RJET Looking for Opportunities, But Not Off Shore

Republic Airways Holding CEO Bryan Bedford rejected suggestions that the company reduce cash on hand during last week’s analysts call, saying that with consolidation there may come opportunities for acquisition for which the company wants to be ready. “Our cash needs are fairly low,” he...

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Republic Airways Holding CEO Bryan Bedford rejected suggestions that the company reduce cash on hand during last week’s analysts call, saying that with consolidation there may come opportunities for acquisition for which the company wants to be ready.
“Our cash needs are fairly low,” he told investors, “but the risk is in the counterparty risk and their performance. If we feel the counterparty risk is going up, then perhaps the amount of capital you want to retain also increases. But, I think, the real reason to preserve capital is with consolidation. We feel, depending upon the how the pairings come together, that some of the network carriers might sell some non-core assets and, in that situation, there are certain assets out there we might be interested in.”
He also rejected an off-shore venture, especially given the overseas interest in the ERJ 170s that are now available as the result of the cancellation of its Frontier contract, for which it was slated to operate 17 aircraft. “We’ve had some guys in foreign countries wanting us to operate the aircraft for them or in partnership with them,” he said. “But that is not something we are ready to pursue or even think about it. Mainly, it’s just focus. There is a lot going on in North American market now and we need to be laser focused on running the business and making sure we are flying the aircraft as efficiently as possible, the most cost efficient and be able to respond to opportunities as they arise. I actually think those opportunities will arise. The industry is very distracted right now on what is happening and how we recover through higher pricing and oil and what happens to demand with higher pricing. We need to be patient on what networks are going to look like in 2009 and beyond. That’s the balancing act we have to address right now.”

Reassurance Sought
Investors sought reassurance that Republic’s contracts were solid, but Bedford pointed out that the greatest risk was in the health of the partners.
“If you go back 90 days to the last call, the big issue was what happens with consolidation,” he said. “We’ve always thought consolidation was a great idea but today I think it is critical. In my opinion, there are too many airplanes, too many flights, too much choice and it doesn’t seem like customers are willing to pay the amount of money it takes to travel at $115 to $120 oil. Prices have to go up and when that happens demand is going to go down. Our partners have a different view on the world in terms of how to respond to increasing prices and reducing demand.
“If we segment the domestic marketplace, the average fares, on a system-wide basis, are $125,” he continued. “If the prices go up 20-25 percent the guy who is not fly who is the one paying well less than the average. That implies there are too many coach seats flying around. If you are in the network model, do you remove cities, therefore reduce connects and revenue? Do you reduce flights through hubs? The hubs are high fixed cost animals. Any thing that negatively impacts connectability will have a negative impact on revenue. Or, do you want to reduce the gauge of the equipment? At the end of the day we will continue to provide more mainline seamlessness with 70- to 80-seat aircraft and will do it at trip costs substantially lower than larger capacity planes. Our task is to make sure we are performing, to make sure we are reliable and as cost effective than what the competition is running.”
Bedford had already approached mainline partners offering to switch out smaller 50 seaters for the larger jets but he indicated that they were not now interested, even as pressure on 50-seaters in a $118 per barrel fuel environment increases. Bedford indicated that should block hours go below minimums there is an increase in the reimbursement rate for partners.
“The trend toward lower utilization seems to be targeted at smaller capacity planes,” he said. “Our goal is to move from a small regional jet supplier business into a large regional jet supplier business and we are working harder to accelerate the transitions at $115+ oil. But that’s a transition we must work through with our partners. If they want larger planes they must be willing to let smaller planes go. We’ve been trying to reduce the number of small capacity planes but no body wants to let anything go right now.”
He said that the cost of operating an extra 50-seat flight is virtually zero for the major carrier, but added that the costs of operating an ERJ 170 versus an ERJ 145 would rise only 30 percent for a gain of 50 percent more seats. With current scope clauses majors have room for more 70 seaters.
“Some partners like US Airways, Delta and United do have some inflection points based on either the size or the number of aircraft in the mainline fleet and the number of hours flown,” he said. “There is enough room to absorb the Frontier aircraft. What happens in consolidation, if there is any retrenchment; that I don’t know. But we have always had a suspicion that, in consolidation, scope has to be addressed because they are so disparate between the parties. Between the rumored combinations such as Continental/United or, even, United/US Airways, their scope provisions are substantially different. At US Airways it is up to 90 seats, United is capped at 70 seats, and Continental at 50 seats. We’ve always believed that Continental, as a participant in the Skyteam Alliance, has been disadvantaged with its scope provision relative to Delta and Northwest. We’ve also felt that the larger aircraft, operated and financed by regional carriers are part of the solution not part of the problem.”

RJET Report Q1 Profits
RJET reported net income of $20.2 million for the quarter ended March 31, 2008, compared to $19.3 million reported in the prior year's first quarter. The company also reported earnings per diluted share of $0.55, compared to $0.44 for the same period last year. Operating revenues of $363.9 million for the quarter ended March 31, 2008, rose by 25.3 percent, compared to $290.4 million for the same period last year. Included in the first quarter 2008 results were two adjustments: a $3.9 million pre-tax loss (non-cash) on an interest rate swap transaction, which reduced net income by $2.4 million and earnings per diluted share by $0.07 and a reserve on all pre-petition accounts receivables due from Frontier Airlines as of March 31, 2008, which reduced net income by $0.4 million and earnings per diluted share by $0.01. Excluding these two items, net income for the quarter increased 19 percent to $23.0 million and earnings per diluted share increased 43 percent to $0.63.

First Quarter Highlights
Excluding reimbursement for fuel expense airline service revenues increased 27.7 percent for the first quarter of 2008. This increase was primarily as a result of a 32.1 percent increase in available seat miles (ASMs) to 3.2 billion ASMs, up from 2.5 billion ASMs and a 26.1 percent increase in block hours. These increases reflect the addition of 38 aircraft that were placed into service since March 31, 2007.
Total operating expenses for the first quarter of 2008, including interest expense but excluding fuel charges of $246.9 million, increased approximately 27.2 percent from $194.1 million for the same quarter of 2007. Operating cost per ASM (CASM), including interest expense but excluding fuel, decreased to 7.62 cents for the first quarter of 2008, from 7.91 cents for the same quarter of 2007.
During the quarter the company took delivery of seven new 86-seat E175 regional jets which were placed into fixed-fee service for US Airways. At March 31, 2008, the RJET fleet consisted of 226 regional jet aircraft.
Also during the quarter, RJET repurchased approximately 310,000 shares of its common stock for total consideration of approximately $6.0 million. As of March 31, 2008, the company had approximately $92.5 million authorized under its current share repurchase program.
In March 2008, in anticipation of financing the purchase of regional jet aircraft on firm order with the manufacturer, the company entered into interest rate swap agreements with notional amounts totaling $420 million and a weighted average interest rate of 4.3 percent. During the quarter ended March 31, 2008, the company recorded a pre-tax non-operating loss of $3.9 million related to these agreements. All of the swap agreements were settled on April 22, 2008 at a cash gain of $5.8 million. The company will therefore record a non-operating gain of $9.7 million, pre-tax in the 2nd quarter of 2008 as a result of the settlement.
At March 31, 2007, RJET had $149.5 million in cash and cash equivalents compared to $164.0 million as of December 31, 2007. The company's long-term debt increased to $2.01 billion as of March 31, 2008, compared to $1.91 billion at December 31, 2007.