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Republic Holdings continues 1Q loss

Republic Airways CEO, Bryan Bedford
Republic Airways CEO, Bryan Bedford

The fortunes of one of America’s top airline companies – Republic Airways Holdings – have really taken a turn as it posted another 1Q net loss to the tune of USD22.4 million in the first quarter, a 38.6% negative swing for the company as it successfully struggled to narrow its losses since the acquisition and merger of Frontier and Midwest Airlines last year.

The Indianapolis-based company reported an ex-item net loss of USD18.6 million greater than the USD16.4 million in the 2010 first quarter.

Let’s be clear,” CEO Bryan Bedford told analysts. “We are not pleased with our results nor the outlook at current fuel prices which forces us to dig deeper. We are engaged in making positive changes such as moving the ERJ 170s to our CPA operation. And making associated changes in the network will help. We have our operations teams and flight crews engaged in fuel conservation which we expect will deliver a 1.5-2% reduction in Airbus fuel burn amounting to USD15 million in annual savings. We are working with partners and suppliers to gain meaningful savings but we have a lot to do. We are committed to developing savings in all facets of the organization and its going to be tough work but we are intent on delivering a profitable operation even with high fuel.”

He reported that the back-to-back fare increases have, so far, been sufficient to cover fuel increases up to about USD3 per gallon. However, Mr Bedford also said that, with the forward oil curve pointing to an all-in price of USD3.50 for the remainder of the year and well into 2012, the industry still has a gap to fill.

“We’ve seen only one fare increase succeed in the last 15 days and at some point they are going to impact levels of demand,” he said. “While the fare increases are necessary, with current fuel, it is clear there is too much capacity in market. The industry appears to be heading the way it should. For our part, we are reducing capacity guidance to basically flat for the current year compared to up in the 4-5% range we guided to just 10 weeks ago.”

The impact of its Frontier operations was a clear drag on performance but the flexibility afforded by its CPA operation was made clear in its ability to move ERJ 170s from unprofitable work on the Frontier system to profitable work in its CPA with Delta, as Mr Bedford said, without affecting employees. It just announced it amended its CPA with Delta for the second time adding six 170s to the eight already covered by the first amendment with the carrier for a six-year term. The aircraft are being reconfigured to dual-class service. The remaining three 170s will be out of the Frontier fleet by year end, put to work, said the company on the CPA side although it has not cut a deal to add the aircraft with any of its partners.

Mr Bedford indicated that the effect of moving the 170s to the CPA operation would be USD20 million to the good and would be at the same rates as it current Delta flying. The 14 aircraft bring to 54 aircraft operated on behalf of Delta include 16 ERJ 175s and 24 ERJ145s.

However, its plans to replace the 170s with ERJ 190s have been delayed about two months as Embrear’s supply chain works to recover from the Japanese earthquake. The six deliveries scheduled for this year are are now delayed about two months and extend into 2012 although Frontier hopes to have three or four of the new aircraft in place in the fourth quarter. He also noted that the company has firm financing in place for the balance of the 24-aircraft 190 order.

It has yet to reach a deal to sell or lease the Q-400 fleet formerly operating by Lynx Aviation, Frontier’s regional subsidiary. The company is also accelerating the return of four A318s to lessors, an action expected to be completed in the third quarter.

Vice President Planning and Strategy Daniel Shurz reported during Republic’s earnings call yesterday that expectations on Frontier capacity for the second quarter are up a half a percent and, for the third quarter, will up flat to up 2%. Full year capacity will be flat compared to 2010. He said average seats per aircraft would be up 10% from 107 to 118 by the end of the year after the programme to increase A319 seats from 136 to 138 is completed by the end of the second quarter.

Mr Bedford said that fleet strategy will result in removing 16 lines of flying from the 96 Frontier currently flies for a 10% drop in its footprint.

“Our job is to make sure we are removing the 10% that are least productive,” he said. “Those are the compromises we have to make but there is something galvanizing about USD3.50 oil that makes the decision easier.”

Mr Shurz also reported on competitive capacity, saying total domestic capacity at Denver would be up 1.5-2.5% in the second quarter increasing 2-4% in the third quarter. However, with capacity discipline kicking in after labor day, he expects those levels to come down.

He reported that same-store capacity there would be up 1-2% in the second quarter and flat to up 1% in the third quarter. He noted that Milwaukee capacity was decelerating rapidly and now expected to be flat to up 1% in 2Q and decline 4-6% in the third quarter. Same store capacity in that market will fall 2-3% in the second quarter and fall faster in 3Q by 3-5%. For the full year, capacity at Milwaukee will be down 15-20% compared with 2010.

