GENERAL TERMS AGMT. AMD #7
Published on December 31, 1969
Exhibit 10.2
AMENDMENT NO. 7
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Whereas, CFM International, Inc., (hereinafter referred to as "CFM") and
Southwest Airlines Co. (hereinafter referred to as "Airline") have entered into
(a) General Terms Agreement 6-3418 dated May 19, 1981, as previously amended,
(the "GTA") heretofore consisting of terms and conditions with respect to (i)
CFM's support (including warranty) of CFM56 equipment purchased by The Boeing
Company (hereinafter referred to as "Boeing") and sold to Airline as installed
equipment on Boeing model 737-300, 737-400, and/or 737-500 aircraft and (ii) the
sale and support by CFM and the purchase by Airline from CFM of spare turbofan
engines, engine modules, spare parts, and other specified equipment, all in
support of the above referenced aircraft powered by CFM56-3-B1, CFM56-3B-2,
and/or CFM56-3C-1 engines and (b) ten (10) Letter Agreements which accompany the
GTA (the GTA and Letter Agreements being collectively referred to as the
"Agreement"); and
Whereas, the Agreement has heretofore included a cumulative total of one-
hundred-forty-four (144) Firm and fifty-three (53) Option 737-300, 737-400,
and/or 737-500 aircraft for delivery through 1999; and
Whereas, (a) only eleven (11) of such 53 Option aircraft (3 in April 1997, 2 in
August 1997, 2 in September 1997 and 4 in October 1997) continue to be scheduled
for delivery to Airline (the "Eleven aircraft") and (b) the remainder of such 53
Option aircraft are replaced by a purchase agreement with Boeing (the "Aircraft
Purchase Agreement") for CFM56-7 (22,000 lbs. SlS thrust to 86 degreesF)
powered 737- 700 aircraft as set forth in Attachment I to this Amendment No. 7
(the aircraft set forth in Attachment I being collectively referred to as the
"Aircraft"); and
Whereas, sixty-three (63) of the Aircraft (as defined in such Attachment I
hereto) are Firm Aircraft (the "Firm Aircraft").
Now, in consideration of Airline (a) entering int the Aircraft Purchase
Agreement and (b) actually purchasing and taking delivery of all of the Firm
Aircraft as set forth in such Attachment I hereto, the parties agree that (i)
the applicable terms heretofore set forth in the GTA shall continue to apply to
the Eleven aircraft, (ii) the applicable terms hereinafter set forth shall apply
to the Aircraft, and (iii) the GTA is further amended by this Amendment No. 7 as
follows:
First: The following paragraph D is added to Article I (Equipment):
D. Except for (a) the prices heretofore set forth in Article II, as
amended, of the GTA, (b) the payment
terms as set forth in Article V of the GTA, (c) the special guarantees
set forth in Section XIII, as amended, of Exhibit B of the GTA, (d)
Letter Agreements Nos. 1 through 10 to the GTA, or (e) unless
otherwise agreed to the contrary in writing by the parties, (i)
applicable terms and conditions of the GTA shall hereafter likewise
apply to CFM56-7 installed engines purchased from Boeing, spare
engines, engine modules, spare parts, and other specified equipment
purchased from CFM in support of Airline's 737-700 aircraft fleet and
(ii) such equipment shall be included under the term Products as used
in the GTA and applicable letter Agreements subsequent to letter
Agreement No. 10.
Second: Article II (Prices) is further amended to include the following part
K:
K. Base prices for new CFM56-7 spare engines, engine modules, and
optional equipment rated at SlS thrusts to 86 degreesF of 20,000
lbs. and 22,000 lbs. ordered within lead time for delivery to Airline
by CFM prior to December 31, 2003 in support of the Aircraft are shown
in Attachment II to this Amendment No. 7.
Third: In support of the above CFM56-7 pricing, the escalation provisions set
forth in Exhibit D of the Aircraft Purchase Agreement are hereby
incorporated by referenced into the GTA and such CFM56-7 pricing shall
be escalated to the time of Product delivery in the same manner as the
aircraft price is escalated to the time of aircraft delivery.
However, such escalation provisions shall not be applicable to CFM56-3
pricing set forth in the Agreement.
