenting correlation analyses and IAE recommended test cell corrections which permit comparison of the performance of customer tested engines with the respective Engine Manual limits and guarantee plan requirements. ENGINE STABILITY Technical support is provided to ensure that engine stability and starting reliability are maintained. Service evaluation programs for proposed improvements are initiated and monitored to determine their effectiveness. In addition, problems relating to engine control systems which impact engine stability and performance are analyzed. 17. 55 DIAGNOSTIC SYSTEMS ENGINEERING Diagnostic Systems Engineering is responsible for the technical support of customer acquisition of inflight engine data and the assessment of engine performance through the use of that data. Diagnostic Systems Engineering personnel provide the following services: - Guidance to help customers define their engine monitoring system requirements. - Development of hardware specifications and computer programs (by separate contractual arrangement) to satisfy engine diagnostic requirements. - Coordination of all IAE airborne diagnostic support activity. GUIDANCE IN DEFINING ENGINE MONITORING SYSTEMS REQUIREMENTS Diagnostic Systems Engineering can provide consultation services to assist the customer in defining his engine condition and performance monitoring requirements and in selection of appropriate hardware and software systems to meet those requirements and options between the customer, airframe manufacturer, and Airborne Integrated Data System (AIDS) manufacturer. DEVELOPMENT AND COORDINATION Diagnostic Systems Engineering personnel can develop hardware specification and make computer software available to accomplish Engine Condition Monitoring (ECM) and performance analysis of engine modules using AIDS data. Engine condition monitoring procedures, of both the manual and computerized variety can also be developed and provided in support of the customer's selected method of engine condition monitoring. Computer software will be provided to the customer subject to IAE's then current standard license fees and Terms and Conditions. Diagnostic Systems Engineering personnel also coordinate activities of cognizant functional groups at IAE to provide engine related information to the customer, airframe manufacturer, and AIDS equipment vendor during the planning, installation, and operation of AIDS. HUMAN ENGINEERING Human Engineering supplies data on task time and skill requirements necessary for accomplishing maintenance procedures. Task data provided includes estimates of the man-hours, elapsed time and job skills necessary to accomplish maintenance tasks as described in IAE's Manual and Service Bulletins. Data is supplied for "on" and "off" aircraft maintenance tasks up to modular disassembly/assembly. Additional selected task data can be supplied on disassembly/assembly to the piece part level and on parts repair. In addition, the group can help solve problems related to skill requirements, body dimensions, or excessive man-hours encountered in accomplishing maintenance tasks. 18. 56 FLIGHT OPERATIONS ENGINEERING Flight Operations Engineering provides the airline customer with the following technical assistance concerning installed engine operations: - Introduction of new equipment - Problem resolution and assistance with in-service equipment - Contractual commitment and development program support - Publication of engine operations literature and performance aids NEW EQUIPMENT In accordance with customer needs, a Flight Operations Engineer can provide on-site assistance in the training of operations personnel and help in solving engine operational problems that might arise during the initial commercial service period. Such assistance can include participation in initial delivery flights, engine operational reviews, and flight crew training activity. PROBLEM RESOLUTION - IN-SERVICE EQUIPMENT In accordance with a mutually agreed upon plan, a Flight Operations Engineer can perform cockpit observations to identify or resolve engine operating problems and to assess installed engine performance. CONTRACTUAL SUPPORT AND DEVELOPMENT PROGRAMS As required, a Flight Operations Engineer can assist in evaluating installed engine performance relative to contractual commitments and engine improvements which have an impact on engine operations. PUBLICATION SUPPORT Flight Operations Engineering is responsible for the issuance of Propulsion System Operating Instructions and correspondence pertaining to inflight engine operations. Such material is coordinated with the airframe manufacturers as required. Special Presentations and Reports are also issued, as required, to support the activity described above. REPAIR SERVICES Repair Service provides the following services to the airline customers: - Coordinated Repair Development Activity - Customer Assistance on Repair Procedures and Techniques 19. 57 - Qualification of Repair Sources - Repair Workshops - Repair Development List COORDINATION OF REPAIR DEVELOPMENT The Repair Services Engineer provided direct contact with all sources that initiate repair schemes. The Engineer coordinates with representatives of Engineering and Support Services disciplines in identifying repair needs, evaluating various repair options and establishing repair development procedures and schedules. The Engineer participates in setting repair evaluation and approval requirements. When the repair is approved and substantiating data is documented, the Repair Services Engineer releases the repair to the Engine Manual. TECHNICAL ASSISTANCE The Repair Services Engineer provides daily communications with airline customers via technical responses to inquiries direct from the airline or through our Field Service Representative office at the airline facility. In addition, repair engineer make periodic visits to airline repair facilities to discuss new repairs under development, answer specific questions posed by the particular facility and review actual parts awaiting a repair/scrap decision. Occasionally repair engineers make special visits to customer facilities to assist in training customer personnel in accomplishing particularly complex repairs. QUALIFICATION OF REPAIR SOURCES The Repair Services Engineer coordinates the qualification of repair sources for repairs proprietary to IAE or to an outside repair agency. They also perform a review of the qualifications of repair sources for critical, non-proprietary repairs for which a source demonstration is deemed necessary. The group participates in negotiation of the legal and business agreements associated with these qualification programs. FIELD OPERATIONS DATA ANALYSIS The following information is available to the airline customer from the Field Operations Data Analysis organization: - Composite Engine Parts List - Industry Item Lists - Service Bulletin Incorporation Lists - Operating Experience Reports 20. 58 COMPOSITE ENGINE PARTS LIST The Composite Engine Parts List, a compilation of all saleable and nonsaleable engine parts incorporated in production engines, describes the configuration of each engine and identifies those engine parts for which engineering changes, service bulletins and service instructions have been issued. INDUSTRY ITEM LISTS An Industry Item List, consisting of a computer retrievable magnetic tape and a hard copy printout, is provided after delivery of each new engine to identify specific parts by part number and serial number which the airline customer may choose to monitor during the engine operational life. Listed parts represent approximately 80 percent of engine total value. SERVICE BULLETIN INCORPORATION LISTS Lists are provided that identify all Service Bulletins which were not incorporated and, separately, those which were incorporated during initial build of each new engine. OPERATION EXPERIENCE REPORTS IAE will maintain a V2500 Operational Data base from which selected engine operations and reliability summary reports will be developed and made available on a scheduled basis to each airline customer. Data reported by IAE Field Representatives serve as input to this data base. This computerized data maintenance and retrieval system will permit: - A pooling and exchange of service experience for the benefit of the entire airline industry. - A common statistical base. - The selective querying of computer data files for answers to customer inquiries. In addition to providing operations and reliability reports, the Operating Experience Data Base serves in-house programs directed at improving engine design and enhancing overall customer support, including spare parts provisioning and warranty administration. V. SPARE PARTS GROUP SPARE PARTS SUPPORT The Spare Parts Group provides the following categories of spare parts support to airline customers: - Individual Customer Account Representatives - Provisioning - Planning 21. 59 - Order Administration - Spare Parts Inventory - Effective Expedite Service - Worldwide Distribution ACCOUNT REPRESENTATIVE An Account Representative is assigned to each customer using IAE equipment. This representative provides individualized attention for effective spare parts order administration, and is the customer's interface on all matters pertaining to new part planning and procurement. Each representative is responsible for monitoring each assigned customer's requirements and providing effective administrative support. The Account Representatives are thoroughly familiar with each customer's spare parts ordering policies and procedures and are responsible for ensuring that all customer new parts orders are processed in an effective manner. SPARE PARTS PROVISIONING PLANNING Prior to delivery of the first new aircraft to an airline customer, preplanning discussions will be held to determine the aircraft/engine program, and engine spare parts provisioning and order plans. Mutually agreed upon provisioning target dates are then established and on-time completion tracked by the Customer Account Representative with the assistance of logistics specialists in Spare Parts Provisioning and Inventory Management. Meetings are held with airline customers at a mutually agreeable time to review suggested spare parts provisioning lists prepared by spare parts Provisioning. These lists are designed to support each customer's particular fleet size, route structure and maintenance and overhaul program. ORDER ADMINISTRATION IAE subscribes to the general principles of Air Transport Association of America (ATA) Specification No. 200, Integrated Data Processing - Supply. The procedures of Air Transport Association of America (ATA) Specification No. 200 may be used for Initial Provisioning, (Chapter II) Order Administration (either Chapter III or Chapter VI) Invoicing (Chapter IV). A spare parts supply objective is to maintain a 90 percent on-time shipment performance record to our published lead times. The lead time for replenishment spare parts is identified in the IAE spare Parts Price Catalog. Initial provisioning spare parts orders should be placed at least six months prior to required delivery, while conversions and major modifications require full manufacturing lead times. The action to be taken on emergency requests will be answered as follows: - Aircraft-On-Ground (AOG) - within four hours (in these instances every effort is made to ship immediately). 22. 60 - Critical (Imminent Aircraft-On-Ground (AOG) or Work Stoppage) - -- Within 24 hours. - Stock Outage -- Within seven working days (these items are shipped as per customer request). SPARE PARTS INVENTORY To ensure availability of spare parts in accordance with published lead time, spare parts provisioning maintains a modern, comprehensive requirements planning and inventory management system which is responsive to changes in customer demand, special support programs and engineering design. Organized on an engine model basis, this system is intended to maintain part availability for delivery to customers consistent with published lead times. A majority of parts in the spare parts inventory are continually controlled by an Automatic Forecasting and Ordering System. Those parts which do not lend themselves to automatic control due to supercedure, unusual usage or conversion requirements are under the direct manual control of Spares Planning personnel. As additional protection against changes in production lead time or unpredicted demand, certain raw materials are also inventoried. Successful inventory management is keyed to accurate requirements planning. In support of the requirements planning effort, a wide ranging data retrieval and analysis program is offered. This program concerns itself both with the customer logistics and technical considerations as follows: - Forecasts of life limited parts requirements are requested and received semi-annually from major customers. - Engine technical conferences are held frequently within IAE to assess the impact of technical problems on parts. - For a selected group of parts a provisioning conference system is offered which considers actual part inventory change, including usage and receipts, as reported monthly by participating customers. INITIAL PROVISIONING PARTS BUY-BACK IAE offers an initial provisioning parts buy-back service, the details of which are contained in individual customer spare parts contracts. PACKAGING All material is packaged in general compliance with Air Transport Association of America (ATA) Specification No. 300. WORLD AIRLINE SUPPLIERS' GUIDE IAE subscribes to the supply objectives set forth in the World Airlines Supplier's Guide published by the Air Transport Association of America (ATA). 23. 61 IAE requires that its proprietary component vendors also perform in compliance with the precepts of the World Airline Suppliers' Guide. VI. BUSINESS SUPPORT GROUP CUSTOMER MAINTENANCE SUPPORT This Service provides the following services to airline and engine maintenance shop customers: - Engine Reliability and Logistics Cost Forecasts - Logistics Support Studies ENGINE RELIABILITY AND ECONOMIC FORECASTS Engine reliability and economic forecasts in the forms of predicted shop visit rates and maintenance costs can be provided to reflect the airline customers' operating characteristics. Additionally, various analyses can be conducted to establish life probability profiles of critical engine parts, and to determine optimum part configuration and engine operating procedures. LOGISTICS SUPPORT STUDIES As required, logistics studies are conducted to assist in the planning of engine operational support. Such studies may include spare engine and spare module requirements forecasts, level of maintenance analyses, engine type economics evaluations and life cycle cost estimates. 24. 62 EXHIBIT E-1 IAE INTERNATIONAL AERO ENGINES AG V2500 ENGINE AND PARTS SERVICE POLICY This Engine and Parts Service Policy ("Service Policy") is a statement of the terms and conditions under which IAE International Aero Engines AG ("IAE") will grant AWA certain Allowances and adjustments in the event that Parts of its new V2500 Engines suffer Failure in Commercial Aviation Use, or in the event that a Parts Life Limit is established or reduced. This Service Policy becomes effective for AWA's first new V2500 Engine. This Service Policy is divided into seven sections: Section I describes the Credit Allowances which will be granted should an Engine suffer a Failure. Section II describes the Credit Allowances which will be granted should a Primary Part Suffer a Failure. Section III lists the Class Life for those Primary Parts for which Credit Allowances will be granted. Section IV describes the Credit Allowances which will be granted when the establishment or reduction of a Parts Life Limit is mandated. Section V describes the Credit Allowances and adjustments which will be granted when IAE declares a Campaign Change. Section VI contains the definitions of certain words and terms used throughout this Service Policy. These words and terms are identified in the text of this Service Policy by the use of initial capital letters for such words and terms. Section VII contains the general conditions governing the application of this Service Policy. I. ENGINE FAILURE CREDIT ALLOWANCES A. FIRST RUN ENGINE, MODULE AND PART 1. A First Run Engine is an Engine with 3,000 hours or less Engine Time, a First Run Module is a Module with 3,000 hours or less Module Time, and a First Run Part is a Part with 3,000 hours or less Parts Time operating in a First Run Engine or a First Run Module. 1. 63 2. If a First Run Part suffers Direct Damage or Resultant Damage, and provided that the Part causing Resultant Damage is also a First Run Part, IAE will grant to AWA: a. A 100 percent Parts Credit Allowance for any First Run Part Scrapped, or b. A 100 percent Labor Credit Allowance for any First Run Part Repair. 3. If such Damage of a First Run Part requires the removal of the Engine or a Module from the Aircraft, IAE will, in addition to Subparagraph A.2. above, grant to AWA: a. A 100 percent Labor Credit Allowance for disassembly, reassembly and necessary testing of the Engine or Module requiring Reconditioning as a result of such Damage of the First Run Part, and b. A 100 percent Parts Credit Allowance for those Expendable Parts required in the Reconditioning of the Engine or Module. 4. If such Damage of a First Run Part requires the removal of the Engine or a Module from the Aircraft, IAE will arrange, upon request by AWA, to Recondition the Engine or Module or accomplish the Parts Repair at no charge to AWA rather than providing the above Credit Allowances. Such work will be accomplished at a V2500 Maintenance Center designated by IAE and acceptable to AWA. Transportation charges to and from the Maintenance Center shall be paid by AWA. In the event IAE designates a Maintenance Center for which AWA does not have a maintenance contract and if such Maintenance Center is located outside of the United States, then IAE shall pay for the transportation charges to and from such Maintenance Center. B. EXTENDED FIRST RUN ENGINE, MODULE AND PART 1. An Extended First Run Engine is an Engine with more than 3,000 hours Engine Time but not more than 3,500 hours Engine Time, an Extended Run Module is a Module with more than 3,000 hours Module Time, but not more than 3,500 hours Module Time, and an Extended First Run Part is a Part with 3,500 hours or less Parts Time operating in an Extended First Run Engine or an extended First Run Module. 2. If an Extended First Run Part suffers Direct Damage or Resultant Damage, and provided that the Part causing Resultant Damage is also an Extended First Run Part, IAE will grant to AWA: a. A pro rata Parts Credit Allowance for any Extended First Run Part Scrapped, or b. A pro rata Labor Credit Allowance for any Extended First Run Part Repair. 2. 64 If the Extended First Run Part is a Primary Part (Section III), the pro rata Credit Allowances will be based on 100 percent at 3,000 hours Engine Time which then decreases, pro rata, to zero percent at 3,500 hours Engine Time, or, 100 percent to 2,000 hours Parts Time which then decreases, pro rata, to zero percent at the end of its Class Life (Section III), whichever is greater. If the Extended First Run Part is not a Primary Part, the pro rata Credit Allowances will be based on 100 percent at 3,000 hours Engine Time which then decrease, pro rata, to zero percent at 3,500 hours Engine Time. 3. If such Damage of an Extended First Run Part requires the removal of the Engine or a Module from the Aircraft, IAE will, in addition to Subparagraph B.2. above, grant to AWA: a. A pro rata Labor Credit Allowance for disassembly, reassembly and necessary testing of the Engine or Module requiring Reconditioning as a result of such Damage of the Extended First Run Part, and b. A pro rata Parts Credit Allowance for those Expendable Parts required in the Reconditioning of the Engine or Module. The pro rata Credit Allowances will be based on 100 percent at 3,000 hours Engine Time, which then decreases, pro rata, to zero percent at 3,500 hours Engine Time. Note: Section VI, Paragraph D. contains the formulas to be used for computing the Credit Allowances described above. C. ENGINE OR MODULE FAILURE CREDIT ALLOWANCES ILLUSTRATION Insert Illustration (?) Note: The Primary Parts Credit Allowances Illustration (Section II, Paragraph B) is also applicable to the Credit Allowances which are based on Parts Time as described in Section I, Subparagraph B.2. II. PRIMARY PARTS CREDIT ALLOWANCE A. PRIMARY PARTS OTHER THAN FIRST RUN PARTS OR EXTENDED FIRST RUN PARTS 1. Primary Parts are limited to those Parts listed in Section III while such Parts are within the Class Life indicated in Section III. 3. 65 2. The Primary Parts Credit Allowances described in Subparagraph A.3 below will be based on 100 percent to 2,000 hours total Parts Time which then decreases, pro rata, to zero percent at the end of the applicable hourly Class Life. 3. If a Primary Part suffers Direct Damage or Resultant Damage, and provided that the Part causing Resultant Damage is also a Primary Part, IAE will grant to AWA: a. A Parts Credit Allowance for any Primary Part Scrapped, or b. A Labor Credit Allowance for any Primary Part Repaired in accordance with a Parts Repair designated in writing by IAE as being eligible for a Credit Allowance under this Section II, Paragraph A. Note: Section VI, Paragraph D. contains the formulas to be used for computing the Credit Allowances described above. B. PRIMARY PARTS CREDIT ALLOWANCES ILLUSTRATION Insert Illustration (?) A = CLASS A PRIMARY PARTS (Page 5) B = CLASS B PRIMARY PARTS (Page 6) C = CLASS C PRIMARY PARTS (Page 6) III. IDENTIFICATION OF PRIMARY PARTS The following Parts are defined as Primary Parts while such Parts are within the Class Life indicated. Class Life is the period, expressed in either hours or Parts Time or number of Parts Cycles during which IAE will grant Credit Allowances for Primary Parts which suffer Direct Damage or Resultant Damage, or for which a Parts Life Limit is established or reduced. CLASS A (4,000 HOURS PARTS TIME) Cold Section Rotating Parts LP Compressor Inlet Cone - Spinner LP Compressor Blades LP Compressor 1st Stage Blade Annulus Fillers LP Compressor Blades Radial Drive Bevel Gear Tower Shaft HP Compressor Blades HP Compressor Front and Rear Rotating Airseals LP Turbine Shaft Coupling Nut COLD SECTION STATIC PARTS 4. 66 Fan Splitter Fairing LP Compressor Stage 2 Inlet and Exhaust Stator Assembly HP Compressors Variable Stator Assemblies Fan Aerodynamic OGVs HP Compressor Stage Stator Assemblies HP Compressor Exit Stator HOT SECTION ROTATING PARTS HP Turbine Stage Blades HP Turbine Gage Spacer HP Turbine Lock Nut LP Turbine Stage Blades LP Turbine Lock Nut HOT SECTION STATIC PARTS Fuel Injector Combustion Chamber Assembly HPT First Stage Cooling Duct Assembly (TOBI Duct) HPT 1st and 2nd Stage Nozzle Guide Vane Assembly HPT 1st and 2nd Stage Outer Airseal Assembly HP to LP Turbine Transition Duct (Inner & Outer) LPT Nozzle Guide Vane Assemblies LPT Outer Airseal Assemblies MAIN AND ANGLE GEARBOX Gearshafts and Bearings Lay Shaft All Accessory Drive Shafts Gearbox Oil Pumps (Pressure and Scavenge) CLASS B (8,000 HOURS PARTS TIME) Fan Case Assembly (Includes Intermediate Case) HP Compressor Front Casings (Split Casings) HP Compressor Rear Casings Diffuser Case HP Turbine Case LP Turbine Case Turbine Exhaust Case Main Gearbox Casing Oil Tank CLASS C (20,000 HOURS PARTS TIME FOR DAMAGE 15,000 PARTS CYCLES FOR LIFE LIMIT REDUCTION) 5. 67 Fan Disk LPC Drum HPC Drums HP Turbine Stage Disks HP Turbine Spacer Disk HP Turbine Stage l Front Rotating Airseal HP Turbine 2nd Stage Disk Rear Seal LP Turbine Disks LP Turbine Rotating Airseals Shafts All Class C Parts are those referred to in the time limits section of the Engine Manual IV. PARTS LIFE LIMIT ALLOWANCES A. A Parts Life Limit is the maximum allowable total Parts Time or total Parts Cycles for specific Parts, including Reoperation if applicable, as established by IAE and the United States Federal Aviation Administration. Parts Life Limits are published in the Times Limit Section (Chapter 05) of the applicable V2500 Series Engine Manual. B. CREDIT ALLOWANCES 1. CLASS A AND CLASS B PRIMARY PARTS If a Parts Life Limit is established which results in Part Scrappage at less than 4,000 hours Parts Time for a Class A Primary Part or less than 8,000 hours Parts Time for a Class B Primary Part, IAE will grant for each such Primary Part Scrapped as a result thereof, a Parts Credit Allowance based on 100 percent to 2,000 hours total Parts Time which then decreases, pro rata, to zero percent at the end of 4,000 hours total Parts Time for a Class A Primary Part or 8,000 hours total Parts Time for a Class B Primary Part. 2. CLASS C PRIMARY PARTS If a Parts Life Limit is established for a Class C Primary Part which results in Part Scrappage in less than 15,000 total Parts Cycles, IAE will grant for each such Primary Part Scrapped as a result thereof, a Parts Credit Allowance based on 100 percent to 10,000 total Parts Cycles which then decreases, pro rata, to zero percent at 15,000 total Parts Cycles. In addition, IAE will grant a similarly calculated Labor Credit Allowance and Parts Credit Allowance for that labor and those Expendable Parts which are solely related to the removal and replacement of such Class C Primary Parts and is additional to other maintenance being performed on the Engine or Module. Note: Section VI, Paragraph D. contains the formulas to be used for computing the Credit Allowances described above. C. PARTS LIFE LIMIT CREDIT ALLOWANCES ILLUSTRATIONS 6. 68 Insert Illustration(?) A = CLASS A PRIMARY PARTS (Page 5) B = CLASS B PRIMARY PARTS (Page 6) Insert Illustration(?) C = CLASS C PRIMARY PARTS (Page 6) V. CAMPAIGN CHANGE CREDIT ALLOWANCES AND ADJUSTMENTS A. A Campaign Change is an IAE program, so designated in writing, for the Reoperation, replacement, addition, or deletion of a Part(s). IAE will grant the Credit Allowances and Adjustments specified in this Section V to AWA when Campaign Change recommendations are complied with by AWA. B. STANDARD ALLOWANCES 1. A 100 percent Parts Credit Allowance for the replacing Parts specified in the Campaign Change for installed Parts or serviceable shelf stock Parts directed by IAE to be Scrapped with 3,000 hours or less total Parts Time. 2. A pro rata Parts Credit Allowance for the replacing Parts specified in the Campaign Change for installed Parts or serviceable shelf stock Parts directed by IAE to be Scrapped with more than 3,000 hours total Parts Time but less than 3,500 hours total Parts Time. The pro rata Parts Credit Allowance will be based on 100 percent at 3,000 hours total Parts Time which then decreases, pro rata, to 50 percent at 3,500 hours total Parts Time. 3. A 50 percent Parts Credit Allowance for the replacing Parts specified in the Campaign Change for installed Parts or serviceable shelf stock Parts directed by IAE to be Scrapped with more than 3,500 hours total Parts Time. 4. A 100 percent Labor Credit Allowance for Reoperation of installed Parts or serviceable shelf stock Parts with 3,000 hours or less total Parts Time which are Reoperated in accordance with the Campaign Change. 5. A pro rata Labor Credit Allowance for Reoperation of installed Parts or serviceable shelf stock Parts with more than 3,000 hours total Parts Time but less than 3,500 hours total Parts Time which are Reoperated in accordance with the Campaign Change. The pro rata Labor Credit Allowance will be based on 100 percent at 3,000 hours total Parts Time which then decreases, pro rata, to 50 percent at 3,500 hours total Parts Time. 6. A 50 percent Labor Credit Allowance for Reoperation of installed Parts or serviceable shelf stock Parts with more than 3,500 hours total Parts Time which are Reoperated in accordance with the Campaign Change. 7. 69 7. A 100 percent Labor Credit Allowance for disassembly and reassembly of the Engine or Module, if the disassembly of the Engine or Module is recommended by IAE for accomplishment of the Campaign Change and such disassembly is performed solely for the purpose of accomplishing the Campaign Change. Note: Section VI, Paragraph D. contains the formulas to be used for computing the Credit Allowances described above. C. CAMPAIGN CHANGE CREDIT ALLOWANCES ILLUSTRATION Insert Illustration (?) Note: The Labor Credit Allowance for Engine or Module disassembly and reassembly remains at a constant 100%. D. OPTIONAL CREDIT ALLOWANCES AND ADJUSTMENTS 1. When IAE declares a Campaign Change, IAE, at its sole option, may grant to AWA Credit Allowances and/or adjustments, other than as described above, such as: a. No Charge material. b. Specifically priced material. c. Single credit settlements for AWAs' fleet. d. Fixed Credit Allowance support for each Engine. 2. These optional Credit Allowances and adjustments may be provided: a. Instead of the standard Credit Allowances of Section V, Paragraph B., b. In addition to the standard Credit Allowances of Section V, Paragraph B or c. As a portion of the standard Credit Allowances of Section V, Paragraph B. 3. In no event shall the value to AWA, as reasonably determined by IAE, be less than the amount that would have been granted to AWA as a standard Campaign Change Credit Allowance, per Section V, Paragraph B. In considering the use of these optional Credit Allowances and adjustments, IAE will attempt to minimize the financial and administrative impact on AWA. VI. DEFINITIONS 8. 70 A. "CAMPAIGN CHANGE" is an IAE program, so designated in writing, for the Reoperation, replacement, addition or deletion of Part(s) and is characterized by the granting of certain Credit Allowances to AWA when such program recommendations are complied with by AWA. B. "CLASS LIFE" is the period, expressed in either hours of Part Time or number of Parts Cycles, during which IAE will grant Credit Allowances for Primary Parts which suffer Direct Damage or Resultant Damage, or for which a Parts Life Limit is established or reduced. C. "COMMERCIAL AVIATION USE" is the operation of Engines in Aircraft used for commercial, corporate or private transport purposes. The operation of Engines by government agencies or services is normally excluded except that IAE will consider written requests for the inclusion of such Engines under the provisions of this Service Policy pursuant to the C.R.A.F. Program where AWA operates the Aircraft in North America to its then current flight operations and maintenance specifications. D. "CREDIT ALLOWANCES" 1. "PARTS CREDIT ALLOWANCE" is an amount determined in accordance with the following formulas: a. 100 percent Parts Credit Allowance = P b. 50 percent Parts Credit Allowance = P/2 c. Pro rata Parts Credit Allowance = (i) For a Primary Part which suffers Direct or Resultant Damage, or a Class A or Class B Primary Part for which a Parts Life Limit is established: Lt - T ________ x P Lt (ii) For a Class C Primary Part for which a Parts Life Limit is established, which is greater than 10,000 total Parts Cycles but is less than 15,000 total Parts Cycles: Lc - C ________ x P Lc (iii) For replacement of a Part because of a Campaign Change, when such a Part has more than 3,000 hours Parts Time but less than 3,500 hours Parts Time: 9. 71 4,000 - T ___________ x P l,000 d. Extended First Run Parts Credit Allowance = 3,500 - E Lt - T _________ x P or ________ x P 500 Lt 2. "LABOR CREDIT ALLOWANCE" is an amount determined in accordance with the following formulas, except that in no event shall the amount to be granted for repair of Parts exceed the amount of the Parts Credit Allowance which would have been granted if the Part had been Scrapped: a. 100 percent Labor Credit Allowance = H x R b. 50 percent Labor Credit Allowance = H x R - 2 c. Pro rata Labor Credit Allowance = (i) For a Primary Part which suffers Direct or Resultant Damage, or a Class A or Class B Primary Part for which a Parts Life Limit is established: Lt - T ________ x H x R Lt (ii) For a Class C Primary Part for which a Parts Life Limit is established which is greater than 10,000 total Parts Cycles but is less than 15,000 total Parts Cycles: Lc - C ________ x H x R Lc (iii) For replacement of a Part because of a Campaign Change, which such a Part has more than 3,000 hours Parts Time but less than 3,500 hours Parts Time: 4,000 - T 10. 72 _________ x H x R l,000 (iv) Extended First Run Labor Credit Allowance = 3,500 - E Lt - T _________ x H x R or ______ x H x R 500 Lt 3. The variables used in calculating the above allowances are defined as: P = a. For a Part Scrapped because of Direct Damage, Resultant Damage or a Parts Life Limit being established, the IAE catalog price of the Part Scrapped current at the time of either the Engine removal or Part removal, whichever occurs sooner, or b. For replacement of a Part because of a Campaign Change, the IAE catalog price of the replacing Part specified in the Campaign Change current at the time of replacement. T = a. For a Primary Part which has suffered Direct Damage or Resultant Damage, the actual Parts Time on the Part minus 2,000 hours, or b. For a Class A or Class B Primary Part for which a Parts Life Limit is established, the actual Parts Time on the Part minus 2,000 hours, or the Parts Life Limit minus 2,000 hours, whichever is greater, or c. For replacement of a Part because of a Campaign Change, when such a Part has more than 3,000 hours Parts Time but less than 3,500 hours Parts Time, the actual Parts Time on the Part. C = For a Class C Primary Part for which a Parts Life Limit is established which is greater than 10,000 Total Parts Cycles but less than 15,000 Total Parts Cycles, the greater of either: a. The actual Parts Cycles on the Part minus 10,000 cycles, or b. The new Parts Life Limit minus 10,000 Cycles. Lt = Either: a. For a Primary Part which has suffered Direct Damage or Resultant Damage, the hours indicated in Section III minus 2,000 hours, or b. For a Class A or Class B Primary Part for which a Parts Life Limit is established, the hours indicated in Section III minus 2,000 hours. 11. 73 Lc = For a Class C Primary Part for which a Parts Life Limit is established which is greater than 10,000 total Parts Cycle, 5,000 Cycles. H = The man-hours reasonably required to accomplish the work. R = The labor rate, expressed in U.S. Dollars per hour, which will be determined as follows: a. If the labor is performed at AWA's facility, or its subcontractor's facility, the labor rate will be the greater of AWA's labor rate or the subcontractor's labor rate, where the labor rates were determined in accordance with IAE Form _____ and provided to AWA in writing, or b. If the labor is performed by IAE, the labor rate will be the then-current labor rate of IAE. E = Actual Engine Time on an Extended First Run Engine. E. "DIRECT DAMAGE" is the damage suffered by a Part itself upon its Failure. F. "ECONOMICALLY REPAIRABLE" shall mean that the cost of the repair as determined by IAE, exclusive of modification and transportation costs, will be equal to or less than 65 percent of the IAE catalog price of the Part at the time the repair is considered, or, shall be as otherwise reasonably determined by IAE. G. "ENGINE(S)" means those V2500 Engine(s), as described by IAE Specifications, sold by IAE for Commercial Aviation Use, whether installed as new equipment in aircraft by the manufacturer thereof and delivered to AWA or delivered directly to AWA from IAE for use as a spare Engine. An Engine which has been converted or upgraded in accordance with IAE instructions shall continue to qualify for Credit Allowances and Adjustments under the provisions of this Service Policy. H. "ENGINE OR MODULE TIME" is the total number of flight hours of operation of an Engine or a Module. I. "EXPENDABLE PARTS" means those nonreusable Parts, as reasonably determined by IAE, which are required to be replaced during inspection or Reconditioning, regardless of the condition of the Part. J. "EXTENDED FIRST RUN ENGINE OR MODULE" is an Engine or Module with more than 3,000 hours Engine or Module Time but not more than 3,500 hours Engine or Module Time. K. "EXTENDED FIRST RUN PART" means a Part with 3,500 hours or less Parts Time operating in an Extended First Run Engine. 12. 74 L. "FAILURE (FAILED)" is the breakage, injury, or malfunction of a Part rendering it unserviceable and incapable of continued operation without corrective action. M. "FIRST RUN ENGINE OR FIRST RUN MODULE" is an Engine or Module with 3,000 hours or less Engine or Module Time. N. "FIRST RUN PART" is an Engine Part with 3,000 hours or less Parts Time operating in a First Run Engine. O. "MODULE(S)" means any one or more of the following assemblies of Parts: Fan Assembly and Low Pressure Compressor Assembly High Pressure Compressor Assembly High Pressure Turbine Assembly Low Pressure Turbine Assembly Main gearbox P. "PART(S)" means Engine parts delivered to AWA as original equipment in an Engine or Engine parts sold and delivered by IAE to AWA as new spare parts in support of an Engine. Q. "PARTS CYCLE(S)" means the aggregate total number of times a Part completes an Aircraft takeoff and landing cycle, whether or not thrust reverser is used on landing. As pilot training will involve extra throttle transients such as touch and go landings and takeoffs, IAE shall evaluate such transients for Parts Cycle determination. R. "PARTS LIFE LIMIT" is the maximum allowable total Parts Time or total Parts Cycles for specific Parts, including Reoperation if applicable, as established by IAE or by the United States Federal Aviation Administration. Parts Life Limits are published in the Time Limits Section (Chapter 05) of the applicable V2500 Series Engine Manual. S. "PARTS REPAIR" means the IAE designated restoration of Failed Parts to functional serviceable status, excluding repair of normal wear and tear, as determined by IAE. T. "PARTS TIME" is the total number of flight hours of operation of a Part. U. "PRIMARY PART(S)" are limited to those Parts listed in Section III while such Parts are within the Class Life indicated in Section III. V. "RECONDITIONING" means the restoration of an Engine or Module allowing substitution of new or serviceable used Parts, to the extent necessary for continued operation of the Engine or Module as a serviceable unit. When such Reconditioning is performed by IAE, the Parts Time or Parts Cycles, as applicable, of the replaced Part shall, for the purpose of this Service Policy, be applicable to the substituted new or serviceable used Part. Said replaced Part shall become the property of IAE. W. "REOPERATION" is the alteration to or modification of a Part. 13. 75 X. "RESULTANT DAMAGE" is the damage suffered by a Part because of the Failure of another Part within the same Engine. Y. "SCRAPPED PARTS (SCRAP, SCRAPPED, SCRAPPAGE)" shall mean those Parts which are unserviceable and not Economically Repairable. AWA shall cause such Parts to be mutilated or disposed of in such a manner as to preclude any possible further use as an Engine Part. VII. GENERAL CONDITIONS The following general conditions govern the application of this Service Policy: A. RECORDS AND AUDIT AWA shall maintain adequate records for the administration of this Service Policy and shall permit IAE to audit such records at reasonable intervals. B. SCRAPPING OF PARTS 1. SCRAPPAGE VERIFICATION Any Part for which a Parts Credit Allowance is requested shall be verified as Scrapped prior to the issuance of the Parts Credit Allowance. Verification of Scrappage shall occur as follows: a. At AWA's, or its subcontractor's, facility. Such verification shall be accomplished by the IAE Field Representative; or b. At IAE, by IAE. Sufficient information to identify the Part, the Engine from which the Part was removed, and the reason for its return shall be provided. 2. RETURN OF PARTS IAE, at its sole option, may require AWA to return to IAE any Part for which a Parts Credit Allowance is requested. Such return shall be a condition for the issuance of a Parts Credit Allowance. 3. TRANSPORTATION EXPENSES Transportation expenses shall be at the expense of AWA if such Parts are shipped to and from IAE for examination and verification; except that IAE shall pay the expense if such Parts as are shipped at the request of IAE. 4. TITLE Title to such Parts returned to IAE shall vest in IAE: a. Upon receipt by AWA of a replacement Part or a Parts Credit Allowance. If the Parts are Scrapped Parts but are not eligible for Service Policy coverage, the 14. 76 Parts will be returned at AWA's expense if AWA so requests; otherwise, the Parts will be disposed of by IAE without any type of adjustment, or b. Upon shipment, when such Parts are determined to be Scrap at AWA's facility and are shipped to IAE at the request of IAE. C. REPAIRABILITY REQUIREMENTS AWA shall set aside and exclude from the operation of this Service Policy for a period of six months any Life Limited Part for which IAE states it has, or plans to initiate, an active program to achieve a repair, corrective Reoperation or Parts Life Limit extension, provided that such program has equivalent or greater coverage to this warranty. In the event IAE has not released a repair procedure, corrective Reoperation, or Parts Life Limit extension by the expiration of this six month period, such Life Limited Part shall be retained by AWA and excluded from the operation of this Service Policy for additional periods beyond the expiration of said six month period only if agreed to by AWA. D. EXCLUSIONS FROM SERVICE POLICY This Service Policy will not apply to any Engine, Module or Part to the extent it has been determined to the reasonable satisfaction of IAE that said Engine, Module or Part has Failed because: 1. IAE recommendations with respect to installation or maintenance were not properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations), or 2. It has been used contrary to the operating and maintenance instructions or recommendations authorized or issued by IAE and current at the time, or 3. It has been repaired or altered other than by an IAE designated V2500 Maintenance Center in such a way as to impair its safety, operation or efficiency, or 4. It has been subjected to: a. Misuse, neglect, or accident, or b. Ingestion of foreign material, or 5. It has been adversely affected in any way by a part not defined as a Part herein, or 6. It has been adversely affected in any way by occurrences not associated with ordinary use, such as, but not limited to, acts of war, rebellion, seizure or other belligerent acts, in each case, to the extent that such events can be reasonably determined to have contributed to the failure of the Engine, Modules, or Parts. E. PAYMENT OPTIONS 15. 