Frontier losing position at Denver

The results follow Southwest overtaking Frontier in its home market, knocking the smaller carrier to number three. Southwest not only knocked Frontier from its number two position behind United at Denver late last year but continued to widen the gap during the first quarter.

Interestingly, Republic executives refused to discuss market share or profitability in individual hub markets. In addition, it did not respond to concerns about Frontier’s competitive position with its usual assertions that it has a cost advantage over both United and Southwest in Denver and Milwaukee, where it also faces Southwest and now Southwest/Air Tran.

Southwest has a 22% market share in the market to Frontier’s 19% at Denver, the fastest growing city in Southwest’s system. Mr Shurz noted that Frontier was focused on profitability not market share. Even so, Southwest posted a profit during the quarter and Frontier did not. The Denver Post, to which Mr Shurz spoke, noted that Southwest's growth comes more at United’s expense.

Observers doubt there is room for three in the Denver market and MIT International Center for Air Transportation Research Engineer Bill Swelbar noted that the entire industry is less focused on market share.

“Given that Frontier is a one/two hub pony, for Frontier to be profitable and remain profitable maintaining a high market share in Denver would seem to be critical over the longer term,” he said.  “Without meaningful share of the local market, pricing power is compromised. No pricing power in a high jet fuel cost environment does little to bolster a fragile balance sheet. Presumably. the value in the Frontier franchise was its cult following in the Denver local market.  Southwest has the time and the financial wherewithal to infringe on Frontier's franchise value.”

Mr Swelbar agreed that Southwest has filled a gap at Denver in response to the aircraft upgauging at United and added that little United service is truly dedicated to the local market compared to its transcontinental and international connecting traffic. Whereas Frontier plays to the local market but, he indicated, Frontier has limited financial resources to enable aggressive growth.

“There certainly has been some stimulation of new demand in Denver, but there is also a redistribution of traffic occurring amongst the three carriers depending on strategy in carrying traffic in the Mile High City,” he said in an email note to CAPA. “Today Southwest and Frontier are competing for local Denver domestic traffic.  United's capacity in Denver is less focused on Denver local traffic and this fact does make Denver somewhat different than other cities where three carriers have tried to hub in the past. My guess is something is going to give in Denver because at some point the law of diminishing returns is sure to play out for any one of the three competitors.”

Mr Swelbar noted Southwest is an opportunistic competitor that would ultimately fill any voids left by either Frontier or United. “I expect them to be methodical and engage in smart growth,” he said. “And where either United or Frontier might be vulnerable, I would expect them to add capacity. They can be patient because they have a balance sheet that is far stronger than either of the other two Denver competitors. The high cost of fuel is Frontier's immediate term enemy and the carrier has fewer options than either of the other two competitors as a result.”

He doubted the fact United and Southwest are now engaged in mergers would give Frontier many opportunities.   

“The Southwest - AirTran merger gives the Texas carrier many new opportunities to fill its aircraft serving Denver with both new local traffic, arguably diverted from United and Frontier and others as well as a way to fill airplanes with connecting traffic,” he said. “The merger between the two low-cost carriers virtually ensures that Southwest will not shrink Denver and will more than likely to continue to grow Denver.  As for United - Continental, I see less impact on Frontier as the carrier will first have to homogenize services between Denver and Houston. There might be some opportunities for Frontier, but I do believe that Southwest will have more.”

RJET results

As with its mainline counterparts, Republic reported its loss came on rising revenues, 8.3% as the company posted USD659 million in revenues attributed to a 13.9% increase in Frontier’s unit revenues. Its operating loss showed an even greater swing - 97% - from the USD20 million loss in the 2010 March quarter to USD600,000 in 1Q-2011.

The news comes as Frontier announced it was dropping its ancillary fees including a reduction in change fees to USD50, considerably below its major rivals. However, to change the name of the ticket will cost an additional USD50. Baggage fees are dropping from USD20 to USD15 as long as passengers check in online. Bike fees have dropped to what it costs for any other piece of luggage, USD15 with online check-in.

It is also compensating passengers with USD50 credit toward future travel if delays between two and four hours caused by Frontier itself, not weather or ATC. For a four-to-six-hour delay the credit rises to USD100 and if more than six hours it will be USD200. The new fees gained rave reviews from the travel press who naturally want other airlines to follow.

Fixed fee

CFO Tim Dooley reported pre-tax income of USD19.6 million for a pre-tax margin of 7.6%, up slightly from the 7.3% in the 2010 first quarter.