Fourth: Payment terms for CFM56-7 spare engines, engine modules and optional
equipment are shown in Attachment III to this Amendment No. 7.
Fifth: The Special Guarantees set forth in Attachment IV to this Amendment
No. 7 are added as a separate section (SECTION XIV) of Exhibit B
(Product Support Plan) of the GTA exclusively for Airline's CFM56-7
powered 737-700 aircraft as defined in Attachment I to this Amendment
No. 7:
Nothing contained in the Aircraft Purchase Agreement or any other documentation
with respect to CFM56-7 powered 737-700 aircraft shall, unless stated to the
contrary in either the Aircraft Purchase Agreement or the Agreement, (i) subject
CFM to any liability, obligation or duplication of obligations to which it would
not otherwise be subject under the terms of the Agreement or (ii) otherwise
modify the respective contract rights of CFM and Airline under the terms of the
Agreement.
Except as expressly set forth herein, all other provisions of the GTA, as
previously amended, and associated letter Agreements shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
19th day of January, 1994.
SOUTHWEST AIRLINES CO. CFM INTERNATIONAL, INC.
By:/s/ Gary A. Barron By: /s/ Gilbert R. Eckler
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Typed Name: Gary A. Barron Typed Name: Gilbert R. Eckler
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Title: Executive V.P. - COO Title: Director Airline Sales
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Date: January 15, 1994 Date: January 19, 1994
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ATTACHMENT I
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737-700 DELIVERY PERIOD
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(ALL AIRCRAFT POWERED BY CFM56-7 ENGINES RATED AT 22,000 LBS.)
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The Aircraft Purchase Agreement contains the delivery schedule described below
and delivery of Firm Aircraft described therein are subject only to excusable
delay caused by events beyond the reasonable control of Airline:
1. Delivery Positions - Firm Aircraft
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2. Delivery Positions - Option Aircraft
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3. Delivery Positions -- Rollover Option Aircraft
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ATTACHMENT II
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BASE PRICES FOR CFM56-7
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SPARE ENGINES, OPTIONAL EQUIPMENT AND MODULES
---------------------------------------------
A. The above base prices are effective for Firm orders received by CFM within
quoted lead time for basic spare engines (including associated equipment
and max. climb thrust increase), optional equipment and engine modules for
delivery to Airline by CFM on or before December 31, 2003 in support of the
Aircraft defined in Amendment No. 7 to the GTA. The base prices are FOB
Evendale, Ohio or point of manufacture and are subject to adjustment for
escalation as further defined in Amendment No. 7 to the GTA.
B. For the above base prices, the base ECI is 123.7 and the base ICI is 118.3
(ECI and ICI being as defined in Exhibit D of the Aircraft Purchase
Agreement for July 1993 deliveries).
C. The selling price of CFM56-7 basic spare engines, optional equipment and
modules ordered for delivery after the period set forth in Paragraph A
above shall be the base price then in effect and as set forth in each
purchase order as accepted by CFM, which base price shall be subject to
adjustment for escalation in accordance with CFM's then-current escalation
provisions.
ATTACHMENT III
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PAYMENT
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Airline shall pay CFM with respect to each purchase order hereunder, in
United States Dollars as follows:
1. For Engines, Engine Modules, and Associated/Optional Equipment
therefor:
a. Ten percent (10%) of the total purchase order base price,
escalated to the month payment is due, shall be paid eighteen
(18) months prior to scheduled delivery date thereof;
b. Ten percent (10%) of the base price of each item, escalated to
the month payment is due, shall be paid twelve (12) months prior
to scheduled delivery date thereof; and
c. Ten percent (10%) of the base price of each item, escalated to
the month payment is due, shall be paid six (6) months prior to
scheduled delivery date thereof; and
d. Payment of the balance, including amount for price escalation to
the month of scheduled delivery, shall be paid within thirty (30)
days after delivery of each item.
Any payment following the first payment in a. above which becomes
due prior to or at the time of purchase order placement, shall be
paid concurrently therewith.
2. For Spare Parts, payment of the selling price shall be made thirty
(30) days after delivery thereof.
