Pilot attrition and transition costs impacted Republic Airways Holding’s Q3 results but passenger revenues still managed to climb 20 percent or $43 million to $254.2 million, which investors called, “impressive” during last week’s investor’s call. While the airline was hit with $7 million in increased expenses with transition costs, CEO Bryan Bedford said that would not recur. The airline also incurred no operational penalties in its partnership contracts. In addition, unit costs per available seat mile dropped one tenth of a percent to 7.4 cents.
It posted a similar increase for the nine months when passenger revenues reached $710 million, a 22.3 percent increase. This increase primarily resulted from a 22.6 percent increase in available seat miles (ASMs) to 3.0 billion ASMs, up from 2.5 billion, and an 18.3 percent increase in block hours resulting from the addition of 21 Embraer ERJ 170/175 regional jets placed into fixed-fee service since September 30, 2006 and 24 Bombardier CRJ-200 regional jet aircraft placed into fixed-fee service during the first nine months of 2007. It carried 4.4 million passengers in the quarter, up 28.6 percent and for the nine months 6.2 million, up 27 percent.
The return of 80 pilots under US Airway’s Jets-for-Jobs program will mean the deployment delay of its Embraer ERJ 170/175s for USAirways which the airline anticipates will hit 11 aircraft originally scheduled to enter service between next month and next June. CEO Bryan Bedford indicated the delay could be as much as two months per aircraft and some of the increased expenses would be reimbursable by US Airways.
The company is managing to attract new pilots but “we have to work harder at it,” he said, adding he assumes an annual attrition rate of 20 percent now, double what occurred in 2006, something that will continue through next year. The company also budgets at least $1 million to $1.5 million for training costs per quarter for which it does not anticipating being reimbursed. The three-carrier company hired 900 pilots, he said, 500 of which to meet growth opportunities with the balance to cover attrition. In ’08, he is anticipating hiring a further 650 pilots, 220 for growth and the balance to replace the US Airway pilots.
When asked by Calyon Securities Analyst Ray Niedl what he thought of independent flying, Bedford noted that Republic’s models were based on its mainline partnerships, adding that independent flying with 50-seat jets has always been challenging. “If a market produces enough revenue to be profitable,” he said, “our partners prefer to capture that through capacity purchase agreements. By its very nature, the cards are sort of stacked against you with 50 seaters although you see a lot of low cost carriers using larger equipment and they seem to be okay.”
Niedl also asked about the softening economy and its potential impact on the company with Bedford responding that economic downturns usually benefit regionals as major carriers reduce their mainline flying but retain the feed through their partners.
Republic Airways Holding said its net profit in the September quarter dropped eight percent to 20.2 million on operating revenues of $330.1 million, which were up 7.8 percent. The company cited $7 million in transition expenses, which include un-reimbursed aircraft costs, increased pilot training expenses, and forgone profits on the company's reduced scheduled operations during Q3.
Total operating expenses for the third quarter, including interest expense but excluding fuel charges (which are reimbursable by its partners), of $227.9 million, increased 24.7 percent. Operating cost per ASM (CASM), including interest expense but excluding fuel, increased 1.8 percent to 7.50 cents compared to the prior year's 7.37 cents.
During the quarter, Republic took delivery of six new 86-seat E175 aircraft and entered into long-term, fixed-rate, debt financing arrangements for all six aircraft. It also took delivery of two 50-seat CRJ-200 regional jet aircraft on short-term leases which were placed into service with Continental. An Embraer 145 was removed from its charter operation and subleased offshore. At the end of the quarter, the fleet included 211 regional jets including 94 ERJ 145 family aircraft, 93 ERJ 170/175 aircraft and 24 CRJ-200 aircraft. In addition to 41 regional jets added to operations in the first nine months, the company has also completed the transition of 20 ERJ 145s and seven ERJ 170s from existing partners to Continental Airlines and Frontier Airlines, respectively.
Among its quarterly highlights was the amendment of its agreement with Delta to provide for the replacement of 16, 70-seat ERJ 170 aircraft with 16, 76-seat ERJ 175 aircraft. The new aircraft are expected to be placed into service during the second half of 2008 and the first quarter of 2009. Also in August, it amended its agreement with United to provide for the operation of 10 additional 70-seat ERJ 170 aircraft, expected to be placed into service during the fourth quarter of 2008 and the first quarter of 2009. It is also scheduled to place five ERJ 170s into Frontier in the second half of 2008.
RJET expects to take delivery of seven new ERJ 175s in the fourth quarter of 2007 and 27 new ERJ 175s during 2008. Additionally, three new ERJ 175s are scheduled for delivery in the first quarter of 2009. The company also maintains options for up to 74 ERJ 170/190 aircraft for delivery beginning in March 2009. The company has firm financing commitments in place for 28 of its 37 remaining firm aircraft at competitive interest rates and it expects to obtain competitive financing commitments on its remaining firm aircraft.
At September 30, 2007 the company had $183.1 million in cash and cash equivalents compared to $195.5 million as of December 31, 2006.