Both the existing ASA and the Amended ASA provide a monthly margin payment calculated to achieve a target operating margin, based on reimbursement payments and payments based on pre-set rates. The Amended ASA will provide for Pinnacle to charge Northwest current market rates for regional airline services. Specifically, three major items of compensation will change for Pinnacle. First, Northwest will provide jet fuel to Pinnacle at no charge to Pinnacle, and fuel will be removed as a revenue and expense item from Pinnacle's statement of operations. As fuel will no longer be an expense item, Pinnacle will no longer receive its target margin on fuel expense. Second, the amount that Pinnacle pays to sublease aircraft from Northwest will be reduced under the Amended ASA and related aircraft subleases. Pinnacle will continue to receive its target margin on the reduced aircraft rent. Third, Pinnacle's target margin rate will be reduced from 10.0% to 8.0%. The reset of the target margin to industry average in 2008 has also been eliminated. These new rates will remain in effect (subject to indexed annual inflation adjustments) until 2013, when the rates will be reset.
Had they been in effect, the changes in the Amended ASA would have reduced Pinnacle's operating income for the nine months ended September 30, 2006 by approximately $30 million.
Contingent on Final Bankruptcy Court Approval
The Amended ASA, the Share Purchase Agreement and the Claim Resolution Agreement are subject to the approval by the bankruptcy court overseeing Northwest's bankruptcy proceedings. Northwest will file an appropriate motion with the bankruptcy court seeking approval of these agreements and certain amendments to aircraft subleases in effect between the parties. Any creditor or party-in-interest, including the Official Committee of Unsecured Creditors of Northwest Airlines Corp, et al., may file an objection to this motion and, regardless of whether any such objections are filed, the bankruptcy court may not approve the motion, in which case the Amended ASA, the Share Purchase Agreement, the Claims Resolution Agreement and the amendments to the aircraft sublease agreements would not become effective. Furthermore, even if the motion is approved by the bankruptcy court, the Amended ASA could later be rejected by Northwest in its bankruptcy proceedings. In addition, the existing ASA could be rejected by Northwest or its successor under applicable provisions of the Bankruptcy Code prior to any approval of the motion. If either rejection were to occur, Pinnacle would file a claim against Northwest or its successor arising out of such rejection of either the existing ASA or the Amended ASA. However, such rejection would nevertheless have a materially adverse impact on Pinnacle's financial condition and results of operations.