3. For Special Tools and Test Equipment, payment of the selling price
shall be made thirty (30) days after delivery thereof.
B. All invoicing and payments (including payment details) hereunder shall be
transmitted electronically.
C. If delivery hereunder is delayed by Airline, payment shall be made based on
the delivery schedule set forth in the purchase order as accepted by CFM.
D. In the event of delay in the payments to be made by Airline hereunder, CFM
shall be entitled, without prejudice to any other rights to CFM, to claim
interest on the amounts due, computed at the current rates of the monetary
market in New York (The New York Prime Rate) or the then-prevailing
equivalent in force on the day last payment is due, plus two
percent. Interest will cover the whole period of delayed payment.
E. In the event of a material adverse change in the financial condition of
Airline, CFMI may require payment of an amount due under A.d above at the
time of Product delivery.
ATTACHMENT IV
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SECTION XIV - SPECIAL GUARANTEES FOR CFM56-7 ENGINES
----------------------------------------------------
The following Special Guarantees have been tailored to Airline's 737-700 fleet
average flight conditions. The delivery schedule upon which such Special
Guarantees are conditioned is set forth in Attachment I to Amendment No. 7 to
the GTA (the "Aircraft"), and the basis for such guarantees is described in
Attachment V to this Amendment No. 7 to the GTA.
A. Material Cost Guarantee
-----------------------
CFM guarantees that the ten-year cumulative net material cost, including
Life Limited parts material, for all engine Parts supported through CFM56
Engine Spare parts Catalog sales for Airline's fleet of CFM56-7 engines
will not exceed the following values per engine flight hour:
$51.10, based on an average Aircraft utilization of
3600 hours per year; or
$48.90, based on an average Aircraft utilization of
3200 hours per year.
The appropriate guaranteed rate will be adjusted for escalation annually in
the month of July in accordance with the provisions set forth in Exhibit D
of the Aircraft Purchase Agreement using a base ECI of 123.7 and a base ICI
of 118.3 (July 1993).
Such guaranteed rates are based on a stub life of 4,000 flight cycles for
each module at the same guaranteed rate of $51.10 or $48.90 per engine
flight hour, as appropriate. To the extent the fleetwide average exceeds
4,000 flight cycles, costs attributable to such excess shall not be
included in Airline's cumulative net material cost for purposes of
calculating the material cost guarantee. Excess costs due to stub lifes
greater than 4,000 cycles shall be calculated component by component and
excluded on a prorate cycle basis for those cycles greater than 4,000
cycles. This reconciliation shall be completed on a yearly basis.
The cumulative net material cost is based on the actual price of
replacements for Parts scrapped during the guarantee period, less any
material credits issued under warranty, other guarantee, or other program
considerations. All other costs, including material handling fees, are
excluded.
Parts scrapped due to service bulletin compliance will be included in the
guarantee at 100% less any credits, provided the service bulletins are
agreed to by Airline and CFM.
In cases where a Parts repair procedure is required and is not available
within six (6) months from receipt of Airline's request for such repair
procedure, the Part may be scrapped unless CFM and Airline agree otherwise.
Settlement of the ten (10) year net cumulative Material Cost Guarantee
will be on a yearly basis. If at the time of any yearly settlement,
Airline's cumulative net material cost under this guarantee exceeds the
guarantee level, CFM will provide airline a credit against purchases from
CFM in the amount of 65 percent (65%) of the actual cost overrun incurred
by Airline since the last settlement. In the event that (a) at the time of
any yearly settlement the guarantee level is not met, (b) CFM provides
Airline a credit, and (c) subsequently the guarantee overrun is reduced
such that the cumulative guarantee level is met, then Airline shall return
to CFM all credits previously issued under the guarantee, without interest.
B. Performance Retention Guarantee
-------------------------------
CFM guarantees that the cumulative fleet average cruise fuel consumption
deterioration of new CFM56-7 engines will not exceed an average of two
percent (2%) during the first five (5) years of Airline's 737-700 revenue
service. This includes installed and spare engines to support all Aircraft
delivered during the period of this guarantee. Attachment VI to Amendment
No. 7 to the GTA describes the method of measurement to be used.