77 IAE at its option may grant any Parts Credit Allowance as either a credit to AWA's account with IAE or as a Part replacement. F. PRESENTATION OF CLAIMS Any request for a Credit Allowance must be presented to IAE not later than 60 days after the receipt of invoice for which the Credit Allowance is requested. If IAE disallows the request, written notification will be provided to AWA. AWA shall have 90 days from such notification to request a reconsideration of the request for Credit Allowance. IAE shall have the right to refuse any request for a Credit Allowance which is not submitted within the stated time periods. G. DURATION OF SERVICE POLICY This Service Policy will cease to apply to all Parts in any Engine that is more than ten years old as measured from the date of shipment of the Engine from the factory. Unless advised to the contrary by IAE, this Service Policy shall, however, continue to be applicable to individual Engines after the expiration of the ten year period on a year to year basis so that AWA may continue to receive the benefits of the Service Policy on the Parts in these Engines. H. GENERAL ADMINISTRATION On matters concerning this Service Policy, AWA is requested to address all correspondence to: IAE International Aero Engines AG 400 Main Street, M/S 121-10 East Hartford, CT 06108 U.S.A. Attention: Warranty Administration I. LIMITATION OF LIABILITY 1. Except as set forth in the Contract, the express provisions of this Service Policy set forth the maximum liability of IAE with respect to any claims relating to this Service Policy. In the event of any conflict or inconsistency between the express provisions of this Service Policy and any illustrations contained herein, the express provisions shall govern. 2. Except to the extent that the Credit Allowances and adjustments expressly set forth in this Service Policy may exceed the limitations of the corresponding portions of any warranties or representations included in any sales agreements, the provisions of this Service Policy do not modify, enlarge or extend in any manner the conditions governing the sale of its Engines and Parts by IAE. 3. IAE reserves the right to change or retract this Service Policy at any time at its sole discretion. No such retraction or change shall diminish the benefits which AWA may be entitled to receive with respect to Engines: (1) Engines purchased from or on firm order with IAE prior to the announcement of any such retraction or change; and (2) Engines to be delivered 16. 78 on Aircraft pursuant to the New Purchase Agreement; and (3) Engines which were installed on the S.A.L.E. Aircraft at time of delivery to AWA. J. ASSIGNMENT OF SERVICE POLICY This Service Policy shall not be assigned, either in whole or in part, by either party, except as provided in the Contract. IAE will, however, upon the written request of AWA, consider an extension of Service Policy Credit Allowances and adjustments to Engines, Modules and Parts sold or leased by an AWA to another operator, to the extent only, however, that such Credit Allowances and adjustments exist at the time of such sale or lease and subject to the terms and conditions of the Service Policy. IAE shall not unreasonably withhold such extension of such Credit Allowances. 17. 79 EXHIBIT E-2 IAE INTERNATIONAL AERO ENGINES AG V2500 NACELLE AND PARTS SERVICE POLICY This Nacelle and Parts Service Policy (Service Policy) is a statement of the terms and conditions under which IAE International Aero Engines AG ("IAE") will grant the Operators of its V2500 Nacelles certain Allowances and adjustments in the event that Parts of such Nacelles suffer Failure in service. This Service Policy is divided into four sections: Section I describes the Allowances and adjustments which will be granted should the Nacelle or Part(s) suffer a Failure. Section II describes the Allowances and adjustments which will be granted when IAE declares a Campaign Change. Section III contains the definitions of certain words and terms used throughout this Service Policy. These words and terms are identified in the text of this Service Policy by the use of initial capital letters for such words and terms. Section IV contains the general conditions governing the application of this Service Policy. VIII. ALLOWANCES AND ADJUSTMENTS A. FIRST RUN NACELLE AND PART 1. A First Run Nacelle is a Nacelle with 6,000 hours or less Nacelle Time and a First Run Part is a Part with 6,000 hours or less Parts Time operating in a First Run Nacelle. 2. If a First Run Part suffers Direct Damage or Resultant Damage, and provided that the Part causing Resultant Damage is also a First Run Part: a. IAE will grant to the Operator: (i) A 100 percent Parts Credit Allowance for any such First Run Part Scrapped, and (ii) A 100 percent Labor Allowance for Parts Repair of any First Run Part requiring Parts Repair. b. If such Damage of a First Run Part causes the removal of the Nacelle from the Aircraft, IAE will, in addition to Subparagraph a. above, grant to the Operator: 1. 80 (i) A 100 percent Labor Allowance for disassembly, reassembly and necessary testing of the Nacelle requiring Reconditioning as a result of such Damage of the First Run Part, and (ii) A 100 percent Parts Credit Allowance for those Expendable Parts required in the Reconditioning of the Nacelle. c. If such Damage of a First Run Part causes the removal of the Nacelle from the Aircraft, IAE will arrange, upon request by the Operator, to Recondition the Nacelle or accomplish the Parts Repair at no charge to the Operator rather than providing the above Allowances. Such work will be accomplished at a V2500 Maintenance Center designated by IAE, and acceptable to AWA . Transportation charges to and from the Maintenance Center shall be paid by the operator. B. PRIMARY PART 1. A Primary Part is a Part other than a First Run Part but having not more than 6,000 hours Parts Time. 2. Primary Parts not eligible for those Allowances granted to First Run Parts are eligible for Allowances under this Section I, Paragraph B., provided that the Primary Part suffers Direct Damage or Resultant Damage and Provided that the Part causing Resultant Damage is also a Primary Part. 3. IAE will grant to the Operator a Parts Credit Allowance for such a Primary Part Scrapped or a Labor Allowance for such a Primary Part for which a Parts Repair is designated in writing by IAE as being eligible for adjustment under this Section I, Paragraph B. Such Allowance will be based on 100 percent to 1,000 hours total Parts Time which then decreases, pro rata, to zero percent at 6000 hours Parts time. IX. CAMPAIGN CHANGE ALLOWANCES AND ADJUSTMENTS A. A Campaign Change is an IAE program, so designated in writing, for the Reoperation, replacement, addition, or deletion of a Part(s). IAE will grant the Allowances and adjustments specified in this Section II to the Operator when Campaign Change recommendations are complied with by the Operator. B. STANDARD ALLOWANCES 1. A 100 percent Parts Credit Allowance for the replacing Parts specified in the Campaign Change for installed or serviceable shelf stock Nacelle Parts which are Scrapped with 6,000 hours or less total Parts Time. 2. A 50 percent Parts Credit Allowance for the replacing Parts specified in the Campaign Change for installed or serviceable shelf stock Nacelle Parts which are Scrapped with more than 6,000 hours total Parts Time. 2. 81 3. A 100 percent Labor Allowance for Reoperation of installed or serviceable shelf stock Nacelle Parts with 6,000 hours or less total Parts Time, which are Reoperated in accordance with the Campaign Change. 4. A 50 percent Labor Allowance for Reoperation of in-stalled or serviceable shelf stock Nacelle Parts with more than 6,000 hours total Parts Time, which are Reoperated in accordance with the Campaign Change. 5. A 100 percent Labor Allowance for disassembly and reassembly of the Nacelle, if the disassembly is recommended by IAE for accomplishment of the Campaign Change and such disassembly is performed solely for the purpose of accomplishing the Campaign Change. C. OPTIONAL ALLOWANCES AND ADJUSTMENTS 1. When IAE declares a Campaign Change, IAE, at its sole option, may grant to the Operator allowances and adjustments, such as, but not necessarily limited to: a. No charge material b. Specially priced material c. Single payment settlements for the Operators' fleet d. Fixed allowance support for each Nacelle. 2. These optional allowances and adjustments will be provided either: a. Instead of the standard Allowances of Paragraph B., b. In addition to the standard Allowances of Paragraph B., or c. As a portion of the standard Allowances of Paragraph B. 3. In no event shall the worth to the Operator, as reasonably determined by IAE, be less than the amount that would have been granted to the Operator as a standard Campaign Change Allowance, per Paragraph B. In considering the use of these optional allowances and adjustments, IAE will attempt to minimize the financial and administrative impact on the Operator. X. DEFINITIONS A. ALLOWANCES 1. "PARTS CREDIT ALLOWANCE" is an amount determined in accordance with the following formula: a. 100 percent Parts Credit Allowance = P 3. 82 b. 50 percent Parts Credit Allowance = P/2 c. Pro rata Parts Credit Allowance = 6,000 - T x P - --------- 5,000 2. "LABOR ALLOWANCE" is an amount determined in accordance with the following formulas, except that in no event shall the amount to be granted for repair of Parts exceed the amount of the Parts Credit Allowance which would have been granted if the Part had been Scrapped. a. 100 percent Labor Allowance = H x R b. 50 percent Labor Allowance = H x R - 2 c. Pro rata Labor Allowance = 6,000 - T x H x R --------- 5,000 3. The variables used in calculating the above Allowances are defined as: P = for a Part Scrapped because of Direct Damage or Resultant Damage, the IAE commercial price of the Part Scrapped current at the time of either the Nacelle removal or Part removal, whichever occurs sooner, or for replacement of Parts because of a Campaign Change, the IAE price of the replacing Part specified in the Campaign Change current at the time of notification to the Operator of the Campaign Change. T = actual Parts Time hours on a Part which has suffered Direct Damage or Resultant Damage or the Parts Life Limit as established for the Part. H = the man-hours required to accomplish the work as established in writing by IAE. R = the labor rate, expressed in dollars per hour, which will be determined as follows: a. If the labor is performed at the Operator's facility, or its subcontractor's facility, the labor rate will be the greater of the Operator's labor rate or the subcontractor's labor rate, where the labor rates were determined in accordance with IAE Form and provided to the Operator in writing, or b. If the labor is performed at a V2500 Maintenance Center designated by IAE, the labor rate will be the then current labor rate at that Center. 4. 83 B. "CAMPAIGN CHANGE" is an IAE program, so designated in writing, for the Reoperation, replacement, addition or deletion of a Part(s) and is characterized by the granting of certain Allowances to the Operator when such recommendations are complied with by the Operator. C. "COMMERCIAL AVIATION USE" is the operation of Nacelles in Aircraft used for commercial, corporate or private transport purposes. The operation of Nacelles by Government Agencies or Services is normally excluded except that IAE will consider written requests for the inclusion of such Nacelles under the provisions of this Service Policy. D. "DIRECT DAMAGE" is the damage suffered by a Part itself upon its Failure. E. "ECONOMICALLY REPAIRABLE" shall generally mean that the cost of the repair as determined by IAE exclusive of modification and transportation costs, will be equal to or less than 65 percent of the IAE commercial price of the Part at the time the repair is considered, or, shall be as otherwise reasonably determined by IAE. F. "EXPENDABLE PARTS" means those nonreusable Parts, as determined by IAE, which are required to be replaced during inspection or Reconditioning, regardless of the condition of the Part. G. "FAILURE (FAILED) is the breakage, injury, or malfunction of a Part rendering it unserviceable and incapable of continued operation without corrective action. H. "FIRST RUN NACELLE" is a Nacelle with 6,000 hours or less Nacelle Time. I. "FIRST RUN PART" is a Nacelle Part with 6,000 hours or less Parts Time operating in a First Run Nacelle. J. "NACELLE(S)" means V2500 nacelle(s) and thrust reverser, as described in IAE Specifications referenced below, as such Specifications may be revised from time to time, sold by IAE for Commercial Aviation Use, whether installed as new equipment in aircraft by the manufacturer thereof and delivered to the Operator or delivered directly to the Operator from IAE for use as a spare nacelle. A Nacelle which has been converted or upgraded in accordance with IAE instructions shall continue to qualify for Allowances and adjustments under the provisions of this Service Policy.
MODEL NO. SPECIFICATION NO. SPECIFICATION FATE V2500 IAE 0004 December 1988, as amended
K. "NACELLE TIME" is the total number of flight hours of operation of a Nacelle. L. "OPERATOR" is the owner of one or more Nacelles operated for Commercial Aviation use, the lessee if such Nacelle(s) is the subject of a long-term financing lease or as otherwise reasonably determined by IAE. 5. 84 M. "PART(S)" means Nacelle parts delivered to the Operator as original equipment in a Nacelle or Nacelle parts sold and delivered by IAE to the Operator as new spare parts in support of a Nacelle. N. "PARTS LIFE LIMIT" is the maximum allowable Parts Time, for specific Parts as established by IAE or by the Federal Aviation Administration in an Airworthiness Directive. O. "PARTS REPAIR" means the IAE designated restoration of Failed Parts to functional serviceable status, excluding repair of normal wear and tear, as determined by IAE. P. "PARTS TIME" is the total number of flight hours of operation of a Part. Q. "PRIMARY PART" means a Part other than a First Run Part but not having more than 6,000 hours Parts Time. R. "RECONDITIONING" means the restoration of a Nacelle allowing substitution of new or serviceable used Parts, to the extent necessary for continued operation of the Nacelle as a serviceable unit. When such Reconditioning is performed by IAE designated V2500 Maintenance Center, the Parts Time, of the replaced Part shall, for the purpose of this Service Policy, be applicable to the substituted new or serviceable used Part. Said replaced Part shall become the property of IAE. S. "REOPERATION" is the alternation to or modification of a Part. T. "RESULTANT DAMAGE" is the damage suffered by a Part because of the Failure of another Part within the same Nacelle. U. "SCRAPPED PARTS (SCRAP, SCRAPPED, SCRAPPAGE)" shall mean those Parts determined by IAE to be unserviceable and not Economically Repairable. The Operator shall cause such Parts to be mutilated or disposed of in such a manner as to preclude any possible further use as a Nacelle Part. XI. GENERAL CONDITIONS The following general conditions govern the application of this Service Policy: A. RECORDS AND AUDIT The Operator shall maintain adequate records for the administration of this Service Policy and shall permit IAE to audit such records at reasonable intervals. B. SCRAPPING OF PARTS 1. SCRAPPAGE VERIFICATION Any Part for which a Parts Credit Allowance is requested shall be verified as Scrapped prior to the issuance of the Allowance. Verification of Scrappage shall occur as Follows: 6. 85 a. At the Operator's, or its subcontractor's, facility. Such verification shall be accomplished by the IAE Field Representative. b. At a V2500 Maintenance Center designated by IAE, provided that IAE concurs that the Part is to be Scrapped. Sufficient information to identify the Nacelle from which the Part was removed, and the reason for its return shall be provided. 2. RETURN OF PARTS IAE, at its sole option, may require the Operator to return to IAE any Part for which a Parts Credit Allowance is requested. Such return shall be a condition for the issuance of a Parts Credit Allowance. 3. TRANSPORTATION EXPENSES Transportation expenses shall be at the expense of the Operator if such Parts are shipped to and from a V2500 Maintenance Center designated by IAE for examination and verification; except, that IAE shall pay the expense of transport of such Parts as are shipped at the request of IAE. 4. TITLE Title to such Parts returned to IAE shall vest in IAE. a. Upon determination by IAE that the Operator is eligible for a Parts Credit Allowance. If it is determined that the Parts are scrapped Parts but are not eligible for Service Policy coverage, the Operator will be notified of the decision and the Parts returned at the Operator's expense if the Operator so requests; otherwise, the Parts will be disposed of by IAE without any type of adjustment, or b. Upon shipment, when such Parts are determined to be Scrap at the Operator's facility and are shipped to IAE at the request of IAE. C. REPAIRABILITY REQUIREMENTS The Operator shall set aside and exclude from the operation of this Service Policy for a period of six months any Part for which IAE states it has, or plans to initiate, an active program to achieve a repair, corrective Reoperation or Parts Life Limit extension provided that such program has equivalent or greater coverage to this warranty. In the event IAE has not released a repair procedure, corrective Reoperation, or Parts Life Limit extension by the expiration of this six month period, such Part shall be retained by the Operator and excluded from the operation of this Service Policy for additional periods beyond the expiration of said six month period only if agreed to by the Operator. D. EXCLUSIONS FROM SERVICE POLICY This Service Policy will not apply to any Nacelle, or Part if it has been determined to the reasonable satisfaction of IAE that said Nacelle or Part has Failed because: 7. 86 1. IAE recommendations with respect to installation or maintenance were not properly implemented (proper implementation of such recommendation taking into consideration the impact on AWA's operations), or 2. It has been used contrary to the operating and maintenance instructions or recommendations authorized or issued by IAE and current at the time, or 3. It has been repaired or altered outside any V2500 Maintenance Center in such a way as to impair its safety, operation or efficiency, or 4. It has been subjected to: a. Misuse, neglect, or accident, or b. Ingestion of foreign material, or 5. It has been adversely affected in any way by a part not defined as a Part herein, or 6. It has been affected in any way by occurrences not associated with ordinary use, such as, but not limited to, acts of war, rebellion, seizure or other belligerent acts, in each case, to the extent that such events can be reasonably determined to have contributed to the failure of the Engine, Modules, or Parts. E. PAYMENT OPTIONS IAE at its option may grant any Parts Credit Allowance as either a credit to the Operator's account or as a Part replacement. F. PRESENTATION OF CLAIMS Any request for an Allowance must be presented to IAE not later than 180 days after the removal from service of the Engine or Part for which the Allowance is requested. If IAE disallows the request, written notification will be provided to the Operator. The Operator shall have 90 days from such notification to request a reconsideration of the request for Allowance. IAE shall have the right to refuse any request for an Allowance which is not submitted within the stated time periods. G. DURATION OF SERVICE POLICY This Service Policy will cease to apply to all Parts in any Nacelle that is more than ten years old as measured from the date of shipment of the Nacelle from the factory. This Service Policy shall, however, continue to be applicable to individual Nacelles after the expiration of the ten year period on a year to year basis so that the Operator may continue to receive the benefits of the Service Policy on the Parts in these Nacelles. 8. 87 H. GENERAL ADMINISTRATION On matters concerning this Service Policy, the Operator is requested to address all correspondence to: IAE International Aero Engines AG 400 Main Street, M/S 121-10 East Hartford, CT 06108 U.S.A. Attention: Warranty Administration I. LIMITATION OF LIABILITY 1. Except on set forth in the Contract the express provisions of this Service Policy set forth the maximum liability of IAE with respect to any claims relating to this Service Policy. 2. Except to the extent that the Allowances and adjustments expressly set forth in this Service Policy may exceed the limitations of the corresponding portions of any warranties or representations included in any sales agreements, the provisions of this Service Policy do not modify, enlarge or extend in any manner the conditions governing the sale of its Nacelles and Parts by IAE. 3. IAE reserves the right to change or retract this Service Policy at any time at its sole discretion. No such retraction or change shall diminish the benefits which AWA may be entitled to receive with respect to Nacelles: (1) Nacelles to be delivered on Aircraft pursuant to the New Purchase Agreement; and (2) Nacelles which were installed on the S.A.L.E. Aircraft at time of delivery to AWA. J. ASSIGNMENT OF SERVICE POLICY This Service Policy shall not be assigned, either in whole or in part, by either party except as provided in the Contract. IAE will, however, upon the written request of the Operator consider an extension of Service Policy Allowances and adjustments to Nacelles and Parts sold or leased by an Operator to another Operator, to the extent only, however, that such Allowances and adjustments exist at the time of such sale or lease and subject to the terms and conditions of the Service Policy. IAE shall not unreasonably withhold such extension of such Allowances. 9. 88 EXHIBIT E-3 WARRANTY FOR SPECIAL TOOLS AND GROUND EQUIPMENT 1. If it is shown that a defect in material or workmanship has become apparent in any item of special tooling and ground equipment within one year from the date of receipt of such item by the Operator, then IAE will either as it may in its sole discretion determine repair or exchange such item free of charge. 2. The obligations of IAE under this Warranty are subject to the following terms and conditions. 2.1 The defect must not be due to misuse, negligence of anyone other than IAE, accident or misapplication. 2.2 Such item shall not have been used, maintained, modified, stored or handled other than in a manner approved by IAE. 2.3 Any claim under this Warranty shall be made in writing to IAE within 90 days of the discovery of the defect and the defective item shall be made available or sent to IAE for inspection as it may require. 3. IAE shall not be liable for any incidental, consequential or resultant loss or damage howsoever occurring, nor for labor costs involved in removal or replacement of parts. 1. 89 EXHIBIT E-4 V2500 PARTS COST GUARANTEE I. INTRODUCTION IAE covenants to AWA that during the Guarantee Period, the cumulative Eligible Parts Cost will not, subject to escalation, exceed a Guaranteed Cost Rate of [***] per Eligible Engine flight hour. Under this Guarantee, if the cumulative Eligible Parts Cost per Eligible Engine flight hour of AWA's Engines over the Guarantee Period exceeds the escalated Guaranteed Cost Rate, IAE will credit AWA's account with IAE an amount of [***] of the excess costs as described in paragraph II.F. II. GUARANTEE A. GUARANTEE PERIOD The Guarantee Period will be the [***] period following the [***] B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. ELIGIBLE PARTS COSTS Eligible Parts Costs shall comprise the cost of Parts which are removed from Eligible Engines and actually Scrapped as a result of: 1. a [***] 2. [***] 3. an [***]; and 4. [***]; except for Parts Scrapped as the result of life limitation and vendor proprietary accessories and parts therein. D. ADJUSTED PARTS COST Within [***] following each [***] of the commencement of the Guarantee Period, AWA will report to IAE the Eligible Parts Costs incurred by AWA during the preceding [***] together with a statement of any contributions received from IAE or third parties - --------- [*] indicates Redacted material 1. 90 towards such Eligible Parts Costs. Within the following [***], IAE and AWA will jointly calculate the adjusted Parts Costs for that [***] making appropriate reductions for contributions received by AWA from IAE and third parties including, but not limited to: Prior remedy payments under this guarantee, warranty payments in the form of a Parts Credit Allowance or a Parts replacement, commercial assistance programs provided by IAE or its shareholders, insurance settlement, and maintenance provider warranty settlements (the "Adjusted Parts Costs"). and for disallowed Parts Costs incurred by AWA because IAE recommendations with respect to installation or maintenance were not properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). E. GUARANTEED PARTS COST Within thirty days following each [***] of the commencement of the Guarantee Period, AWA will report to IAE the flight hours of Eligible Engines operated by AWA in the preceding [***]. Within thirty days of receipt of the flight hours for Eligible Engines, IAE will calculate the Guaranteed Parts Cost (GPC) for AWA for that [***] using the following formula: GPC = A x Escalated Guaranteed Cost Rate ("GCR") where: A is the flight hours of Eligible Engines operated by AWA in that [***]; Escalated GCR is $[***]/engine Flight Hours escalated for that [***]; and the Escalated Guaranteed Cost Rate for any [***] is calculated by determining the arithmetic average of the Guaranteed Cost Rate calculated for each [***] using the IAE Escalation Formula attached to this Contract for a Base Month of January, 1996. F. ANNUAL STATEMENT Following the [***] of the commencement of the Guarantee Period, IAE will, within thirty days following the calculation of the adjusted parts cost and the GPC, credit AWA's account with IAE an amount equal to [***] of the difference between the Adjusted Parts Costs for each preceding year and of the Guaranteed Parts Costs for [***]. III DEFINITIONS AND GENERAL CONDITIONS All of the definitions and General Conditions of the V2500 Engine and Parts Service Policy (Exhibit E-1) shall apply to this Guarantee. Engines and Engine maintenance excluded by the General Conditions of the Policy shall be excluded from this Guarantee except that Parts Costs incurred during Engine maintenance resulting from ingestion of birds, hailstones or runway gravel shall be included as Eligible under this Guarantee. - --------- [*] indicates Redacted material 2. 91 IV SPECIFIC CONDITIONS A. THE GUARANTEED COST RATE IS PREDICATED ON THE USE BY AWA OF: 1. An average flight cycle of no less than [***]; 2. Thrust levels which are derated an average of [***] percent for takeoff and climb relative to full takeoff and climb ratings; 3. An average Firm Aircraft utilization equal to or less than [***] flight hours per year; 4. a fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] S.A.L.E. Aircraft and [***] Purchased Items; and 5. a delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. B. [***] C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V. EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the parts cost level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA - --------- [*] indicates Redacted material 3. 92 may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. 4. 93 EXHIBIT E-5 V2500 RELIABILITY GUARANTEE I. INTRODUCTION IAE covenants to AWA that during the Guarantee Period, the cumulative Engine Shop Visit Rate will not exceed a Guaranteed Rate of [***] per [***] Eligible Engine flight hours. Under this Guarantee, if the cumulative Engine Shop Visit Rate exceeds the Guaranteed Rate, IAE will credit AWA's account with IAE an amount of $[***] U.S. Dollars for each Eligible Engine Shop Visit determined to have been in excess of the Guaranteed Rate. II. GUARANTEE A. GUARANTEE PERIOD The Guarantee Period will be the [***] period following the [***] B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. ELIGIBLE SHOP VISITS Eligible Shop Visits shall comprise the shop visits of Eligible Engines required for the following reasons: 1. [***]; 2. [***]; 3. [***]; and 4. [***]. D. REPORTING OF ENGINE SHOP VISITS AND ENGINE FLIGHT HOURS Eligible Shop Visits shall be reported to IAE by AWA within [***] following each [***] of the commencement of the Guarantee Period using IAE Form FIAE-152 together with such other information as may be needed to determine the Eligibility of the Engine Shop Visit. [***] - --------- [*] indicates Redacted material 1. 94 [***] AWA shall have the right to provide additional information for IAE's consideration in an effort to qualify such event as eligible. Within thirty days following each [***] of the commencement of the Guarantee Period, AWA will report to IAE the flight hours of Eligible Engines operated by AWA in the preceding [***]. E. CREDIT ALLOWANCE CALCULATION A credit of $[***] U.S. Dollars will be granted by IAE for each Eligible Engine Shop Visit determined as calculated below to be in excess of the Guaranteed Rate during the Guarantee Period. An [***] calculation will be made no later than [***] following receipt of IAE form FIAE-152 and the flight hours accumulated on Eligible Engines. Each [***] calculation will be made using data that will be cumulative from the start of the Guarantee Period. An interim credit will be granted, if necessary, following the [***] calculations for the [***] and each subsequent year of the Guarantee Period. If subsequent [***] calculations show that on a cumulative basis, a previous interim credit (or portion thereof) was excessive, such excess amount shall be subject to repayment which will be effected by IAE issuing a debit against AWA's account with IAE. Credits and debits will be applied to AWA's account with IAE not later than [***] following a calculation for the [***] of the Guarantee Period, as applicable. Credit Allowance = (AR - GR) x $[***] U.S. Dollars where: AR = Total Eligible Engine Shop Visits during the period of the calculation. GR = [***] removals per [***] Engine flight hours x total engine flight hours accumulated on Eligible Engines during the period of the calculation. (NOTE: GR will be rounded to the nearest whole number.) III. DEFINITIONS AND GENERAL CONDITIONS All of the Definitions and General Conditions of the V2500 Engine and Parts Service Policy (Exhibit E-1) shall apply to this Guarantee. Engines and Engine Shop Visits excluded by the General Conditions of the Policy shall be excluded from this Guarantee except that Engine Shop Visits resulting from ingestion of birds, hailstones or runway gravel shall be included as Eligible under this Guarantee. - --------- [*] indicates Redacted material 2. 95 IV. SPECIFIC CONDITIONS A. The Guaranteed Rate is predicated on the use by AWA of: 1. An average flight cycle of no less than [***] hours; 2. Thrust levels which are derated an average of [***] percent for Takeoff and Climb relative to full Takeoff and Climb ratings; 3. An average Engine utilization equal to or less than [***] flight hours per year; and 4. A fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] Aircraft and [***] Purchased Items; and 5. A delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. B. [***] C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the reliability level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA - --------- [*] indicates Redacted material 3. 96 may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. 4. 97 EXHIBIT E-6 V2500 INFLIGHT SHUTDOWN GUARANTEE I. INTRODUCTION IAE covenants to AWA that during the Guarantee Period, the cumulative Engine Inflight Shutdown Rate will not exceed a Guaranteed Rate of [***] per [***] Eligible Engine flight hours. Under this Guarantee, if the cumulative Eligible Inflight Shutdown Rate is determined to have exceeded the Guaranteed Rate over the Guarantee Period, IAE will credit AWA's account with IAE an amount of $[***] U.S. Dollars for each Eligible Inflight Shutdown determined to have been in excess of the Guaranteed Rate. II. GUARANTEE A. GUARANTEE PERIOD The Guarantee Period will be the [***] period following the [***] B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. ELIGIBLE INFLIGHT SHUTDOWNS Eligible Inflight Shutdowns shall comprise the inflight shutdown of an Eligible Engine during a scheduled revenue flight which is determined to have been caused by a Failure of a Part of such Engine. Multiple inflight shutdowns of the same Engine during the same flight leg for the same problem will be counted as one Eligible Inflight Shutdown. [***] D. REPORTING OF ELIGIBLE INFLIGHT SHUTDOWNS Eligible Inflight Shutdowns shall be reported to IAE by AWA within [***] following each [***] of the commencement of the Guarantee Period using IAE Form FIAE-153 together with such other information as may be needed to determine the Eligibility of the Inflight Shutdown. Each such Form shall be verified by an authorized IAE Representative before submission. Should it be necessary to disqualify a reported Inflight Shutdown, IAE will notify AWA of such intent. AWA shall have the right to provide additional information for IAE's consideration in an effort to qualify such event as eligible. Within [***] following - --------- [*] indicates Redacted material 1. 98 each [***] of the commencement of the Guarantee Period, AWA will report to IAE the flight hours of Eligible Engines operated by AWA in the [***]. Notwithstanding the foregoing, AWA's failure to provide data will not invalidate the coverage provided by this Guarantee if data can be accurately recreated unless the data was specifically requested by IAE and AWA failed to provide the information. E. CREDIT ALLOWANCE CALCULATION A credit of $[***] U.S. Dollars will be granted by IAE for each Eligible Inflight Shutdown determined as calculated below to be in excess of the Guaranteed Rate during the Guarantee Period. An [***] calculation will be made no later than [***] following receipt of IAE form FIAE-153 and flight hours accumulated on Eligible Engines. Each [***] calculation will be made using data that will be cumulative from the start of the Guarantee Period. An interim credit will be granted, if necessary, following the annual calculations for the [***] and each [***] of the Guarantee Period. Credits will be applied to AWA's account with IAE not later than [***] following a calculation for the [***] and each [***] of the Guarantee Period, as applicable. The Credit Allowance = (AI - GI) x $[***] U.S. Dollars Where: AI = Total Eligible Inflight Shutdowns during the period of the calculation; GI = [***] inflight shutdowns per [***] engine flight hours) x total Engine flight hours accumulated on Eligible Engines during the period of the calculation. (NOTE: GI will be rounded to the nearest whole number.) III. DEFINITIONS AND GENERAL CONDITIONS All of the Definitions and General Conditions of the V2500 Engine and Parts Service Policy (Exhibit E-1) shall apply to this Guarantee. Engines and Inflight Shutdowns excluded by the General Conditions of the Policy shall be excluded from this Guarantee. IV. SPECIFIC CONDITIONS A. The Guaranteed Rate is predicated on the use by AWA of: 1. An average flight cycle of no less than [***] hours; 2. Thrust levels which are derated an average of [***] percent for Takeoff and Climb relative to full Takeoff and Climb ratings; 3. An average Aircraft utilization equal to or less than [***] flight hours per year; - --------- [*] indicates Redacted material 2. 99 4. A fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] Aircraft and [***] Purchased Items; and 5. A delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. B. [***] C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the reliability level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. - --------- [*] indicates Redacted material 3. 100 EXHIBIT E-7 V2500 DELAY AND CANCELLATION I. INTRODUCTION IAE covenants to AWA that during the Guarantee Period, the cumulative Engine caused delay and cancellation rate will not exceed a Guaranteed Rate of [***] per [***] Aircraft departures. Under this Guarantee, if the cumulative Engine-caused delay and cancellation Rate is determined to have exceeded the Guaranteed Rate over the Guarantee Period, IAE will credit AWA's account with IAE an amount of $[***] U.S. Dollars for each excess Eligible delay and cancellation determined to have been in excess of the Guaranteed Rate. II. GUARANTEE A. GUARANTEE PERIOD The Guarantee Period will be the [***] period following the [***] B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. (i) ELIGIBLE DELAY An Eligible delay shall occur when by a Failure of a Part in an Eligible Engine installed in an Aircraft is the initial and primary cause of a delay in the final Departure of that Aircraft by fifteen or more minutes after its scheduled Departure in either of the following instances: 2. an originating flight departing later than its scheduled departure time; or 3. a through flight or a turnaround flight remaining on the ground longer than its scheduled ground time. C. (ii) ELIGIBLE CANCELLATION A single cancellation shall occur when a Failure of a Part in an Eligible Engine installed in an Aircraft is the initial and primary cause of the elimination of a departure in either of the following instances: 1. cancellation of a trip comprising a single flight leg; or - --------- [*] indicates Redacted material 1. 101 2. cancellation of any or all of the flight legs of a multiple leg trip. C. (iii) [***] shall be an Eligible cancellation not an Eligible Delay. C. (iv) Consecutive delays and cancellations for the same problem because corrective action had not been taken will be excluded unless AWA is prevented from taking corrective action due to a failure of IAE to reasonably provide technical support. D. DEPARTURE A Departure comprises the movement of an Aircraft from the blocks for the purpose of an intended revenue flight provided that there can be only one Departure for each intended flight. E. REPORTING OF ELIGIBLE DELAYS AND CANCELLATIONS Eligible delays and cancellations shall be reported to IAE by AWA [***] during the Guarantee Period using IAE Form FIAE-155 together with such other information as may be needed to determine the Eligibility of the delay or cancellation. Each such Form shall be verified by an authorized IAE Representative before submission. Should it be necessary to disqualify a reported delay or cancellation, IAE will notify AWA of such intent. AWA shall have the right to provide additional information for IAE's consideration in an effort to qualify such event as eligible. Departures accumulated by Eligible Engines during the Guarantee Period shall be reported by AWA within [***] following each [***] of the commencement of the Guarantee Period. Notwithstanding the foregoing, AWA's failure to submit such information to IAE shall not invalidate the coverage provided by this Guarantee if the information can be accurately recreated unless IAE requested the information from AWA and AWA failed to provide the information. F. CREDIT ALLOWANCE CALCULATION A credit of $[***] U.S. Dollars will be granted by IAE for each Eligible Delay and Eligible Cancellation determined as calculated below to be in excess of the Guaranteed Rate during the Guarantee Period. An [***] calculation will be made no later than [***] following receipt of the necessary records of Delays, Cancellation and Departure. Each annual calculation will be made using data that will be cumulative from the start of the Guarantee Period. An interim credit will be granted, if necessary, following the [***] calculations for the [***] and each [***] of the Guarantee Period. If subsequent [***] calculations show that on a cumulative basis, a previous interim credit (or portion thereof) was excessive, such excess amount shall be subject to repayment which will be effected by IAE - --------- [*] indicates Redacted material 2. 102 issuing a debit against AWA's account with IAE. Credits and debits will be applied to AWA's account with IAE not later than [***] following the calculation ADC for the [***] and each [***] of the Guarantee Period, as applicable. Credit Allowance = (ADC - GDC) x $[***] U.S. Dollars Where: ADC = Total qualifying Eligible Delays and Eligible Cancellations. GDC = [***] Eligible Delays and Eligible Cancellations per [***] Departures) x total Departures completed on Eligible Engines during the applicable period of calculation. III. DEFINITIONS AND GENERAL CONDITIONS All of the Definitions and General Conditions of the V2500 Engine and Parts Service Policy (Exhibit E-1) shall apply to this Guarantee. Delays and Cancellation excluded by the General Conditions of the Policy shall be excluded from this Guarantee. IV SPECIFIC CONDITIONS A. The Guaranteed Rate is predicated on the use by AWA of: 1. An average flight cycle of no less than [***] hours; 2. Thrust levels which are derated an average of [***] percent for Takeoff relative to full Takeoff ratings; 3. An average Aircraft utilization equal to or less than [***] flight hours per year; 4. A fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] S.A.L.E. Aircraft and [***] Purchased Items; and 5. A delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. B. [***] - --------- [*] indicates Redacted material 3. 103 C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V. EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the reliability level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. - --------- [*] indicates Redacted material 4. 104 EXHIBIT E-8 V2500 FUEL CONSUMPTION RETENTION GUARANTEE I INTRODUCTION IAE covenants to AWA that at the end of the Period of Guarantee, the fleet average cruise fuel consumption for Eligible Engines will not have increased by more than a Guaranteed Margin of [***]. Under this Guarantee, if the fleet average cruise fuel consumption for Eligible Engines exceeds the Guaranteed Margin at the end of the Guarantee Period, IAE will credit AWA's account with IAE an amount in respect of excess fuel consumed. II. GUARANTEE A. PERIOD OF GUARANTEE The Guarantee Period will be the [***] period following [***]. B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. FUEL CONSUMPTION MEASUREMENT The inflight data required for administration of this Guarantee will be obtained by AWA during steady state cruise conditions using methods which will be mutually agreed between AWA and IAE. Steady state cruise conditions are defined as a minimum of five minutes at the same altitude, Mach number and thrust setting Engine Pressure Ratio in clear, smooth air with normal bleed and power extraction and autothrottle disengaged (unless flight evaluation shows this disengagement to be unnecessary). Data points falling within the following envelope of altitude, Mach number and Engine Pressure Ratio: Mach No. -- TBD to TBD, Altitude -- TBD to TBD feet, Engine Pressure Ratio -- TBD to TBD will be deemed to be Acceptable Data Points, provided that: 1. the fuel consumption data for any Eligible Engine on which the engine parameters indicate a possible malfunction (including associated Aircraft systems), other than normal gas path deterioration, that is subsequently confirmed by maintenance action will not be considered acceptable data, and 2. data which is obviously inaccurate under normal engine monitoring practices will not be considered acceptable data; this type of data will be rejected unless AWA validity checks have established that Total Air Temperature, Fuel Flow Aircraft and Engine Bleed Systems and other Aircraft parameters are within normal operating ranges. - ---------- [*] indicates Redacted material 1. 