Even as Republic Airways Holdings Inc. (RJET) reported net income of $19.3 million for the first quarter – a 14.1 percent improvement – it is facing increasing crew shortages that have forced it to ground aircraft. The upshot is not only lost revenue and reimbursement from partners, but the increased carrying costs for non-productive aircraft. Such costs are normally reimbursed by partners, but not when they are not flying.
Indeed, it scheduled ASMs and block hours by approximately three to four percent for May through September of 2007. In addition, the attrition problem has dramatically increased the transition costs for both the Continental (CAL) and USAirways (LCC) programs. It originally predicted that first and second quarter costs for the transition would be $6 million. Now, however, it has adjusted its predictions, adding between $11.4 million and $14.4 million. In addition, it is projecting 2008 training costs to rise to $4.5 million. reduced scheduled ASMs and block hours by approximately 3-4 percent for the months of May through September of 2007.
“We knew we had an aggressive growth plan for the first half of the year,” said CEO Bryan Bedford. “We scheduled putting 38 aircraft into service in six months and planned for less than 10 percent attrition rate. Then we found the CRJ was far more challenging than anticipated which forced us to modify the growth programs for the rest of the year.” He added RJET could have probably handled one but not both factors. “Rather than battle on with a substandard product, we pulled in our horns.”
While all its mainline partners have taken a hit, the largest impact is on its Continental and USAirways partnerships since they are growing at a faster pace. This is an industry-wide problem said Bedford, who added RJET’s attrition rate jumped from nine percent in 2006 to 21 percent in the first quarter. “The best we can tell is these guys have left the industry,” he said. “The network carriers are finding that many are not coming back and, as they look at their retirement rates, they are gearing up their training programs. We also had a lot of guys here that were on furlough and they went back to their airlines.”
Bedford, who indicated, all aircraft are expected to be back in the system by the fourth quarter, indicated at the end of 2006, there were ostensibly 1500 pilots on LCC’s furlough list. While some originally accepted positions for the March ramp up to new services, when it came time to report to the January class, few showed up in favor of heading back to LCC, forcing RJET to back fill those training slots.
Bedford said that the problem has been exacerbated by significant reliability issues with the CRJ200s destined for its Continental Express operation. The aircraft, 25 of which were integrated in the first 100 days of the program, were formerly operated by FlyI and have been sitting in the desert for more than a year. Indeed, the airline is slowing down the integration of the remaining 19 aircraft destined for the program.
“Still we are going to produce record passenger revenues, record net profit and earnings per share for the year, ending 2007 with between $240 million and $260 million in cash,” said Bedford, who when asked the growth prospects for the airline with respect to winning any requests for proposals that remain outstanding, said, “We are certainly not looking to grow in ’07. But in ’08 we have 18 aircraft in the pipeline and options on 13-16 more and we believe we’ll be able to put them into service into ’08 and ’09.”
RJET has not incurred significant performance penalties as the result of its Continental teething problems, amounting to only five figures. Bedford reported that its Frontier (FRNT) start up went well.

Results
The company, reported operating revenues of $290.4 million for the quarter ended March 31, 2007, a 12.9 percent increase, compared to $257.3 million for the same period last year. The company also reported earnings per diluted share of $0.44, compared to $0.39 for the same period last year.
Excluding reimbursement for fuel expense, which is a pass-through cost to partners, passenger revenues increased 26.7 percent for the first quarter of 2007. This increase was primarily as a result of a 24.8 percent increase in available seat miles (ASMs) to 2.5 billion, up from 2.0 billion and a 23.1 percent increase in block hours.
Total operating expenses for the first quarter of 2007, including interest expense but excluding fuel charges of $194.1 million, increased approximately 25.4 percent from $154.8 million for the same quarter of 2006. Operating cost per ASM (CASM), including interest expense but excluding fuel, remained unchanged at 7.9 cents.
In March, RJET amended its agreements with Delta (DALRQ). The amendments provide for the cancellation of the company's warrants of 3,435,000 shares of common stock that had been issued to Delta, a decrease in block hour reimbursement rates of approximately three percent for the sixteen 70-seat aircraft and the 24 50-seat aircraft operated for Delta, and the early removal of the fifteen 37-seat aircraft between September 2008 and April 2009. Republic was also granted a pre-petition, unsecured general claim in the amount of $91 million which it sold this month for $44.5 million.
In order to reduce operational disruptions resulting from higher than planned pilot attrition and the integration of the CRJ fleet, the company  The decision was made because attrition would force it to compromise its service quality, something it is not willing to do.
At March 31, 2007 the company had $156.5 million in cash and cash equivalents compared to $195.5 million as of December 31, 2006. Its long-term debt increased to $1.54 billion as of March 31, 2007, compared to $1.48 billion at December 31, 2006.