If at the end of the five-year guarantee period the guarantee level is
exceeded, CFM will provide Airline with:
1) Reimbursement for the excess fuel consumed for that portion of the
guarantee period during which the guarantee is exceeded, computed at
Airline's average monthly cost of fuel; and
2) An extension of the guarantee to ten (10) years at a cumulative fuel
consumption level of two and one half percent (2.5%), with
reimbursement for the excess fuel consumed for the portion of years 6
through 10 inclusive during which the guarantee is exceeded.
This reimbursement will be in the form of a credit against purchases
from CFM.
C. New Engine EGt Deterioration Guarantee
--------------------------------------
CFM guarantees that each new CFM56-7 engine delivered to Airline either as
an installed or spare engine will operate the first 7,000 engine flight
hours without removal due to exceeding the certified maximum takeoff EGT
limit. Available on-wing performance restoration techniques to
regain EGT margin will be employed prior to engine removal. If an engine
is removed from an Aircraft during the guarantee period solely for
exceeding the takeoff EGT limit, CFM will provide Airline a credit against
purchases from CFM equivalent to Airline's cost of restoration, less fees,
to restore adequate EGT margin to meet the guarantee. As with the
"Restored Engine EGT Deterioration Guarantee", a mutually agreed to
workscope shall apply. Any material credit issued under this guarantee
will be applied as credit under the Material Cost Guarantee.
D. Restored Engine EGT Deterioration Guarantee
-------------------------------------------
CFM guarantees that for five (5) years beginning with delivery of Airline's
first 737-700 Aircraft, each CFM56-7 engine operated by Airline since
original delivery thereof and restored to a mutually agreed to workscope
will operate for 5,000 engine flight hours following installation without
removal due to exceeding the certified maximum takeoff EGT limit. If an
engine is removed from an Aircraft during the guarantee period solely for
exceeding the takeoff EGT limit, CFM will provide Airline a credit against
purchases from CFM equivalent to Airline's cost of restoration, less fees,
to restore adequate EGT margin to meet the guarantees. Any material credit
issued under this guarantee will be applied as credit under the Material
Cost Guarantee.
ATTACHMENT V
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BASIS FOR CFM56-7 SPECIAL GUARANTEES
------------------------------------
The special guarantees set forth in Attachment IV to Amendment No. 7 to the GTA
(the "Special Guarantees") have been developed specifically for Airline's new
installed and spare CFM56-7 (22,000 lbs.) engines (the "Engines"). Such 737-700
fleet based guarantees are contingent upon Airline accepting delivery of sixty-
three (63) firm, sixty-three (63) option, and forty-nine (49) rollover option
CFM456-7 powered 737-700 aircraft (the "Aircraft") in the time period described
in Attachment I to Amendment No. 7 to the GTA, and upon Airline procuring a
mutually agreed upon number of spare CFM56-7 engines and engine modules. Such
Special Guarantees are also contingent upon Airline's Engines being identified
and maintained separately from other operators' engines at the repair agency,
and upon agreement between Airline and CFM regarding administration of the
Special Guarantees.
The Special Guarantees are based on an average flight leg of 0.95 hours or
greater, an average takeoff thrust derate of 10 percent or greater, and an
average Aircraft utilization of 3600 or 3200, as appropriate, hours per year
maximum. Operation under different conditions including delivery of a lesser
number of aircraft, changes in delivery schedule from that described in
Attachment I to Amendment No. 7 to the GTA, and/or introduction of 737-700
aircraft with greater than 22,000 lb. thrust may require adjustment of the
guaranteed values.
The Special Guarantees require that Airline and CFM agree upon the workscope
necessary during each shop visit, that available on-wing maintenance and
performance restoration procedures are used to avoid unnecessary shop visits,
and that service bulletins agreed to between Airline and CFM are incorporated in
a timely manner.
The Material Cost Guarantee includes Foreign Object Damage (FOD) caused by birds
or hail.
Unless stated otherwise in the specific Special Guarantee, such Special
Guarantees commence with delivery of Airline's first Aircraft.
CFM will, with Airline's assistance, conduct an accounting at least annually to
determine the status of each of such Special Guarantees.