105 The data to be recorded will be that normally recorded for Engine Condition Monitoring purposes and will include the following: Altitude Mach Number Total Air Temperature (TAT) Indicated Airspeed (IAS) Engine Pressure Ratio (EPR) Fuel Flow Low Compressor Rotor Speed (N1) High Compressor Rotor Speed (N2) Exhaust Gas Temperature (EGT) Bleed Air Configuration Engine Fuel Flow measurements will be referred to in the Standard Engine Fuel Flow-Engine Pressure Ratio Relationship which will be defined for installed Engines by the Aircraft manufacturer during the Aircraft flight test certification program. D. BASE FUEL FLOW The Base Fuel Flow shall be the initial fuel flow level of each Eligible Engine on commencement of its commercial service. This shall be the average of the cruise fuel flow values for the first ten Acceptable Data Points recorded for each Eligible Engine. Base Fuel Flow is represented as a percentage deviation from the Standard Engine Fuel Flow-Engine Pressure Ratio Relationship. E. CRUISE FUEL FLOW The Cruise Fuel Flow shall be the average of the cruise fuel flow values for ten Acceptable Data Points for each installed Eligible Engine at any time after that Engine's Base Fuel Flow is established. Cruise Fuel Flow will also be expressed as a percent deviation from the Standard Engine Fuel Flow-Engine Pressure Ratio Relationship. F. ENGINE CRUISE FUEL FLOW DETERIORATION The Cruise Fuel Flow Deterioration for an Eligible Engine shall be the difference between its Cruise Fuel Flow and the Base Fuel Flow expressed in percentage points. G. PERIODIC FLEET AVERAGE CRUISE FUEL CONSUMPTION DETERIORATION The Periodic Fleet Average Cruise Fuel Consumption Deterioration shall be the average of the Cruise Fuel Flow Deterioration for all installed Eligible Engines for a [***] reporting period. This is to be reported to IAE every [***]. - --------- [*] indicates Redacted material 2. 106 H. FINAL FLEET AVERAGE CRUISE FUEL CONSUMPTION DETERIORATION The Final Fleet Average Cruise Fuel Consumption Deterioration is the average of the Periodic Fleet Average Cruise Fuel Consumption Deterioration values for all [***] periods during the Period of Guarantee. I. OPERATIONAL DATA AWA shall provide the following data to IAE as indicated during the Period of the Guarantee: 1. Total quantity of fuel consumed by Eligible Engines during the Period (U.S. Gallons), every [***]. 2. Average cost of fuel to AWA over the Period of Guarantee (U.S. Dollars per U.S. Gallon), every [***]. 3. Individual Eligible Engine operating hours for each [***] period during the Period of Guarantee identified by engine serial number, annually. 4. Engine maintenance action information, as requested. J. EXCESS FUEL CONSUMPTION CREDIT CALCULATION If at the [***] the Final Fleet Average Fuel Consumption Deterioration exceeds the Guaranteed Margin, IAE will grant AWA a credit in respect to excess fuel consumption calculated in accordance with the following formula: C = (D-GM) YHF where: C = the amount of the credit in U.S. dollars D = the Final Fleet Average Fuel Consumption Deterioration (expressed as a percentage) GM = the Guaranteed Margin (expressed as a percentage) Y = average cruise fuel flow of Eligible Engines expressed in U.S. gallons per hour H = the total of all flight hours flown by Eligible Engines during the Period of Guarantee F = [***] - ---------- [*] indicates Redacted material 3. 107 In the alternative, the Credit Calculation will be made using the ECM Trend Monitoring Program. In such event, the [***] reporting requirements are not required and references to [***] periods shall be deemed deleted. Instead, the Trend Monitoring data will be shared with IAE on a regular basis. III. DEFINITIONS AND GENERAL CONDITIONS All of the Definitions and General Conditions of the V2500 Engine and Parts Service Policy shall apply to this Guarantee. Engines excluded by the General Conditions of the Policy shall be excluded from this Guarantee. IV. SPECIFIC CONDITIONS A. The Guaranteed Rate is predicated on the use by AWA of: 1. An average flight cycle of no less than [***] hours; 2. Thrust levels which are derated an average of [***] percent for Takeoff and Climb relative to full Takeoff and Climb ratings; 3. An average Aircraft utilization equal to or less than [***] flight hours per year; 4. A fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] Aircraft and [***] Purchased Items; and 5. A delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. B. [***] C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. - ---------- [*] indicates Redacted material 4. 108 E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V. EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the performance level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. 5. 109 EXHIBIT E-9 V2500 EXHAUST GAS TEMPERATURE GUARANTEE I. INTRODUCTION IAE covenants with AWA that during the first [***] hours of operation of each V2500 Engine, the maximum stabilized takeoff exhaust gas temperature will not exceed the Certified Limit. Under this Guarantee if it is confirmed that the Certified Limit has been exceeded, IAE will credit AWA's account with IAE in the amount equal to the pro rata cost to restore the Engine performance. Further, if there are five or more confirmed Engine removals to restore Engine performance during the term of this Guarantee, additional credits will be provided to AWA as described in section II E below. For the purpose of this Guarantee, the Certified Limit is exceeded if the Engine will not achieve the specified engine pressure ratio for takeoff thrust without exceeding the Certified Limit for its exhaust gas temperature. II. GUARANTEE A. PERIOD OF GUARANTEE The Period of Guarantee for each Eligible Engine will begin as of [***] and will terminate [***] from that [***] or upon the expiration of the first [***] hours of operation of such Engine, whichever is the sooner. B. ELIGIBLE ENGINES The Engines that will be Eligible Engines under this Guarantee shall be the Engines delivered with the Aircraft, the Purchased Items and S.A.L.E. Engines. The Engines shall remain Eligible Engines provided that IAE recommendations with respect to installation or maintenance are properly implemented (proper implementation of such recommendations taking into consideration the impact on AWA's operations). C. RESTORATION OF INSTALLED ENGINE If during the Period of Guarantee, the maximum stabilized takeoff exhaust gas temperature of an Eligible Engine installed on an Aircraft operated by AWA exceeds the Certified Limit, AWA shall undertake on-wing Engine maintenance recommended by IAE, with technical assistance provided by IAE, to restore the performance of that Engine. D. CALIBRATION OF REMOVED ENGINE If the performance of an installed Eligible Engine cannot be restored by the maintenance recommended under Section II, Paragraph C, AWA shall promptly remove such Engine from the Aircraft and dispatch it for calibration in an IAE designated test cell. If such calibration verifies that the exhaust gas temperature of the Engine is not in excess of the Certified Limit or it is established that any excess is due to causes which are excluded by the General Conditions in Section III, then the cost of such test cell calibration and associated transportation will be borne by AWA. Otherwise, IAE will bear the cost of the test cell calibration. - ---------- [*] indicates Redacted material 1. 110 E. CREDIT ALLOWANCE A credit will be granted by IAE for each event not meeting the requirements set forth in Section I of this Guarantee and as verified by Section II, Paragraph D. above. Such credit shall be equivalent to the pro rata cost to restore the Engine's performance based on the time remaining on the Engine's first [***] flight hours of commercial operation according to the following equation; Credit = (([***] engine flight hours - engine flight hours of commercial operation)/[***])) x cost of performance restoration In addition to the above, should there be [***] or more confirmed Engine removals to restore Engine performance during the Period of Guarantee, the following additional credit will be granted by IAE. For the [***] confirmed removal through the [***] confirmed removal: Credit - $[***] per confirmed removal; For the tenth and each additional confirmed removal; Credit = $[***] per confirmed removal. IAE's maximum liability for these additional credits shall be $[***]. III. DEFINITIONS AND GENERAL CONDITIONS All of the Definitions and General Conditions of the V2500 Engine and Parts Service Policy shall apply to this Guarantee. Engines excluded by the General Conditions of the Policy shall be excluded from this Guarantee. IV. SPECIFIC CONDITIONS A. The Guaranteed Rate is predicated on the use by AWA of: 1. An average flight cycle of no less than [***] hours; 2. Thrust levels which are derated an average of [***] percent for Takeoff and Climb relative to full Takeoff and Climb ratings; 3. An average Aircraft utilization equal to or less than [***] flight hours per year; and 4. A fleet of aircraft and spare Engines consisting of [***] Firm Aircraft, [***] Aircraft and [***] Purchased Items; and 5. A delivery schedule in respect of the aforementioned aircraft and spare Engines as set forth in Exhibit A, Exhibit B and Clause 1.1.6 of the Contract on the date of Contract signature. - ---------- [*] indicates Redacted material 2. 111 B. [***] C. IAE hereby confirms that the analytical relationships and processes used to calculate the original coverage provided by the Warranties for the Aircraft will be used to calculate the adjusted levels of coverage for the V2500 Guarantees set forth in the Contract. D. Any modifications to the Guaranteed Cost Rate will be made in consultation with AWA. Further, IAE will, at AWA's request, recalculate the Guaranteed Cost Rate one time in each [***] during the Period of Guarantee. E. AWA and IAE establish by mutual agreement modifications or Parts which can be incorporated to correct Guarantee exceedances, and AWA will incorporate the changes into Eligible Engines. V. EXCLUSION OF BENEFITS The intent of this Guarantee is to provide specified benefits to AWA as a result of the failure of Eligible Engines to achieve the performance level stipulated in the Guarantee. It is not the intent, however, to duplicate benefits provided to AWA under any other applicable guarantee, sales warranty, service policy, or any special benefit of any kind as a result of the same failure. Therefore, the terms and conditions of this Guarantee notwithstanding, if the terms of this Guarantee should make duplicate benefits available to AWA from IAE or any third-party, AWA may elect to receive the benefits under this Guarantee or under any of the other benefits described above, but not both. - --------- [*] indicated Redacted material 3. 112 7 October 1998 America West Airlines, Inc. 4000 East Sky Harbor Boulevard Sky Harbor International Airport Phoenix, Arizona 85034 Subject: SIDE LETTER NO. 1 TO AMENDED AND RESTATED V2500(R) SUPPORT CONTRACT BETWEEN AMERICA WEST AIRLINES, INC. AND IAE INTERNATIONAL AERO ENGINES AG DATED 7 OCTOBER 1998 Ladies and Gentlemen: We refer to the Amended and Restated V2500 Support Contract dated 7 October 1998 between America West Airlines, Inc. ("AWA") and IAE International Aero Engines AG ("IAE") (said Amended and Restated V2500 Support Contract, as amended, being hereinafter referred to as the "Contract"). Terms used herein shall have the same meanings as those given to them in the Contract. The Side Letter No. 1 amends and restates Side Letter No. 1 to V2500 Support Contract dated 23 December 1994 between AWA and IAE and Side Letter No. 2 to V2500 Support Contract dated 7 March, 1995 between AWA and IAE as part of the Contract to reflect the purchase by AWA of certain additional Airbus V2500-A5 powered A320 family aircraft. 1. OPTION AIRCRAFT The delivery schedule of the Option Aircraft are subject to: (a) Delivery occurring between [***] and [***]; and (b) AWA will provide written notice to IAE within [***] days of AWA's exercise of its right to firmly order such Option Aircraft in accordance with a delivery date proposed by Aircraft Manufacturer; and (c) AWA purchasing no more than ten (10) Aircraft in any calendar year. [***] - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 1. 113 2. CONVERSION RIGHTS 2.1 [***] If the Aircraft Manufacturer permits AWA to convert every other [***] to be delivered to AWA into either one (1) [***]") or one (1) [***] collectively referred to as the "[***]"), and IAE receives written notice of such conversion at least [***] months prior to the month of scheduled delivery of the [***], IAE will provide Propulsion Systems to such new delivery dates to the same extent such substitution rights are provided by Aircraft Manufacturer for such [***]. AWA's right to exercise its substitution rights are subject to IAE's receipt of an irrevocable written notice from AWA upon effectivity of such substitution and, in any event, such notice shall be at least [***] months prior to the scheduled delivery date of the [***] which is being substituted by the new [***]. 2.2 [***] If the Aircraft Manufacturer permits AWA to convert each of the [***] to be delivered to AWA in accordance with the schedule set forth in Exhibit A of the Contract to one [***], and IAE receives irrevocable written notice from AWA of such conversion at least [***] months prior to the month of scheduled delivery of the [***] to be converted, IAE will provide Propulsion Systems to such new delivery dates. 2.3 The conversion rights set forth in Clause 2.1 above are limited to a maximum of one (1) conversion per [***] 2.4 To the extent AWA converts [***], then at least one (1) of the Firm Spare Engines shall be substituted with one (1) new V2533-A5 spare Engine for delivery in accordance with the Firm Spare Engine delivery schedule set forth in Exhibit B to the Contract. The unit base price of each V2533-A5 spare Engine is US$[***], subject to escalation from the base month of July 1988. 3. [***] 3.1 [***] - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 2. 114 [***] 4. THIRD PARTY PRE-DELIVERY PAYMENT FINANCING 4.1 In respect of predelivery payment financing of the Aircraft by a third party lender or financial lessor, IAE will consent to the assignment by AWA of certain of its rights to receive benefits (monetary or otherwise) and its obligations under the Contract (including any exhibits thereto and any letter agreements currently existing or hereafter entered into, that by their terms constitute part of such Contract), upon no less than [***] days prior written notice from AWA, to such lender or financial lessor, as security; provided that (1) the assignee shall agree in a manner reasonably acceptable to IAE that exercise of its rights and obligations shall be subject to this agreement; and (2) a copy of the assignment by provided to IAE (with financial terms redacted); and (3) AWA shall be liable for all costs and expenses arising from the preparation and enforcement of such agreement. 4.2 Without limiting the foregoing, AWA may assign its rights under this Agreement as collateral security for the payment of amounts owed in respect of any financing of the Aircraft, provided that (i) IAE shall receive an executed true and complete original of the written instrument of assignment with sensitive commercial terms redacted, and (ii) the assignee shall agree in a manner reasonably satisfactory to IAE that the exercise of its rights is subject to all of the terms and conditions of the Contract and provided further that in no event shall such assignee obtain any rights greater than the rights of AWA under the Contract. IAE shall provide reasonably cooperation in connection with such an assignment provided appropriate documentation is provided to IAE for review and execution at least [***] business days prior to the closing. No action taken by AWA or IAE under the Subclause shall subject IAE to any liability to which it would not otherwise be subject under the Contract or adversely modify in any way IAE's rights under the Contract. 5. FLEET INTRODUCTORY ASSISTANCE CREDIT 5.1 To assist AWA with introducing the Firm Aircraft, Growth A320 Aircraft and Option Aircraft into its fleet, IAE will provide the following fleet introductory assistance credits (the "Fleet Introductory Assistance Credit") to AWA: a. US$[***] per aircraft for each of the Firm A319 Aircraft; b. US$[***] per aircraft for each of the Firm A320 Aircraft; c. US$[***] per aircraft for each of the Growth A320 Aircraft; d. US$[***] per aircraft for each of the Option A319 Aircraft; - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 3. 115 e. US$[***] per aircraft for each of the Option A320 Aircraft; f. US$[***] per aircraft for each of the Option A321 Aircraft; With the agreement of AVSA, IAE consents to the assignment by AWA of the credit to AVSA. IAE will issue the applicable Fleet Introductory Assistance Credit specified above to AVSA, upon delivery to AWA of each of the corresponding Firm, Growth or Option Aircraft, to be applied toward payment for the Propulsion Systems for the corresponding Aircraft. Should AVSA not agree to the assignment of the credit, IAE will issue the applicable credit to AWA's account with IAE. Should AWA be in default or material breach of any of its obligations under the Contract, and without prejudice to any other rights that IAE may have, any credits issued hereunder will be used first to reduce any outstanding indebtedness under the Contract to IAE. Thereafter, any remaining Fleet Introductory Assistance Credit issued hereunder may be used by AWA for the purchase of V2500 spare Engines, Spare Parts, tooling, or services from IAE. 5.2 In respect of each Firm Converted Aircraft and Option Converted Aircraft of which AWA takes delivery, the credits specified in Clause 5.1 above would be withdrawn, and replaced with a substitute credit as follows: (a) In respect of each new Firm Converted A320 Aircraft powered by new V2527-A5 Propulsion Systems, the value of the fleet introductory assistance credit is US$[***]. (b) In respect of each new Firm Converted A321 Aircraft powered by new V2533-A5 Propulsion Systems, the value of the fleet introductory assistance credit is US$[***]. (c) In respect of each new Option Converted A319 Aircraft powered by new V2524-A5 Propulsion Systems, the value of the fleet introductory assistance credit is US$[***]; (d) In respect of each new Option Converted A321-200 Aircraft powered by new V2533-A5 Propulsion Systems, the value of the fleet introductory assistance credits is US$[***]; Fleet Introductory Assistance Credits for the Firm Converted Aircraft and the Option Converted Aircraft will be issued by IAE and may be used by AWA as set forth in Clause 5.1 above. 5.3 To further assist AWA with introducing the Firm A320 Aircraft, Growth A320 Aircraft, Option Converted Aircraft and the Option Aircraft into its fleet, IAE will provide AWA with spare parts credits in the amount of US$[***] per Aircraft for each of the Firm A320 Aircraft and spare parts credits in the amount of US$[***] per - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 4. 116 Aircraft for each of the Growth A320 Aircraft, Option Converted Aircraft, and Option Aircraft. These credits will be issued upon delivery to and acceptance of each corresponding Firm A320 Aircraft, Growth A320 Aircraft, Option Converted Aircraft and Option Aircraft and shall be used for the payment of up to [***] of the invoiced amount of any individual Spare Parts or tooling order from IAE. 5.4 The credits described above in Clause 5.1, 5.2, and 5.3 above are subject to escalation in accordance with the IAE Escalation Formula from the base month of January, 1996 to the actual date of delivery to Aircraft Manufacturer by IAE of the Propulsion Systems for the corresponding Aircraft. 6. ADDITIONAL CREDITS IAE will provide additional Fleet Introductory Assistance Credits (the "Additional Credits") to AWA as follows: (i) US$[***] per aircraft for each of the [***] Firm A319 Aircraft delivered to and accepted by AWA, payable by IAE to AWA on delivery of such Firm A319 Aircraft. In the event AWA converts [***] Firm A319 Aircraft to Firm Converted Aircraft, $[***] credit may be payable by IAE to AWA on delivery of such Firm Converted Aircraft. (ii) US$[***] per aircraft for each of the [***] Firm A320 Aircraft delivered to and accepted by AWA, payable by IAE to AWA on delivery of such Firm A320 Aircraft. It shall be a condition precedent to the obligation of IAE to provide such Additional Credits that each of the following conditions shall have been satisfied (x) IAE shall have no obligation to arrange or provide or cause to be arranged or cause to be provided any other financing, credit support, or asset support whatsoever in relation to any of the Aircraft, except as set forth in the [***] Agreement between AWA and IAE dated [***] and (y) the [***] Agreement between AWA and IAE dated [***] shall have been terminated by an instrument in writing of even date herewith executed by all parties or by their duly authorized representatives. 7. LIQUIDATED DAMAGES 7.1 AWA acknowledges and agrees that, should it breach the Contract as modified by this Side Letter No. 1, the damages that IAE would suffer would be uncertain and difficult to prove and quantify. If AWA shall have [***], then AWA shall pay to IAE, as liquidated damages, and not as a penalty, [***] - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 5. 117 Subject to the limitation set forth in Clause [***] below, AWA and IAE agree that liquidated damages are appropriate and that the amount of liquidated damages is not disproportionate to the amount of damages that IAE would suffer if AWA were to [***] as described above. 7.2 AWA acknowledges and agrees that, should it breach the Contract as modified by this Side Letter No. 1, the damages that IAE would suffer would be uncertain and difficult to prove and quantify. If AWA shall have [***], then AWA shall pay to IAE, as liquidated damages, and not as a penalty, [***]. Subject to the limitation set forth in Clause [***] below, AWA and IAE agree that liquidated damages are appropriate and that the amount of liquidated damages is not disproportionate to the amount of damages that IAE would suffer if AWA [***] as described above. 7.3 In no event shall AWA be liable to IAE for liquidated damages pursuant to clauses 7.1 and 7.2 above in an aggregate amount in excess of US$[***]. 7.4 IAE's rights to claim liquidated damages hereunder shall not prejudice any other rights and remedies IAE may have under the Contract and at law, including without limitation, any other claim for damages relating to AWA's failure to purchase and to take delivery of any of the Firm Aircraft pursuant to the Contract, and any other breach by AWA of its obligations hereunder. 7.5 AWA, after consultation with its own attorneys, hereby specifically acknowledges and agrees with IAE that these liquidated damages represent a reasonable forecast of the loss that would be incurred by IAE and just compensation to IAE should AWA breach this Contract by [***]. 7.6 Should AWA not [***] - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 6. 118 [***] For the purpose of clarity and solely as an example, should AWA [***] 8. [***] [***] 9. AIRCRAFT DELIVERY DATE FLEXIBILITY IAE acknowledges that the [***] has certain rights to change the delivery date of the Aircraft. IAE agrees that the delivery dates of the Aircraft as set forth in [***] Contract shall be modified without the prior written consent of IAE if all of the following conditions are fulfilled: (1) The change in delivery date is made [***] in accordance with the terms of the contract [***]; and (2) [***] advises [***] of the change in delivery date at approximately the same time; and (3) The change in delivery date does not change the calendar year in which the Aircraft will be delivered unless: a. the change is due to a force majeure event affecting [***] or b. the change is due to an inexcusable delay on the part of [***] of the delay within the [***] prior to the scheduled delivery date; or c. the change is due to an inexcusable delay on the part of [***] of the delay more than [***] prior to the scheduled delivery date, and, at IAE's request, AWA has used its reasonable efforts to arrange a meeting amongst [***] to discuss the impact of such change on IAE. The resultant change in the delivery date of the Propulsion Systems for such Aircraft can be made by the Aircraft Manufacturer without the consent of IAE according to the terms of the contract between IAE and the Aircraft Manufacturer for the supply of the respective Propulsion Systems. Except as revised by this Side Letter No. 1, the provisions of the Contract shall remain in full force and effect. Very truly yours, Accepted on behalf of: IAE INTERNATIONAL AERO AMERICA WEST AIRLINES, INC. ENGINES AG By: /s/ Barry Eccleston By: /s/ Ronald A. Armini ---------------------- -------------------------- Title: President and CEO Title: Sr. V.P. Operations ------------------- ----------------------- Date: October 7, 1998 Date: October 7, 1998 -------------------- ------------------------ - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 7. 119 7 October 1998 America West Airlines, Inc. 4000 East Sky Harbor Boulevard Sky Harbor International Airport Phoenix, Arizona 85034 RE: SIDE LETTER AGREEMENT NO. 2 TO THE AMENDED AND RESTATED V2500(R) SUPPORT CONTRACT BETWEEN AMERICA WEST AIRLINES, INC. AND IAE INTERNATIONAL AERO ENGINES AG DATED 7 OCTOBER 1998 Dear Ladies and Gentlemen: We refer to the Amended and Restated V2500 Support Contract between America West Airlines, Inc. ("AWA") and IAE International Aero Engines AG ("IAE") dated 7 October 1998 (said Amended and Restated V2500 Support Contract, as amended, being hereinafter referred to as the "Contract"). Terms used herein shall have the same meaning as those given to them in the Contract. This Side Letter Agreement Number 2 provides AWA with certain benefits pertaining to AWA's V2500-A5 series Propulsion Systems for Aircraft and V2500 spare Engines purchased by AWA. 1. Pre-Delivery Payments ("PDP's")/Pooling Arrangement. 1.1 With respect to Purchased Item Nos. [***] through [***], the predelivery payment terms set forth in Clauses 2.6.1.1, 2.6.1.2, 2.6.1.3 and 2.6.2 of the Contract are replaced with the following: 1.1.1 AWA is to deposit $[***] into IAE's account within five (5) business days of the date of signature of the Contract. 1.1.2 Such $[***] deposit will be applied to the invoice price of Purchased Item No. 9. 1.1.3 No further predelivery payments will be required of AWA with respect to Purchased Items No. [***] through [***]. 1.1.4 The $[***] deposited with IAE will be refunded to AWA if IAE is unable to deliver Purchased Item No. [***] and AWA cancels the order for Purchased Item No. [***] pursuant to AWA's rights as set forth in Clause 6.1 of the Contract. In such event, IAE will refund the $[***] deposit [***]. 1.1.5 If AWA fails to take delivery of any of Purchased Items Nos. [***] through [***], except as to Purchased Item No. [***] as set forth in Clause 1.1.4 above, the $[***] deposit will be applied against IAE's damages and the balance refunded to AWA. Should AWA fail to take delivery of any of Purchased Items Nos. [***] through [***], and the $[***] deposit be - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 120 applied against IAE's damages, the parties agree to negotiate in good faith the replenishment of the deposit pool. 2. Spare Engine Assistance Credit for Specified Engines. 2.1 To assist AWA with procuring spare Engines, IAE will credit AWA's account with IAE in the amount of $[***] per spare Engine for each of the [***] spare Engines purchased by AWA pursuant to the Contract. 2.2 Each such credit will be issued upon delivery to and acceptance by AWA of the corresponding spare Engine. Each such credit may be used by AWA toward the final payment for the corresponding spare Engine or for the purchase of Spare Parts from IAE. 2.3 Each such credit is subject to escalation in accordance with the IAE Escalation Formula set forth in Exhibit B to the Contract from the base month of July 1988. 3. V2500 Engine and Parts Service Policy Enhancement. 3.1 The V2500 Engine and Parts Service Policy set forth in Exhibit E-1 to the Contract is hereby enhanced as follows: 3.1.1 Service Policy coverage as described below will be provided for those Engines installed on the Aircraft and on the S.A.L.E. Aircraft, in both cases at the time of delivery of such to AWA, and Spare Engine Nos. [***] through [***] (collectively referred to as the "Enhanced Engines"). 3.1.2 From [***] Engine Flight Hours through [***] Engine Flight Hours of each of the Enhanced Engines, AWA will receive reimbursement from IAE for the costs of AWA's qualifying shop visits in the following amounts: 3.1.2.1 For the first [***] removals/shop visits of any of the Enhanced Engines taken together which would have been covered by the Service Policy had they occurred prior to 3,000 Engine Flight Hours - no reimbursement; 3.1.2.2 For each subsequent removal/shop visit of any of the Enhanced Engines which would have been covered by the Service Policy had they occurred prior to 3,000 Engine Flight Hours - [***] percent ([***]%) of the allowance set forth in Section I.A of the Service Policy as if the Engine had been operated less than [***] Engine Flight Hours. 3.2 All provisions of the Service Policy regarding submission and verification of claims shall apply to this Clause 3. 3.3 IAE's contribution to the cost of qualifying shop visits will take the form of a Spare Parts credit to AWA's account with IAE. 3.4 The [***] events referred to in Clause 3.1.2.1 above shall be eligible for Extended First Run Coverage as described in the Service Policy. Thereafter, Extended First Run Coverage shall no longer be applicable to Eligible Engines. - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 121 4. SPARE PARTS AND SPARE ENGINE DELIVERY ASSISTANCE. 4.1 In the event that AWA anticipates entering into a period of zero spares (no serviceable spare Engines available) that will continue for at least [***] days and such situation is due either to: 4.1.1 excessive turn times at AWA's maintenance provider and such excessive turn times can be reasonably associated with IAE's inability to deliver Spare Parts to the maintenance provider at the published lead times in the then current IAE Spare Parts Catalog; or 4.1.2 a delay in delivery of a spare Engine purchased by AWA pursuant to the Contract; IAE will use diligent efforts to reposition a V2500-A5 spare engine to AWA's facility in Phoenix. This engine will remain there until the zero spare situation has been alleviated or until the spare engine is needed to satisfy an Aircraft-on-Ground ("AOG") situation. 4.2 In the situation described in Clause 4.1 above, should AWA require the use of the IAE lease pool engine positioned at AWA's facility in Phoenix to alleviate an AOG situation, such engine shall be leased to AWA under the then current IAE Standard Terms of Business Lease ("STOBL") except that [***] 4.3 In a situation described in Clause 4.1 above which does not relate to an excusable delay in delivery of a spare Engine purchased by AWA, if IAE can not position an emergency lease pool engine in Phoenix and AWA is forced to lease an engine from a third party to alleviate an AOG situation, IAE will reimburse AWA for up to [***] percent ([***]%) of reasonable third party fees (excluding hourly use charges) incurred by AWA during the period reasonably necessary to alleviate the AOG situation. This reimbursement shall be in the form of Spare Parts credits which will be issued upon IAE's receipt of an original invoice issued by such third party which has been certified by AWA. The benefit set forth in this clause 4.3 will not be available to AWA with respect to any delays in delivery of spare Engine purchased by AWA pursuant to the Contract for reasons set forth in Clause 6.1.1 of the Contract. 4.4 If IAE fails to have a V2500-A5 engine available for positioning in the situation described in Clause 4.1 above, and AWA can not lease an engine from a third party during an AOG situation, IAE will issue AWA Spare Parts credits in an amount equal to of $[***] per day of the AOG situation up to a maximum of $[***] of Spare Parts credits per occurrence. IAE's maximum obligation pursuant to this Clause 4.4 shall be $[***]. The benefits set forth in this Clause 4.4 will not be available to AWA with respect to any delays in delivery of spare Engines purchased by AWA pursuant to the Contract for reasons set forth in Clause 6.1.1 of the Contract. 4.5 IAE's obligations in this Clause 4 shall begin upon delivery of the first Aircraft to AWA and terminate [***] years thereafter. - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 122 5. THRUST RATING FLEXIBILITY. 5.1 Subject to AWA's compliance with Clause 2.1.3 of the Contract, the IAE Customer Support Representative at AWA will provide AWA with access to an adequate quantity of appropriate data plates and data entry plugs which allow AWA to utilize the Aircraft Engines and Engines on the S.A.L.E. Aircraft and spare Engines and any other spare Engine(s) purchased from IAE interchangeably in the AWA fleet of Aircraft and IAE shall take any other action required to allow this interchange. For purposes of IAE service bulletin 500-ENG-72-0285, this Side Letter shall constitute a contractual agreement to allow the conversion described in that bulletin. 6. ASSIGNMENT OF CREDITS. So long as AWA is not in material default of any of its obligations as set forth in the Contract at the time of any assignment, which default has continued for a period of [***] business days after notice thereof from IAE, AWA may assign to any provider of Engine maintenance to AWA any credits available in AWA's account with IAE to which AWA has the right to utilize toward the purchase of V2500 spare parts or otherwise from IAE. Any credits in AWA's account with IAE which were granted pursuant to Clause 5.3 of Side Letter No. 1 and so assigned shall be utilized in the manner set forth in Clause 5.3 of Side Letter No. 1. 7. SPARE ENGINE DELIVERY DATE FLEXIBILITY. AWA may interchange the delivery date of Purchased Item No. [***] as set forth in Exhibit B of the Contract as of the date of Contract signing, with one (1) of the delivery dates assigned to Purchased Item Nos. [***]. AWA agrees to advise IAE in writing of such interchange no later than [***] days prior to the proposed interchange date. 8. PREVIOUSLY DELIVERED ENGINE. If any Engines were delivered to AWA prior to the date of the delivery date of the first spare Engine listed on Exhibit B, the V2500 Support Contract dated December 23, 1994 and its Warranties and Guarantees shall apply to such Engines as if the amendments and letter agreement of even date herewith had not been made. - ---------- [*] indicates Redacted material THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE 123 Except as revised by this Side Letter Agreement No. 2, the provisions of the Contract shall remain in full force and effect. Very truly yours, Accepted on behalf of: IAE INTERNATIONAL AERO AMERICA WEST AIRLINES, INC. ENGINES AG By: /s/ Barry Eccleston By: /s/ Ronald A. Armini Title: President and CEO Title: Sr. V.P. Operations Date: October 7, 1998 Date: October 7, 1998 THIS DOCUMENT CONTAINS INFORMATION PROPRIETARY TO IAE EX-10.21 3 EX-10.21 1 Exhibit 10.21 AMERICA WEST 1994 INCENTIVE EQUITY PLAN AMENDED AND RESTATED EFFECTIVE JANUARY 15, 1999 (INCORPORATES FIRST, SECOND, THIRD AND FOURTH AMENDMENTS) America West Airlines, Inc., a Delaware corporation ("AWA"), established the America West Airlines, Inc. 1994 Incentive Equity Plan (this "Plan"), effective as of December 1, 1994. Pursuant to that certain Agreement and Plan of Merger, dated as of December 19, 1996, among AWA, America West Holdings Corporation, a Delaware corporation and a wholly-owned subsidiary of AWA ("Holdings"), and AWA Merger, Inc., a Delaware corporation and a wholly-owned subsidiary of Holdings ("Merger Sub"), Merger Sub has merged with and into AWA (the "Merger"), as a result of which AWA has become a wholly-owned subsidiary of Holdings (the "Reorganization"). In connection with the Reorganization, (a) AWA has assigned this Plan to Holdings and Holdings has assumed the obligations of AWA under this Plan (such assignment and assumption becoming effective immediately prior to the effectiveness of the Merger) and (b) this Plan is amended and restated in its entirety as hereinafter provided (such amendment and restatement becoming effective immediately prior to the effective of the Merger), to provide, among other things, that (i) effective immediately prior to the effectiveness of the Merger, Holdings shall replace AWA as the "Company" under this Plan, and (ii) effective as of the effectiveness of the Merger, all Awards outstanding immediately prior to the effectiveness of the Merger shall automatically became Awards with respect to the Class B common stock, par value $0.01 per share, of Holdings, without any other change in the terms of such Awards (as defined in Paragraph 2). 1. PURPOSE. The purpose of the Plan is to promote the interests of the Company by encouraging employees of the Company and its Subsidiaries (as defined in Paragraph 2) and the Nonemployee Directors (as defined in Paragraph 2) of the Company to acquire or increase their equity interests in the Company and to provide a means whereby employees may develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to remain with and devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. The Plan is also contemplated to enhance the ability of the Company and its Subsidiaries to attract and retain the services of individuals who are essential for the growth and profitability of the Company. 2. DEFINITIONS. As used in this Plan: (a) "Appreciation Right" means a right granted pursuant to Paragraph 5. (b) "Award" means an Appreciation Right, an Option Right, a Director Option, Phantom Shares, a Performance Unit, Bonus Stock, Restricted Stock, or a Cash Tax Right (each as defined in this paragraph). (c) "Board" means the board of directors of the Company. (d) "Bonus Stock" means unrestricted shares of Common Stock granted pursuant to Paragraph 9. 1. 2 (e) "Cash Tax Right" means a right granted pursuant to Paragraph 10. (f) "Change in Control" shall occur if: (i) the individuals who, upon consummation of the Reorganization, constitute the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Reorganization whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such an individual were a member of the Incumbent Board; or (ii) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) acquires (directly or indirectly) the beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than 50% of the combined voting power of the then outstanding voting securities of AWA or Holdings entitled to vote generally in the election of directors ("Voting Power"); or (iii) any share of Common Stock or any other voting securities of the Company shall be purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); or (iv) the Company's stockholders shall approve a merger or consolidation, sale or disposition of all or substantially all of the Company's assets or a plan of liquidation or dissolution of the Company, other than (A) a merger or consolidation in which the voting securities of the Company outstanding immediately prior thereto will become (by operation of law), or are to be converted into, voting securities of the surviving corporation or its parent corporation immediately after such merger or consolidation that are owned by the same person or entity or persons or entities as immediately prior thereto and possess at least 75% of the Voting Power held by the voting securities of the surviving corporation or its parent corporation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the Voting Power; or (v) the stockholders of the Company shall approve a merger, consolidation, reorganization, disposition of assets, liquidation or other transaction (or series of related transactions) in which neither the Company nor AWA will survive as a publicly-owned corporation whose common stock is registered under the Exchange Act; or (vi) Holdings or AWA shall sell or otherwise dispose of, or shall enter into a transaction or series of related transactions providing for the sale or other disposition of, or the stockholders of Holdings or AWA shall approve a transaction or series of related transactions providing for the sale or other disposition of, all or substantially all of the stock or assets of AWA. (g) "Code" means the Internal Revenue Code of 1986, as in effect from time to time. 2. 3 (h) "Committee" means the Compensation/Human Resources Committee of the Board. (i) "Common Stock" means the Class B Common Stock, $0.01 par value, of the Company or any security into which such Common Stock may be changed by reason of any transaction or event of the type described in Paragraph 13. (j) "Company" means (i) immediately prior to the effectiveness of the Merger, Holdings, and (ii) at all times prior to such time, AWA. (k) "Date of Grant" means (i) with respect to an Award other than a Director Option or an automatic grant of Common Stock pursuant to Paragraph 11(d), the date specified by the Committee on which such Award will become effective (which date will not be earlier than the date on which the Committee takes action with respect thereto), (ii) with respect to a Director Option, the automatic grant date as provided in Paragraph 11(a) or 11(b) and (iii) with respect to a grant of Common Stock to a Nonemployee Director pursuant to Paragraph 11(d), the automatic grant date as provided in Paragraph 11(d). (l) "Deferral Account" means the account established and maintained by the Company for deferral of Stock Option Gain by a Deferral Participant. Deferral Accounts will be maintained solely as bookkeeping entries to evidence unfunded obligations of the Company. (m) "Deferral Participant" means any Participant who is a member of a select group of management or highly compensated employees of the Company or any Subsidiary, who is designated by the Committee as a Deferral Participant and who makes a Stock Option Gain deferral election pursuant to Paragraph 15. (n) "Director Option" means the right to purchase a share of Common Stock upon exercise of an option granted pursuant to Paragraph 11. (o) "Dividend Equivalent" means, with respect to a Phantom Share, an amount equal to the amount of any dividends that are declared and become payable after the Date of Grant for such Award and on or before the date such Award is paid or forfeited, as the case may be. (p) "Grant Price" means the price per share of Common Stock at which an Appreciation Right not granted in tandem with an Option Right is granted. (q) "Management Objectives" means the objectives, if any, established by the Committee that are to be achieved with respect to an Award granted under this Plan, which may be described in terms of Company-wide objectives, in terms of objectives that are related to performance of the division, Subsidiary, department or function within the Company or a Subsidiary in which the Participant receiving the Award is employed or in individual or other terms, and which will relate to the period of time determined by the Committee. The Management Objectives intended to qualify under Section 162(m) of the Code shall be with respect to one or more of the following: (i) earnings before interest, taxes, depreciation and amortization expenses ("EBITDA"); (ii) earnings before interest and taxes ("EBIT"); (iii) EBITDA, EBIT or earnings before taxes and unusual or nonrecurring items as measured 3. 