Fixed-fee business down, Frontier gains in Republic performance

While its third quarter was profitable, Republic Airways Holdings is operating at a loss for the nine months ending 30-Sept-2010 on significant percentage drops in its bread-and-butter, fixed-fee business. Frontier, however, is experiencing unprecedented gains.

The company posted a USD21.3 million profit for the quarter on USD711.9 million in operating revenues. Operating revenues rose 92.9% from 3Q2010 which was before it began the Frontier integration. Even so, for the nine months it posted a loss of USD12.5 million, a 177.1% negative swing from the first nine months of 2009. Operating expenses doubled to USD638,843 on the addition of its branded business.

The story is all in the falling numbers for its fixed fee business, some metrics for which declined as much as 9%. Fixed fee revenue ex fuel declined 7.9% to USD245 million, ex fuel, on a 9% reduction in revenue passenger miles to 4.6 billion and an 8.8% decline in available seat miles to 2.2 billion. However, the operations returned a respectable 8.7% margin, better than the 7-8% guidance provided by the company, according to CEO Bryan Bedford who spoke to analysts Monday.

Bedford cited the increased utilisation and better unit-cost performance. Unit cost for fixed fee, ex-fuel, he reported, dropped to 7.52 cents from the 7.61 cents in 3Q2010, especially good considering the 5% decline in average stage length for the third quarter.  Fixed fee revenues, ex-fuel, were down about USD21 million or 8% on a 7% decline in block hours owing to the reduction of 15 lines of 50 seat flying on aircraft which have exited the business as it shed smaller 37 to 50-seat equipment in favour of larger regional jets.

Share offering

In a simultaneous release to its third quarter earnings. Republic announced a new 12-million-share offering of common stock with the proceeds to be used to boost liquidity, for general corporate purposes and the purchase of the six firm Embraer ERJ 190 order announced last week. The new aircraft will replace on a one-for-one basis six 37 to 76-seat aircraft as new aircraft are delivered in the back half of next year.

Last week, it announced a firm order for six and a conditional firm order for 18 190s or 195s. Bedford reiterated the company’s desire to replace its Airbus A318 with A319 aircraft. Bedford noted block-hour costs for the E190 is the same as the E170 but yields an additional 23 seats. Similarly, the block-hour costs between the A320 and A318 are about the same but the A320 has an additional 42 seats.

Beginning in January, Frontier will accept the first of seven new 162-seat A320 aircraft. All seven aircraft have firm lease financing arranged and will be delivered during the first two quarters of 2011. In addition, it also leased three additional 136-seat A319 aircraft that are scheduled for delivery between February and April 2011.

“Up-gauging the equipment on our Frontier business will further lower our already-low unit costs,” he told analysts. “The fleet change will increase seat density by 10% and will remove 120-seat A318s with three 136-seat A319s and seven 162-seat A320s. We will also remove six smaller jets. Our already-competitive unit costs will be expanded with aircraft with better mission capabilities and we believe that is a solid strategic transaction for our Frontier business.”

The agreement concludes a letter of intent announced earlier this year, which remains conditional, according to Bedford, until financing is in place. He explained that the company is benefiting from support from the Brazilian ExIm branch BNDS and the share offering not only helps boost liquidity but makes obtaining financing and a more favourable rate that much easier.

The first six are due between August and December 2011 and are destined for the Frontier and Republic Airlines networks. The 18 are scheduled for 2012. Interestingly, since earlier this year Bedford was unconvinced the take rate on Wi-Fi warranted the expense, the aircraft will be Wi-Fi enabled and configured for stretch seating affording 5-inches more pitch in the first four rows.

The company cited USD7.8 million in several special items for the third quarter GAAP pre-tax income of USD35.1 million including USD4.7 million of branded integration expenses; USD2.9 million of disposal costs for A318 and Q400 aircraft; and USD0.2 million in negative adjustments for fuel hedges. In addition, the company recorded USD8.6 million for non-cash adjustments associated with the purchase accounting for amortisation of intangible assets, the latter of which is expected to continue over the next few quarters.

