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Frontier drags on Republic as it prepared to reveal restructuring plan for the entire company

Set for its third quarter earnings call next week, Republic Airways Holdings (RJET) will be presenting its strategy not only for its ailing branded subsidiary, Frontier, but for its three capacity purchase agreement (CPA) subsidiaries.

It is following both SkyWest and Pinnacle in restructuring the company as the result of changes in CPA business imposed by mainline partners. It, too, is feeling the strain and, as with SkyWest and Pinnacle, is in talks with partners to increase the remuneration for its 50-seat aircraft in CPA operations. CEO Bryan Bedford echoed SkyWest in citing rising maintenance costs but added lease rates were now more than the aircraft was worth given the market lease rates for the type.

As with SkyWest and Pinnacle, some of its CPA rates have become uneconomic and, during the SkyWest call, executives agreed with the Mr Bedford’s evaluation of the aircraft. He specifically targeted the ERJ 145s, also operated by American Eagle and on the way out of its fleet as well. He indicated that once Frontier’s problems were squared away, the company would turn to RJET stakeholders to reduce costs just as it did with Frontier.

In his memo to employees, Mr Bedford sounded just like Pinnacle President Sean Menke saying the company had to improve the economics of its CPA operations.

RJET posted losses that started in 4Q-2010. Frontier, lost more than USD90 million in the first half, and, according to an employee letter, was USD15 million below its USD200 million unrestricted cash target for the third quarter. It was unable to complete its debt deal by the end of the third quarter because of the European debt crisis which slowed some of its efforts.

Problems with Frontier put RJET into a USD15 million loss in the second quarter. It is trimming schedules, cutting a third of departures at Milwaukee and some at Kansas City.

It is also facing pilot unrest after pilots representing pilots at subsidiaries Republic Airways, Shuttle America and Chautauqua began voting to authorise a strike against the company for failing to reach a contract that would give them their first raise in four years. That voting is set for completion on 22-Nov.

Ambitious plans

RJET has been nothing if not ambitious in the last year, ordering both the Bombardier CSeries as well as the Airbus neo for its Frontier operation. The company ordered 80 neos and 80 CSeries.

As part of its plan, it is already removing a lav on its A319s to gain three more revenue-producing seats as well as six more on the A320. The additional seats would give it the same capacity as rivals Allegiant Travel Co, Spirit Airlines and Southwest, said Mr Bedford in the leaked letter which was obtained by Bloomberg. He estimated the additional cash generation will come at little risk to passenger satisfaction.

Mr Bedford indicated the failure to reach its cash target will put it further behind its year-end target. It must be remembered that Frontier was thrown into bankruptcy in in 2008 when it was required to have full reserves for its credit card transactions.

It is trying to indefinitely defer its Embraer E-Jet deliveries and is set to take two new, 99-seat ERJ 190s in Dec-2011. It also wants to sell 10 ERJ 190s already in operation. Mr Bedford estimates that selling the 10 aircraft could yield USD40 million in cash. The 2010 order for six ERJ 190s were set for delivery this year. Mr Bedford told employees that devoting its limited cash to new aircraft is “impossible.”

It had five more on lease when it cut a new order with Embraer to acquire six firm and option another 18. It is already testing the market for valuation. It has long been known to want to rid itself of the former Lynx Aviation Bombardier Q400s.

Should it be successful in deferring the balance of the order it could recoup USD3 million in cash deposits already paid Embraer. It would also save the company USD20 million now better used for cash reserves.

Not helping is the fact the company is in its seasonal low. However, should bankruptcy rumours continue to fly, passengers and travel agents may book away because it may not have the staying power of other airlines in trouble and parent company, Republic may not have deep enough pockets to sustain it.

Most recently, it announced the sale of already-encumbered slots at Washington National, which, with the aircraft, could yield USD113 million which would be in addition to the USD190 million recapitalisaton effort. That effort include USD120 million in cost savings from employees and vendors. However, Mr Bedford also told employees it was close to reaching its USD120 million recapitilisation goal, delayed because of the European debt crisis, which includes pilot give backs as well as concessions from other employees and vendors.

The effort also included the addition of USD70 million in new financing for the airline that had to be completed this year.

These slots were part of a financing deal it did with US Airways when that airline needed cash through which RJET provide commuter service using the 113 slots for feeding US Airways which Mr Bedford estimates would yield another USD50 million. It might be time for US Airways to return the favour for RJET which provided cash to the company when it needed it in 2008. US Airways has the right of first refusal on the slots.

As if its Frontier troubles were not enough, they were compounded yesterday by noise from its International Brotherhood of Teamster pilots for its CPA subsidiaries about striking. About 2,300 members are set to vote on a strike with the conclusion of voting set for 22-Nov-2011. The union covers pilots at Republic Airways Holding subsidiaries Republic Airways, Chautauqua and Shuttle America which do capacity purchase work for US Airways, United, Continental, Frontier, American and Delta.

It is doubtful a strike is imminent since action by the National Mediation Board (NMB) is necessary to declare an impasse in union/management negotiations, impose a cooling-off period which must happen before the NMB releases the union to strike.

In addition to a raise, picketers say they want improvements in working conditions, flight scheduling and seniority as well as receiving payments for layovers, according to the Indianapolis Star, the company’s hometown newspaper.