Having hinted at an Airbus neo order during its last earnings call, Republic Airways Holdings took the plunge announcing it signed a letter of intent to acquire 80 aircraft, powered by CFM’s LEAP-X engine and set for its Frontier Airlines subsidiary. That represents a USD2 billion commitment for the engine alone.
This order is part of a deal, as with pilots, to renegotiate current contracts but it remains interesting since Republic/Frontier has also ordered 40 Bombardier CSeries for delivery in 2016, making it the US launch customer. It also optioned another 40. The airline was quick to nix speculation that the 40 A319neos and the 40 A320neos would replace the CSeries orders, telling Reuters the CSeries order remains in place. "We need aircraft in the greater-than-160-seat category and that's in the Airbus neo sweet spot," Republic Spokesperson Peter Kowalchuk said.
In its SEC filing the company said it cut “an amended and restated term sheet” with Airbus to purchase the 80 aircraft and is subject to the cutting of a definitive document by the end of July.
As part of the deal, Republic also amended its credit agreement with Airbus Financial services originally signed on 30-Oct-2009 and amended Frontier’s purchase agreement with Airbus. Its MOU with CFM on the LEAP-X covers, among other things, a fuel burn guarantee, future spare engine pricing, and a reduction in the overhaul cost of existing Airbus engines, it said.
At the same time, it signed a term sheet with GE Capital Aviation Services to amend its A319 leases agreeing on the return of four A319s to GECAS in 2012. The remaining 18 A319 leases, however, are being extended an additional three years albeit at a reduced monthly rate. The company said it operates 58 Airbus aircraft and its website indicates it has 41 A319s, four A318s and nine A320s and it could be the neos are replacements for its current crop of aircraft.
It already has two fleet types given its operation of 15 Embraer E190s. The E170s once used at Frontier have migrated back to the company’s capacity-purchase operations under a Delta contract. Should the E190s leave the fleet their remarketing will compete with the 25 E190s JetBlue announced it is re-marketing.
The order is also interesting since Republic is in the process of restructuring Frontier as the result of an unanticipated USD250 million addition to its fuel costs this year. It just cut a deal in which pilots agreed to concessions in return for an equity stake in the troubled carrier in addition to the Indianapolis-based company reducing its stake in the company by the end of 2014. As part of the deal Republic must raise USD70 million, find new investors and find USD120 million in annual cost savings. In its announcement about the pilot deal, it said it was half way to its annual savings goal this year.
Republic has always played its plans close to its vest leaving many questions and confused signals in its wake, especially regarding fleet plans which seem to be all over the map.
If the key to low-cost carriers is a single aircraft fleet, how does that tally with operating two aircraft of the same size – Airbus A319 and CSeries, 138-seat CS300 powered by different engines, the CFM LEAP-X and the Pratt & Whitney PurePower PW1000engine, respectively? It certainly begs the question as to whether Bombardier may offer a second engine option but considering its weak order book, that is highly doubtful, at least at this point.
Republic Airways Holdings Chair Bryan Bedford said the Airbus neo order was symbolic. "This aircraft order displays our confidence in the bright future ahead for Frontier Airlines,” he said, before going into a riff about the 15% savings in fuel consumption offered by the neo. “That fuel savings would correspond to a 5% margin improvement at today's prices."
The way Frontier has been going recently and its need to recapitalize, it is hard to believe they can now be committing to buy any new future aircraft much less two different types. Bold moves are often used to position companies for sale although why that would be so in this case is anyone’s guess except that it projects a stronger future as suggested by Mr Bedford’s statement.
Having just emerged from bankruptcy last year, the company has been citing the transition and merger with Midwest Airlines for its rising costs which have been exacerbated by the run up in fuel this year. It is also facing stiff Southwest competition at both its hubs at Denver and Milwaukee. One hopes that it has a better story to tell than what appears on the surface resulting from its announcements in the last few weeks.
The only thing clear is Republic’s next earnings call will be very, very interesting.