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. RJET management will discuss the Frontier situation during today’s first quarter earnings conference call.
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.
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. Frontier earlier terminated its relationship with ExpressJet which stepped in to serve Lynx Aviation routes when the subsidiary’s certification was delayed. In addition, last year, it spun off Horizon Air, replacing it with RJET.
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.
The move is the latest in the low-cost carrier’s regional operations which over the last year has undergone the spin off of Horizon Airlines, the launch of Lynx Aviation and the cancellation of ExpressJet’s service which substituted for Frontier’s regional subsidiary while it awaited certification. 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. 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 quarater, 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.