4 either against the annual budget or as a ratio to revenue or return on total capital; (iv) total stockholder return; (v) stock price performance; (vi) revenue per available seat mile; (vii) costs per available seat mile; and (viii) customer satisfaction rating using the PLOG survey. Which objectives to use with respect to an Award, the weighting of the objectives if more than one is used, and whether the objective is to be measured against a Company-established budget or target, an index or a peer group of airlines, shall be determined by the Committee in its discretion at the time of grant of the Award. A Management Objective need not be based on an increase or a positive result and may include, for example, maintaining the status quo or limiting economic losses. The Committee, in its sole discretion and without the consent of the Participant, may amend an Award to reflect (1) a change in corporate capitalization, such as a stock split or dividend, (2) a corporate transaction, such as a corporate merger, a corporate consolidation, any corporate separation (including a spinoff or other distribution of stock or property by a corporation), any corporate reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code), or (3) any partial or complete corporate liquidation. With respect to an Award that is subject to Management Objectives, the Committee must first certify that the Management Objectives have been achieved before the Award may be paid. (r) "Market Value per Share" means, at any date, the closing sale price per share of the Common Stock on that date (or, if there are no sales on that date, the last preceding date on which there was a sale) in the principal market in which the Common Stock is traded. (s) "Nonemployee Director" means a director of the Company who is not also an employee of the Company or a Subsidiary. (t) "Option Price" means the purchase price per share payable on exercise of an Option Right or Director Option. (u) "Option Right" means the right to purchase a share of Common Stock upon exercise of an option granted pursuant to Paragraph 4. (v) "Participant" means an employee of the Company or any of its Subsidiaries who is selected by the Committee to receive an Award under any of Paragraphs 4 through 10 and 14, and shall also include a Nonemployee Director who has received an automatic grant of Director Options pursuant to Paragraph 11(a) or 11(b) or an automatic grant of Common Stock pursuant to Paragraph 11(d). (w) "Performance Unit" means a unit equivalent to $100 (or such other value as the Committee determines) awarded pursuant to Paragraph 8. (x) "Phantom Shares" means notional shares of Common Stock awarded pursuant to Paragraph 7. (y) "Restricted Stock" means shares of Common Stock granted or sold pursuant to Paragraph 6 as to which neither the ownership restrictions nor the restriction on transfers referred to therein has expired. 4. 5 (z) "Rule 16b-3" means Rule 16b-3 of the Securities and Exchange Commission (or any successor rule to the same effect) as in effect from time to time. (aa) "Spread" means the amount determined by multiplying (a) the excess of the Market Value per Share on the date when an Appreciation Right is exercised over the Option Price provided for in the related Option Right, or if there is no tandem Option Right, the Grant Price provided for in the Appreciation Right by (b) the number of shares of Common Stock in respect of which the Appreciation Right is exercised. (bb) "Stock Option Gain" means, pursuant to the exercise of an Option Right not intended to qualify as an incentive stock option under Section 422 of the Code, the shares of Common Stock representing the difference between the aggregate Market Value per Share of shares of Common Stock subject to the Option Right on the date of exercise less the aggregate Option Price, if, and only if, the aggregate Option Price is paid with shares of Common Stock already owned by the Deferral Participant, as described in Paragraph 4(c)(ii) and in Revenue Ruling 80-244, 1980-2 C.B. 234. (cc) "Subsidiary" means, at any time, any corporation in which at the time the Company then owns or controls, directly or indirectly, not less than 50% of the total combined voting power represented by all classes of stock issued by such corporation. 3. SHARES AVAILABLE UNDER PLAN. Subject to adjustments as provided in Paragraph 13, (i) 7,500,000 is the maximum number of shares of Common Stock which may be issued or transferred and covered by all outstanding Awards under this Plan, of which number no more than 1,500,000 shares will be issued or transferred as Restricted Stock or Bonus Stock and (ii) 350,000 is the maximum number of shares of Common Stock which may be issued pursuant to or covered by Option Rights and Appreciation Rights granted under this Plan to any one Participant during any calendar year. Such shares may be shares of original issue or any combination of the foregoing. Upon the exercise of an Option Right pursuant to which Stock Option Gain is deferred under Paragraph 15, the number of shares representing Stock Option Gain will be deemed to have been issued under this Plan for purposes of this Paragraph 3; and transfer of shares in respect of the settlement of a Deferral Account pursuant to Paragraph 15 shall not be deemed to be the transfer of additional shares under this Paragraph 3. Upon exercise of any Appreciation Rights or the payment of any Phantom Shares, there will be deemed to have been delivered under this Plan for purposes of this Paragraph 3 the number of shares of Common Stock covered by the Appreciation Rights or equal to the Phantom Shares, as applicable, regardless of whether such Appreciation Rights or Phantom shares were paid in cash or shares of Common Stock. Subject to the provisions of the preceding sentence, any shares of Common Stock which are subject to Option Rights, Appreciation Rights, or Phantom Shares awarded or sold as Restricted Stock that are terminated, unexercised, forfeited or surrendered or which expire for any reason will again be available for issuance under this Plan, unless, with respect to Restricted Stock, the Participant has received benefits of ownership with respect to such shares, such as dividends, but not including voting rights. 4. OPTION RIGHTS. The Committee may from time to time authorize grants to any Participant of options to purchase shares of Common Stock upon such terms and conditions as it may determine in accordance with the following provisions: 5. 6 (a) Each grant will specify the number of shares of Common Stock to which it pertains. (b) Each grant will specify its Option Price, which may not be less than 100% of the Market Value per Share on the Date of Grant. (c) Each grant will specify that the Option Price will be payable (i) in cash by check acceptable to the Company, (ii) by the transfer to the Company of shares of Common Stock already owned by the optionee having an aggregate Market Value per Share at the date of exercise equal to the aggregate Option Price, (iii) from the proceeds of a sale through a broker of some or all of the shares to which such exercise relates, or (iv) by a combination of such methods of payment. (d) Successive grants may be made to the same Participant whether or not any Option Rights previously granted to such Participant remain unexercised. (e) Each grant will specify the required period or periods of continuous service by the Participant with the Company and/or any Subsidiary and/or the Management Objectives (if any) to be achieved before the Option Rights or installments thereof will become exercisable, and any grant may provide for the earlier exercise of the Option Rights in the event of a Change in Control or other corporate transaction or event or upon termination of the Participant's employment due to death, disability, retirement or otherwise. (f) Each grant the exercise of which, or the timing of the exercise of which, is dependent, in whole or in part, on the achievement of Management Objectives may specify a minimum level of achievement in respect of the specified Management Objectives below which no Options Rights will be exercisable and may set forth a formula or other method for determining the number of Option Rights that will be exercisable if performance is at or above such minimum but short of full achievement of the Management Objectives. (g) Option Rights granted under this Plan may be (i) options which are intended to qualify as incentive stock options under Section 422 of the Code, (ii) options which are not intended to so qualify or (iii) combinations of the foregoing. (h) Each grant shall specify the period during which the Option Right may be exercised, but no Option Right will be exercisable more than ten years from the Date of Grant. (i) Each grant of Option Rights will be evidenced by an agreement executed on behalf of the Company by any officer and delivered to the Participant and containing such terms and provisions, consistent with this Plan, as the Committee may approve. 5. APPRECIATION RIGHTS. The Committee may also from time to time authorize grants to any Participant of Appreciation Rights upon such terms and conditions as it may determine in accordance with this Paragraph. Appreciation Rights may be granted in tandem with Option Rights or separate and apart from a grant of Option Rights. An Appreciation Right will be a right of the Participant granted such Award to receive from the Company, upon exercise, an amount which will be determined by the Committee at the Date of Grant and will be expressed as a percentage of the Spread (not exceeding 100%) at the time of exercise. An 6. 7 Appreciation Right granted in tandem with an Option Right may be exercise only by surrender of the related Option Right. Each grant of an Appreciation Right may utilize any or all of the authorizations, and will be subject to all of the limitations, contained in the following provisions: (a) Each grant will state whether it is made in tandem with Option Rights and, if not made in tandem with any Option Rights, will specify the number of shares of Common Stock in respect of which it is made. (b) Each grant made in tandem with Option Rights will specify the Option Price and each grant not made in tandem with Option Rights will specify the Grant Price, which in either case will not be less than 100% of the Market Value per Share on the Date of Grant. (c) Any grant may specify that the amount payable on exercise of an Appreciation Right may be paid by the Company in (i) cash, (ii) shares of Common Stock having an aggregate Market Value per Share equal to the Spread or a percentage of the Spread, or (iii) any combination thereof, as determined by the Committee in its sole discretion. (d) Any grant may specify that the amount payable on exercise of an Appreciation Right may not exceed a maximum specified by the Committee at the Date of Grant (valuing shares of Common Stock for this purpose at their Market Value per Share at the date of exercise). (e) Each grant will specify the required period or periods of continuous service by the Participant with the Company and/or any Subsidiary and/or Management Objectives to be achieved before the Appreciation Rights or installments thereof will become exercisable, and will provide that no Appreciation Right may be exercised except at a time when the Spread is positive, and with respect to any grant made in tandem with Option Rights, when the related Option Right is also exercisable. Any grant may provide for the earlier exercise of the Appreciation Rights in the event of a Change in Control or other corporate transaction or event or upon the Participant's termination due to death, disability or retirement. (f) Each grant the exercise of which, or the timing of the exercise of which, is dependent, in whole or in part, on the achievement of Management Objectives may specify a minimum level of achievement in respect of the specified Management Objectives below which no Appreciation Rights will be exercisable and may set forth a formula or other method for determining the number of Appreciation Rights that will be exercisable if performance is at or above such minimum but short of full achievement of the Management Objectives. (g) Each grant of an Appreciation Right will be evidenced by an agreement executed on behalf of the Company by any officer and delivered to and accepted by the Participant receiving the grant, which agreement will describe such Appreciation Right, identify any Option Right granted in tandem with such Appreciation Right, state that such Appreciation Right is subject to all the terms and conditions of this Plan and contain such other terms and provisions, consistent with this Plan, as the Committee may approve. 6. RESTRICTED STOCK. The Committee may also from time to time authorize grants or sales to any Participant of Restricted Stock upon such terms and conditions as it may determine in accordance with the following provisions: 7. 8 (a) Each grant or sale will constitute an immediate transfer of the ownership of shares of Common Stock to the Participant in consideration of the performance of services, entitling such Participant to voting and other ownership rights, but subject to the restrictions hereinafter referred to. Each grant or sale may limit the Participant's dividend rights during the period in which the shares of Restricted Stock are subject to any such restrictions. (b) Each grant or sale will specify the Management Objectives, if any, that are to be achieved in order for the ownership restrictions to lapse. Each grant or sale that is subject to the achievement of Management Objectives will specify a minimum acceptable level of achievement in respect of the specified Management Objectives below which the shares of Restricted Stock will be forfeited and may set forth a formula or other method for determining the number of shares of Restricted Stock with respect to which restrictions will lapse if performance is at or above such minimum but short of full achievement of the Management Objectives. (c) Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Market Value per Share at the Date of Grant. (d) Each such grant or sale will provide that the shares of Restricted Stock covered by such grant or sale will be subject, for a period to be determined by the Committee at the Date of Grant, to one or more restrictions, including, without limitation, a restriction that constitutes a "substantial risk of forfeiture" within the meaning of Section 83 of the Code and the regulations thereunder, and any grant or sale may provide for the earlier termination of such period in the event of a Change in Control or other corporate transaction or event or upon termination of the Participant's employment due to death, disability, retirement or otherwise. (e) Each such grant or sale will provide that during the period for which such restriction or restrictions are to continue, the transferability of the Restricted Stock will be prohibited or restricted in a manner and to the extent prescribed by the Committee at the Date of Grant (which restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the Restricted Stock to continuing restrictions in the hands of any transferee). (f) Each grant or sale of Restricted Stock will be evidenced by an agreement executed on behalf of the Company by any officer and delivered to and accepted by the Participant and containing such terms and provisions, consistent with this Plan, as the Committee may approve. (g) Unless otherwise approved by the Committee, certificates representing shares of Common Stock transferred pursuant to a grant of Restricted Stock will be held in escrow pursuant to an agreement satisfactory to the Committee until such time as the restrictions on transfer have expired or the shares have been forfeited. (h) The maximum number of shares of Restricted Stock that may be granted or sold to any one Participant in any calendar year is 150,000 shares. 8. 9 7. PHANTOM SHARES. The Committee may also from time to time authorize grants to any Participant of Phantom Shares upon such terms and conditions as it may determine in accordance with the following provisions: (a) Each grant will specify the number of Phantom Shares to which it pertains and the payment or crediting of any Dividend Equivalents with respect to such Phantom Shares. (b) Each grant will specify the Management Objectives, if any, that are to be achieved in order for the Phantom Shares to be earned. Each grant that is subject to the achievement of Management Objectives will specify a minimum acceptable level of achievement in respect of the specified Management Objections below which the Phantom Shares will be forfeited and may set forth a formula or other method for determining the number of Phantom Shares to be earned if performance is at or above such minimum but short of full achievement of the Management Objectives. (c) Each grant will specify the time and manner of payment of Phantom Shares which have been earned, which payment may be made in (i) cash, (ii) shares of Common Stock or (iii) any combination thereof, as determined by the Committee in its sole discretion. (d) Each grant of Phantom Shares will be evidenced by an agreement executed on behalf of the Company by any officer and delivered to and accepted by the Participant and containing such terms and provisions, consistent with this Plan, as the Committee may approve, including provisions relating to a Change in Control or other corporate transaction or event or upon the Participant's termination due to death, disability or retirement. (e) The maximum number of Phantom Shares that may be granted to any one Participant in any calendar year is 150,000 shares. 8. PERFORMANCE UNITS. The Committee may also from time to time authorize grants to any Participant of Performance Units upon such terms and conditions as it may determine in accordance with the following provisions: (a) Each grant will specify the number of Performance Units to which it pertains. (b) Each grant will specify the Management Objectives that are to be achieved in order for the Performance Units to be earned. Each grant will specify a minimum acceptable level of achievement in respect of the specified Management Objectives below which no payment will be made and may set forth a formula or other method for determining the amount of payment to be made if performance is at or above such minimum but short of full achievement of the Management Objective. (c) Each grant will specify the time and manner of payment of Performance Units which have become payable, which payment may be made in (i) cash, (ii) shares of Common Stock having an aggregate Market Value per Share equal to the aggregate value of the Performance Units which have become payable or (iii) any combination thereof, as determined by the Committee in its sole discretion at the time of payment. 9. 10 (d) Each grant of a Performance Unit will be evidenced by an agreement executed on behalf of the Company by any officer and delivered to and accepted by the Participant and containing such terms and provisions, consistent with this Plan, as the Committee may approve, including provisions relating to a Change in Control or other corporate transaction or event or upon the Participant's termination of employment due to death, disability, retirement or otherwise. (e) The maximum amount of compensation that may be subject to any Performance Unit grant made to any one Participant in any calendar year is $1.5 million. 9. BONUS STOCK. The Committee may also from time to time authorize grants to any Participant of Bonus Stock, which shall constitute a transfer of shares of Common Stock, without other payment therefor, as additional compensation for the Participant's services to the Company or its Subsidiaries. 10. CASH TAX RIGHTS. (a) The Committee may also from time to time authorize grants to any Participant of Cash Tax Rights upon such terms and conditions as it may determine in accordance with this Paragraph. Cash Tax Rights may be granted in tandem with any Award that is payable in shares of Common Stock. A Cash Tax Right will be the right of the Participant granted such Award to receive from the Company, upon receipt of shares of Common Stock pursuant to the tandem Award, an amount of cash, which will be determined by the Committee at the Date of Grant and will be expressed as a percentage of the Market Value per Share (not exceeding 100%) of each share of Common Stock received upon payment of the tandem Award. (b) Each grant of a Cash Tax Right will (i) state the Award it is made in tandem with and will specify the percentage of the Market Value per Share that shall be payable in cash and (ii) be evidenced by an agreement extended on behalf of the Company by any officer and delivered to and accepted by the Participant and containing such terms and provisions, consistent with this Plan, as the Committee may approve, including provisions relating to a Change in Control or other corporate transaction or event or upon the Participant's termination of employment due to death, disability, retirement or otherwise. 11. DIRECTOR OPTIONS, ETC. (a) Each Nonemployee Director who serves in such capacity on December 31, 1994 shall automatically receive, on such date, a Director Option for 3,000 shares of Common Stock. Each Nonemployee Director who is elected or appointed to the Board for the first time after the effective date of this Plan shall automatically receive, on the date of his or her election or appointment, a Director Option for 3,000 shares of Common Stock. (b) On the date following the regular meeting of the stockholders of the Company in each year that this Plan is in effect (commencing with the 1995 annual meeting of stockholders), each Nonemployee Director who is in office on that day and who was not elected for the first time at such annual meeting shall automatically receive a Director Option of 3,000 shares of Common Stock. 10. 11 (c) Each Director Option will be subject to all of the limitations contained in the following provisions: (i) Each Director Option shall become exercisable (vested) on the first day that is more than six months following its Date of Grant; provided that in no event shall any Director Option be excisable prior the approval of this Plan by the Company's stockholders. (ii) The Option Price of each Director Option shall be the Market Value per Share on its Date of Grant. (iii) Each Director Option that is vested may be exercised in full at one time or in part from time to time by giving written notice to the Company, stating the number of shares of Common Stock with respect to which the Director Option is being exercised, accompanied by payment in full of the Option Price for such shares, which payment may be (A) in cash by check acceptable to the Company, (B) by the transfer to the Company of shares of Common Stock already owned by the optionee having an aggregate Market Value per Share at the date of exercise equal to the aggregate Option Price, (C) from the proceeds of a sale through a broker of some or all of the shares to which such exercise relates or (D) by a combination of such methods of payment. (iv) Each Director Option shall expire ten years from the Date of Grant thereof, but shall be subject to early termination as follows: Director Options, to the extent exercisable as of the date a Nonemployee Director ceases to be a director of the Company, must be exercised within three months of such date; provided that if such termination from the Board results from the Nonemployee Director's death, disability or retirement, then case the Director Options must be exercised within three years from the date of such termination; provided further that if within such three month period the Nonemployee Director is appointed to serve on the Advisory Committee established by the Board of Directors of May 20, 1998, then the Director Options must be exercised within three months following the date on which he or she ceases to serve on such Advisory Committee; but provided further, however, that in no event shall the normal ten year expiration date of such Director Options be extended. (v) In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Director Options provided for at such time in Paragraphs 11(a) and 11(b) and all automatic grants of Common Stock provided for at such time in Paragraph 11(d), then Paragraph 11(d) shall take precedence over Paragraphs 11(a) and 11(b) so that all automatic grants of Common Stock then required to be made under Paragraph 11(d) shall be made in full before any automatic grants of Director Options are made at such time under Paragraphs 11(a) and 11(b). In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Director Options provided for in Paragraphs 11(a) and 11(b) at such time, then all Nonemployee Directors who are entitled to an automatic grant of Director Options at such time shall share ratably in the number of shares then available for grant under this Plan and shall have no right to receive a grant with respect to the deficiencies in the number of available shares. 11. 12 (d) On December 31 in each year that this Plan is in effect (commencing on December 31, 1997), each Nonemployee Director who is in office on that day shall automatically receive, without additional consideration, a grant for that number of shares of Common Stock (rounded to the nearest whole number) determined by dividing 13,000 by the Market Value per Share on the December 31 immediately preceding the Date of Grant; provided, however, that the annual grant to any Nonemployee Director who has not been in office at all times during the 12-month period immediately prior to the Date of Grant shall be prorated based on the number of whole months that such Nonemployee Director has been in office during such 12-month period. Each such grant of Common Stock shall be subject to the following terms and conditions: (i) Each grant will constitute an immediate and nonforfeitable transfer of the ownership of shares covered thereby to the Nonemployee Director in consideration for services rendered by such Nonemployee Director, entitling such Nonemployee Director to voting and other ownership rights. (ii) In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Common Stock provided for at such time in this Paragraph 11(d) and all automatic grants of Director Options provided for at such time in Paragraphs 11(a) and 11(b), then this Paragraph 11(d) shall take precedence over Paragraphs 11(a) and 11(b) so that all automatic grants of Common Stock then required to be made under this Paragraph 11(d) shall be made in full before any automatic grants of Director Options are made at such time under Paragraphs 11(a) and 11(b). In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Common Stock provided for in this Paragraph 11(d) at such time, then all Nonemployee Directors who are entitled to an automatic grant of Common Stock under this Paragraph 11(d) at such time shall share ratably in the number of shares then available for grant under this Plan and shall have no right to receive a grant with respect to the deficiencies in the number of available shares. 12. TRANSFERABILITY. (a) Except as provided in subparagraph (b) below, no Award that has not become payable or earned will be transferable by a Participant other than by will or the laws of descent and distribution and Director Options, Option Rights or Appreciation Rights will be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. (b) The Committee may, in its discretion, adopt rules or guidelines under which any Award previously granted or to be granted to a Participant (other than an incentive stock option) may be transferred (in whole or in part) by the Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of the Immediate Family Members and, if applicable, the Participant, (iii) a partnership in which such Immediate Family Members and, if applicable, the Participant are the only partners or (iv) section 501(c)(3) organizations. Following transfer, any such Awards shall continue to be subject to the same terms and conditions as were applicable to the Award immediately prior to transfer; provided, however, that no transferred Award shall be exercisable or payable, as the case may be, unless arrangements satisfactory to the Company 12. 13 have been made to satisfy any tax withholding obligations the Company may have with respect to the Award. Effective January 1, 1999, transfers pursuant to this paragraph are permitted for all senior vice presidents, presidents, the Chairman of the Board and all non-employee members of the Board. 13. ADJUSTMENTS. The Board shall make or provide for such adjustments in the maximum number of shares specified in Paragraph 3, in the numbers of shares of Common Stock covered by outstanding Director Options, Option Rights, Appreciation Rights and Phantom Shares granted hereunder, in the Option Price or Grant Price applicable to any such Director Options, Option Rights and Appreciation Rights, in the value of Deferral Accounts and the deemed investment thereof, and/or in the kind of shares covered thereby (including shares of another issuer), as is equitably required to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, merger, consolidation, reorganization, partial or complete liquidation, issuance of writs or warrants to purchase securities or any other corporation transaction or event having an effect similar to any of the foregoing. 14. RE-LOAD OPTIONS. (a) Without in any way limiting the authority of the Committee to make or not to make grants of options hereunder, the Committee shall have the authority (but not an obligation) to include as part of any option grant a provision entitling the Participant to a further option (a "Re-Load Option") if the Participant exercises the option, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the option grant, provided that the Participant has held such surrendered shares of Common Stock for at least six (6) months. Only 50% of an option grant or 100,000 shares, whichever is less, may be exercised in any year subject to Re-Load Option pursuant to the provisions of this Paragraph 14. Any Re-Load Option shall (i) provide for a number of shares equal to the number of shares surrendered as part or all of the exercise price of an Option Right; (ii) have an exercise price equal to the aggregate Market Value per Share on the date of exercise of the Option Right, the exercise of which gave rise to such Re-Load Option (the "Original Option Right"); (iii) have an expiration date which is ten (10) years from the Date of Grant of the Original Option Right; (iv) have a vesting schedule equal to one third (1/3) of the Re-Load Option grant for each year following the date of such grant, assuming continued active employment during such period, provided that the Re-Load Option shall be one hundred percent (100%) vested upon the Participant's retirement or disability, assuming continued active employment through the date of such retirement or disability, and such retired or disabled Participant shall have three (3) years from the date of termination of employment (but not beyond the Re-Load Option's expiration date) to exercise such Re-Load Option; (v) be exercisable upon three (3) months' written notice to the Committee made prior to exercise; and (vii) be exercisable not more than once per year with the approval of the Committee. Re-Load Options shall be subject to the same terms and conditions of the Original Option Right unless otherwise stated in this Paragraph 14(a). (b) Any Re-Load option may be an option intended to qualify as an incentive stock option under Section 422 of the Code or an option not intended to so qualify, as the 13. 14 Committee may designate at the time of the grant of the Original Option Right; provided, however, that the designation of any Re-Load Option as an incentive stock option shall be subject to the one hundred thousand dollars ($100,000) annual limitation on exercisability of incentive stock options described in Section 422(d) of the Code. There shall be no Re-Load Options on Re-Load Options. Any Re-Load Option shall be subject to the availability of sufficient shares under Paragraph 3 and the limitations on individual Participants' option grants under Paragraph 3 and shall be subject to such other terms and conditions as the Committee may determine which are not inconsistent with the express provisions of the Plan regarding the terms of options. 15. STOCK OPTION GAIN DEFERRAL. (a) Participation. Only Deferral Participants are eligible to make an election pursuant to this Paragraph 15. (b) Deferrals. A Deferral Participant may elect to defer Stock Option Gain pursuant to one or more Option Rights. All of the gain inherent in an Option Right must be deferred, although the Option Right may be exercised in parts. (i) Elections. Once an election form, properly completed, is received by the Committee, the election of the Deferral Participant shall be irrevocable; provided, however, that the Committee may, in its discretion, permit a Deferral Participant to elect a further deferral of amounts credited to his or her Deferral Account by filing a later election form; provided further, however, that, unless otherwise approved by the Committee, any election to defer further amounts credited to a Deferral Account must be made at least one (1) year prior to the date such amounts would otherwise be payable in the absence of such later election and shall be void in the event of a Deferral Participant's earlier termination of employment. (ii) Date of Election. An election to defer Stock Option Gain shall be made at least six (6) months prior to the exercise of an Option Right. Accordingly, once a Deferral Participant has made such an election, the Deferral Participant may not exercise the Option Right covered by the election for at least six (6) months thereafter. (c) Deferral Accounts. (i) Establishment; Crediting of Amounts Deferred. A Deferral Account shall be established for each Deferral Participant, as directed by the Committee. The amount of Stock Option Gain deferred with respect each Deferral Account will be credited to such Deferral Account as of the date on which such amount would have been paid to the Deferral Participant but for the Deferral Participant's election to defer receipt hereunder. Amounts credited to a Deferral Account shall be deemed invested in Common Stock, and the Deferral Account accordingly shall fluctuate in value in accordance with the Market Value per Share of Common Stock. (ii) Adjustments. Amounts credited to a Deferral Account shall be adjusted pursuant to the terms of Paragraph 13. 14. 15 (d) Settlement of Deferral Accounts. (i) Form of Payment. The Company shall settle a Deferral Participant's Deferral Account, and discharge all of its obligations to pay deferred compensation under this Paragraph 15 with respect to such Deferral Account, by transferring to the Deferral Participant (or the Deferral Participant's beneficiary or estate in the case of death) shares of Common Stock equal in number (both whole and fractional) to the deemed Common Stock investment of the Deferral Account. (ii) Timing of Transfers. Transfers in settlement of a Deferral Account shall be made as soon as practicable after the date specified by the Deferral Participant in his or her election relating to such Deferral Account, or earlier in the event of termination of employment, in the following circumstances: (1) A single lump sum transfer or installment transfers in settlement of any Deferral Account shall be made or commence, as the case may be, as promptly as practicable following the Deferral Participant's attainment of age 55, 60, or 65, in accordance with the Deferral Participant's election made pursuant to Paragraph 15(b); provided, however, that a single lump sum transfer shall be made in the event of the Deferral Participant's termination of active employment, regardless of cause, prior to the transfer date specified in such election. Installment transfers shall be made in substantially equal amounts (i.e., substantially equal in terms of the number of shares of Common Stock transferred) over five (5), ten (10) or fifteen (15) years pursuant to the Deferral Participant's election made pursuant to Paragraph 15(b). (2) In the event of a Change in Control, a single transfer in settlement of a Deferral Participant's entire Deferral Account shall be made within fifteen (15) business days following the effective date such Change in Control. (3) In the event of a Deferral Participant's death prior to receiving all transfers to which he or she is entitled, the beneficiary of the Deferral Participant, as last designated in writing on a form provided by the Committee, or the Deferral Participant's estate (in the absence of such a designation) shall receive the remaining transfers in accordance with the single lump sum or installment method of transfer specified in the Deferral Participant's election made pursuant to Paragraph 15(b); provided, however, that such transfer shall be made or commence, as the case may be, within sixty (60) business days following the date of the Deferral Participant's death and that a single lump sum transfer shall be made in all cases in which transfers to the Deferral Participant have not commenced prior to death. (iii) Financial Hardship Transfers. Other provisions of the Plan notwithstanding, if, upon the written application of a Participant, the Committee determines that the Deferral Participant has a financial hardship of such a substantial nature and beyond the individual's control that settlement of amounts previously deferred under the Plan is warranted, the Committee may direct the settlement of all or a portion of the balance of a Deferral Account and the time and manner of such transfer. Financial hardship shall mean a severe financial hardship to the Deferral Participant resulting from a sudden and unexpected illness or accident of the Deferral Participant or his or her dependent, loss of the Deferral Participant's property due to 15. 16 casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Deferral Participant. (e) Statements. The Committee will furnish statements to each Deferral Participant reflecting the amount credited to a Deferral Participant's Account and transactions therein not less frequently than once each calendar year. (f) Claims Procedure. (i) Any application or request for the settlement of a Deferral Account, inquiries about this Paragraph 15 or inquiries about present or future rights under this Paragraph 15 (a "Claim") must be submitted to the Committee at: Compensation/Human Resources Committee America West Airlines, Inc. 4000 E. Sky Harbor Boulevard Phoenix, Arizona 85034-3899 or such other address as the Committee may from time to time specify. (ii) If a Claim is denied in whole or in part, the Committee must notify the applicant, in writing, of the denial of the application and of the applicant's right to review the denial. The written notice of denial will be set forth in a manner designed to be understood by the individual and will include specific reasons for the denial, specific references to the provisions of Plan upon which the denial is based, a description of any information or material that the Committee needs to complete the review and an explanation of the claims procedure of Paragraph 15(f). (iii) This written notice will be given to the individual within 90 days after the Committee receives the application, unless special circumstances require an extension of time, in which case, the Committee shall have up to an additional 90 days for processing the application. If an extension of time for processing is required, written notice of the extension will be furnished to the applicant before the end of the initial 90-day period. (1) This notice of extension will describe the special circumstances necessitating the additional time and the date by which the Committee is to render its decision on the application. If written notice of denial of the Claim is not furnished within the specified time, the application shall be deemed to be denied. The applicant will then be permitted to appeal the denial in accordance with the review procedure described below. (iv) Any person (or that person's authorized representative) for whom a Claim is denied (or deemed denied), in whole or in part, may appeal the denial by submitting a request for a review to the Committee within 60 days after the application is denied (or deemed denied). The Committee will give the applicant (or his or her representative) an opportunity to review pertinent documents in preparing a request for a review. A request for a review shall be in writing and shall be addressed to the Committee at: 16. 