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Monday, April 28, 2008

Frontier Drops RJET, Claim Filed

Republic Airways will cease operating as a Frontier Jet Express effective mid June, as part of a mutual agreement reached with Frontier for the early termination of the airlines’ code sharing agreement. As a result, Republic Holdings intends to file a damage claim for approximately $260 million arising out of Frontier Airline's rejection of the ASA. The ultimate amount of the company's claim will be determined in the future by the Bankruptcy Court.
The move is the latest in the low-cost carrier’s rocky regional operations which over the last year has undergone the spin off of Horizon Airlines, the launch of Lynx Aviation and the early cancellation of ExpressJet’s service which substituted for Frontier’s regional subsidiary while it awaited certification. For its part, Horizon has suffered the most and just announced it will be removing the Bombardier CRJ 700s from its fleet. See Horizon Q1 story this issue.
Regional operations have, thus far, been a drag on the Frontier’s balance sheet, with only $30 million in revenues compared to $38 million in expenses as of its December 31, 2007 quarterly statement. That included a $4.8 million charge for start-up costs and losses for its fledgling regional Lynx Aviation, expected given the new nature of its feeder. Regional partners Horizon (which ended its participation in Frontier Jet Express in November) and Republic contributed $26.6 million in revenues during Frontier’s third quarter, up 17.9 percent and $88.3 million for the year, up 17.8 percent. Lynx had $2.6 million in revenues for the limited period it operated. Expenses for the regional partnerships reached $38.5 million in the quarter compared to $26.1 million in the year ago period. Related Story

Republic Worried About FL Before Bankruptcy
While it was surprised at the swiftness of the bankruptcy, Republic Airways Holdings CEO Bryan Bedford said RJET began talks about Frontier’s survival plans a month ago. “As oil passed $100 per barrel, we engaged Frontier in discussions in an effort to understand its business plan and what its plan was for survival in such a hostile environment,” he told investors. “We talked about the possibility of not delivering the last five aircraft. Given that a lot has transpired in a short period of time we are not in a position to say exactly what we will do with the disposal of the Frontier planes, whether we will reposition them to other network partners, or sell them off shore.”
RJET had already entered into discussions for the sale of the last five aircraft and had 26 interested parties respond to it. Now it is looking at the sale of all 17 aircraft if it cannot place them with the major carriers. But for now, the focus is on figuring out the best action to take and whether it is to sit tight on aircraft and find a longer term home for them or to move them abroad.
The airline will carry between $270,000 and $300,000 in costs per aircraft for lost profit, contributions to overhead, rent, hull insurance, property taxes, and calendar maintenance items to keep them ready for fly, for each month if they are ultimately parked. But Bedford noted that those figures did not count anything the airline would do to reduce costs. However, demand for larger regional jets is high and there are no used larger RJs on the market now. Consequently, RJET does not expect that it will be long before they are placed.
It already has deals lined up including deposits from a couple of parties and hopes to announce something in the not to distant future. He pointed to the advantages of the dollar value right now saying it made the aircraft look as if they were on sale since it was cheaper to buy in Euros than in dollars.
The agreement provides for an orderly wind-down under which the Republic will remove four aircraft on May 1, an additional six aircraft on June 2 and the final two aircraft on June 23, 2008. Immediately prior to Frontier's filing, the company was generating approximately $6 million in gross monthly revenues under the ASA. Republic has additional commitments on five E170 aircraft that would have otherwise been placed into service with Frontier during the second half of 2008 which are now available to work for other airline partners or be sold. This could benefit Republic as mainline carriers spin out the smaller, 50-seat RJs, in favor of the larger aircraft. However, mainline carriers are reticent to give up their 50-seaters, reported Bedford. See the RJET Q1 story in this issue.
Frontier cited the current economic environment in “drastically rethinking the use of regional aircraft in our fleet mix.” The move is not surprising considering statements after the low-cost carrier made after its recent Chapter 11 bankruptcy filing that all contracts would be up for consideration “to ensure that [it] can come out of this thing as strong and as financially viable as possible.” Related Story
With 12 aircraft being removed from the fleet, Frontier also announced cancellations of plans to launch Denver-Missoula service set to begin May 16. In addition, it will discontinue Sioux City, Ia on May 12, and Jacksonville, Fla on May 31 as well as Little Rock, Memphis and Tulsa, all discontinued as of June 1.
The 12-year Frontier/RJET agreement was cut January 11, 2007 as a fixed-fee, code-share agreement with Frontier to operate 17 ERJ-170 aircraft for Frontier. By the end of last year, RJET had nine ERJ-170 aircraft, providing 40 flights per day as Frontier between Denver and designated outlying cities. The first aircraft was placed into service in March 2007 with the last aircraft expected to be placed into service in December 2008. The bankruptcy filing allowed for early termination of the contract that would have expired in 2019.
"It's unfortunate that despite their many efforts to reorganize their business outside of Chapter 11, factors beyond their control conspired to force a deeper reorganization, said Republic CEO Bryan Bedford.
Frontier filed for Chapter 11 after First Data Corp began to hold back 100 percent of credit card receipts until after passenger travel is completed. Menke indicated credit card companies will do the same at other airlines in order to avoid being stuck for airline tickets for which services were not delivered.

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