As we previously posted, AMR filed a motion for approval to enter into a 12-year capacity purchase agreement with Republic Airline Inc. (“Republic”).
Capacity purchase agreements between major carriers and regional partners are one approach airlines use to provide regional feed services. Under such arrangements, the major carrier generally purchases the entire capacity of the aircraft covered by the respective capacity purchase agreement from the regional service provider. The major carrier sets the regional service provider’s schedule, sells all seats on the regional service provider’s flights, and determines the product offering in order to optimize the major carrier’s network, in each case with respect to the aircraft covered by the capacity purchase agreement. The major carrier retains all revenues associated with the regional service provider’s flying. In exchange, the major carrier pays the regional service provider a fixed amount determined in accordance with a formula based on, among other factors, the aircraft included and the block hours of flying performed. The fixed payment is designed to cover the regional service provider’s controllable costs and a target profit margin.
The terms of the agreement include:
Capacity Purchase: American shall purchase from Republic all of the capacity (exclusive of one maintenance space) for 53 Embraer E-175 aircraft. Republic shall use the aircraft solely for, or as directed by, American in connection with Republic’s provision of regional airline services for flights scheduled by American.
Flight-Related Revenues: American shall be entitled receive all revenues resulting from the sale or issuance of passenger tickets associated with the aircraft and all other sources of revenue derived from the services provided by the aircraft and its use and operation.
Base and Incentive Payments: American shall pay to Republic a formula based fee on a monthly basis that is calculated based upon, among other factors, (a) a daily rate for the use of the aircraft, (b) the aggregate time elapsed for completed flights between gate departure and gate arrival, (c) the aggregate flight time for completed flights, (d) the aggregate number of flight departures, and (e) a monthly lease rate for the aircraft. Republic may also earn bonuses for its ability (or be penalized for its inability) to satisfy certain target performance standards, including with respect to the level of complaints associated with its services and its ability to satisfy the target range of on-time departures.
Costs and Expenses: The Agreement identifies and categorizes costs and expenses into controllable costs, pass-through costs and absorbed costs and also delineates whether American or Republic is responsible for the payment of such costs and the process for payment or reimbursement associated with each cost.
a. Pass-Through Costs: American shall reimburse Republic for pass through costs. Pass-through costs include, among other things, landing fees, air traffic control fees, out of pocket costs incurred by Republic relating to interior design changes for the aircraft, costs associated with passenger liability insurance, aircraft property taxes, and incremental costs associated with acquiring any liquor licenses that Republic does not already hold.
b. Controllable Costs: American is not required to incur any cost or make any payment that is attributable to a cost and expense incurred by Republic related to the flight operation or maintenance of the aircraft. Such costs include, among other things, costs associated with maintaining access to American’s reservation, global distribution and other support systems, various insurance costs not related to the aircraft, maintenance costs for the aircraft, costs and expenses associated with flight crews, costs and expenses related to overnight maintenance facilities and flight related communication costs.
c. American Absorbed Expenses: American shall be responsible to pay costs and expenses related to, among other things, passenger advertising and marketing costs, including commissions, taxes, reservation costs and expenses, costs and expenses associated with participation in American’s AAdvantage Program, costs and expenses related to fuel, ground handling, catering and liquor, and costs and expenses for providing passenger and cargo related services such as ticketing and check-in of passengers, baggage service, and passenger security screening and credit card processing.
American claims that American Eagle will continue to provide the majority of regional feed services to American, but that American Eagle does not currently own or have access to 76-seat regional aircraft necessary to satisfy American’s requirements.
The motion was opposed by the TWU, APLA and AFA and supported by the testimony Charles Schubert Vice President – Network Planning for American Airlines, Inc. The Court granted the motion.
Lowenstein Sandler LLP
Sharon L. Levine
S. Jason Teele
Paul Kizel