17 Compensation/Human Resources Committee America West Airlines, Inc. 4000 E. Sky Harbor Boulevard Phoenix, Arizona 85034-3899 or such other address as the Committee may from time to time specify. (v) A request for review must set forth all of the grounds on which it is based, all facts in support of the request and any other matters that the applicant feels are pertinent. The Committee may require the applicant to submit additional facts, documents or other material as it may find necessary or appropriate in making its review. (vi) The Committee will act on each request for review within 60 days after receipt of the request, unless special circumstances require an extension of time (not to exceed an additional 60 days) for processing the request for a review. If an extension for review is required, written notice of the extension will be furnished to the applicant within the initial 60-day period. The Committee will give prompt, written notice of its decision to the applicant. If the Committee defers denial of a Claim in whole or in part, the notice will outline, in a manner calculated to be understood by the applicant, the specific provisions of this plan upon which the decision is based. If written notice of the Committee's decision is not given to the applicant within the time prescribed in this subparagraph (vi), the application will be deemed denied on review. (vii) The Committee will establish rules and procedures, consistent with the Plan, this Paragraph 15 and Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), as necessary and appropriate in carrying out its responsibilities in reviewing Claims. The Committee may require an applicant who wishes to submit additional information in connection with an appeal from the denial (or deemed denial) of a Claim to do so at the applicant's own expense. (viii) No legal action in respect of a Claim under this Paragraph 15 may be brought until the claimant (i) has submitted a written Claim in accordance with Paragraph 15(f)(i) above, (ii) has been notified by the Committee that the application is denied (or the application is deemed denied due to the Committee's failure to act on it within the established time period), (iii) has filed a written request for a review of the application in accordance with the appeal procedure described in Paragraph 15(f)(iii) above, and (iv) has been notified in writing that the Committee has denied the appeal (or the appeal is deemed to be denied due to the Committee's failure to take any action on the claim within the time prescribed by Paragraph 15(f)(iv) above). (g) General Provisions. (i) Limits on Transfers. Other than by will or the laws of descent and distribution, no right, title or interest of any kind in a Deferral Account shall be transferable or assignable by a Deferral Participant or his or her Beneficiary, be subject to alienation, anticipation, encumbrance, garnishment, attachment, levy, execution or other legal or equitable process, or be subject to the debts, contracts, liabilities or engagements, or torts of any Deferral 17. 18 Participant or his or her Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish, attach or take any other action subject to legal or equitable process or encumber or dispose of any interest in a Deferral Account shall be void. (ii) Receipt and Release. A transfer to any Deferral Participant or Beneficiary in accordance with the provisions of this Paragraph 15 shall, to the extent thereof, be in full satisfaction of all claims for the compensation or awards deferred pursuant to the Deferral Account to which the transfer relates against the Company or any Subsidiary, and the Committee may require such Deferral Participant or Beneficiary, as a condition to such transfer, to execute a receipt and release to such effect. (iii) Unfunded Status; Creation of Trusts. This Paragraph 15 is intended to constitute an "unfunded" plan for deferred compensation, and Deferral Participants shall rely solely on the unsecured promise of the Company for transfers hereunder with respect to any transfer not yet made to a Deferral Participant. Nothing contained in this Paragraph 15 shall give a Deferral Participant any rights that are greater than those of a general unsecured creditor of the Company; provided, however, that the Committee may authorize the creation of a trust or make other arrangements to meet the Company's obligations under this Paragraph 15, which trust or other arrangements shall be consistent with the "unfunded" status of such deferred compensation plan unless the Committee otherwise determines with the consent of each affected Deferral Participant. (iv) Compliance. A Deferral Participant shall have no right to receive any payment or transfer with respect to his or her Deferral Account until legal and contractual obligations of the Company relating to this Paragraph 15 and the making of such payment or transfer shall have been complied with in full. In addition, the Company shall impose such restrictions on Common Stock delivered to a Participant hereunder and any other interest constituting a security as it may deem advisable in order to comply with the Securities Act of 1933, as amended, the requirements of the New York Stock Exchange or any other stock exchange or automated quotation system upon which the Common Stock is then listed or quoted, any state securities laws applicable to such a transfer, any provision of the Company's Certificate of Incorporation or Bylaws, or any other law, regulation, or binding contract to which the Company is a party. (v) Other Participant Rights. No Deferral Participant shall have any of the rights or privileges of a stockholder of the Company under this Paragraph 15, including as a result of the deemed investment of a Deferral Account in Common Stock or the creation of any trust and deposit of Common Stock therein, except at such time as Common Stock may be actually delivered in settlement of a Deferral Account. Subject to the limitations set forth in Paragraph 15(g)(i) above, the terms and conditions of this Paragraph 15 shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. (vi) Limitation. A Deferral Participant and his or her Beneficiary shall assume all risk in connection with any decrease in value of the Deferral Account, and neither the Company, any Subsidiary nor the Committee shall be liable or responsible therefor. 18. 19 (vii) Effect on Cash Tax Rights. If an election under this Paragraph 15 is made to defer the receipt of Stock Option Gain upon the exercise of an Option Right pursuant to which a Cash Tax Right was awarded at the time of grant according to the terms of Paragraph 10 above, such Cash Tax Right shall be terminated upon the election to defer Stock Option Gain. 16. FRACTIONAL SHARES. Except as otherwise provided in Paragraph 15(d)(i) above, the Company will not be required to issue any fractional share of Common Stock pursuant to this Plan. The Committee may provide for the elimination of fractions or the settlement of fractions in cash. 17. WITHHOLDING OF TAXES. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any grant or payment made to a Participant or any other person under this Plan, or is requested by a Participant to withhold additional amounts with respect to such taxes, and the amounts available to the Company for such withholding are insufficient, it will be a condition to the receipt of such grant or payment that the Participant or such other person make arrangements satisfactory to the Company for the payment of the balance of such taxes required or requested to be withheld, which arrangements in the discretion the Committee may include relinquishment of a portion of such Award or payment. With respect to any Participant who is subject to Rule 16b-3 at the time withholding is required with respect to an Award payable in Common Stock, to the extent such withholding is not satisfied by a tandem Cash Tax Right, if any, the Participant may direct the Company to withhold a number of shares of Common Stock having an aggregate Market Value per Share equal to the amount of taxes required to be withheld by the Company. 18. PARACHUTE TAX GROSS-UP. If option acceleration or any payment, distribution or other benefit by or from the Company to or for the benefit of a Participant (whether actually or deemed paid or payable, distributed or distributable or received or receivable pursuant to the terms of the Plan or otherwise, but determined without regard to any additional payment required under this gross-up provision) (collectively, the "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive from the Company an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Participant of all taxes (including, without limitation, any income and employment taxes and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. All calculations required by this excise tax gross-up provision shall be performed by the independent auditors retained by the Company most recently prior to the Change in Control (the "Auditors"), based on information supplied by the Company and the Participant. All fees and expenses of the Auditors shall be paid by the Company. 19. ADMINISTRATION OF THE PLAN. (a) This Plan will be administered by the Committee, which at all times will consist of not less than three directors appointed by the Board, each of whom will be a "non-employee director" within the 19. 20 meaning of Rule 16b-3 and an "outside director" within the meaning of Section 162(m) of the Code. A majority of the Committee will constitute a quorum, and the action of the members the Committee present at any meeting at which a quorum is present, or acts unanimously approved writing, will be the acts of the Committee. (b) The interpretation and construction by the Committee of any provision of this Plan or of any agreement, notification or document evidencing the grant of an Award and any determination by the Committee pursuant to any provision of this Plan or of any such agreement, notification or documentation will be final and conclusive. No member of the Committee will be liable for any such action or determination made in good faith or in the absence of gross negligence or willful misconduct on the part of such member. 20. AMENDMENTS, ETC. (a) This Plan may be amended from time to time by the Board. (b) The Committee may, in its sole discretion, take any action it deems to be equitable under the circumstances or in the best interests of the Company with respect to any Award, unless such Award is intended to qualify as "performance based" compensation under Section 162(m) of the Code and such action would cause the Award to fail to so qualify. (c) This Plan will not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate such Participant's employment or other service at any time. 21. TERM. This Plan became effective as of December 1, 1994. Unless sooner terminated, this Plan shall terminate on November 30, 2004, and no further Awards shall be made, but all outstanding Awards and Deferral Accounts on such date shall remain effective in accordance with their terms and the terms of this Plan. This AMERICA WEST 1994 INCENTIVE EQUITY PLAN, amended and restated effective January 15, 1999, is hereby executed by a duly authorized officer of America West Holdings Corporation. AMERICA WEST HOLDINGS CORPORATION By: /s/ William A. Franke __________________________________________ William A. Franke Its: Chief Executive Officer 20. EX-10.23 4 EX-10.23 1 EXHIBIT 10.23 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of February 17, 1998, by and among AMERICA WEST HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), AMERICA WEST AIRLINES, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("AWA"), THE LEISURE COMPANY, a Delaware corporation and a wholly-owned subsidiary of Holdings ("Leisure", and, together with AWA and Holdings, "Employers" and individually, an "Employer"), and WILLIAM A. FRANKE ("Franke"). WHEREAS, Employers desire to employ Franke in an executive capacity and Franke desires to serve in such capacity, all on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations 1.1 Definitions For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "AmWest Registration Agreement" shall have the meaning specified in Section 6.1. "Base Salary" shall have the meaning specified in Section 3.1(a). "Board" shall mean the Board of Directors of Holdings. "CEO" shall mean, when used with reference to any Constituent Company, the chief executive officer of such Constituent Company. "Chairman" shall mean, when used with reference to any Constituent Company, the Chairman of the Board of such Constituent Company. 2 "Change in Control" shall occur if, after the date hereof: (i) the individuals who, as of the date hereof, constitute the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Holdings' stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (ii) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than the Employers, acquires (directly or indirectly) the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 25% of the combined voting power of the then outstanding voting securities of Holdings or AWA entitled to vote generally in the election of directors ("Voting Power"); or (iii) any shares of Class B Common Stock or other voting securities of Holdings shall be purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Employers); or (iv) an Employer's stockholders shall approve a merger or consolidation involving the Employer other than (A) a merger or consolidation in which the voting securities of the Employer outstanding immediately prior thereto will become (by operation of law), or are to be converted into, voting securities of the surviving corporation or its parent corporation immediately after such merger or consolidation that are owned by the same person or entity or persons or entities as immediately prior thereto and possess at least 75% of the Voting Power held by the voting securities of the surviving corporation or its parent corporation, (B) a merger or consolidation effected to implement a recapitalization of the Employer (or similar transaction) in which no person (excluding the Employers) acquires more than 25% of the Voting Power or (C) a merger or consolidation in which the Employer is the surviving corporation and such transaction was determined not to be a Change in Control, which transaction and determination was approved by a majority of the Board in actions taken prior to, and with respect to, such transaction; or (v) Holdings' stockholders shall approve a merger, consolidation, reorganization, disposition of assets, liquidation or other transaction (or series of related transactions) in which Holdings will not survive as a publicly-owned corporation. "Code" shall mean the Internal Revenue Code of 1986, as in effect from time to time. "Confidential Information" shall have the meaning specified in Section 5.1(a). -2- 3 "Constituent Companies" shall mean, collectively, Holdings, AWA, Leisure and all other direct or indirect subsidiaries of Holdings. "Disability" shall mean a physical or mental condition of Franke that, in the good faith judgment of not less than a majority of the entire membership of the Board, based upon certification by a licensed physician reasonably acceptable to Franke and the Board, (i) prevents Franke from being able to perform the services required under this Agreement, (ii) has continued for a period of at lease six months during any period of twelve consecutive months and (iii) is expected to continue. "Dispute" shall have the meaning specified in Article VII. "Employment Period" shall mean that the period commencing on the date hereof and ending on the Expiration Date; provided, however, that if either Holdings or Franke gives a Notice of Termination pursuant to Section 4.1 or 4.2, then the Employment Period shall not extend beyond the relevant Termination Date. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended. "Expiration Date" shall mean December 31, 2000; provided, however, commencing on January 1, 2000 and on each January 1 thereafter, the Expiration Date shall automatically be extended one additional year unless, not later than the September 30 prior to such January 1, either party shall give written notice to the other party that the Expiration Date shall cease to be so extended. "Good Reason" shall mean any of the following actions or failures to act, but in each case only if it occurs during the Employment Period and then only if it is not consented to by Franke: (1) a material alteration by an Employer in the nature or status of Franke's applicable positions, functions, duties or responsibilities described in Section 2.2, including any change which would (i) alter Franke's reporting responsibilities described in Section 2.2 or (ii) cause Franke's positions with the Employers to become of less dignity or importance than the applicable positions described in paragraphs (a), (b), and (c) of Section 2.2; provided, however, that each such alteration shall cease to be a Good Reason on the date which is 90 days after the occurrence of such alteration unless, prior to such date, Franke gives a Notice of Termination pursuant to Section 4.1 on account of such alteration; (2) the failure of an Employer to perform any of its obligations under this Agreement in any regard, but only if such failure shall continue unremedied for more than 15 days after written notice thereof is given by Franke to Holdings; -3- 4 (3) the relocation of the principal executive offices of an Employer outside the greater Phoenix, Arizona metropolitan area or an Employer's requiring Franke to be based other than at such principal executive offices; provided, however, that such relocation shall cease to be a Good Reason on the date which is 90 days after the occurrence of such relocation unless, prior to such date, Franke gives a Notice of Termination pursuant to Section 4.1 on account of such relocation; (4) the failure of an Employer to elect or re-elect, or to appoint or re-appoint, Franke to the applicable offices described in paragraphs (a), (b), and (c) of Section 2.2; (5) any purported termination by an Employer of Franke's employment not in accordance with the provisions of this Agreement; (6) the failure of an Employer to obtain any assumption agreement required by Section 9.5(a); (7) the failure of Franke to be elected or appointed, or to be re-elected or re-appointed, as a director of an Employer as contemplated by Section 2.2(g); or (8) the failure of Franke to be granted the 1999 Stock Option as contemplated by Section 3.4. "Holders" shall have the meaning specified in Section 6.1. "Incentive Plan" shall mean the America West 1994 Incentive Equity Plan, as amended from time to time, or any successor plan. "Market Value per Share" means, at any date, the closing price per Share on that date (or, if there are no sales on that date, the last preceding date on which there was sale) in the principal market in which the Shares are traded. "Misconduct" shall mean one or more of the following: (i) the willful and continued failure by Franke to perform his duties described in Section 2.2 (other than any such failure resulting from Franke's incapacity due to physical or mental illness) after written notice of such failure has been given to Franke by Holdings and Franke has had a reasonable period after receipt of such notice to correct such failure; (ii) the willful commission by Franke of acts that are both dishonest and demonstrably injurious to any Constituent Company (monetarily or otherwise) in any material respect, provided that no act taken by Franke shall be deemed to constitute Misconduct if such act was taken by Franke in good faith and in the reasonable belief -4- 5 that such act was in the best interests of the Constituent Companies or in furtherance of Franke's duties and responsibilities described in Section 2.2; (iii) the conviction of Franke for a felony offense involving moral turpitude; or (iv) a material breach by Franke of any of the covenants set forth in this Agreement (other than Section 2.2), but only if such breach shall continue unremedied for more than 15 days after written notice thereof is given to Franke by Holdings. "Notice of Termination" shall mean a notice purporting to terminate Franke's employment in accordance with Section 4.1 or 4.2, which notice shall set forth in reasonable detail the reason for such termination and the facts and circumstances claimed to provide a basis for such termination. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust and an unincorporated organization. "Piggyback Registration Notice" shall have the meaning specified in Section 6.2(a). "Pledge Agreement" shall have the meaning specified in Section 3.5(i). "Promissory Note" shall have the meaning specified in Section 3.5(i). "Registrable Securities" shall have the meaning specified in Section 6.1. "Restricted Period" shall have the meaning specified in Section 5.2(a). "Restricted Shares" shall have the meaning specified in Section 3.5. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share" shall mean a share of the Class B common stock, $.01 par value, of Holdings. "Stock Grant" shall have the meaning specified in Section 3.5. "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. -5- 6 "Transfer Restriction" shall have the meaning specified in Section 3.5(b). "1997 Agreement" shall mean the Employment Agreement between Franke, Holdings, and AWA dated as of February 15, 1997. "1996 Stock Option" shall have the meaning specified in Section 3.2. "1998 Stock Option" shall have the meaning specified in Section 3.3. "1999 Stock Option" shall have the meaning specified in Section 3.4. 1.2. Interpretations (a) In this Agreement, unless a clear contrary intention appears, (i) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, (ii) reference to any Article or Section, means such Article or Section hereof, (iii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (iv) where any provision of this Agreement refers to action to be taken by any party, or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. (b) The Article and Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. ARTICLE II Employment; Term; Positions and Duties 2.1. Employment; Term Each Employer hereby employs Franke in an executive capacity and Franke hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. Franke's employment hereunder shall commence on the date hereof and shall terminate on the Expiration Date, unless earlier terminated as provided in Article IV. -6- 7 2.2 Positions and Duties (a) While employed hereunder, Franke shall serve as a director, Chairman and CEO of Holdings and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including (without limitation) such duties and responsibilities as are set forth with respect to such positions in the certificate of incorporation and bylaws (as from time to time in effect) of Holdings. (b) While employed hereunder, Franke shall serve as Chairman of AWA and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such position, including (without limitation) such duties and responsibilities as are set forth with respect to such position in the certificate of incorporation and bylaws (as from time to time in effect) of AWA. (c) While employed hereunder, Franke shall serve as Chairman of Leisure and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such position, including (without limitation) such duties and responsibilities as are set forth with respect to such position in the certificate of incorporation and bylaws (as from time to time in effect) of Leisure. (d) Franke shall have such additional duties and responsibilities commensurate with the positions referred to above as from time to time may be reasonably assigned to him by the Board. (e) While employed hereunder, Franke shall report directly and exclusively to the Board and shall observe and comply with all lawful policies, directions and instructions of the Board which are consistent with paragraphs (a), (b) and (c) above. (f) During the Employment Period, (i) the President of Holdings, the President and CEO of AWA, and the President and CEO of Leisure shall report directly to Franke, (ii) the chief operating officer, the chief financial officer, the chief legal officer and the chief public affairs officer of Holdings shall, unless otherwise directed by the Board, report directly to Franke, and (iii) the chief financial officer, the chief corporate affairs officer, the chief legal officer and the chief public affairs officer of AWA shall, unless other directed by Franke or the Board, report jointly to Franke and the CEO of AWA. (g) Employers agree to use their reasonable best efforts to cause Franke to be elected or appointed, or re-elected or re-appointed, as director of each Employer at all times during the Employment Period. (h) While employed hereunder, Franke agrees to devote a reasonable portion (which need not constitute a substantial portion) of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder as Chairman and CEO of Holdings, as Chairman of AWA and as Chairman of Leisure; provided, however, that Franke may engage in the -7- 8 following activities so long as they do not interfere in any material respect with the performance of Franke's duties and responsibilities hereunder: (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions, (iii) manage his personal investments, (iv) serve as a managing partner of Newbridge Latin American Fund and (v) render consultation and financial advisory services to third parties. Employers acknowledge that Franke is the principal owner of Franke & Company, Inc. through which Franke owns and oversees equity interests in several enterprises and provides consultation and financial advisory services to third parties. 2.3 Place of Employment Franke's place of employment hereunder shall be at Holdings' principal executive offices in the greater Phoenix, Arizona metropolitan area. ARTICLE III Compensation and Benefits 3.1 Base Salary (a) For services rendered by Franke under this Agreement, Employers shall pay to Franke an annual cash base salary ("Base Salary") in the amount (subject to adjustment as provided in paragraph (b) below) of $200,000 effective from and after the date of execution of this Agreement and for the remainder of his employment hereunder. The Base Salary shall be payable semi-monthly as earned during the Employment Period. (b) The Base Salary may be increased by the Board at any time or from time to time as the Board may deem appropriate. 3.2 1996 Stock Option Franke has heretofore been granted several options to purchase Shares, the latest being an option to purchase 71,000 Shares for $12 per Share (the "1996 Stock Option"). The following provisions of this Section 3.2 constitute the agreement required with respect to the 1996 Stock Option under Paragraph 4(i) of the Incentive Plan: (a) The 1996 Option became exercisable as to 10% of the Shares covered thereby on October 28, 1997, and shall become exercisable as to 30% of the Shares covered thereby on October 28, 1998, and as to 60% of the Shares covered thereby on December 31, 1998, so that the 1996 Stock Option will be exercisable in full on December 31, 1998. (b) Upon the exercise of the 1996 Stock Option, the Person exercising the 1996 Stock Option shall pay to Holdings an amount equal to the exercise price, such amount to be -8- 9 paid (i) in cash, (ii) by delivering to Holdings issued and outstanding Shares which have an aggregate Market Value per Share at the date of exercise equal to the exercise price and any applicable withholding taxes, (iii) by directing Holdings to sell a sufficient number of Shares to be acquired on exercise of the 1996 Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the exercise price and any applicable withholding taxes, with any surplus then remaining to be paid to the Person exercising the 1996 Stock Option or its designee or (iv) by any combination of the foregoing. (c) Upon the occurrence of a Change in Control, the 1996 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1996 Stock Option be exercisable after October 28, 2006. (d) In the event Franke's employment is terminated by Franke pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct, the 1996 Stock Option, to the extent then vested, may be exercised at any time within six months following the Termination Date, but not thereafter. To the extent the 1996 Stock Option is not vested on such Termination Date, the portion thereof that is not vested on such Termination Date shall automatically lapse and be canceled unexercised as of such Termination Date. (e) The 1996 Stock Option shall become automatically vested in full on the date of Franke's death and may be exercised at any time within the one-year period beginning on the date of Franke's death, but not thereafter. (f) In the event Franke's employment is terminated by reason of Disability, the 1996 Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not thereafter. (g) Except as otherwise provided herein, the 1996 Stock Option may be exercised in whole or in part or in two or more successive parts. (h) The 1996 Stock Option shall not be transferrable by Franke except for transfers permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Franke, the 1996 Stock Option may not be exercised by anyone other than Franke or the Person to whom the 1996 Stock Option has been transferred in accordance with the Incentive Plan. (i) The 1996 Stock Option may be exercised from time to time by a notice in writing which identifies the 1996 Stock Option and specifies the number of Shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to the Secretary of Holdings at its principal corporate offices. The date of exercise of the 1996 Stock Option shall be the date the exercise notice is hand delivered or mailed to -9- 10 the Secretary of Holdings, whichever is applicable. An election to exercise the 1996 Stock Option shall be irrevocable. (j) The 1996 Stock Option is not intended to qualify as an incentive stock option under Section 422 of the Code. (k) The provisions of this Section 3.2 shall survive the termination of Franke's employment hereunder. 3.3 1998 Stock Option Effective as of February 17, 1998 Franke has been granted an option to purchase 350,000 Shares for $24.1875 per Share pursuant to the Incentive Plan (the "1998 Stock Option"). The following provisions of this Section 3.3 constitute the agreement required with respect to the 1998 Stock Option under Paragraph 4(i) of the Incentive Plan: (a) The 1998 Stock Option shall become exercisable as to one-third of the Shares covered thereby on December 31, 1998, as to an additional one-third of the Shares covered thereby on December 31, 1999 and as to the remaining one-third of the Shares covered thereby on December 31, 2000, so that the 1998 Stock Option will be exercisable in full on December 31, 2000. (b) Upon the exercise of the 1998 Stock Option, the Person exercising the 1998 Stock Option shall pay to Holdings an amount equal to the exercise price, such amount to be paid (i) in cash, (ii) by delivering to Holdings issued and outstanding Shares which have an aggregate Market Value per Share at the date of exercise equal to the exercise price, (iii) by directing Holdings to sell a sufficient number of Shares to be acquired on exercise of the 1998 Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the exercise price and any applicable withholding taxes, with any surplus then remaining to be paid to the Person exercising the 1998 Stock Option or its designee or (iv) by any combination of the foregoing. (c) Upon the occurrence of a Change in Control, the 1998 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1998 Stock Option be exercisable after February 17, 2008. (d) In the event Franke's employment is terminated by Franke pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct, the 1998 Stock Option, to the extent then vested, may be exercised at any time within six months following the Termination Date, but not thereafter. To the extent the 1998 Stock Option is not vested on such Termination Date, the portion thereof that is not vested on such Termination Date shall automatically lapse and be canceled unexercised as of such Termination Date. -10- 11 (e) The 1998 Stock Option shall become automatically vested in full on the date of Franke's death and may be exercised at any time within the one-year period beginning on the date of Franke's death, but not thereafter. (f) In the event Franke's employment is terminated by reason of Disability, the 1998 Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not thereafter. (g) Except as otherwise provided herein, the 1998 Stock Option may be exercised in whole or in part or in two or more successive parts. (h) The 1998 Stock Option shall not be transferrable by Franke except for transfers permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Franke, the 1998 Stock Option may not be exercised by anyone other than Franke or the Person to whom the 1998 Stock Option has been transferred in accordance with the Incentive Plan. (i) The 1998 Stock Option may be exercised from time to time by a notice in writing which identifies the 1998 Stock Option and specifies the number of Shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to the Secretary of Holdings at its principal corporate offices. The date of exercise of the 1998 Stock Option shall be the date the exercise notice is hand delivered or mailed to the Secretary of Holdings, whichever is applicable. An election to exercise the 1998 Stock Option shall be irrevocable. (j) The 1998 Stock Option is not intended to qualify as an incentive stock option under Section 422 of the Code. (k) The provisions of this Section 3.3 shall survive the termination of Franke's employment hereunder. 3.4. 1999 Stock Option Employers agree to use their best efforts to cause Franke to be granted on January 15, 1999 an option to purchase 150,000 Shares pursuant to the Incentive Plan with an exercise price per Share equal to the fair market value (as defined in the Incentive Plan) of a Share on January 15, 1999 (the "1999 Stock Option"). The following provisions of this Section 3.4 shall be effective upon the grant of the 1999 Stock Option and shall constitute the agreement required with respect to the 1999 Stock Option under Paragraph 4(i) of the Incentive Plan: (a) The 1999 Stock Option shall be exercisable as to one-third of the Shares covered thereby immediately on the date of grant, as to an additional one-third of the Shares covered thereby on December 31, 1999 and as to the remaining one-third of the Shares -11- 12 covered thereby on December 31, 2000, so that the 1999 Stock Option will be exercisable in full on December 31, 2000. (b) Upon the exercise of the 1999 Stock Option, the Person exercising the 1999 Stock Option shall pay to Holdings an amount equal to the exercise price, such amount to be paid (i) in cash, (ii) by delivering to Holdings issued and outstanding Shares which have an aggregate Market Value per Share at the date of exercise equal to the exercise price, (iii) by directing Holdings to sell a sufficient number of Shares to be acquired on exercise of the 1999 Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the exercise price and any applicable withholding taxes, with any surplus then remaining to be paid to the Person exercising the 1998 Stock Option or its designee or (iv) by any combination of the foregoing. (c) Upon the occurrence of a Change in Control, the 1999 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1999 Stock Option be exercisable after January 15, 2009. (d) In the event Franke's employment is terminated by Franke pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct, the 1999 Stock Option, to the extent then vested, may be exercised at any time within six months following the Termination Date, but not thereafter. To the extent the 1999 Stock Option is not vested on such Termination Date, the portion thereof that is not vested on such Termination Date shall automatically lapse and be canceled unexercised as of such Termination Date. (e) The 1999 Stock Option shall become automatically vested in full on the date of Franke's death and may be exercised at any time within the one-year period beginning on the date of Franke's death, but not thereafter. (f) In the event Franke's employment is terminated by reason of Disability, the 1999 Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not thereafter. (g) Except as otherwise provided herein, the 1999 Stock Option may be exercised in whole or in part or in two or more successive parts. (h) The 1999 Stock Option shall not be transferrable by Franke except for transfers permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Franke, the 1999 Stock Option may not be exercised by anyone other than Franke or the Person to whom the 1999 Stock Option has been transferred in accordance with the Incentive Plan. (i) The 1999 Stock Option may be exercised from time to time by a notice in -12- 13 writing which identifies the 1999 Stock Option and specifies the number of Shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to the Secretary of Holdings at its principal corporate offices. The date of exercise of the 1999 Stock Option shall be the date the exercise notice is hand delivered or mailed to the Secretary of Holdings, whichever is applicable. An election to exercise the 1999 Stock Option shall be irrevocable. (j) The 1999 Stock Option is not intended to qualify as an incentive stock option under Section 422 of the Code. (k) The provisions of this Section 3.4 shall survive the termination of Franke's employment hereunder. 3.5. Stock Grant Effective as of the date of execution of this Agreement Franke has been granted 113,000 Shares (the "Restricted Shares"), pursuant to the Incentive Plan as additional compensation for services rendered under this Agreement (the "Stock Grant"). The grant of the Restricted Shares in accordance with this Section 3.5 shall be in addition to, and not in lieu of, the stock grants described in any prior agreement between the parties. The following provisions of this Section 3.5 constitute the agreement required with respect to the Stock Grant under Paragraph 6(f) of the Incentive Plan: (a) Except as expressly set forth below in this Section 3.5, (i) the Stock Grant shall be irrevocable and unconditional and (ii) none of the Restricted Shares shall be subject to forfeiture or surrender for any reason. (b) Franke will not sell, transfer or otherwise dispose of any of the Restricted Shares other than by will or by laws of descent and distribution; provided, however, that the foregoing restriction (the "Transfer Restriction") shall lapse with respect to any Restricted Shares which are no longer subject to forfeiture by Franke pursuant to paragraph (c) below and, provided further, that the Transfer Restriction shall automatically lapse in full (i) upon the occurrence of a Change in Control, (ii) in the event of Franke's death or (iii) in the event Franke's employment is terminated by Franke for Good Reason or on account of Disability or by Holdings for any reason other than Misconduct on account of the conviction of Franke for a felony. (c) Subject to the provisions of paragraphs (b) and (d) of this Section 3.5, the Transfer Restriction shall lapse as to (i) 13,400 Restricted Shares on the last day of each month in 1998, beginning on August 31, 1998, and continuing through December 31, 1998 (ii) as to 1,917 Restricted Shares on the last day of each month beginning on January 31, 1999 and continuing thereafter through November 30, 2000, and (iii) as to 1,909 Restricted Shares on December 31, 2000. (d) In the event Franke's employment is terminated by Franke pursuant to Section -13- 14 4.1 other than for Good Reason or by Holdings pursuant to Section 4.2 for Misconduct, then Franke shall forfeit and be obligated, for no consideration, to surrender to Holdings all Restricted Shares with respect to which the Transfer Restriction has not then lapsed. (e) Certificates evidencing the Restricted Shares will be issued by Holdings in Franke's name. Holdings may cause such certificates to bear a legend setting forth or incorporating the Transfer Restriction, and Holdings may cause such certificates to be delivered upon issuance to the Secretary of Holdings (or such other depositary as may be designated by the committee which administers the Incentive Plan) as a depositary for safe-keeping until the Transfer Restriction lapses with respect thereto or until forfeiture occurs with respect thereto pursuant to paragraph (d) above. If such certificates bear a legend setting forth or incorporating the Transfer Restriction, then upon the lapse of the Transfer Restriction without forfeiture, Holdings will cause a new certificate or certificates to be issued in the name of Franke without such legend. Holdings may require Franke to execute and deliver stock powers in the event of forfeiture. (f) Franke shall be entitled to receive all dividends and distributions in respect of the Restricted Shares (subject to applicable tax withholding), to vote the Restricted Shares and to give consents, waivers and ratifications with respect to the Restricted Shares; provided, however, that distributions applicable to any Restricted Shares shall be held by Holdings until (i) the Transfer Restriction lapses with respect to such Shares, at which time such distributions shall be paid to Franke or his designee without interest or (ii) forfeiture occurs with respect to such Shares pursuant to paragraph (d) above, at which time such distributions shall be forfeited. (g) If requested by Franke at any time, Holdings shall promptly request, and diligently seek in good faith to obtain, a no action letter from the SEC to the effect that the date of purchase, within the meaning and for the purposes of the short-swing profit provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, of the Restricted Shares is the grant date thereof. (h) With respect to the Stock Grant, if requested by Franke, Holdings will loan Franke an amount up to $1,144,125.00, solely for the purpose of enabling Franke to pay all or portion of the taxes (federal and state) attributable to the Stock Grant. Such loan shall be evidenced by, and be subject to the terms and conditions of, a promissory note duly executed by Franke and payable to the order of Holdings (the "Promissory Note"). The Promissory Note shall be in form and substance reasonably satisfactory to Holdings and shall be secured by a pledge agreement (the "Pledge Agreement") initially covering that number of the Restricted Shares determined by dividing 150% of the principal amount of the Promissory Note by the Market Value per Share on the day prior to the date the loan is funded. The Pledge Agreement shall be in form and substance (including release of collateral provisions based on a collateral value to loan ratio of 1.5 to 1.0) reasonably satisfactory to Holdings and shall be accompanied by appropriate stock powers. The Promissory Note shall be payable in two equal installments on the 5th and 6th anniversaries of the date the loan is funded and shall bear interest, compounded monthly, at the applicable federal rate determined in accordance with section 1274(d) of the Code. Franke shall not be personally liable for payments due under the Promissory Note, it being expressly understood and agreed that the sole -14- 15 recourse of Holdings for satisfaction of the Promissory Note shall be against the Restricted Shares pledged as collateral for the Promissory Note under the Pledge Agreement. Nothing in this paragraph (h) or this Agreement shall operate or be construed as replacing, changing or terminating the terms and provisions of Section 3.2(i) of the Employment Agreement between Franke and AWA, dated November 9, 1995, which Section 3.2(i) is hereby incorporated by reference as part of this Agreement and shall continue without interruption or change with respect to the "New Stock Grant," as defined in said prior agreement. 