Vice President Revenue and Production Greg Aretakis explained that while the 2% TRASM increase may be a little low compared to the industry, broken down it reveals a passenger ticket unit revenue increase of 9% largely owing to its focus during the summer of its Classic and Classic Plus bundled fares.

It had guided to 1-3% TRASM for the quarter. An increase in stage length at Frontier decreased the TRASM results by 2-3%. Accounting adjustments also had a negative effect of a couple of percent.

It showed an increased by more than 70% for Classic and Classic Plus although off a low base from last year. However, it is encouraged by the response. It is also switching more and more of its sales to its lower-cost distribution channels such as Frontier.com.

Branded operations

Frontier experienced a 503.4% increase in total revenues at USD445.8 million achieved on a capacity increase of 594.2% to 3.9 billion as Midwest was integrated into the Frontier 2009 numbers. TRASM declined 13.1% to 11.15 cents from 3Q2009,  Load factor at Frontier remains strong at 87.4% during the quarter, a record and a jump over the 86.1% in the 2009 quarter.

Operating unit costs ex fuel came in at 7.17 cents and, excluding USD7.6 million in integration costs and the return of aircraft, unit costs were 6.98 cents on an average seat density of 100-seats per departure. “We are pleased with the progress on Frontier costs,” he said. “GAAP pre-tax income was USD11.6 million and, ex items, US19.4 million.”

Fuel costs on Frontier were USD137.3 million for the quarter. Excluding a USD0.2 million mark to market loss, the fuel cost per gallon, including into-plane taxes and fees for the quarter was USD2.32 for the third quarter. Frontier has call options for approximately 10% of its consumption for the fourth quarter of 2010 at an average price per gallon, excluding the hedge premium and into-plane taxes and fees, of USD2.26.

The stretch seating is already on all the E-Jets and will be on the Airbus fleet in time for the holidays. The Wi-Fi is Aircell’s GoGo product.

There are fewer competitive sales and those that do emerge were limited in both capacity and to off-peak travel days and Aretakis noted fares were rising which the company expects to continue, given the demand.

Capacity for the December quarter will be flat to down 1% driven by re-fleeting effort and TRASM is expected to be flat to up 2% compared to 4Q2009 when its was 10.61 cents. So, 4Q2010 should be in the 10.6 to 10.8-cent range. Capacity is driven by refleeting. For the year, capacity is expected to be up 6% while TRASM will be in the 10.5 to 10.7-cent range or flat to up 2%.

For 2011, he indicated capacity will be up 4-5%, mostly in the back half of the year as the new 190s arrive. Advanced bookings are strong. October load factor came in at a record 83%, up 2 points for the combined operations. November and December are continuing that trend for expectations of a load factor increase of four points to 77% for each month. For the first half of 2011, capacity should be up 4-5%. First quarter is flat to up 1% capacity.

Competition strengthening at MKE, DEN

Vice President Planning and Strategy Daniel Shurz indicated that additional 319s will be added at Milwaukee to replace its smaller RJs. Seats per departure will rise from 64 to 72. He also said the company is adding five more destinations in February from MKE for a total of 36.

Domestic capacity at Denver – from all carriers – will be up 6-7% in the fourth quarter, highest rate for the year, and will moderate to 3-5% in Q1. At MKE, competitive capacity growth moderating but will be up 9-10% in the fourth quarter and 5-7% in 1Q-2011. Kansas City is stable, he said, with domestic capacity dropping 0 to -1% while competitive capacity in the first quarter its expected to be up 2-4%.

At Denver, which is 75-76% of Frontier’s capacity, Southwest will be pouring on the capacity while United will be very disciplined, he said. United will be flat to down 1% while Frontier will be down 2-3% in the fourth quarter and less in the first quarter. However, Southwest will have a 30- to 40% growth rate in the coming months trailing off to the upper 20s in March, according to Shurz. 

Balance sheet

As of 30-Sept-2010, the company had USD390.4 million in cash, of which USD191.4 million was restricted. This compares to USD350.2 million in cash, of which USD192.7 million was restricted as of December 31, 2009. Debt declined to USD2.63 billion at the end of the third quarter versus USD2.79 billion at the end of 2009.

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