Its capacity purchase feeder service for its mainline partners was flat during the quarter experiencing a 1% uptick in revenues to USD236.7 million on a 2.2% drop in ASMs to 2.6 billion. Load factor also declined 3.6 points to 67.8%.

CASM rose 4.2% for the fixed fee operations to 8.96 cents while operating CASM including interest but ex fuel, rose only 0.9% to 8.14 cents. Block hours rose 1.2% to 145,590 on a 3.1% rise in utilisation to 9.9 hours per day.

Income before taxes on the fixed-fee operations improved 23.1% to $17.6 million for the quarter compared to a pre-tax income of USD14.3 million for the first quarter of 2010, which included USD2.0 million of CRJ aircraft return costs.

“These fleet adjustments between our contract and branded operations allow us to maximize our aircraft portfolio in the most cost-effective way,” said Mr Bedford. “In light of current oil prices we will continue to focus on developing Frontier’s most successful and profitable routes while managing capacity at responsible levels.” He expects Frontier’s capacity to be flat or grow 1% with the fleet changes this year.

The company is also removing three ERJ 135s at the end of their leases in September and is delaying delivery of ERJ 190s by an average of two months owing to the Japanese earthquake in Embraer’s supply chain. Delivery of the six aircraft will now run through 1Q2012.


Frontier posted total revenues of USD395.4 million, up 12.2% for the quarter as capacity dropped 1.4% to 3.6 billion. Load factor rose three points to 78.7%. The airline posted a pre-tax loss of USD55.2 million narrowed from the USD70.4 million posted in 1Q-2010.

Unit unit revenue increased 13.9% over first quarter 2010 to to 10.85 cents exceeding its 11-13% guidance. Load factor rose three points to a record 78.7%. Fuel costs rose USD30 million but Mr Dooley reported that its fuel hedges for the rest of the year were all in the month. Capacity during the first quarter was affected by five weather events that cost the company USD2 million in revenues.

Vice President Revenue Management Greg Aretakis reported that yield up 6.5% which resulted in a unit revenue from ticket sales rising 10.6% in the quarter.

“While we continue to see yield improvement, demand will grow at a slower pace,” he told analysts. “In the second quarter we are projecting a one-point increase in load factor. We see continuing traction in selling our bundled fare products - classic and classic plus - on which research tells us increases customer satisfaction. We have been marketing them in former Midwest markets and in the first quarter we increased sales of classic and Classic Plus by 81% versus the first quarter of 2010 and 30% of our customers booking tickets are purchasing Classic or Classic Plus.”

He concluded by saying the June quarter TRASM will be 11.7% and improvement on the 9-11% it had guided to, despite flat capacity. Advanced booked for looks good with April load factor up two points to 80%. June load factors are ahead of last year and tracking beyond last year’s 90% record load factor.

The company reported that total CASM 8.3% to 12.12 cents while operating CASM ex fuel increased 5.2% to 7.77 cents on a 7% drop in block hours to 89,350.  The company had guided to 7.0-7.1 cents but embedded in that was a first quarter estimate of 7.6 cents so, Mr Dooley concluded, the company was off its own internal estimate by about two ticks. With its revised schedule it is expecting 7.2-7.4 cents for the full year.

Mr Dooley cited higher engine restoration and heavy maintenance on its Airbus fleet and, as with its mainline counterparts, higher revenue-related expenses including higher advertising costs. It had a 1% increase in passengers carried to 3.2 million.

Fuel costs for Frontier were USD158.7 million for the quarter. Cost per gallon, including into-plane taxes and fees, increased 23.7% to USD2.92 for the first quarter of 2011 compared to USD2.36 for the prior year's first quarter. The increase in price resulted in USD30.5 million additional fuel expense in the first quarter, as compared to first quarter 2010 although the first quarter 2011 result includes unrealized fuel hedge gains of USD8.7 million, or $0.16 per gallon compared to the 1Q-2010 fuel hedge loss of USD1.6 million, or three cents per gallon.

Republic reported its cash balance increased USD37.0 million to USD467.3 million as of 31-March. Restricted cash increased USD86.8 million, to USD225.9 from 31-Dec-2010 on Frontier seasonality. The restricted cash balance compared to the 2010 quarter was USD13.5 million lower owing to the reduction in the Frontier's credit-card holdback from 100% to 95%. The company's unrestricted cash balance decreased USD49.8 million, to USD241.4 million, from the end of the fourth quarter.

Net cash provided by operating activities was USD7.7 million. Debt declined to the company's debt decreased to uSD2.55 billion in the first quarter compared to USD2.58 billion in the year-ago quarter. It reported that approximately 85% of the total debt is fixed-rate.

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