Republic Airways’ profit up on branded business
Still benefiting from the positive impact of its Frontier/Midwest acquisitions and rebranding, Republic Airways Holdings reported a 113.6% jump in operating revenues to USD683.3 million for the second quarter compared to USD320 million for the year-ago period. It reported net income of USD2.6 million for the quarter, a significant decline from the USD14.1 million of net income in 2Q2009.
The company’s pre-tax income of USD4.8 million was negatively impacted by USD19.7 million in items including USD18.5 million in integration expenses and accruals for the lease return costs of two A318s and five Q400s. In addition, it experienced USD6.4 million in negative adjustments for fuel hedges and prior-year fuel excise taxes, as well as a USD5.2 million positive adjustment on a reduction in lease obligations for Midwest Airlines aircraft and office facilities. All that, results in a pre-tax net income of USD24.5 million ex items.
Additionally, the company recorded a total of USD13.6 million of non-cash adjustments associated with the purchase accounting for Frontier and Midwest: USD10.4 million as a reduction of passenger revenues and USD3.2 million expense for amortisation of intangible assets. The non-cash adjustments to revenue are expected to continue into the third quarter of 2010 and the intangible asset amortisation is expected to continue at current levels for the remainder of 2010.
Republic took in USD260.2 million in fixed-fee revenues in the second quarter, a decline of USD50.1 million from the year-ago period. The company cited a 16% reduction in block hours, bucking a trend at other regionals of increasing block hours. However, It removed 33 aircraft from fixed fee operations since 2Q-2009 and its Midwest operations – previously accounted for in the fixed-fee business – has now been moved over to its branded operations.
Excluding fuel reimbursement from partners, the fixed-fee revenue declined USD42.5 million or 15%. Income before taxes on the fixed-fee operations was USD18.2 million for the quarter. Results were negatively impacted by approximately USD2.6 million for an adjustment to fuel excise taxes. Cost per ASM (CASM), including interest expense but excluding fuel decreased to 7.86 cents for the second quarter of 2010, from 8.03 cents for the year-ago period.
Chair and CEO Bryan Bedford reported that Frontier represented a different story from the last quarter. “Revenues were up 9.3% while unit revenues came in at 10.76 cents up 2% over the 2009 quarter and better than the guidance it gave in the first quarter call. The branded operation also achieved a record load factor of 85% during the quarter compared to 81% in the year-ago period. Republic did look at the acquisition of Compass and Mesaba when Delta put out its sales proposal on the two wholly-owned airlines which went to Pinnacle and Trans States, respectively. However, there were a lot of labour requirements and guarantees we didn’t think we could commit to without the consent of the Teamsters especially in the short time Delta had. Taking a pass does not mean we weren’t interested. We just didn’t see how we could get the Teamsters consent and make the commitments on what Delta was telling us they needed.”
For the branded services, operating unit costs ex fuel were 7.23 cents. “We are now reporting unit costs consistent with the rest of the industry, which excludes interest,” he said. “Ex a USD18.5 million integration charge we took in aircraft return costs and other integration expense our unit cost was actually 6.89 cents, accomplished on a average seating density of about 100 seats per departure so we are vey pleased with the progress on our Frontier unit cost structure. We had a GAAP pre-tax loss on the branded business of USD 14.2 million but ex items, we actually had net income of USD2.8 million. Our consolidated pre-tax, ex items profit of USD24.5 million was actually USD15 million when tax deducted and was substantially better than guidance.”
He announced the company was raising Frontier’s EPS guidance for the third quarter ex items of 65-70 cents on a consolidated basis based on average fuel costs of USD2.35 per gallon.
CFO Hal Cooper reported that the company ended the June quarter with USD417 million in total cash, of which USD257 was restricted, a USD13 million increase for the quarter. The company also said that its credit card holdback for Frontier has been reduced slightly from 100% to 95% which equated to a one-time pickup of unrestricted cash of about USD10 million. The floor for reducing holdbacks would be about 80%, they reported.
The company is acquiring six A320s for delivery in the first half of 2011 using lease financing and has a letter of intent for 24 Embraer 190/195s all as part of an effort to reduce unit costs further. Cooper reported credit markets were opening illustrated by a USD20 million financing it did for spare engines.