Special Guarantees shall not be the subject of claims and/or administration
directly between Airline and CFM under the GTA in the event (i) Airline accepts
a 737-700 aircraft maintenance cost guarantee from Boeing or any other third
party and (ii) such guarantee includes an integration of such Special Guarantees
as assigned by Airline to such third party and consented to by CFM.
Also, in the event Airline accepts a proposal independent of Amendment No. 7
(including from GE or SOCHATA) for any type of power-by-the-hour service
contract for the Engines, Airline hereby agrees to assign all of the Special
Guarantees (except the Performance Retention Guarantee which would remain
between CFM and Airline even though such guarantee would be assignable by
Airline subject to administration in the case of an aircraft maintenance cost
guarantee) to the successful contractor for integration into said power-by-the-
hour service contract.
The General Conditions of the CFM Product Support Plan included in the GTA apply
to the Special Guarantees unless stated otherwise herein.
ATTACHMENT VI
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CFM56-7 CUMULATIVE FLEET AVERAGE
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PERFORMANCE RETENTION GUARANTEE
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METHOD OF MEASUREMENT
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1. Base point for the cumulative fleet average fuel flow guarantee is the
average of the first twenty (20) revenue flight cruise points of each
CFM56-7 engine covered by the GTA.
2. Performance Retention (fuel consumption deterioration) is determined
quarterly by comparing the cumulative fleet average of the quarterly data
points with the base point.
3. The period covered by this guarantee starts from the first revenue flight
of the first Aircraft.
4. CFM also requests Airline to submit to CFM on a monthly basis copies of
performance trending printed out from the ADEPT (Aircraft Data Engine
Performance Trending) or GEM's (Ground-base Engine Monitoring) fleet
average program.
5. Cruise data reported quarterly must include the following:
A/C Number; Engine Serial Number (ESN); Date; Flight Number; Engine
Position; Altitude; Mach Number; Total Air Temperature (TAT); and at Cruise
Point; N1, Exhaust Gas Temperature (EGT), N2, Fuel Flow, and Bleed
Configuration.
6. If the deterioration of the cumulative fleet average fuel flow at N1
exceeds the guarantee or if the deterioration trend suggests that the
guarantee might be exceeded, then, the following actions may be initiated:
a) CFM Flight Audits.
b) Test Cell confirmation runs on specific engines, adjusted to account
for sea level to altitude effects plus installation loss. If the test
cell run on a sample of engines shows more than this amount from new,
this would support that the inflight guarantee has been exceeded.
7. If, as a result of incorporation of service bulletins (other than mandatory
campaign change) or other modifications, the initially established
relationship of Engine fuel flow, thrust and fan speed (N1) is altered, the
measured, calibrated fuel consumption shall be suitably corrected as
mutually agreed to account for the effect of such change.
CFM INTERNATIONAL
LETTER AGREEMENT NO. 11
Southwest Airlines Co.
P.O.Box 37611
Love Field
Dallas, Texas 75235
Gentlemen:
WHEREAS, CFM International, Inc. ("CFM") and Southwest Airlines Co.
("Southwest") have entered into General Terms Agreement No. 6-3418 dated May 29,
1981, as amended ("GTA"). The GTA contains applicable terms and conditions
governing the sale by CFM and the purchase by Southwest from CFM of spare CFM56
engines and associated equipment in support of its Boeing 737 series aircraft
powered by CFM engines; and
WHEREAS, CFM and Southwest have, concurrent herewith, entered into Amendment No.
7 to the GTRA and therein defined sixty-three (63) Firm CFM56-7 powered 737-700
aircraft (the "Firm Aircraft") plus a complement of Option and Rollover Option
aircraft which are collectively set forth in Attachment I thereto (all of the
aircraft set forth in such Attachment I being collectively referred to as the
"Aircraft).