3.6 Life Insurance During the Employment Period, Employers agree to maintain, at all times and without cost to Franke, a term life insurance policy on the life of Franke in the amount of $2 million, the proceeds of which, in the event of Franke's death, shall be payable to one or more beneficiaries designated by Franke or, in the absence of any such designation, to his estate. Such policy shall be issued by a solvent insurance company reasonably acceptable to Franke. 3.7 Office Space; Staffing; Services During the Employment Period, Employers shall provide Franke with office space, secretarial and other support staff and administrative services necessary and appropriate to enable Franke to perform his duties and responsibilities under this Agreement. 3.8 Business Expenses Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Franke (without duplication) for business expenses reasonably incurred in the performance of Franke's duties hereunder. It is understood that Franke is authorized to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. 3.9 Other Benefits Franke shall be entitled to receive all fringe benefits and other perquisites that may be offered by the Employers to their senior executives as a group or to any of its senior executives individually or to the members of the Board, including, without limitation, (i) participation in the various employee benefit plans or programs provided to senior executives of Employers in general (including split-dollar life insurance and disability insurance programs), subject to meeting the eligibility requirements with respect to each of such benefit plans or programs, (ii) tax/financial planning assistance, (iii) automobile allowances, (iv) club memberships, (v) on-line and interline, positive space travel privileges, (vi) participation in Employers' severance payment policies on plans for executives in general and (vii) participation in Employers' retiree medical insurance programs, subject to meeting the eligibility requirements of such programs other than the -15- 16 requirement relating to five years service with Employers, which requirement is hereby waived. However, nothing in this Section 3.9 shall be deemed to prohibit Employers from making any changes in any of the plans, programs or benefits described herein, provided the change similarly affects all senior executives of Employers or all members of the Board, as the case may be, similarly situated. Notwithstanding the foregoing, by action by the Board, Franke may be entitled to participate in any incentive plans offered to key employees of an Employer other than the Incentive Plan. 3.10. No Director Fees In no event shall Franke be entitled to receive any additional compensation for serving as a director of any Constituent Company during the Employment Period. 3.11. HSR Filings In the event Franke is required to make a filing under the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended, and the regulations promulgated thereunder with respect to the acquisition by Franke of stock of Holdings, Franke shall inform Holdings of such requirement. Franke and Holdings shall provide each other with such information as is necessary for Franke and Holdings to make their respective filings. Holdings shall pay any applicable filing fee with respect to any such filing required by Franke and shall reimburse Franke for all reasonable attorneys' fees and expenses he incurs in connection with any such required filing. ARTICLE IV Termination of Employment 4.1. Termination by Franke Franke may, at any time prior to the Expiration Date, terminate his employment hereunder for any reason by delivering a Notice of Termination to the Board. -16- 17 4.2 Termination by Holdings Holdings may, at any time prior to the Expiration Date, terminate Franke's employment hereunder for any reason by delivering a Notice of Termination to Franke; provided, however, that in no event shall Holdings be entitled to terminate Franke's employment hereunder prior to the Expiration Date unless the Board shall duly adopt, by the affirmative vote of at least a majority of the entire membership of the Board, a resolution authorizing such termination and stating that, in the opinion of the Board, sufficient reason exists therefor. 4.3 Payment of Accrued Base Salary, Vacation Pay, etc. (a) Promptly upon the termination of Franke's employment hereunder for any reason, Employers shall pay to Franke a lump sum amount for (i) any unpaid Base Salary earned hereunder prior to the termination date, (ii) all unused vacation time accrued by Franke as of the termination date in accordance with Employers' vacation policies for senior executives, (iii) all unpaid benefits earned by Franke as of the termination date under any and all incentive compensation plans or programs of Employers, (iv) all amounts owing to Franke under Section 3.8 and (v) any additional amounts or benefits which may be required to be paid in a lump sum by applicable law. (b) A termination of Franke's employment in accordance with this Agreement shall not alter or impair (i) any of Franke's rights or benefits under or with respect to the 1996 Stock Option, 1998 Stock Option, or 1999 Stock Option, except as expressly provided in Section 3.2, Section 3.3, or Section 3.4, respectively, (ii) any of Franke's rights under or with respect to any of the Restricted Shares, except as expressly provided in Section 3.5, (iii) any of Franke's rights or benefits under any prior employment agreement relating to stock options or stock grants previously awarded to Franke, (iv) any of Franke's rights or benefits under any other agreement with an Employer or (v) any of Franke's rights or benefits, if any, under employee benefit plans or programs maintained by an Employer. 4.4 Other Termination Benefits and Privileges The following provisions shall apply if Franke terminates his employment hereunder for Good Reason or if Holdings terminates Franke's employment hereunder for any reason other than Misconduct or Disability; (a) Severance Payment. Employers shall promptly pay to Franke a severance payment (in cash or other immediately available funds) in the amount of $1.5 million; provided, however, that such severance payment shall be reduced to the -17- 18 extent necessary so that no portion of such payment (or of any other payment or benefit which constitutes a "parachute payment" within the meaning of Section 280G of the Code and which Franke has received or is entitled to receive shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, Franke's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. In the event Franke shall become entitled to receive a severance payment pursuant to this paragraph (a) under circumstances which entitle him to receive a severance payment under any severance policy or plan of an Employer, then the severance payment due to Franke pursuant to such policy or plan shall be automatically reduced by the amount of the severance payment due to him pursuant to this paragraph (a). (b) Medical Insurance. During the 24-month period following the Terminate Date, each Employer, at its cost, shall maintain in full force and effect for the continued benefit of Franke and Franke's dependents all benefits available to Franke and Franke's dependents under all medical plans and programs of such Employer, provided that (i) Franke's continued participation is possible under the terms and provisions of such plans and programs and (ii) Franke pays the regular employee premium, if any, required by such plans and programs. In the event that participation by Franke (or his dependents) in any such plan or program after the Termination Date is barred pursuant to the terms thereof, or in the event an Employer shall terminate any such plan or program, such Employer shall obtain for Franke (and/or his dependents) comparable coverage under individual policies. (c) Life Insurance. During the 12-month period following the Termination Date, each Employer, at its cost, shall continue to provide Franke all life insurance coverages (and in the same amounts) provided to him by an Employer immediately prior to the date on which the relevant Notice of Termination is given in accordance with this Article IV. (d) Travel Privileges. Each Employer shall provide Franke (and his wife and dependents) lifetime on-line and interline, positive space travel privileges in accordance with the terms of its non-revenue travel policy as in effect on the date hereof; provided, however, that the travel privileges to be provided to Franke (and his wife and dependents) by each Employer under this clause (d) shall be at least as favorable to Franke (and his wife and dependents) as the travel privileges generally provided to the senior executives of such Employer from time to time. 4.5. Payment of Benefits During Pendency of Dispute Holdings may, within 10 days after its receipt of a Notice of Termination given -18- 19 by Franke, provide notice to Franke that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VII. Franke may, within 10 days after his receipt of a Notice of Termination given by Holdings, provide notice to Holdings that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VII. Notwithstanding the pendency of any such dispute and notwithstanding any provision herein to the contrary, Employers will (i) continue to pay Franke the Base Salary in effect when the notice giving rise to the dispute was given and (ii) continue Franke as a participant in all compensation and benefit plans in which Franke was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved or, with respect to a Notice of Termination given by Franke, the date of termination specified in such notice, if earlier, but, in each case, not past the Expiration Date. If (i) Holdings gives a Notice of Termination to Franke, (ii) Franke disputes the termination as contemplated by this Section 4.5 and (iii) such dispute is finally resolved in favor of Employers in accordance with Article VII, then Franke shall be required to refund to Employers any amounts paid to Franke under this Section 4.5 but only if, and then only to the extent, Franke is not otherwise entitled to receive such amounts under this Agreement. 4.6 Resignation as a Director In the event Franke's employment under this Agreement is terminated for any reason, Franke agrees, if requested by the Board, to resign as a director of all Constituent Companies of which he is a director, such resignation to be effective immediately or at such later time as the Board shall request. -19- 20 ARTICLE V Confidential Information and Non-Competition 5.1. Confidential Information (a) Franke recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in paragraphs (a), (b), and (c) of Section 2.2, he may acquire Confidential Information (defined below) concerning one or more of the Constituent Companies, the use or disclosure of which would cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Franke agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (i) in the performance of his obligations to the Constituent Companies hereunder, (ii) as required by applicable law, (iii) in connection with the enforcement of his rights under this Agreement, the 1997 Agreement or any other agreement, (iv) in connection with any disagreement, dispute or litigation (pending or threatened) between Franke and one or more of the Constituent Companies or (v) with the prior written consent of the Board. As used herein, "Confidential Information" includes information with respect to the services, strategies, facilities and methods, research and development, trade secrets and other intellectual property, pricing and revenue management systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include any information that (x) is or becomes generally known or available other than as a result of a disclosure by Franke or (y) is or becomes known or available to Franke on a nonconfidential basis from a source (other than Employers) which, to Franke's knowledge, is not prohibited from disclosing such information to Franke by a legal, contractual, fiduciary or other obligation to any Constituent Company. (b) Franke confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by Franke (whether electronically or otherwise) while employed by any Constituent Company relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings at any time, Franke shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials, records and documents made by Franke or coming into his possession while employed by any Constituent Company concerning the business or affairs of any Constituent Company other than personal materials, records and documents (including notes and correspondence) of Franke not containing proprietary -20- 21 information relating to such business or affairs. Notwithstanding the foregoing, Franke shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any disagreement, dispute or litigation (pending or threatened) between Franke and any Constituent Company. 5.2. Non-Competition (a) While employed hereunder and for a period of 18 months thereafter (the "Restricted Period"), Franke shall not, unless he receives the prior written consent of the Board, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any Person which competes with an Employer in the United States other than Alaska Airlines, American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, TWA, United Airlines, USAir and AirTran; provided, however, that the foregoing restriction shall not apply at any time if Franke's employment is terminated by Franke for Good Reason or by Holdings for any reason other than Misconduct. (b) Franke has carefully read and considered the provisions of this Section 5.2 and, having done so, agrees that the restrictions set forth in this Section 5.2 (including the Restricted Period, scope of activity to be restrained and the geographical scope) are fair and reasonable and are reasonably required for the protection of the interests of each Employer, its officers, directors, employees, creditors and shareholders. Franke understands that the restrictions contained in this Section 5.2 may limit his ability to engage in a business similar to that of any Constituent Company, but acknowledges that he will receive sufficiently high remuneration and other benefits hereunder to justify such restrictions. (c) During the Restricted Period, Franke shall not, whether for his own account or for the account of any other Person (excluding Holdings), intentionally (i) solicit, endeavor to entice or induce any employee of any Constituent Company to terminate his employment with such Constituent Company or accept employment with anyone else or (ii) interfere in a similar manner with the business of any Constituent Company. (d) In the event that any provision of this Section 5.2 relating to the Restricted Period and/or the areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas such court deems reasonable and enforceable, the Restricted Period and/or areas of restriction deemed reasonable and enforceable by the court shall become and thereafter be the maximum time period and/or areas. -21- 22 5.3. Stock Ownership Nothing in this Agreement shall prohibit Franke from acquiring or holding any issue of stock or securities of any Person that has any securities registered under Section 12 of the Exchange Act, listed on a national securities exchange or quoted on The Nasdaq Stock Market, provided that if such Person competes with an Employer in the United States, (i) Franke is not deemed to be an "affiliate" of such Person as such term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act and (ii) Franke and members of his immediate family do not own or hold more than 5% of any voting securities of any such Person, except as may be approved by the Board. 5.4. Injunctive Relief Franke acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Constituent Companies (or any of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Franke from engaging in activities prohibited by this Article V or such other relief as may required to specifically enforce any of the covenants contained in this Article V. Franke agrees to and hereby does submit to in personam jurisdiction before each and every such court for that purpose. ARTICLE VI Registration Rights 6.1. Definitions Capitalized terms used herein and in Exhibit A hereto that are not otherwise defined herein shall have the meanings ascribed to them in that certain Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P., Lehman Brothers Inc., Belmont Capital Partners II, L.P., Belmont Fund, L.P. and Fidelity Copernicus Fund, L.P. and in that certain Assumption of Certain Rights Under Registration Rights Agreement executed by Holdings (collectively, "AmWest Registration Rights Agreement"), to which agreements reference is made for such definitions and for all purposes. In addition, the following terms, as used in this Article VI, have the following meanings: "Holders" shall mean (i) Franke, his heirs and personal representatives (ii) any -22- 23 other Person to whom Holdings has granted the right to have Registrable Securities held by such Person included in a registration statement filed by Holdings covering the offer and sale of its securities and (iii) any direct or indirect transferee of Registrable Securities. "Registrable Securities" means: (1) all equity securities of Holdings acquired by Franke as compensation for serving as an officer of an Employer, including, without limitation, (a) stock options, (b) any shares issued on exercise of stock options, (c) any of the Restricted Securities or other stock grants of Shares previously awarded to Franke, and (d) any securities issued or issuable with respect to any such securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, (2) Registrable Securities as such term is defined in the AmWest Registration Rights Agreement, and (3) equity securities of Holdings held by any other Person to whom Holdings has granted the right to have such equity securities included in a registration statement filed by Holdings covering the offer and sale of its securities. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such securities shall have been distributed in accordance with Rule 144, (iii) Holdings has caused to be delivered an opinion of counsel in accordance with Section 6.2(c) that such securities are distributable in accordance with Rule 144 or (iv) such securities shall have been otherwise transferred, new certificates therefor not bearing a legend restricting further transfer shall have been delivered in exchange therefor by Holdings and subsequent disposition of such securities shall not require registration or qualification under the Securities Act or any similar state law then in force. "Requisite Holders" means any Holder or Holders of a majority in interest of the Registrable Securities included or to be included in a registration or other relevant action, as the case may be. -23- 24 6.2. Piggyback Registration (a) Right to Include Registrable Securities. If Holdings at any time proposes to register any of its equity securities under the Securities Act (other than by a registration on Form S-4 or Form S-8, or any successor or similar form then in effect) in a form and in a manner that would permit registration of the Registrable Securities, whether or not for sale for its own account, it will give prompt (but in no event less than 30 days prior to the proposed date of filing the registration statement relating to such registration) notice to all Holders of Registrable Securities of Holdings' intention to do so and of such Holders' rights under this Section 6.2. Upon the request of any such Holder made within 20 days after the receipt by such Holder of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method or methods of disposition thereof) (the "Piggyback Registration Notice"), Holdings will use Commercially Reasonable Efforts to effect the registration under the Securities Act of all Registrable Securities which Holdings has been so requested to register by the Holders thereof, to the extent required to permit the disposition (in accordance with the intended method or methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that if, at any time after giving notice of its intention to register any equity securities and prior to the effective date of the registration statement filed in connection with such registration, Holdings shall determine for any reason not to register or to delay registration of such equity securities, Holdings may, at its election, give notice of such determination to each such Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay all Registration Expenses in connection therewith) and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities for the same period as the delay in registering such other equity securities. (b) Priority in Piggyback Registration. If (i) a registration pursuant to this Section 6.2 involves an underwritten offering of the securities being registered, whether or not for sale for the account of Holdings, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform Holdings and the Holders requesting such registration by letter of its belief that the amount of securities requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to Holdings, then Holdings will include in such registration such amount of securities which Holdings is so advised can be sold in (or during the time of) such offering as follows: first, all securities proposed by Holdings to be sold for its own account; second, such securities of Holdings requested to be included in such registration pursuant to the terms of the AmWest Registration Rights Agreement; third, such Registrable Securities -24- 25 requested to be included in such registration by all other Holders pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such Holders; and fourth, all other securities of Holdings requested to be included in such registration pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included. (c) The Holders shall be entitled to exercise their registration rights pursuant to this Section 6.2 at any time or times until all of the Registrable Securities have been sold pursuant to an effective registration statement under the Securities Act, or until Holdings shall have obtained an opinion of counsel reasonably acceptable to Holdings and Holders that such Registrable Securities may be sold without registration pursuant to available exemptions under Rule 144 without limitation on amount. 6.3 Demand Registration (a) Right to Make Notice of Demand. Franke may provide Holdings with a Notice of Demand, in which case Holdings will have the obligation to use Commercially Reasonable Efforts to: (i) if not theretofore done, seek to obtain such consents, if any, which may be required under the AmWest Registration Rights Agreement to permit Holdings to comply with Franke's Notice of Demand and provisions of this Agreement ("Required Consents"); and (ii) subject to obtaining any Required Consents, effect at the earliest practicable date the registration under the Securities Act of the Registrable Securities of Franke, or any direct or indirect transferee of Franke, that Holdings has been so requested to register for disposition in accordance with the intended method of disposition set forth in the Notice of Demand; provided that, Holdings shall be obligated to effect such registration only if it is then eligible to effect such registration covering all the Registrable Securities set forth in the Notice of Demand by filing either (X) a registration statement on Form S-3, or (Y) a registration statement (or an amendment to a registration statement) on Form S-8 containing a reoffer prospectus pursuant to General Instruction C thereunder (or any successor or comparable provision) in which event Holdings may elect to effect such registration on either form or any other form which it is then eligible to use for such registration. -25- 26 (b) Priority in Demand Registration. If a registration pursuant to this Section 6.3 involves an underwritten offering of securities being registered, whether or not for sale for the account of Holdings, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and if Holdings or any other Holders (other than Franke) are eligible and have elected to participate in such registration, and if the managing underwriter of such underwritten offering shall inform Holdings and Franke of its belief that the amount of securities requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to Holdings, then Holdings will include in such registration such amount of securities which Holdings is so advised can be sold in (or during the time of such offering) as follows: first, all securities proposed by Holdings to be sold for its own account; second, such securities of Franke, or any direct or indirect transferee of Registrable Securities of Franke, requested to be included in such registration pursuant to the Notice of Demand provided for in Section 6.3(a) and such securities of Holdings as shall be requested to be included in such registration pursuant to the terms of the AmWest Registration Rights Agreement, pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such Holders; third, such Registrable Securities requested to be included in such registration by all other Holders pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such Holders; and fourth, all other securities of Holdings requested to be included in such registration pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included. (c) Number of Demand Registrations. Franke shall be entitled to exercise his registration rights pursuant to Section 6.3(a) at any time or times until all of the Registrable Securities owned by Franke, or any direct or indirect transferee of Franke, either: (i) have been sold pursuant to an effective registration statement under the Securities Act, or (ii) no longer constitute Registrable Securities requiring registration or qualification in connection with any proposed sale or transfer. 6.4. Registration Procedures Each registration pursuant to Section 6.2 or Section 6.3 shall be effected in accordance with the procedures, and subject to the indemnification and other provisions, set forth in Exhibit A hereto. -26- 27 ARTICLE VII Dispute Resolution (a) In the event a dispute shall arise between Franke, on the one hand, and Holdings, AWA or Leisure, on the other hand, as to whether the provisions of this Agreement have been complied with (a "Dispute"), the parties agree to resolve such Dispute in accordance with the following procedure: (1) A meeting shall be held promptly between Franke and Holdings, attended (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Franke and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. (3) Franke and Holdings will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in clause (2) above. (4) Upon appointment of the mediator, Franke and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (5) If Franke and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (6) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the event there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (7) If any dispute shall arise under this Agreement involving termination of Franke's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Franke (without duplication), on a current basis, for all legal fees and expenses, if any, incurred by Franke in connection with such dispute, together with interest thereon at -27- 28 the rate of 8% per annum, such interest to accrue from the date Holdings receives Franke's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of such dispute in accordance with this Article VII includes a finding denying, in all material respects, Franke's claims in such dispute, Franke shall be required to reimburse Employers, over a period not to exceed 12 months from the date of such resolution, for all sums advanced to Franke with respect to such dispute pursuant to this clause (7). (8) Except as provided above, each of Franke and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VII. (9) All mediation/arbitration conferences and hearings will be held in Maricopa County, Arizona. (b) In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed question of law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties, but any legal conclusion reached by the arbitrators from such facts may be submitted by either Franke or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after the receipt of the arbitrators' decision. If no such civil action is commenced within such 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither Franke or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this paragraph (b) and if Franke is the party who prevails or substantially prevails (as determined by the court) in such civil action, Franke shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Franke in connection with such action and on appeal. In the event any civil action is commenced under this paragraph (b) and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Franke all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. (c) Except as limited by paragraph (b) above, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights -28- 29 awarded in an arbitration proceeding and if Franke is the party who prevails or substantially prevails in such legal proceeding, Franke shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Franke in connection with such legal proceeding and on appeal. In the event any civil action is commenced to enforce the rights awarded in an arbitration proceeding and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Franke all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. (d) Except as provided above, (i) no legal action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. ARTICLE VIII Antidilution Provisions and Reservation of Shares 8.1 Antidilution (a) In the event of any change after the date hereof in the number of issued shares of common stock (or any class thereof) of Holdings by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of Holdings, then there shall be appropriate and equitable adjustments made (with adjustments being cumulative if more than one of such events shall have occurred) in the number and kind of shares of stock or other securities of Holdings (i) thereafter issued to Franke upon exercise of the 1996 Stock Option, the 1998 Stock Option, the 1999 Stock Option and any other stock options heretofore or hereafter granted to Franke under the Incentive Plan and (ii) Restricted Shares hereafter granted to Franke under the Incentive Plan. Whenever an adjustment is made as required or permitted by the provisions of this paragraph (a), Holdings shall promptly deliver to Franke written notice thereof setting forth a brief statement of the facts requiring such adjustment and the computation thereof. (b) In case of any liquidation, dissolution or winding up of the affairs of Holdings, Holdings shall make prompt, proportionate, equitable, lawful and adequate provision as part of the terms of such dissolution, liquidation or winding up such that Franke may thereafter receive, in lieu of each Share which Franke would have been entitled to receive upon exercise of the 1996 Stock Option, the 1998 Stock Option, the 1999 Stock Option or any other option to purchase Shares, the same kind and amount of any stock, securities or assets as may be issuable, distributable or payable on any such dissolution, -29- 30 liquidation or winding up with respect to each outstanding Share. 8.2. Covenant to Reserve Shares for Issuance Holdings covenants that it will at all times reserve and keep available (free of preemptive rights) out of its authorized and unissued Shares, solely for the purpose of issuance upon exercise of options granted to Franke to purchase Shares, the full number of Shares, if any, then issuable upon exercise of such options. Holdings further covenants that all Shares which shall be so issuable shall be duly and validly issued and fully paid and non-assessable. ARTICLE IX Miscellaneous 9.1. No Mitigation or Set Off The provisions of this Agreement are not intended to, nor shall they be construed to, require that Franke mitigate the amount of any payment provided for in this Agreement by seeking or accepting other employment, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Franke as the result of employment by another employer or otherwise. Without limitation of the foregoing, Employers' obligations to make the payments to Franke required under this Agreement and otherwise to perform their obligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action that either an may have against Franke. 9.2. Assignability The obligations of Franke hereunder are personal and may not be assigned or delegated by Franke or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all its rights, duties and obligations hereunder as provided in Section 9.5. 9.3. Notices All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or any of them), at Holdings principal office address or such other address as -30- 31 Holdings may have designated by written notice to Franke for purposes hereof, directed to the attention of the Board with a copy to the Secretary of Holdings and (ii) if to Franke, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, except that any notice of change of address shall be effective only upon receipt. 9.4. Severability The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9.5. Successors; Binding Agreement (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by agreement in form and substance reasonably acceptable to Franke, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place. Failure of such Employer to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. As used herein, (i) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 9.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law, (ii) the term "AWA" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 9.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law, and (iii) the term "Leisure" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 9.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Franke hereunder shall inure to the benefit of and be enforceable by Franke's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Franke should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Franke's devisee, legatee, or other designee or, if there be no such designee, to Franke's estate. -31- 32 (c) This Agreement and all rights of the Constituent Companies hereunder shall inure to the benefit of an be enforceable by the Constituent Companies and their respective successors and assigns. 9.6. Tax Withholdings Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Franke has otherwise paid to such Employer the amount of such taxes. 9.7. Amendments and Waivers No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Franke and such member of the Board as may be specifically authorized by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9.8. Entire Agreement; Termination of Employment under 1997 Agreement (a) The parties acknowledge, confirm and agree that Franke's employment under the 1997 Agreement shall automatically terminate on the date hereof, the same as if the Expiration Date (as defined in the 1997 Agreement) occurred on the date hereof. (b) This Agreement is an integration of the parties agreement and no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. 9.9. Governing Law THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ARIZONA WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISION. -32- 33 9.10. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9.11. Indemnification Without Franke's prior written consent, no Employer shall amend, modify or repeal any provision of its certificate of incorporation or bylaws if such amendment, modification or repeal would materially adversely affect Franke's rights to indemnification by such Employer. 9.12. Remedies Cumulative No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. 9.13. Joint and Several Liability The obligations of Employers hereunder shall be joint and several. IN WITNESS WHEREOF, the parties have executed this Agreement on September , 1998 but effective for all purposes (except as herein otherwise expressly provided) as of the date first above written. AMERICA WEST HOLDINGS CORPORATION By: ---------------------------------- Chairman of Compensation/Human AMERICA WEST AIRLINES, INC. By: ---------------------------------- THE LEISURE COMPANY -33- 34 By: ---------------------------------- -------------------------------------- -34- 35 Exhibit A Registration Rights Procedures and Indemnifications 1. Defined Terms Capitalized terms used in this Exhibit A without definition shall have the meanings described or referred to in Sections 1.1 and 6.1 of the Employment Agreement of which this Exhibit A is a part (the "Employment Agreement"), except that "the Company" shall mean America West Holdings Corporation, a Delaware corporation. 