Capacity growth sparks concern
Addressing concerns about perceived capacity growth, Bedford said much of the aircraft news was centered on replacement rather than growth. “If you go back to Daniel’s comments we will be slowing our growth rate quite a bit in the fourth quarter – 1.5-3% compared to the second and third quarters,” he said. You’ll see us making seasonal reductions in capacity going into the fall. We will actually be shrinking in the first quarter of 2011 as we retire four A318s and a 170. Yes, we are taking six A320s but, if you look at our economics to operate the A318 compared to the A320, that is a terrific trade on costs. The 190 is the same story. We are trading a less CASM-efficient aircraft for a more CASM-efficient aircraft. And we are not forecasting a net increase in units of production in 2011. If you look at Southwest, they pretty much have the same strategy".
“Look, at the end of the day, we are going to produce branded business CASM ex fuel ex items below 7 cents,” Bedford continued. “We did it in the second quarter and think that is going to continue and the fleet plans will help with that. People want the product we have but we have to produce it at the most competitive price possible and our fleet plans will give us the best cost structure compared to other 100-seat aircraft. The 190 is the right aircraft for a low-fare airline and it gives us the flexibility to keep capacity flat and replace smaller aircraft.”
Vice President Revenue Production Greg Aretakis noted that the company guided to a 1-2% PRASM decline compared to 2Q2009, but it beat that by four points, leading to a uptick in yield. Capacity guidance was at 5-7% range, but came in just over 7% resulting from a major scheduled adjustment.
“The reason why our TRASM improvement did not track to double digit as the rest of the industry did relates to an accounting difference between 2009 and 2010,” he said. “Specifically passenger ticket revenues were up 10.6% year on year. Baggage and other fees were also up 10% on a unit basis. The Denver network turned in positive passenger revenue comparables of 15% year on year while Milwaukee was down a couple of points. It is worth noting that the Milwaukee network had positive year on year passenger RASM comparables for the first time in over a year for June. As we dive into the unit revenues at Milwaukee and look at same-store sales, the second quarter passenger ticket revenue was up 11% for the quarter and 20% in June. Our new markets there are long-haul, high-density routes with lower RASM and CASM than system average so we are, overall, pleased with revenue production. The momentum we saw toward the end of Q1 is continuing and is not slowing for Q3.”
Aretakis said the company’s Classic Plus product is successful. The promotion began in May and is designed to increase the share of business travelers, the local-to-flow mix and the average fare. It contributed 25% of the fare increase experienced in Denver, he said. He added the second quarter was not reflective of its potential because it was introduced during a more heavily leisure period but should show increasing strength as the business traveler returns in the Autumn.
“We continue to experiment with pricing to find an optimal formula,” he said. “The fact of the matter is we see demand up and our revenue management team makes the adjustments on revenue production. We’ve been squeezing and squeezing and demand is still there and looking out into the third quarter we don’t see it weakening.”
The integration of Midwest and Frontier will be complete in October when the carrier will be operating on a single selling and technology platform.
Vice President of Planning and Strategy Daniel Shurz reported on the first half performance with 18 new routes during the first half. He said that Frontier is removing four A318s and one A319 in September to be replaced by A320s for an expected capacity growth in the range of 1.5-3% in Q4 and 0.5-2% in 1Q2011.
Shurz said there would be significant seasonal changes at Milwaukee that will result in improving its competitive position in the hotly contested market. It will base additional A319s at MKE devoted to the big three Northeast markets of Boston, New York and Washington, DC which will result in lower unit costs compared to the Embraer 135 and 145 aircraft. Seats per departure will rise from an average of 64 to 72 this summer.
Frontier is also starting 35 nonstop destinations, four more than it did in 4Q2009 and ten more than its largest competitor. “Our passengers love the Embraer E190 and it will allow us to achieve a CASM level much more competitive with an airplane capable of reaching both coasts from both hubs,” he said. “The expectation on competitive capacity trends for the two hubs are diverging. “Total domestic capacity at Denver was relatively flat in the first half and it will be up in the third quarter 4-5% and in Q4 up 6-8% compared to the year-earlier periods. Milwaukee capacity growth levels are moderating somewhat with a growth of 24-25% in the third quarter and 12-14% in the fourth quarter.”
Frontier still maintains its competitive cost structure at Denver. “We reported across the whole branded operations, CASM ex fuel of 6.89 cents at Denver,” said Shurz. “Southwest’s network wide CASM ex fuel is just under 7.06 cents. They are running a reasonable network-wide CASM ex fuel disadvantage to us. Even if you adjust in Denver we have a lower CASM ex fuel.”