NOW, THEREFORE, in consideration of Airline (i) actually purchasing and taking
delivery of all of the Firm Aircraft as set forth in such Attachment I and (ii)
agreeing that, in the event Southwest exercises any of its Option and Rollover
Option aircraft set forth in such Attachment I, all such aircraft shall be
powered by CFM56-7 engines, the parties agree as follows:
A. Spare Engine Allowance
----------------------
Southwest agrees to order from CFM CFM56-7 spare engines, in a quantity as
mutually agreed to by CFM and Southwest, to support the Firm Aircraft. CFM
agrees to sell to Southwest up to twenty (20) such spare engines with a
rating of 22,000 lbs. at the 20,000 lb. price level as set forth in
Attachment II to Amendment No. 7 to the GTA, escalated, as defined in
Amendment No. 7 to the GTA, to the delivery date of each respective spare
engine, such delivery to occur no later than December 31, 2003.
================================================================================
CFM INTERNATIONAL INCORPORATED a joint company of SNECMA (FRANCE) and GENERAL
ELECTRIC Company (U.S.A.)
CINCINNATI, OHIO 45215-0514 * p.o.b. 15514 * Tel: (513)563-4180 * Tlx: 212078 GE
AEG
LETTER AGREEMENT NO. 11
Southwest Airlines Co.
Page 2
B. Maximum Climb Thrust Increase Allowance
---------------------------------------
CFM will provide Southwest a per-engine allowance equal to the net invoice
price of the appropriate Max Climb Thrust Increase identified in Attachment
II to Amendment No. 7 to the GTA for each spare engine purchased from CFM
by Southwest in support of the Aircraft.
C. Compensation for Additional Thrust
----------------------------------
The engine model designation specified for all of the 737-700 aircraft and
spare engines in support thereof reflects intended use and application by
Southwest of the thrust ratings authorized for such engine model by the
certification nameplate affixed to it. Additional compensation to CFM
shall be made by Southwest for use or application of the engine at a higher
thrust level model designation. For example, except as set forth in
paragraph A above, additional compensation for engines purchased at the
20,000 lb. thrust level under the pricing set forth in Attachment II to
Amendment No. 7 to the GTA but used by Southwest for up to 20,000 lb.
thrust shall be the price difference between the 20,000 lb. engine model
specified in such Attachment II and the 22,000 lb. engine model specified
therein, escalated to the time the 20,000 lb. thrust level is exceeded.
Any hardware modification required to effect the higher thrust model
designation is not included in this compensation and shall be quoted
separately. The price of additional thrust usage beyond 22,000 lbs. shall
be as quoted by CFM.
The terms of this Letter Agreement No. 11 are subject to the conditions set
forth in Attachment I hereto.
The obligations set forth in this Letter Agreement No. 11 are in addition to the
obligations set forth in the GTA.
Please indicate your agreement with the foregoing by signing the original and
one (1) copy in the space provided below.
Very truly yours,
SOUTHWEST AIRLINES CO. CFM INTERNATIONAL, INC.
By:/s/ Gary A. Barron By: /s/ Gilbert R. Eckler
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Typed Name: Gary A. Barron Typed Name: Gilbert R. Eckler
--------------- -----------------
Title: Executive V.P. - COO Title: Director Airline Sales
-------------------- ----------------------
Date: January 19, 1994 Date: January 19, 1994
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ATTACHMENT I
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CONDITIONS FOR DELAY/CANCELLATION OF SPARE ENGINES
--------------------------------------------------
1. Cancellation of Spare Engines
-----------------------------
In the event Southwest cancels any purchase order for, or otherwise fails
to take delivery of, spare CFM engine(s), the parties agree that harm or
damage will be sustained by CFM as a result. The parties agree that if
written notice of cancellation is not received at least 12 months prior to
the scheduled delivery date of a spare engine to Southwest, any
cancellation or failure to accept delivery thereafter will subject
Southwest to a cancellation charge of 10% of the spare engine price
(determined as of the date of scheduled engine delivery) which the parties
acknowledge to be a reasonable estimate of the harm or damage to CFM.
CFM shall retain any engine progress payments or other deposits (not to
exceed 10% as noted above) made to CFM for such cancelled engine, and such
progress payments will be applied to the above-described liquidated
damages.
2. Delay Charge for Spare Engines.
-------------------------------
In the event Southwest delays the scheduled delivery date of a spare engine
for which CRFM has received a purchase order from Southwest, for a period,
or cumulative period, of more than 24 months, such delay shall be
considered a cancellation, and the applicable provisions hereof regarding
the effect of cancellation shall apply.