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Frontier pilots invest in Frontier future, Republic to lower stake to minority share

14-Jun-2011

Republic Airways Holdings (RJET) and Frontier pilots reached a tentative agreement on 10-June in which the pilot concessions would yield them an ownership stake in the troubled low-cost carrier. Members of the Frontier Airlines Pilots Association are set to vote on the accord on Friday, according to an SEC filing by parent company RJET.

For the concessionary investment in their future, the company not only agreed to complete a good portion of the restructuring programme by the end of the year but to attract enough equity investment to reduce Republic’s ownership to a minority position by 31-Dec-2014. The concessions-for-equity-stake swap tied pilot compensation to the airline’s performance.

Dahlman Rose Analysts Helane Becker, in a research note, said Frontier is expected to general about USD1.7 billion in revenue this year and USD1.8 billion in 2012. The USD70 million in additional liquidity expected to be raised this year will probably come from debt markets, she said, adding it would likely be in securitisation of spares.

“Frontier is likely to flounder this year,” she wrote. “The Republic Airways portion is generating [about] USD50 million in after-tax income, but it is being swallowed by the Frontier losses. As a result, we are maintaining our Hold rating.”

The move is seen as the first step in the much ballyhooed restructuring of the carrier discussed during RJET’s first quarter earnings call in which Frontier losses wiped out the profitability from its capacity purchase operations with mainline carriers.

While narrowing its losses, observers began openly wondering whether Republic had gambled too much in acquiring and then merging Frontier and Midwest Airlines despite the first sale prices it paid.

See related story:  Republic’s gamble shakes company into possible Frontier restructuring

In an effort to garner USD100 million in costs cuts, Republic said it was restructuring Frontier and making changes to its network, fleet allocation and operating costs including restructuring wages and benefits at the airline, including pilots.

The tentative agreement includes postponing pay increase, reductions in their 401 (k) plan, reduced accruals for vacation and sick days and an extension of its current agreement two years which the parties characterized as an investment in the future. In exchange for the investment, the company agreed to grow the Frontier fleet, the previously announced move to increase liquidity by USD70 million through one or more debt issuances or other financings. It also agreed to execute a good portion of its restructuring program by the end of this year and a good-faith effort to attract increased equity investment in Frontier. In addition, it will create a profit-sharing plan for Frontier employees.


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