2. Registration Terms and Procedures (a) Registration Statement Form. Registrations under Section 6.2 of the Employment Agreement shall be on such appropriate registration forms of the SEC as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition. Registration under Section 6.3 of the Employment Agreement shall be effected upon the registration forms therein specified (or the successors to such forms), as elected by the Company. The Company agrees to include in any such registration statement all information that any Participating Holder shall reasonably request (to the extent such information relates to such Participating Holder). (b) Registration Expenses. The Company will pay all Registration Expenses incurred in connection with a registration to be effected pursuant to the Employment Agreement. (c) Registration of Securities. Participating Holders may seek to register different types of Registrable Securities and/or different classes of the same type of Registrable Securities simultaneously and the Company shall use its, and in the case of an underwritten offering, shall cause the managing underwriter or underwriters to use Commercially Reasonable Efforts to effect such registration and sale in accordance with the intended method or methods of disposition specified by such Holders. (d) Withdrawal. Any Holder participating in a registration pursuant to Section 6.2 of the Employment Agreement shall be permitted to withdraw all or part of his Registrable Securities from such registration at any time prior to the effective date of the registration statement covering such securities. (e) Registration Procedures. In connection with the Company's obligations to register Registrable Securities pursuant to the Employment Agreement, the Company will use Commercially Reasonable Efforts to effect such registration so as to permit the sale of any Registrable Securities included in such registration in accordance with the intended method or methods of distribution thereof, and pursuant thereto the Company will as expeditiously as possible: (i) prepare and (as soon thereafter as practicable) file with the SEC the requisite registration statement containing all information required thereby to effect such registration and thereafter use Commercially Reasonable Efforts to cause such registration statement to become and remain effective in accordance with the terms of the Employment Agreement, provided that as far in advance as practicable before filing such registration statement or any amendment, supplement or exhibit thereto (but, with respect to the 36 filing of such registration statement, in no event later than seven days prior to such filing), the Company will furnish to the Participating Holders or their counsel copies of reasonably complete drafts of all such documents proposed to be filed (excluding exhibits, which shall be made available upon request by any Participating Holder), and any such Holder shall have the opportunity to object to any information contained therein and the Company will make the corrections reasonably requested by such Holder with respect to information relating to such Holder or the plan of distribution of the Registrable Securities prior to filing any such registration statement, amendment, supplement or exhibit; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith (A) as reasonably requested by any Participating Holder to which such registration statement relates (but only to the extent such request relates to information with respect to such Holder) and (B) as may be necessary to keep such registration statement effective for six months (or such shorter period as shall be necessary to complete the distribution of the securities covered thereby, but not before the expiration of the applicable period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder), and comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such registration statement during such period in accordance with the intended method or methods of disposition by the seller or sellers thereof set forth in such registration statement; (iii) furnish to each Participating Holder covered by, and each underwriter or agent participating in the disposition of securities under, such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case excluding all exhibits and documents incorporated by reference, which exhibits and documents shall be furnished to any such Person upon request), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act relating to such Participating Holder's Registrable Securities, in conformity with the requirements of the Securities Act, and such other documents as such Holder, underwriter or agent may reasonably request to facilitate the disposition of such Registrable Securities; (iv) use Commercially Reasonable Efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under all applicable blue sky and other securities laws, and to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such Holder to consummate the disposition of the securities owned by such Holder, except that the Company shall not for purpose be required to (a) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this clause (iv) be obligated to be so qualified, (b) subject itself to taxation in any such jurisdiction or (c) consent to general service of process in any A-2 37 jurisdiction; (v) use Commercially Reasonable Efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities applicable to the Company as may be reasonably necessary to enable the seller or sellers thereof (or underwriter or agent, if any) to consummate the disposition of such Registrable Securities in accordance with the plan of distribution set forth in such registration statement; (v) furnish to each Holder of Registrable Securities covered by such registration statement a signed counterpart, addressed to such Holder (and underwriter or agent, if any) of: (A) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), and (B) unless otherwise precluded under applicable accounting rules, a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, in each case, reasonably satisfactory in form and substance to such Holder (and underwriter or agent and their respective counsel) and covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriter or agent in underwritten public offerings of securities; (vii) promptly notify each Holder and any underwriter or agent participating in the disposition of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event known to the Company as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and promptly prepare and furnish to such Holder (or underwriter or agent, if any) a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; A-3 38 (viii) otherwise use Commercially Reasonable Efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable (but not more than fifteen months) after the effective date of the registration statement, an earnings statement satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and furnish to each Holder covered by such registration statement or any participating underwriter or agent at least five business days prior to the filing a copy of any amendment or supplement to such registration statement or prospectus; (ix) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; (x) use Commercially Reasonable Efforts to (A) list, on or prior to the effective date of such registration statement, all Registrable Securities covered by such registration statement on any securities exchange on which any of the Registrable Securities are then listed or (B) have authorized for quotation and/or listing, as applicable, on The Nasdaq Stock Market ("NASDAQ") if the Registrable Securities so qualify; (xi) cooperate with each seller of Registrable Securities and each underwriter or agent participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers; (xii) use Commercially Reasonable Efforts to prevent the issuance by the SEC or any other governmental agency or court of a stop order, injunction or other order suspending the effectiveness of such registration statement and, if such an order is issued, use Commercially Reasonable Efforts to cause such order to be lifted as promptly as practicable; (xiii) take such other actions as the Requisite Holders of such Registrable Securities shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (xiv) promptly notify each seller of Registrable Securities and the underwriter or agent, if any: (A) when such registration statement or any prospectus used in connection therewith, or any amendment or supplement thereto, has been filed and, with respect to such registration statement or any post-effective amendment thereto, when the same has become effective; (B) of any written comments from the SEC with respect to any filing referred to in clause (A) above and of any written request by the SEC for amendments or supplements to such registration statement or prospectus; A-4 39 (C) of the notification to the Company by the SEC of its initiation of any proceeding with respect to, or of the issuance by the SEC of, any stop order suspending the effectiveness of such registration statement; and (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the applicable securities or blue sky laws of any jurisdiction; (xv) cooperate with each seller of Registrable Securities and each underwriter or agent participating in the distribution of such Registrable Securities to facilitate the timely preparation and delivery of certificates (which shall not bear any restrictive legends, other than as required by applicable law) representing securities sold under a registration statement hereunder, and enable such securities to be in such denominations and registered in such names as such seller, underwriter or agent may request and keep available and make available to the Company's transfer agent, prior to the effectiveness of such registration statement, an adequate supply of such certificates; (xvi) not later than the effective date of such registration statement, provide a CUSIP number for all Registrable Securities covered by a registration statement hereunder; (xvii) incorporate in the registration statement or any amendment, supplement or post-effective amendment thereto such information as each Holder, the underwriter or agent (if any) or their respective counsel may reasonably request to be included therein with respect to any Registrable Securities being sold by such Holder to such underwriter or agent, the purchase price being paid therefor by such underwriter or agent and any other terms of the offering of such Registrable Securities; (xviii) during any period when a prospectus is required to be delivered under the Securities Act, make periodic filings with the SEC pursuant to and containing the information required by the Exchange Act (whether or not the Company is required to make such filings pursuant to such Act); and (xix) in connection with an underwritten offering, participate, to the extent reasonably requested by the Requisite Holders or the managing underwriter for the offering, in customary efforts to sell the securities under the offering, including, without limitation, participating in "road shows." (f) Agreements of Holders. Each Holder of Registrable Securities as to which any registration is being effected: (i) shall furnish to the Company such information regarding such Holder, the Registrable Securities held by such Holder and the intended plan of distribution of such securities as the Company may from time to time reasonably request in writing in connection with such registration; and (ii) agrees, by acquisition of such Registrable Securities, that upon receipt of any notice (a "Suspension Notice") from the A-5 40 Company of the happening of any event of the kind described in clause (vii) of paragraph 2(e) above, such Holder will forthwith discontinue such Holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by clause (vii) of paragraph 2(e) above (the period from the date on which such Holder receives a Suspension Notice to the date on which such Holder receives copies of the supplemented or amended prospectus being herein called the "Suspension Period"). The Company shall take such actions as are necessary to end the Suspension Period as promptly as practicable. In the event the Company shall give any such notice, the period referred to in clause (ii) of paragraph 2(e) above shall be extended by a number of days equal to the number of days of the Suspension Period. 3. Underwritten Offerings If the Company at any time proposes to register any of its equity securities under the Securities Act as contemplated by Section 6.2 and Section 6.3 of the Employment Agreement and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any Participating Holder and subject to Section 6.2(b) or Section 6.3(b), as the case may be, of the Employment Agreement, arrange for such underwriters to include all of the Registrable Securities to be offered and sold by such Holder among the securities to be distributed by such underwriters. The Holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters, provided that such agreement is reasonably satisfactory in substance and form to the Company and the Requisite Holders. 4. Preparation; Reasonable Investigation In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the Holders of Registrable Securities to be registered under such registration statement, their underwriters or agents, if any, and their respective counsel and accountants reasonable access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Holders' and such underwriters' or agents' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 5. Indemnification (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless, to the full extent permitted by law, each Holder participating in an offering provided for as described herein, and each other Person, if any, who controls such Holder within the meaning of the Securities Act (each such Person, an "Indemnified Party"), from and against any losses, claims, damages, liabilities or expenses, joint or several (each a "Loss" and collectively, "Losses"), to which such Indemnified Party may become subject under the Securities Act or otherwise, to the extent that such Losses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such A-6 41 securities were registered under the Securities Act (including all documents incorporated therein by reference), any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending against any such Loss (or action or proceeding in respect thereof); provided that in any such case the Company shall not be liable to any particular Indemnified Party to the extent that such Loss (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Indemnified Party specifically for inclusion therein; and provided further that the Company shall not be liable in any such case to the extent it is finally determined by a court of competent jurisdiction that any such Loss (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made (i) in any such preliminary prospectus, if (A) it was the responsibility of such Indemnified Party to provide the Person asserting such Loss with a current copy of the prospectus and such Indemnified Party failed to deliver or cause to be delivered a copy of the prospectus to such Person after the Company had furnished such Indemnified Party with a sufficient number of copies of the same prior to the sale of Registrable Securities to the Person asserting such Loss and (B) the prospectus corrected such untrue statement or omission; or (ii) in such prospectus, if such untrue statement or omission is corrected in an amendment or supplement to such prospectus and such amendment or supplement has been delivered to the Indemnified Party prior to the sale of Registrable Securities to the Person asserting such Loss and the Indemnified Party thereafter fails to deliver the prospectus as so amended or supplemented prior to or concurrently with such sale after the Company had furnished such Indemnified Party with a sufficient number of copies of the same for delivery to purchasers of securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of such securities by such Indemnified Party. The Company shall also indemnify each other Person who participates (including as an underwriter) in the offering or sale of Registrable Securities hereunder, their officers and directors and each other Person, if any, who controls any such participating Person within the meaning of the Securities Act to the same extent as provided above with respect to Indemnified Parties. (b) Indemnification by the Holders. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to the Employment Agreement and as a condition to indemnifying such sellers pursuant to this paragraph 5, that the Company shall have received an undertaking reasonably satisfactory to it from each prospective seller of such securities, to indemnify and hold harmless and reimburse (in the same manner and to the same extent as set forth in such subparagraph (a) of this paragraph 5) the Company, each director, officer, employee and agent of the Company, and each other Person, if any, who controls the Company within the meaning of the Securities Act, from and against any Losses (or actions or A-7 42 proceedings, whether commenced or threatened, in respect thereof) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement under which such securities were registered under the Securities Act (including all documents incorporated therein by reference), any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission from such registration statement, preliminary prospectus, final prospectus or summary prospectus, or any amendment or supplement thereto required to be stated therein or necessary to make the statements therein not misleading, if (but only if) such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such prospective seller specifically for inclusion therein; provided, however, that such prospective seller shall not be obligated to provide such indemnity to the extent that such Losses result, directly or indirectly, from the failure of the Company to promptly amend or take action to correct or supplement any such registration statement, prospectus, amendment or supplement based on corrected or supplemental information provided in writing by such prospective seller to the Company expressly for such purpose; and provided further, that the obligation to provide indemnification pursuant to this subparagraph (b) shall be several, and not joint and several, among such indemnifying parties. Notwithstanding anything in this paragraph 5 to the contrary, in no event shall the liability of any prospective seller under such indemnity be greater in amount than the amount of the proceeds received by such seller upon the sale of its Registrable Securities in the offering to which the Losses relate. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer, employee, agent or participating or controlling Person and shall survive the transfer of such securities by such prospective seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in subparagraph (a) or (b) of this paragraph 5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give prompt written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this paragraph 5, except to the extent that the indemnifying party is actually and materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof (such assumption to constitute its acknowledgment of its agreement to indemnify the indemnified party with respect to such matters), jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal fees or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in such indemnified party's reasonable judgment, a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, such indemnified party shall be entitled to separate counsel at the expense of the indemnifying party; and provided, further, that, unless there exists a conflict of interest among indemnified parties, all indemnified parties in respect of such claim shall be entitled to only one counsel or firm of counsel for all such indemnified parties. In the event an indemnifying party shall not be entitled, or elects not, to assume the defense of a claim, such indemnifying A-8 43 party shall not be obligated to pay the fees and expenses of more than one counsel or firm of counsel for all parties indemnified by such indemnifying party in respect of such claim, unless in the reasonable judgment of any such indemnified party a conflict of interest exists between such indemnified party and any other of such indemnified parties in respect of such claim, in which event the indemnifying party shall be obligated to pay the fees and expenses of one additional counsel or firm of counsel for such indemnified parties. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement that (i) does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all Losses in respect of such claim or litigation or (ii) would impose injunctive relief on such indemnified party. No indemnifying party shall be subject to any Losses for any settlement made without its consent, which consent shall not be unreasonably withheld. (d) Other Indemnification. The provisions of this paragraph 5 shall be in addition to any other rights to indemnification or contribution which an indemnified party may have pursuant to law, equity, contract or otherwise. (e) Indemnification Payments. The indemnification required by this paragraph 5 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, promptly as and when bills are received or Losses are incurred. (f) Contribution. If for any reason the foregoing indemnity and reimbursement is unavailable or is insufficient to hold harmless an indemnified party under subparagraph (a) or (b) of this paragraph 5, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of any Loss (or actions or proceedings, whether commenced or threatened, in respect thereof), including, without limitation, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Loss, action or proceeding, in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. Notwithstanding anything in this subparagraph (f) to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this subparagraph (f) to contribute any amount in excess of the amount by which the net proceeds received such indemnifying party from the sale of Registrable Securities in the offering to which the Losses of the indemnified parties relate exceeds the amount of any damages which such indemnifying party has otherwise been required to pay by reason of such untrue statement or omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. A-9 EX-10.31 5 EX-10.31 1 Exhibit 10.31 AMENDMENT NO. 1 TO CODE SHARING AGREEMENT CONTINENTAL AIRLINES, INC. ("Continental") and AMERICA WEST AIRLINES, INC. ("America West") are each party to the Code Sharing Agreement dated June 29, 1994 (the "'Agreement"). America West and Continental each desire to amend the Agreement as provided below. This amendment is made this 19th day of October, 1998. NOW, THEREFORE, IT IS AGREED: 1. Capitalized terms used herein that are not defined shall have the same meaning set forth for them in the Agreement. Except as specifically amended and modified hereby, the Agreement shall remain in effect as written. 2. The Agreement shall be amended as follows: (a) Schedule 1 of the Agreement is hereby replaced in its entirety by the Schedule 1-A and Schedule 1-B attached hereto to designate the Shared Code Segments now operated pursuant to the Agreement and to add a list of new Shared Code Segments to be added to the Agreement effective October 25, 1998 pursuant to Section 1 of the Agreement or, with respect to international Shared Code Segments, as soon as reasonably practicable after all applicable regulatory approvals are obtained for the applicable Shared Code Segment and both parties have satisfactorily implemented mutually acceptable procedures with respect to codesharing on such international Shared Code Segments. (b) A new sentence shall be added to the end of Clause 1 of the Agreement: "Either party may, at its own discretion, by thirty (30) days prior written notice to the other party, remove a Shared Code Segment designated as "New" on Schedules 1-A and 1-B from Schedule 1-A or Schedule 1-B, for all purposes of this Agreement." (c) A new Clause 9(c) shall be added as follows: "Neither CAL nor AWA shall display the designator code of the non-operating carrier on any Shared Code Segment which, when AWA is the non-operating carrier, does not connect with a flight to or from Phoenix, Columbus or Las Vegas, or, when CAL is the non-operating carrier, Houston, Newark or Cleveland, except CAL and AWA shall display the designator code of the non-operating carrier on any Shared Code Segment operated by both CAL and AWA." (d) Clause 20 of the Agreement shall be amended by adding the words "and Amendment No. 1" after the word "Agreement" in the first and second sentences. 1 of 2 2 3. Clauses 3, 20, 21, 22, 25 and 26 of the Agreement are herein incorporated by reference, mutatis mutandis. CONTINENTAL AIRLINES, INC. AMERICA WEST AIRLINES, INC. By: /s/ Thomas Barber By: /s/ Bernard Han ----------------------------- --------------------- Title: VP Alliance Operations Title: SVP Planning 2 of 2 3 SCHEDULE 1-A HP* FLIGHTS
CURRENT SEGMENTS NEW SEGMENTS SEGMENT IMPLEMENTATION DATE SEGMENT SEGMENT ABQ-IAH 2/15/95 ABE-CLE CLE-YYZ AUS-IAH 2/15/95 ACT-IAH CLL-IAH BRO-IAH 2/15/95 ALB-EWR CLT-IAH CLE-DEN 10/1/94 ATL-IAH CVG-IAH CLE-IAH 10/1/94 BDL-CLE DCA-IAH CMH-EWR 10/1/94 BDL-EWR DUB-EWR CMH-IAH 10/1/94 BLD-IAH DUS-EWR CRP-IAH 2/15/95 BGR-EWR EWR-FRA DTW-IAH 2/15/95 BHM-IAH EWR-GLA ELP-IAH 2/15/95 BHX-EWR EWR-MAN EWR-LAS 4/2/95 BNA-IAH EWR-MDT EWR-ORF 2/15/95 BTR-IAH EWR-MHT EWR-PHX 10/1/94 BTV-EWR EWR-PHL EWR-PVD 2/15/95 BUF-CLE EWR-RIC EWR-PWM 2/15/95 BUF-EWR EWR-ROC FLL-IAH 10/1/94 BWI-CLE EWR-SNN GSO-IAH 2/15/95 CAK-CLE EWR-SYR HNL-LAX 1/19/96 CDG-EWR EWR-YOW HRL-IAH 2/15/95 CDG-JAH EWR-YUL IAH-IND 10/1/94 CLE-CMH EWR-YYZ IAH-JAX 10/1/94 CLE-CVG HOU-IAH IAH-LAS 10/1/94 CLE-DCA IAD-IAH IAH-LIT 2/15/95 CLE-DTW IAH-ILE IAH-MCO 10/1/94 CLE-FNT IAH-JAN IAH-MFE 2/15/95 CLE-IAD IAH-LGA IAH-MIA 10/1/94 CLE-LAN IAH-MEM IAH-MSY 10/1/94 CLE-LEX IAH-MLU IAH-PBI 10/1/94 CLE-LGA IAH-MOB IAH-PHL 2/15/95 CLE-MBS IAH-RDU IAH-PHX 10/1/94 CLE-MDT IAH-SHV IAH-PIT 10/1/94 CLE-PHL IAH-SJO IAH-PNS 2/15/95 CLE-PIT IAH-SJU IAH-RSW 2/15/95 CLE-RIC IAH-TYR IAH-SDF 2/15/95 CLE-ROC IAH-YYZ IAH-TPA 10/1/94 CLE-SBN IAH-TUS 10/1/94 CLE-SYR
i. 4 SCHEDULE 1-B CO* FLIGHTS
CURRENT SEGMENTS NEW SEGMENT SEGMENT IMPLEMENTATION DATE REINSTATE DATE SEGMENT BUR-LAS 10/1/94 PHX-PSP BUR-PHX 10/1/94 CMH-LAS 10/1/94 DEN-PHX 10/1/94 LAS-LAX 1/8/96 LAS-MDW 2/1/95 LAS-OAK 10/1/94 LAS-ONT 10/1/94 LAS-PDX 10/1/94 LAS-RNO 10/1/94 LAS-SAN 10/1/94 LAS-SEA 10/1/94 LAS-SFO 10/1/94 LAS-SLC 2/1/95 4/6/97 LAS-SMF 10/1/94 LAS-TUS 10/1/94 LAX-PHX 1/8/96 LGB-PHX 10/1/94 MCO-PHX 2/1/95 4/6/97 OAK-PHX 10/1/94 ONT-PHX 10/1/94 PDX-PHX 10/1/94 PHX-RNO 10/1/94 PHX-SAN 10/1/94 PHX-SEA 10/1/94 PHX-SFO 10/1/94 PHX-SJC 10/1/94 PHX-SLC 2/1/95 4/6/97 PHX-SMF 10/1/94 PHX-TUS 10/1/94 EWR-LAS 4/2/95 EWR-PHX 10/1/94 CMH-EWR 10/1/94 IAH-LAS 10/1/94 IAH-PHX 10/1/94
i. EX-10.32 6 EX-10.32 1 Exhibit 10.32 AMENDMENT NO. 2 TO THE A319/A320 PURCHASE AGREEMENT dated as of September 12, 1997 between AVSA, S.A.R.L. and AMERICA WEST AIRLINES, INC. This Amendment No. 2 (hereinafter referred to as the "Amendment") is entered into as of December 9, 1998, by and between AVSA, S.A.R.L., a societe a responsabilite limitee organized and existing under the laws of the Republic of France, having its registered office located at 2, Rond Point Maurice Bellonte, 31700 Blagnac, France (hereinafter referred to as the "Seller"), and AMERICA WEST AIRLINES, INC., a corporation organized and existing under the laws of the State of Delaware, United States of America, having its principal corporate offices located at Phoenix Sky Harbor International Airport, 4000 East Sky Harbor Boulevard, Phoenix, Arizona 85034, U.S.A. (hereinafter referred to as the "Buyer"). WITNESSETH: WHEREAS, the Buyer and the Seller have entered into an A319/A320 Purchase Agreement, dated as of September 12, 1997 (which agreement, as previously amended by and supplemented with all Exhibits, Appendices, Letter Agreements and amendments (including Amendment No. 1 executed on April 27, 1998) attached thereto is hereinafter called the "Agreement"), which Agreement relates to inter alia, the sale by the Seller and the purchase by the Buyer of certain firmly ordered Airbus Industrie A319-100 and A320-200 model aircraft (the "Aircraft"). WHEREAS, the Buyer and the Seller further agree in this Amendment to revise the delivery schedule for certain of the Aircraft under the Agreement; WHEREAS, capitalized terms used herein and not otherwise defined in this Amendment will have the meanings assigned to them in the Agreement. The terms "herein," "hereof," and "hereunder" and words of similar import refer to this Amendment. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: 2 1. REVISED DELIVERY SCHEDULE FOR THE A319 AIRCRAFT The delivery schedule set forth in the table in Sub-paragraph 9.1 of the Agreement is hereby deleted and replaced in its entirety by the following delivery schedule and table: QUOTE
A319 Aircraft No. Month/Year of Delivery A319 Aircraft No. Month/Year of Delivery ----------------- ---------------------- ----------------- ---------------------- 1 [***] 12 [***] 2 [***] 13 [***] 3 [***] 14 [***] 4 [***] 15 [***] 5 [***] 16 [***] 6 [***] 17 [***] 7 [***] 18 [***] 8 [***] 19 [***] 9 [***] 20 [***] 10 [***] 21 [***] 11 [***] 22 [***]
UNQUOTE 2. DELIVERY SCHEDULE FOR A320 AIRCRAFT 2.1 Provided that the Seller gives the Buyer written notice of confirmation of availability no later than January 29, 1999 as set forth below, the delivery schedule set forth in the table in Sub-paragraph 9.2 of the Agreement, as previously amended by Amendment N. 1 to - ---------- [*] indicates Redacted material Amdt. 2-2 3 the Agreement dated April 27, 1998, is hereby deleted and replaced in its entirety by the following delivery schedule and table (the "Revised A320 Schedule"): QUOTE
A320 Aircraft No. Month/Year of Delivery A320 Aircraft No. Month/Year of Delivery ----------------- ---------------------- ----------------- ---------------------- 1 [***] 13 [***] 2 [***] 14 [***] 3 [***] 15 [***] 4 [***] 16 [***] 5 [***] 17 [***] 6 [***] 18 [***] 7 [***] 19 [***] 8 [***] 20 [***] 9 [***] 21 [***] 10 [***] 22 [***] 11 [***] 23 [***] 12 [***] 24 [***]
UNQUOTE The Seller will send a written notice to the Buyer no later than January 29, 1999 to advise the Buyer whether the Revised A320 Schedule above is confirmed or not (the Seller Notice"). 2.2 Notwithstanding the provisions relating to time of payment of Paragraph 3 of Letter Agreement No. 4 to the Agreement, the Buyer will [***] on the [***] the [***] set forth therein for [***] and [***] in the [***] (as defined in [***] to the [***]) (the [***] - ---------- [*] indicates Redacted material Amdt. 2-3 4 [***] by the [***] to the [***] to be referred to as the "[***]"). 2.3 In the event the Seller Notice confirms the Revised A320 Schedule, then A320 Aircraft No. 21 and No. 22 set forth in such delivery schedule will be irrevocably and firmly ordered by the Buyer as of the date of the Seller Notice, and purchased under the terms of the Agreement applicable to Growth Aircraft [***], as defined in Subparagraph 1.6 of Letter Agreement No. 2 to the Agreement. A320 Aircraft No. 13 through 20 and No. 23 and No. 24 under the Revised A320 Schedule will then remain Growth Aircraft subject to the terms of the Agreement and as modified by the terms of this Amendment. In addition and as of date of the Seller Notice confirming the Revised A320 Schedule, the parties will also have no further rights and obligations with respect to [***] under the Agreement prior to the date hereof. 2.4 In the event the Seller Notice does not confirm the Revised A320 Schedule, then the delivery schedule for A320 Aircraft shall remain unchanged and as set forth under the Agreement prior to the date of execution of this Amendment. For clarification purposes, the delivery schedule for A320 Aircraft under the Agreement prior to the date hereof is as follows:
A320 Aircraft No. Month/Year of Delivery A320 Aircraft No. Month/Year of Delivery ----------------- ---------------------- ----------------- ---------------------- 1 [***] 13 [***] 2 [***] 14 [***] 3 [***] 15 [***] 4 [***] 16 [***] 5 [***] 17 [***] 6 [***] 18 [***] 7 [***] 19 [***] 8 [***] 20 [***] 9 [***] 21 [***] 10 [***] 22 [***] 11 [***] 23 [***]
- ---------- [*] indicates Redacted material Amdt. 2-4 5 12 August 2000 24 February 2002
It is hereby agreed and understood that under the immediately preceding A320 Aircraft delivery schedule (i) A320 Aircraft No. 1 through 12 are A320 Aircraft (excluding for this purpose the Growth Aircraft) irrevocably and firmly ordered under the Agreement prior to the date hereof and (ii) A320 Aircraft No. 13 through 24 are Growth Aircraft as defined in the Agreement. In the event the Seller Notice does not confirm the Revised A320 Schedule, the Seller will also return to the Buyer within 5 Working Days the [***] issued pursuant to Subparagraph 2.2 above and [***] any [***] that may have [***]. 2.5 The Seller hereby [***] set out in Subparagraph 1.6.2 of Letter Agreement No. 2 [***] above as follows: (i) The [***] in respect of [***] to be [***] may be provided by the Buyer by the later of: (a) [***] from the [***] and (b) [***]; and (ii) The [***] to be [***] may be provided by the Buyer by the later of: (a) [***] after [***] and (b) [***]. 3. EFFECT OF AMENDMENT The Agreement will be deemed amended to the extent herein provided, and, except as specifically amended hereby, will continue in full force and effect in accordance with its original terms. 4. CONFIDENTIALITY Subject to any legal or governmental requirements of disclosure, the parties (which for this purpose will include their employees, agents, advisors and accountants) will maintain the terms and conditions of this Amendment and any reports or other data furnished hereunder strictly confidential. Without limiting the generality of the foregoing, the Buyer will use its best efforts to limit the disclosure of the contents of this Amendment to the extent legally permissible in any filing required to be made by the Buyer with any - ---------- [*] indicates Redacted material Amdt. 2-5 6 governmental agency and will make such applications as will be necessary to implement the foregoing. With respect to any public disclosure or filing, the Buyer agrees to submit to the Seller a copy of the proposed document to be filed or disclosed and will give the Seller a reasonable period of time in which to review the document. The Buyer and the Seller will consult with each other prior to the making of any other public disclosure or filing, permitted hereunder, of this Amendment or the terms and conditions thereof. The provisions of this Paragraph 4 will survive any termination of the Agreement. Amdt. 2-6 7 If the foregoing correctly sets forth our understanding, please indicate your acceptance by signing in the space provided below. Agreed an Accepted, Agreed and Accepted, AMERICA WEST AIRLINES, INC. AVSA, S.A.R.L. By: /s/ Michele Lascaux By: /s/ Stephen L. Johnson ------------------------- ------------------------ Its: Its: Date: December 9, 1998 Date: December 9, 1998 Amdt. 2-7 EX-10.33 7 EX-10.33 1 Exhibit 10.33 AMENDMENT TO EMPLOYMENT AGREEMENT This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered into effective as of January 15, 1999 by and among AMERICA WEST HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), AMERICA WEST AIRLINES, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("AWA"), THE LEISURE COMPANY, a Delaware corporation and a wholly-owned subsidiary of Holdings ("Leisure", and, together with AWA and Holdings, "Employers" and individually, an "Employer"), and WILLIAM A. FRANKE ("Franke"). RECITALS A. The Employers and Franke have executed that certain Employment Agreement dated as of February 17, 1998 (the "Original Agreement"). B. In consideration of the premises, and other good and valuable consideration, the receipt of which is hereby acknowledged by the parties, the Employers and Franke desire to amend the Original Agreement as specified herein. AGREEMENT The Employers and Franke, intending to be legally bound, agree as follows: 1. AMENDMENT. (a) AMENDMENT OF SECTION 1.1. Section 1.1 of the Original Agreement is hereby amended to add a new paragraph (vi) and to modify paragraphs (iv) and (v) of the definition of "Change in Control" as follows: "(iv) an Employer's stockholders shall approve a merger or consolidation involving the Employer other than (A) a merger or consolidation in which the voting securities of the Employer outstanding immediately prior thereto will become (by operation of law), or are to be converted into, voting securities of the surviving corporation or its parent corporation immediately after such merger or consolidation that are owned by the same person or entity or persons or entities as immediately prior thereto and possess at least 75% of the Voting Power held by the voting securities of the surviving corporation or its parent corporation, or (B) a merger or consolidation effected to implement a recapitalization of the Employer (or similar transaction) in which no person (excluding the Employers) acquires more than 25% of the Voting Power; or (v) Holdings' stockholders shall approve a merger, consolidation, reorganization, disposition of assets, liquidation or other transaction (or series of related transactions) in which neither Holdings nor AWA will survive as a publicly-owned corporation whose common stock is registered under the Exchange Act; or 1. 2 (vi) Holdings or AWA shall sell or otherwise dispose of, or shall enter into a transaction or series of related transactions providing for the sale or other disposition of, or the stockholders of Holdings or AWA shall approve a transaction or series of related transactions providing for the sale or other disposition of, all or substantially all of the stock or assets of AWA." (b) AMENDMENT OF SECTION 1.1. Section 1.1 of the Original Agreement is hereby amended such that paragraphs 6 and 7 of the definition of "Good Reason" are amended to read in their entirety as follows and paragraph 8 of such definition is deleted: "(6) the failure of an Employer to obtain any assumption agreement required by Section 9.5(a); or (7) the failure of Franke to be elected or appointed, or to be re-elected or re-appointed, as a director of an Employer as contemplated by Section 2.2(g)." (c) AMENDMENT OF SECTION 3.3(c). Section 3.3(c) of the Original Agreement is hereby amended to read in its entirety as follows: "(c) Upon the occurrence of a Change in Control, or in the event Franke's employment is terminated by Franke pursuant to Section 4.1 for Good Reason or by Holdings pursuant to Section 4.2 for a reason other than Misconduct or Disability, the 1998 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1998 Stock Option be exercisable after February 17, 2008." (d) AMENDMENT OF SECTION 3.4. Section 3.4 of the Original Agreement is hereby amended to read in its entirety as follows: "Effective as of January 15, 1999, Franke has been granted an option to purchase 150,000 Shares for $17.125 per Share pursuant to the Incentive Plan (the "1999 Stock Option"). The following provisions of this Section 3.4 constitute the agreement required with respect to the 1999 Stock Option under Paragraph 4(i) of the Incentive Plan: (a) The 1999 Stock Option shall be exercisable as to one-third of the Shares covered thereby immediately on the date of grant, as to an additional one-third of the Shares covered thereby on December 31, 1999 and as to the remaining one-third of the Shares covered thereby on December 31, 2000, so that the 1999 Stock Option will be exercisable in full on December 31, 2000. (b) Upon the exercise of the 1999 Stock Option, the Person exercising the 1999 Stock Option shall pay to Holdings an amount equal to the exercise price, such amount to be paid (i) in cash, (ii) by delivering to Holdings issued and outstanding Shares which have an aggregate Market Value per Share at the date of exercise equal to the exercise price, (iii) by directing Holdings to sell a sufficient number of Shares to be acquired on exercise of the 1999 Stock Option through a broker approved by Holdings, in which event the proceeds of such sale 2. 3 shall be applied by Holdings to the payment of the exercise price and any applicable withholding taxes, with any surplus then remaining to be paid to the Person exercising the 1998 Stock Option or its designee or (iv) by any combination of the foregoing. (c) Upon the occurrence of a Change in Control, or in the event Franke's employment is terminated by Franke pursuant to Section 4.1 for Good Reason or by Holdings pursuant to Section 4.2 for a reason other than Misconduct or Disability, the 1999 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1999 Stock Option be exercisable after January 15, 2009. (d) In the event Franke's employment is terminated by Franke pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct, the 1999 Stock Option, to the extent then vested, may be exercised at any time within six months following the Termination Date, but not thereafter. To the extent the 1999 Stock Option is not vested on such Termination Date, the portion thereof that is not vested on such Termination Date shall automatically lapse and be canceled unexercised as of such Termination Date. (e) The 1999 Stock Option shall become automatically vested in full on the date of Franke's death and may be exercised at any time within the one-year period beginning on the date of Franke's death, but not thereafter. (f) In the event Franke's employment is terminated by reason of Disability, the 1999 Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not thereafter. (g) Except as otherwise provided herein, the 1999 Stock Option may be exercised in whole or in part or in two or more successive parts. (h) The 1999 Stock Option shall not be transferable by Franke except for transfers permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Franke, the 1999 Stock Option may not be exercised by anyone other than Franke or the Person to whom the 1999 Stock Option has been transferred in accordance with the Incentive Plan. (i) The 1999 Stock Option may be exercised from time to time by a notice in writing which identifies the 1999 Stock Option and specifies the number of Shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to the Secretary of Holdings at its principal corporate offices. The date of exercise of the 1999 Stock Option shall be the date the exercise notice is hand delivered or mailed to the Secretary of Holdings, whichever is applicable. An election to exercise the 1999 Stock Option shall be irrevocable. 3. 4 (j) The 1999 Stock Option is not intended to qualify as an incentive stock option under Section 422 of the Code. (k) The provisions of this Section 3.4 shall survive the termination of Franke's employment hereunder." (e) AMENDMENT OF SECTION 4.4(a). Section 4.4(a) of the Original Agreement is hereby amended to read in its entirety as follows: "(a) Severance Payment. Employers shall promptly pay to Franke a severance payment (the "Severance Payment"), in cash or other immediately available funds, in the amount of either (i) $1.5 million, if such termination occurs prior to or more than two years after the effective date of a Change in Control, or (ii) the greater of either (x) $1.5 million or (y) 200% of the sum of Franke's Base Salary as in effect on the date of termination plus a 50% target bonus, if such termination occurs within the two year period beginning on the effective date of a Change in Control; provided, however, that if any payments, distributions, accelerations of vesting or other benefits by or from the Employers to or for the benefit of Franke (whether actually or deemed paid or payable, distributed or distributable or received or receivable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payment required under this Section 4.4(a) (collectively with the Severance Payment, the "Section 4999 Payment")) would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by Franke with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Franke shall be entitled to receive from the Employers an additional payment (a "Gross-Up Payment") in an amount such that after payment by Franke of all taxes (including, without limitation, any income and employment taxes and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, Franke retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Section 4999 Payment. All calculations required by this Section 4.4(a) shall be performed by the independent auditors retained by Holdings most recently prior to the Change in Control (the "Auditors"), based on information supplied by the Employers and Franke. All fees and expenses of the Auditors shall be paid by the Employers. In the event Franke shall become entitled to receive a Severance Payment pursuant to this paragraph (a) under circumstances which also entitle him to receive another severance payment under any severance policy or plan of an Employer, then the other severance payment due to Franke pursuant to such policy or plan shall be automatically reduced by the amount of the Severance Payment (but shall not be reduced by the amount of any Gross-Up Payment)." (f) AMENDMENT OF SECTION 5.2(a). The proviso at the end of Section 5.2(a) of the Original Agreement is hereby amended to read in its entirety as follows: 4. 5 "provided, however, that this Section 5.2 shall not apply and shall have no further force or effect if either (i) at any time Franke's employment is terminated by Franke for Good Reason or by Holdings for any reason other than Misconduct, or (ii) within two years following a Change in Control Franke's employment is terminated by either Franke or Holdings for any reason or for no reason." 2. MISCELLANEOUS PROVISIONS. (a) ORIGINAL AGREEMENT. The Original Agreement, as amended by this Amendment, shall continue in full force and effect after the date hereof. (b) WHOLE AGREEMENT. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in the Original Agreement, as amended by this Amendment, have been made or entered into by either party with respect to the subject matter of this Amendment. IN WITNESS WHEREOF, each of the parties has executed this Amendment, in the case of the Employers by their duly authorized officers, effective as of the day and year first above written. AMERICA WEST HOLDINGS CORPORATION By:___________________________________________ Chairman of Compensation/Human Resources Committee AMERICA WEST AIRLINES, INC. By:___________________________________________ THE LEISURE COMPANY By:___________________________________________ ______________________________________________ WILLIAM A. FRANKE 5. EX-10.34 8 EX-10.34 1 Exhibit 10.34 SECOND AMENDMENT TO AIRPORT USE AGREEMENT AMONG CITY OF PHOENIX AND THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF PHOENIX, ARIZONA AND AMERICA WEST AIRLINES, INC. DATED AS OF AUGUST 25, 1994 The rights, title and interests of The Industrial Development Authority of the City of Phoenix, Arizona in this Second Amendment to Airport Use Agreement (except for certain Unassigned Rights) have been assigned to First Bank National Association, St. Paul, Minnesota, as trustee under a Restated and Amended Trust Indenture dated as of August 25, 1994 2 SECOND AMENDMENT TO AIRPORT USE AGREEMENT This Second Amendment to Airport Use Agreement (the "Second Amendment"), dated as of August 25, 1994, is entered into by and among the City of Phoenix, Arizona, a municipal corporation (the "City"), The Industrial Development Authority of the City of Phoenix, Arizona (the "Authority") and America West Airlines, Inc., a corporation organized and existing under the laws of the State of Delaware and authorized to do business in the State of Arizona (the "Company"); W I T N E S S E T H: WHEREAS, the City is the owner and operator of Sky Harbor International Airport ("Airport") located in Phoenix, Arizona and has the power and authority to grant certain rights and privileges in connection with the Airport; and WHEREAS, the Company is a corporation primarily engaged in the business of providing Air Transportation for persons, property, cargo, and mail which has its principal location at the Airport; and WHEREAS, the Authority has entered into an Airport Use Agreement dated as of July 1, 1989 (the "Original Agreement") with the City and the Company, providing for the acquisition, construction, installation, maintenance and operation by the Authority of certain improvements (the "Original Improvements") to Terminal 4 at Sky Harbor International Airport located in the City and for the use of the Original Improvements by the Company and providing for the terms and conditions of the payments due under the Original Agreement; and WHEREAS, the Authority issued and sold on July 20, 1989 its Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1989 (the "Series 1989 Bonds") for the purpose of financing the costs of the acquisition, construction and installation of the Original Improvements; and WHEREAS, the Authority has entered into a First Amendment to Airport Use Agreement dated as of August 1, 1990 (the "First Amendment" and with the Original Agreement, the "Amended Agreement") with the City and the Company providing for the financing for and the construction and installation by the authority of certain additional improvements (the "Enhanced Improvements" and with the Original Improvements, the "Improvements") to Terminal 4 at Sky Harbor International Airport located in the City and for the use of the Enhanced Improvements by the Company and providing for the terms and conditions of the payments due under the Amended Agreement; and WHEREAS, the Authority issued and sold on September 6, 1990 its Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1990 (the "Series 1990 Bonds" and with the Series 1989 Bonds, the "Prior Bonds") for the purpose of financing the costs of the acquisition, construction and installation of the Enhanced Improvements; and WHEREAS, on June 27, 1991 the Company filed its voluntary petition under Chapter 11 of the Bankruptcy Code; and WHEREAS, pursuant to an Order Granting Motion for Authority to Compromise Controversies with GE Entities dated October 8, 1993, certain obligations of the Company under the Amended Agreement were amended in accordance with that Stipulation to Settle Adversary Proceedings and Contested Matters among the Company, the Trustee and GE Capital Public Finance, Inc. and various related entities (collectively, "GE") dated September 10, 1993 (as subsequently amended, the "Stipulation"); and 3 WHEREAS, the Company desires that the Authority reissue certain of the Prior Bonds in the form of refunding bonds (the "Bonds") so as to implement the provisions of the Stipulation on or about the effective date of the Plan (as defined in the Stipulation) with the holder of the Prior Bonds redeeming the remainder of the Prior Bonds contemporaneously with said reissuance in exchange for other consideration provided by the Company in accordance with the Plan; and WHEREAS, the Authority is authorized by the Act to issue revenue bonds for the purpose of refunding the Prior Bonds, which refunding shall be effected by an exchange of the Bonds for those of the Prior Bonds not otherwise redeemed, after which exchange and redemption the Prior Bonds shall no longer be outstanding (except for purposes of the Stipulation); and WHEREAS, subject to the terms and conditions set forth below, the Authority is willing to issue the Bonds in an aggregate amount not to exceed $22,500,000.00 for the purpose of reissuing, refunding and exchanging an equal amount of the Prior Bonds; and WHEREAS, by this Second Amendment, the parties hereto desire to provide for certain amendments to the Amended Agreement, as permitted by Section 10.4 thereof and Section 12.07 of the Indenture; NOW, THEREFORE, in consideration of the mutual covenants and considerations herein contained, the City, the Authority and the Company agree as follows: 1. All of the terms defined in the Amended Agreement shall have the same meanings herein, except as otherwise provided herein or unless the context otherwise so indicates, and upon the execution and delivery of this Second Amendment, the term "Agreement" as used in the Amended Agreement and this Second Amendment shall include and incorporate this Second Amendment. 2. Section 1.1 of the Amended Agreement, encaptioned Definitions, is hereby amended in part by substitution of the lettered definitions set forth below for those definitions bearing the same letter designation in the Amended Agreement: H. "Arbitrage Certificate" means the Tax Exemption Certificate and Agreement among the Authority, the Company and the Trustee, and the Certificate Re: Refunding Bonds and Use of Proceeds of Series 1989 Bonds and Series 1990 Bonds from the Company and the Authority to Bond Counsel, both dated as of the Closing Date. I. "Authority" means The Industrial Development Authority of the City of Phoenix, Arizona, a nonprofit corporation designated a political subdivision of the State incorporated with the approval of the City, pursuant to the provisions of the Constitution of the State of Arizona and Title 35, Chapter 5, Arizona Revised Statutes, enacted by Chapter 204, Section 2, Laws of Arizona of 1968 as amended and supplemented, or any public body or corporation succeeding to its rights and obligations under this Agreement. M. "Bonds" means the Series 1994A Bonds and the Series 1994B Bonds. O. "Closing Date" means July 20, 1989 as to the Series 1989 Bonds, September 6, 1990 as to the Series 1990 Bonds, and as to the Bonds, the date upon which there is an exchange of the Bonds for certain of the Prior Bonds. R. "Completion Date" means June 14, 1991 as to the Series 1989 Bonds and as to the Series 1990 Bonds. -2- 4 S. [Intentionally left blank.] AD. "Indenture" means the Trust Indenture relating to the Series 1989 Bonds, dated as of July 1, 1989, between the Authority and First Interstate Bank of Arizona, N.A., as supplemented by the First Supplement to Trust Indenture relating to the Series 1990 Bonds dated as of August 1, 1990, and as amended, supplemented and restated by the Restated and Amended Trust Indenture dated as of August 25, 1994 between the Authority and the Trustee, and as such Trust Indenture may be further amended and supplemented from time to time in accordance with its terms. AG. [Intentionally left blank.] AM. [Intentionally left blank.] AN. [Intentionally left blank.] AX. "Series 1989 Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1989, issued by the Authority in the amount of $34,589,000 on July 20, 1989, pursuant to the Indenture. AY. "Series 1990 Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1990, issued by the Authority in the amount of $9,800,000 on their Closing Date pursuant to the Indenture. 3. Section 1.1 of the Amended Agreement, encaptioned Definitions, is hereby amended in part by the addition of the following definitions: AZ. "Effective Date" means August 25, 1994. BA. "Prior Bonds" means the Series 1989 Bonds and the Series 1990 Bonds. BB. "Series 1994A Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1994A, issued by the Authority in the amount of $17,127,659.78. BE. "Series 1994B Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1994B Bonds issued by the Authority in the amount of $4,736,842.02. 4. Subsection A of Section 2.3 of the Amended Agreement, encaptioned Term, is hereby amended to read as follows: A. The term of this Master Use Agreement shall be seventeen (17) years subject to prior termination as provided herein. 5. Section 2.5 of the Amended Agreement is hereby amended to read as follows: SECTION 2.5 Refinancing of Improvements. City acknowledges and hereby consents to (1) the issuance of the Bonds by the Authority to refinance the purchase, construction and installation of the Improvements, (2) the security interest, and assignment of rights, title and interests, in this Agreement and each of the Improvements granted by Authority in favor of the Trustee and the perfection of the same by filing and recording all financing statements required under Arizona law, and (3) the -3- 5 authorization of the Trustee to take all actions and do all things permitted or required under this Agreement and any future Use Agreement permitted hereunder. 6. Subsection A of Section 2.6 of the Amended Agreement, encaptioned Ownership of Improvements, is hereby amended to read as follows: A. Subject to the rights of the Trustee pursuant to the Security Agreement including without limitation the right to remove the Improvements that are subject to this Master Use Agreement, Authority grants to City, and the City hereby agrees to accept, all rights, title and interests in each of the Improvements, effective, without further action required, upon the earlier of (1) the payment in full of the Bonds or (2) a term, commencing upon the Completion Date, which is the lesser of (a) eighty percent (80%) of the reasonably expected economic life of the specific Improvements as shown in Exhibit "A" or (b) seventeen (17) years; provided, however, that the grant of the Authority to the City and the acceptance of the City of all rights, title and interests in the Improvements described as Other Tenant Improvements on Exhibit "A" hereto shall be effective upon the Completion Date. Upon any such transfer to the City by the Authority, the transferred Improvements shall no longer be subject to this Master Use Agreement, any other Article or Section of this Agreement or any Use Agreement and may be used by the Company, any other Air Transportation company or any other User together with the Gates in accordance with the City's Rates and Charges Program described in Section 2.4 hereof. 7. Section 3 of the First Amendment is deleted in its entirety. 8. Representations of the Authority as to the New Bonds. The Authority makes the following representations to the City and the Company as the basis for its covenants herein: A. The Authority is duly organized pursuant to the Act as a nonprofit corporation under the laws of the State and is designated by the Act as a political subdivision of the State. B. To the extent within its reasonable control, the Authority will not knowingly engage in any activity which might result in the income of the Authority to be received hereunder becoming taxable to it or interest on the Bonds becoming includable in the gross income of the Holders under Federal income tax laws. C. Under the provisions of the Act, the Authority is authorized to enter into the transactions contemplated by this Second Amendment and the Indenture and to carry out its obligations hereunder and thereunder. D. The Authority has duly authorized the execution and delivery of this Second Amendment and the Indenture. E. To refinance the Costs of the Improvements, and in anticipation of the collection of the Revenues to be received hereunder, the Authority has duly authorized the Series 1994A Bonds in the aggregate principal amount not to exceed $17,500,000 and the Series 1994B Bonds in the aggregate principal amount not to exceed $5,000,000 to be issued upon the terms set forth in the Indenture, under the provisions of which certain of the Authority's rights, title and interests in, to and under this Agreement and the Revenues hereunder are pledged as security for the payment of the principal of, premium, if any, and interest on the Bonds. F. The Authority has not pledged and will not pledge or grant (except as provided in the Indenture) any security interest in, or assign any -4- 6 of its rights under, this Agreement, or the Revenues or income to be derived by the Authority hereunder for any purpose other than to secure the Bonds. G. The Authority has and will have title to the Improvements sufficient to carry out the purposes of this Agreement, and such title shall be in and remain in the Authority, except as permitted by Sections 2.5 and 2.6 of the Original Agreement. 9. Representations of the Company as to the Bonds. The Company makes the following representations to the Authority and the City as the basis for its undertakings herein contained: A. The Company has been incorporated and is validly existing as a corporation under the laws of the State of Delaware, is in good standing in the State of Delaware, is duly qualified to do business in and is in good standing in the State, has the corporate power and authority to own its properties and assets and to carry on its business as now conducted and as contemplated to be conducted as described in the Agreement and the Indenture, and has the corporate power to enter into and has duly authorized, by all requisite corporate action, the execution and delivery of this Second Amendment and all other documents contemplated hereby to be executed by the Company. B. Neither the execution and delivery of this Second Amendment or any other document in connection with the financing of the Improvements, the consummation of the transactions contemplated hereby and thereby, nor the fulfillment of or compliance with the terms and conditions hereof and thereof, results or will result in a material breach of or conflict with any of the terms, conditions or provisions of the Company's Certificate of Incorporation, Bylaws, or any statute or order of any court or regulatory agency or of any material agreement or instrument to which the Company is now a party or by which it is bound, or constitutes a material default (with due notice or the passage of time or both) under any of the foregoing, or results in the creation or imposition of any prohibited lien, charge or encumbrance whatsoever upon any of the property or assets of the Company under the terms of any instrument or agreement to which the Company is now a party or by which it is bound. C. The Company is not in default with respect to any order or decree of any court or any order, regulation or decree of any federal, state, municipal or other governmental agency, which default would materially and adversely affect its operation or its properties. The Company is not in material default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which it is a party. D. Neither the Company nor any "related person" (as defined in Section 147(a)(2) of the Code) is, or will be, a party to any arrangement, formal or informal, pursuant to which it has or will purchase any of the Bonds. E. The information used in preparing the certification pursuant to Section 148 of the Code and information statement pursuant to Section 149(e) of the Code, will be accurate and complete as of the date of the issuance of the Bonds. F. No portion of the Bonds shall be federally guaranteed within the meaning of Section 149(b) of the Code. G. The Improvements consist of those facilities and that equipment described in Exhibit "A" to the Original Agreement and those facilities and that equipment described in Exhibit "A" to the Amended Agreement and the Company shall make no changes to the Improvements or to the operation thereof which would affect the qualification of the Improvements under the Act or impair the exclusion of the interest on the Bonds from the gross income of the Holders thereof for federal income tax purposes. The Company intends to -5- 7 utilize the Improvements as part of its Air Transportation facilities at the Airport during the term of the Bonds. H. The average reasonably expected economic life of the Improvements is at least ten years; the average maturity of the Bonds is not more than 120% of such economic life. I. There is no action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending, or, to the best knowledge of the Company, threatened against or affecting the Company or any of its properties or rights, which, if adversely determined, would materially and adversely impair its right to carry on business substantially as now conducted or as now contemplated to be conducted, or would materially and adversely affect its financial condition, assets, properties or operations, and the Company is not in default with respect to any order or decree of any court or any order, regulation or decree of any federal, state, municipal or other governmental agency, which default would materially and adversely affect its operation or its properties or the completion of the acquisition, construction and equipping of the Improvements. The Company is not in material default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which it is a party. J. The operation and design of the Improvements in the manner presently contemplated and as described herein will not conflict with any applicable zoning, water or air pollution or other ordinance, order, law or regulation relating to zoning, building, safety or environmental quality, which conflict would materially and adversely affect its operation or the completion of its acquisition, construction and equipping. K. The Company has obtained, or will obtain on or before the date required therefor, all necessary certificates, approvals, permits and authorizations with respect to the Improvements from applicable local, state, and federal governmental agencies. L. The information used in preparing the certification pursuant to Section 148 of the Code and information statement pursuant to Section 149(e) of the Code, will be accurate and complete as of the date of the issuance of the Bonds. M. To the best knowledge of the Company, there exists no security interest in the Improvements perfected under the laws of any other jurisdiction that is prior to that held by the Trustee pursuant to the Security Agreement. N. To the best knowledge of the Company, there exists no security interest in the Improvements created by any person other than the Company or the Authority prior to the acquisition of title and possession thereof by the Company or the Authority. 10. Section 4.4 of the Amended Agreement, encaptioned Financing Fee, is hereby amended to read as follows: The Company agrees to pay as the Financing Fee during the Term of the Bonds an amount which, together with any monies held by the Trustee in the Bond Fund, shall at all times be sufficient to pay all principal of, premium, if any, and interest on the Bonds as such principal, premium, if any, and interest become due, at maturity, upon acceleration, upon optional or mandatory redemption or otherwise, at the dates and in the places and manner required herein. Payments of the Financing Fee shall be made in immediately available funds. 11. Section 4.5 of the Amended Agreement, encaptioned Semiannual -6- 8 Payments is hereby amended to read as follows: Section 4.5 Payments. Payment of interest on the Bonds shall be due commencing October 1, 1994 for interest accrued from the Effective Date, and payment of principal on the Bonds shall be due commencing October 1, 1994, both continuing on each Bond Payment Date thereafter, to and including the date that all such unpaid principal of the Bonds shall be paid in full. Payments on the Bonds are to be made to the Trustee in accordance with the schedule set forth on Exhibit E, as amended by this Second Amendment. Payments of the Financing Fee on the Bonds are to be made to the Trustee by the close of business one (1) Business Day before each Bond Payment Date and shall, together with any balance then held in the Bond Fund, equal the sum of the principal of and interest due on all Outstanding Bonds on such Bond Payment Date. The Company shall only be required to make payments of the Financing Fee to the extent that monies held in the Bond Fund for the payment of the principal of and interest due on all Outstanding Bonds on the next succeeding Bond Payment Date are not sufficient for such purpose. In the event the Company proposes to make a payment of defaulted interest on the Bonds, the Company shall follow the procedures specified in Section 2.02(b) of the Indenture. 12. Section 4.6 of the Amended Agreement, encaptioned Restoration of Security Reserve Fund, is deleted and the references in the Agreement to Section 4.6 are deleted. 13. Section 4.12 of the Amended Agreement, encaptioned Prepayment of Financing Fee, is hereby amended to read as follows: A. The Financing Fee with respect to the Prior Bonds not reissued by the Bonds is prepayable in accordance with the Plan. B. So long as all amounts which have become due pursuant to this Article 4 hereof have been paid and the Company is not in default hereunder, the Company may: (1) on any Interest Payment Date pay in advance all or part of the Financing Fee with respect to the Series 1994A Bonds to become due pursuant to Article 4 hereof if the Company (a) gives the Trustee notice of its intent to prepay, (b) deposits with the Trustee an amount equal to the redemption price of the Series 1994A Bonds to be prepaid, and (c) directs the Trustee to apply such amount to the redemption of Series 1994A Bonds in accordance with Section 3.01 of the Indenture; and (2) on July 1, 1995 and on any Interest Payment Date thereafter pay in advance all or part of the Financing Fee with respect to the Series 1994B Bonds to become due pursuant to Article 4 hereof if the Company (a) gives the Trustee notice of its intent to prepay, (b) deposits with the Trustee an amount equal to the redemption price of the Series 1994B Bonds to be prepaid (including without limitation any premium due), and (c) directs the Trustee to apply such amount to the redemption of Series 1994B Bonds in accordance with Section 3.01 of the Indenture. 14. Section 4.15 of the Amended Agreement, encaptioned Relationship of Payments to the Use of Improvements, is hereby amended to read as follows: A. All portions of Financing Fee payments representing principal payments on the Series 1994A Bonds shall relate to the use of the Original Improvements in accordance with their -7- 9 respective reasonably expected economic life (those with the shortest life first, those with the longest life last) as specified on Exhibit "A" to the First Amendment. No such payments shall relate to the use of an Original Improvement after a term, commencing upon the Completion Date, of eighty percent (80%) of the reasonably expected economic life of the specific Original Improvements as shown on Exhibit "A" to the First Amendment. B. All portions of Financing Fee payments representing principal payments on the Series 1994B Bonds shall relate to the use of the Enhanced Improvements in accordance with their respective reasonably expected economic life (those with the shortest life first, those with the longest life last) as specified on Exhibit "A" to the First Amendment. No such payments shall relate to the use of an Enhanced Improvement after a term, commencing upon the Completion Date, of eighty percent (80%) of the reasonably expected economic life of the specific Enhanced Improvements as shown on Exhibit "A" to the First Amendment. 15. Section 6.9 of the Amended Agreement, encaptioned Rebate Payments, is hereby amended by inserting new subsection C as follows: C. On each date as determined by Section 6.15(a) of the Indenture and not later than sixty (60) days after the payment in full of all principal and interest on the Bonds, the Company will direct the Trustee to pay to the United States the amounts as calculated in said Section 6.15(a) of the Indenture. Should any further deposits be made to the accounts of the Rebate Fund relating to the Bonds after such payment is made, such further deposit will immediately be paid to the United States of America. Such payments will be by check and mailed to: Internal Revenue Service Center Philadelphia, Pennsylvania 19255 Each payment shall be accompanied by a Form 8038-T duly executed by an authorized representative of the Issuer. 16. Section 6.11 of the Amended Agreement, encaptioned Net Worth, is hereby amended to read as follows: Section 6.11 Chief Executive Office. The Company will not change its chief executive office to a new jurisdiction outside the State unless: (a) The Company shall first have provided written notice to the Trustee; and (b) All actions necessary to perfect the security interest granted to the Trustee in the Improvements pursuant to the Security Agreement shall have been taken in the new jurisdiction, to the extent required by such new jurisdiction as a result of such change. 17. Exhibit "E" is hereby amended to read as attached to this Second Amendment and by this reference is incorporated herein. 18. Section 1.1 of Exhibit "F" of the Amended Agreement, encaptioned Definitions, is hereby amended in part by substitution of the lettered definition set forth below for those definitions bearing the same letter designation in Exhibit "F" to the Amended Agreement: H. "Arbitrage Certificate" means the Tax Exemption -8- 10 Certificate and Agreement among the Authority, the Original User and the Trustee, the Project Certificate from the Original User and the Authority to Bond Counsel, both dated as of the Closing Date. L. "Bonds" means the Series 1994A Bonds and the Series 1994B Bonds. AA. "Indenture" means the Trust Indenture, dated as of July 1, 1989, as supplemented by the First Supplement to Trust Indenture dated as of August 1, 1990, as restated and supplemented by the Restated and Amended Trust Indenture dated as of August 25, 1994 between the Authority and the Trustee, as such Trust Indenture may be further amended and supplemented from time to time in accordance with its terms. AC. "Original Agreement" means the Airport Use Agreement dated as of July 1, 1989, as amended by the First Amendment to the Airport Use Agreement dated as of August 1, 1990 and by the Second Amendment to the Airport Use Agreement dated as of August 25, 1994, among the City, the Authority and the Original User. AJ. [Intentionally left blank.] AK. [Intentionally left blank.] 19. Section 1.1 of Exhibit "F" of the Amended Agreement, encaptioned Definitions, is hereby amended in part by the addition of the following definitions: AV. "Bonds" means the Series 1994A Bonds and the Series 1994B Bonds. AW. "Effective Date" means August 25, 1994. AX. "Prior Bonds" means the Series 1989 Bonds and the Series 1990 Bonds. AY. "Series 1994A Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1994A, issued by the Authority in the amount of $17,127,659.78. AZ. "Series 1994B Bonds" means the Airport Facility Revenue Bonds (America West Airlines, Inc. Project) Series 1994B, issued by the Authority in the amount of $4,736,842.02. 20. Section 4.4 of Exhibit "F" to the Amended Agreement, encaptioned Financing Fee, is hereby amended to read as follows: The Company agrees to pay as the Financing Fee during the Term of the Bonds its Pro Rata Share of an amount which, together with any monies held by the Trustee in the Bond Fund, shall at all times be sufficient to pay all principal of, premium, if any, and interest on the Bonds as such principal, premium, if any, and interest become due, at maturity, upon acceleration, upon optional or mandatory redemption or otherwise at the dates and in the places and manner required herein. Payments of the Financing Fee shall be made in immediately available funds. 21. Section 4.5 of Exhibit "F" to the Amended Agreement, encaptioned Semiannual Payments, is hereby amended to read as follows: -9- 11 Section 4.5 Payments. Payment of interest on the Bonds shall be due commencing October 1, 1994 for interest accrued from the Effective Date and payment of principal on the Bonds shall be due commencing October 1, 1994, both continuing on each Bond Payment Date, to and including the date that all such unpaid principal of the Bonds shall be paid in full. Payments on the Bonds are to be made to the Trustee in accordance with the schedule set forth on Exhibit "E". Payments of the Financing Fee are to be made to the Trustee by the close of business two (2) Business Days before each Bond Payment Date and shall, together with any balance then held in the Bond Fund, equal the Company's Pro Rata Share of the sum of the principal of and interest due on all Outstanding Bonds on such Bond Payment Date. The Company shall only be required to make payments of the Financing Fee to the extent that monies held in the Bond Fund for the payment of the principal of and interest due on all Outstanding Bonds on the next succeeding Bond Payment Date are not sufficient for such purpose. In the event the Company proposes to make a payment of defaulted interest, the Company shall follow the procedures specified in Section 2.02(b) of the Indenture. 22. Section 4.6 of Exhibit "F" to the Amended Agreement, encaptioned Restoration of the Security Reserve Fund, is deleted and the references therein to said Section 4.6 are deleted. 23. Section 4.12 of Exhibit "F" of the Amended Agreement, encaptioned Prepayment of Financing Fee, is hereby amended to read as follows: So long as all amounts which have become due pursuant to this Article 4 hereof have been paid and the Company is not in default hereunder, the Company may: (1) on any Interest Payment Date pay in advance all or part of the Financing Fee with respect to the Series 1994A Bonds which become due pursuant to Article 4 hereof if the Company (a) gives the Trustee notice of its intent to prepay, (b) deposits with the Trustee an amount equal to the redemption price of the Series 1994A Bonds to be prepaid, and (c) directs the Trustee to apply such amount to the redemption of Series 1994A Bonds in accordance with Section 3.01 of the Indenture; and (2) on July 1, 1995 and on any Interest Payment Date thereafter pay in advance all or part of the Financing Fee with respect to the Series 1994B Bonds which become due pursuant to Article 4 hereof if the Company (a) gives the Trustee notice of its intent to prepay, (b) deposits with the Trustee an amount equal to the redemption price of the Series 1994B Bonds to be prepaid (including without limitation any premium due), and (c) directs the Trustee to apply such amount to the redemption of Series 1994B Bonds in accordance with Section 3.01 of the Indenture. 24. Section 4.15 of Exhibit "F" of the Amended Agreement, encaptioned Relationship of Payments To The Use of Improvements, is hereby amended to read as follows: (a) All portions of Financing Fee payments representing principal payments on the Series 1994A Bonds shall relate to the use of the Original Improvements in accordance with their respective reasonably expected economic life (those with the -10- 12 shortest life first, those with the longest life last) as specified on Exhibit "A" hereto. No such payments shall relate to the use of an Original Improvement after a term, commencing upon the Completion Date, of eighty percent (80%) of the reasonably executed economic life of the specific Original Improvements as shown on Exhibit "A" hereto. (b) All portions of Financing Fee payments representing principal payments on the Series 1994B Bonds shall relate to the use of the Enhanced Improvements in accordance with their respective reasonably expected economic life (those with the shortest life first, those with the longest life last) as specified on Exhibit "A" hereto. No such payments shall relate to the use of an Enhanced Improvement after a term, commencing upon the Completion Date, of eighty percent (80%) of the reasonably expected economic life of the specific Enhanced Improvement as shown on Exhibit "A" hereto. 25. Exhibits "B" and "E" to Exhibit "F" of the Amended Agreement are hereby amended to read as attached to this Second Amendment and by this reference are incorporated herein. 26. All parties acknowledge that this Second Amendment is subject to cancellation pursuant to Section 38-511 of the Arizona Revised Statutes, the provisions of which are incorporated herein. All parties represent, as of the date hereof, that, to the best of their knowledge, no circumstances or conditions exist which would provide a basis for cancellation of this Second Amendment pursuant to Section 38-511 of the Arizona Revised Statutes. The Company covenants not to employ or appoint as an agent, or to retain as a consultant with respect to the subject matter of this Second Amendment, for a period of three (3) years following the execution hereof, any person who was significantly involved in initiating, negotiating, securing, drafting or creating this Second Amendment on behalf of the City or the Authority unless a waiver of the provisions of Section 38-511 of the Arizona Revised Statutes is obtained from the City or the Authority. 27. This Second Amendment may be executed in any number of counterparts, each of which, when so executed and delivered, shall be an original; but such counterparts shall together constitute but one and the same Second Amendment, and, in making proof of this Second Amendment, it shall not be necessary to produce or account for more than one such counterpart. 28. The Company reaffirms for the benefit of the holders of the Bonds its agreements, covenants and representations stated in Article 6 of the Amended Agreement, as amended by this Second Amendment. 29. The Company hereby represents and agrees that, for purposes of the Stipulation, the Series 1994A Bonds are and shall be deemed to be the Series 1989 Bonds and the Series 1994B Bonds are and shall be deemed to be the Series 1990 Bonds. Neither the City or the Authority has any objection to such representation and agreement by the Company. -11- 13 30. Except as expressly amended herein, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the City, the Authority and the Company have caused this Second Amendment to be duly executed in their respective names, all as of the date herein before written. CITY OF PHOENIX, a municipal corporation By /s/ illegible ______________________________________ Its Aviation Director _________________________________ ATTEST: By /s/ illegible ___________________________________ City Clerk APPROVED AS TO FORM: By /s/ illegible ___________________________________ City Attorney THE INDUSTRIAL DEVELOPMENT AUTHORITY OF THE CITY OF PHOENIX, ARIZONA By /s/ illegible _____________________________________ Its President ATTEST: By /s/ illegible ___________________________________ Its Treasurer ______________________________ AMERICA WEST AIRLINES, INC. By /s/ illegible ______________________________________ Its Senior Vice President _________________________________ -12- 14 EXHIBIT "B" TO EXHIBIT "F" SPECIFIC TERMS The following are the specific terms of this Agreement: 1. The Company is: ____________________________________. 2. The Gates at the Terminal to be used by the Company pursuant to the City's Rates and Charges program (as described in Section 2.4 of the Master Use Agreement) are: _____________________________. 3. The Company's state of incorporation is: _________________. 4. The amount of general liability insurance to be provided by the Company pursuant to Section 6.5A hereof is $_____________. 5. The Gate-based Percentage (the number of Gates specified in No. 2 divided by 28) is: ______________________%. 6. The Company intends only to make use of the following Gate-related Improvements (as specified in Exhibit "A" hereto) as they relate to the Gates specified in paragraph 2 of this Exhibit "B". [List Improvements] The costs paid from proceeds of the Bonds for the above-listed Gate-related Improvements total $_________ which is equal to ___% (the "Usage Rate") of the original cost of the Project ($29,885,000 of the Series 1989 Bonds and $5,796,000 of the Series 1990 Bonds originally deposited in the Construction Fund, less the amount of Bonds redeemed pursuant to Section 3.02(a) of the Indenture). In the event the Company wishes to use some of the Improvements that are not Gate-related Improvements, it shall negotiate such usage and payment therefor directly with America West Airlines, Inc. The Usage-based Percentage is ___% (the Usage Rate times the Gate-based Percentage calculated in paragraph 5 of this Exhibit "B"). 7. The Company's Pro Rata Share is equal to [choose one] a. The Gate-based Percentage (if the Company intends to make use of all the Improvements). b. The Usage-based Percentage (if the Company intends only to make use of some or all the Gate-related Improvements). -13- 15 EXHIBIT "E" SCHEDULE OF PAYMENTS DUE ON THE BONDS Series 1994A BONDS
Total Due Principal Interest Payment --- --------- -------- ------- 10/1/94 $ 372,340.43 $ 142,159.58 $ 514,500.01 1/1/95 372,340.43 347,672.88 720,013.31 4/1/95 372,340.43 339,946.81 712,287.24 7/1/95 372,340.43 332,220.75 704,561.18 10/1/95 372,340.43 324,494.68 696,835.11 1/1/96 372,340.43 316,768.62 689,109.05 4/1/96 372,340.43 309,042.56 681,382.99 7/1/96 372,340.43 301,316.49 673,656.92 10/1/96 372,340.43 293,590.43 665,930.86 1/1/97 372,340.43 285,864.37 658,204.80 4/1/97 372,340.43 278,138.30 650,478.73 7/1/97 372,340.43 270,412.24 642,752.67 10/1/97 372,340.43 262,686.17 635,026.60 1/1/98 372,340.43 254,960.11 627,300.54 4/1/98 372,340.43 247,234.05 619,574.48 7/1/98 372,340.43 239,507.98 611,848.41 10/1/98 372,340.43 231,781.92 604,122.35 1/1/99 372,340.43 224,055.85 596,396.28 4/1/99 372,340.43 216,329.79 588,670.22 7/1/99 372,340.43 208,603.73 580,944.16 10/1/99 372,340.43 200,877.66 573,218.09 1/1/00 372,340.43 193,151.60 565,492.03 4/1/00 372,340.43 185,425.53 557,765.96 7/1/00 372,340.43 177,699.47 550,039.90 10/1/00 372,340.43 169,973.41 542,313.84 1/1/01 372,340.43 162,247.34 534,587.77 4/1/01 372,340.43 154,521.28 526,861.71 7/1/01 372,340.43 146,795.21 519,135.64 10/1/01 372,340.43 139,069.15 511,409.58 1/1/02 372,340.43 131,343.09 503,683.52 4/1/02 372,340.43 123,617.02 495,957.45 7/1/02 372,340.43 115,890.96 488,231.39 10/1/02 372,340.43 108,164.89 480,505.32 1/1/03 372,340.43 100,438.83 472,779.26 4/1/03 372,340.43 92,712.77 465,053.20 7/1/03 372,340.43 84,986.70 457,327.13 10/1/03 372,340.43 77,260.64 449,601.07 1/1/04 372,340.43 69,534.58 441,875.01 4/1/04 372,340.43 61,808.51 434,148.94 7/1/04 372,340.43 54,082.45 426,422.88 10/1/04 372,340.43 46,356.38 418,696.81 1/1/05 372,340.43 38,630.32 410,970.75 4/1/05 372,340.43 30,904.26 403,244.69 7/1/05 372,340.43 23,178.19 395,518.62 10/1/05 372,340.43 15,452.13 387,792.56 1/1/06 372,340.43 7,726.06 380,066.49 ----------------- Total Principal $ 17,127,659.78
-14- 16 Series 1994B BONDS
Total Due Principal Interest Payment --- --------- -------- ------- 10/1/94 $ 263,157.89 $ 38,842.10 $ 301,999.99 1/1/95 263.157.89 91,710.52 354,868.41 4/1/95 263.157.89 86,315.79 349,473.68 7/1/95 263,157.89 80,921.05 344,078.94 10/1/95 263,157.89 75,526.31 338,684.20 1/1/96 263,157.89 70,131.58 333,289.47 4/1/96 263,157.89 64,736.84 327,894.73 7/1/96 263,157.89 59,342.10 322,499.99 10/1/96 263,157.89 53,947.37 317,105.26 1/1/97 263,157.89 48,552.63 311,710.52 4/1/97 263,157.89 43,157.89 306,315.78 7/1/97 263,157.89 37,763.16 300,921.05 10/1/97 263,157.89 32,368.42 295,526.31 1/1/98 263,157.89 26,973.68 290,131.57 4/1/98 263,157.89 21,578.95 284,736.84 7/1/98 263,157.89 16,184.21 279,342.10 10/1/98 263,157.89 10,789.47 273,947.36 1/1/99 263,157.89 5,394.74 268,552.63 ---------------- Total Principal $ 4,736,842.02
-15- 17 EXHIBIT "E" TO EXHIBIT "F" SCHEDULE OF PAYMENTS DUE ON THE BONDS Series 1994A BONDS
Total Due Principal Interest Payment --- --------- -------- ------- 10/1/94 $ 372,340.43 $ 142,159.58 $ 514,500.01 1/1/95 372,340.43 347,672.88 720,013.31 4/1/95 372,340.43 339,946.81 712,287.24 7/1/95 372,340.43 332,220.75 704,561.18 10/1/95 372,340.43 324,494.68 696,835.11 1/1/96 372,340.43 316,768.62 689,109.05 4/1/96 372,340.43 309,042.56 681,382.99 7/1/96 372,340.43 301,316.49 673,656.92 10/1/96 372,340.43 293,590.43 665,930.86 1/1/97 372,340.43 285,864.37 658,204.80 4/1/97 372,340.43 278,138.30 650,478.73 7/1/97 372,340.43 270,412.24 642,752.67 10/1/97 372,340.43 262,686.17 635,026.60 1/1/98 372,340.43 254,960.11 627,300.54 4/1/98 372,340.43 247,234.05 619,574.48 7/1/98 372,340.43 239,507.98 611,848.41 10/1/98 372,340.43 231,781.92 604,122.35 1/1/99 372,340.43 224,055.85 596,396.28 4/1/99 372,340.43 216,329.79 588,670.22 7/1/99 372,340.43 208,603.73 580,944.16 10/1/99 372,340.43 200,877.66 573,218.09 1/1/00 372,340.43 193,151.60 565,492.03 4/1/00 372,340.43 185,425.53 557,765.96 7/1/00 372,340.43 177,699.47 550,039.90 10/1/00 372,340.43 169,973.41 542,313.84 1/1/01 372,340.43 162,247.34 534,587.77 4/1/01 372,340.43 154,521.28 526,861.71 7/1/01 372,340.43 146,795.21 519,135.64 10/1/01 372,340.43 139,069.15 511,409.58 1/1/02 372,340.43 131,343.09 503,683.52 4/1/02 372,340.43 123,617.02 495,957.45 7/1/02 372,340.43 115,890.96 488,231.39 10/1/02 372,340.43 108,164.89 480,505.32 1/1/03 372,340.43 100,438.83 472,779.26 4/1/03 372,340.43 92,712.77 465,053.20 7/1/03 372,340.43 84,986.70 457,327.13 10/1/03 372,340.43 77,260.64 449,601.07 1/1/04 372,340.43 69,534.58 441,875.01 4/1/04 372,340.43 61,808.51 434,148.94 7/1/04 372,340.43 54,082.45 426,422.88 10/1/04 372,340.43 46,356.38 418,696.81 1/1/05 372,340.43 38,630.32 410,970.75 4/1/05 372,340.43 30,904.26 403,244.69 7/1/05 372,340.43 23,178.19 395,518.62 10/1/05 372,340.43 15,452.13 387,792.56 1/1/06 372,340.43 7,726.06 380,066.49 ----------------- Total Principal $ 17,127,659.78
-16- 18 Series 1994B BONDS
Total Due Principal Interest Payment --- --------- -------- ------- 10/1/94 $ 263,157.89 $ 38,842.10 $ 301,999.99 1/1/95 263.157.89 91,710.52 354,868.41 4/1/95 263.157.89 86,315.79 349,473.68 7/1/95 263,157.89 80,921.05 344,078.94 10/1/95 263,157.89 75,526.31 338,684.20 1/1/96 263,157.89 70,131.58 333,289.47 4/1/96 263,157.89 64,736.84 327,894.73 7/1/96 263,157.89 59,342.10 322,499.99 10/1/96 263,157.89 53,947.37 317,105.26 1/1/97 263,157.89 48,552.63 311,710.52 4/1/97 263,157.89 43,157.89 306,315.78 7/1/97 263,157.89 37,763.16 300,921.05 10/1/97 263,157.89 32,368.42 295,526.31 1/1/98 263,157.89 26,973.68 290,131.57 4/1/98 263,157.89 21,578.95 284,736.84 7/1/98 263,157.89 16,184.21 279,342.10 10/1/98 263,157.89 10,789.47 273,947.36 1/1/99 263,157.89 5,394.74 268,552.63 ---------------- Total Principal $ 4,736,842.02
-17- EX-21.1 9 EX-21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANTS
JURISDICTION OF NAME ORGANIZATION PARENT LINE OF BUSINESS America West Holdings Corporation ("Holdings") Delaware Airline America West Airlines, Inc. Delaware Holdings Airline The Liesure Company Delaware Holdings Travel AWHQ LLC Arizona Holdings Administrative
EX-23.1 10 EX-23.1 1 EX 23.1 INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT The Board of Directors and Stockholders America West Holdings Corporation: The audits referred to in our report dated March 10, 1999, included the related consolidated financial statement schedule as listed in Item 14(d) for the years ended December 31, 1998, 1997 and 1996, included herein. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to incorporation by reference in the Registration Statements (Form S-8 No. 33-60555), (Form S-3 No. 333-51107) and (Form S-3 No. 333-02129) of America West Holdings Corporation of our report dated March 10, 1999, relating to the consolidated balance sheets of America West Holdings Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998 and the related consolidated financial statement schedule, which report appears in the December 31, 1998, annual report on Form 10-K of America West Holdings Corporation. KPMG LLP Phoenix, Arizona March 30, 1999 EX-27.1 11 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EPS PRIMARY REPRESENTS BASIC NET INCOME PER SHARE. 0001029863 AMERICA WEST HOLDINGS CORPORATION 1 US DOLLAR YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 108,360 27,485 99,926 (3,545) 31,147 302,103 1,172,501 (410,461) 1,525,030 535,259 0 0 0 464 668,994 1,525,030 0 2,023,284 0 1,814,221 0 3,365 26,050 194,346 85,775 0 0 0 0 108,571 2.58 2.40
EX-27.2 12 EX-27.2
5 0000706270 AMERICA WEST AIRLINES, INC. 1 US DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 107,234 27,485 90,316 (3,268) 31,147 402,558 1,167,081 (408,065) 1,594,644 506,194 0 0 0 0 769,225 1,594,644 0 1,968,714 0 1,770,868 0 3,000 33,807 184,557 81,541 0 0 0 0 103,016 0 0
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