Republic Airways Holdings improves to a 2Q net profit of $20 million

Republic Airways Holdings Inc. (Indianapolis) reported net income of $20.0 million, or $0.40 per diluted share, for the quarter ended June 30, 2012. This compares to a net loss of $14.9 million, or $0.31 per diluted share, for the same period last year, on operating revenues of $728.1 million, a decrease of 1.6%, compared to $739.7 million for last year’s second quarter on a 5.1% decrease in consolidated capacity.

The Company also reported the following key metrics for the second quarter of 2012:

Three months ended June 30,
(Unaudited) 2012 2011 % Change
Consolidated operating revenues (millions) $ 728.1 $ 739.7 -1.6 %
Consolidated ASMs (millions) 6,392 6,736 -5.1 %
Consolidated operating margin 9.0 % 1.6 % 7.4 pts
Consolidated net income (loss) $ 20.0 $ (14.9 ) nm
Diluted Earnings per share $ 0.40 $ (0.31 ) nm
Consolidated EBITDAR (millions) $ 174.6 $ 128.7 35.7 %
Consolidated EBITDAR margin 24.0 % 17.4 % 6.6 pts
Frontier total revenue per ASM (cents) 12.18 11.25 8.3 %
Frontier operating income (loss) (millions) $ 15.5 $ (30.8 ) nm
Frontier operating margin 4.2 % -9.2 % 13.4 pts

Business Segment Presentation
As announced on its fourth quarter 2011 conference call, the Company has adjusted its presentation of business segments in 2012 and has revised the prior year’s information to conform to the current period segment presentation. Reportable segments now consist of Republic and Frontier. The Republic segment includes all regional flying performed by sub-100 seat aircraft operating under either fixed-fee or pro-rate agreements, subleasing activities, regional charter operations and the cost of any unassigned regional aircraft. The Frontier segment includes passenger service revenues and expenses for operating Frontier’s Airbus fleet, as well as its charter and cargo operations.

Republic Segment Summary
Republic revenues decreased 12.1%; compared to the prior year’s second quarter on an 8.9% decrease in block hours. The block hour reduction was due to a significant reduction in the level of pro-rate flying performed on behalf of Frontier Airlines (Denver). As of June 30, 2012, Republic operated 14 fewer 37- to 50-seat aircraft than a year ago. Republic also redeployed 14 of 17 E170 aircraft that had been flown on behalf of Frontier in 2011 into fixed-fee service with Delta. The remaining three E170s are being subleased offshore.

Income before taxes for Republic was $19.0 million for the quarter, compared to a pre-tax income of $10.0 million for the second quarter of 2011. The improvement in Republic’s second quarter result stems from a significant reduction in pro-rate flying and related losses that were incurred in the second quarter of 2011 on sub-99 seat aircraft operating on behalf of Frontier.

Fuel costs for Republic were $54.4 million for the quarter, a decrease of $33.9 million from the prior year’s second quarter, due mainly to the reduction in pro-rate flying. The price per gallon decreased 8.2% from $3.55 to $3.26 year over year for the quarter.

Cost per Available Seat Mile (“CASM”), including interest expense but excluding fuel, increased 3.8% to 8.48¢ for the second quarter of 2012, from 8.16¢ for the same quarter of 2011. The increase is mainly due to expenses for aircraft that were unassigned and not producing ASMs during the quarter, and reduced seat count on our 58 US Airways E-jets, which have been reconfigured with first class cabins and total fewer seats.

As of June 30, 2012, Republic operated 56 aircraft with 44-50 seats and 126 aircraft with 69-80 seats under fixed-fee commercial agreements. Additionally, Republic operated one aircraft with 50 seats and 17 aircraft with 99 seats under pro-rate agreements with Frontier. Twenty 37- to 76-seat aircraft were unassigned as of June 30, 2012. Of the 20 unassigned aircraft, four ERJs and four Q400s will be returned to service for United-Continental under CPA agreements and two E170s will be subleased offshore during the third quarter.

Frontier Segment Summary
Total revenues increased 11.3% to $370.7 million for the quarter, compared to $333.2 million for the same period in 2011. Capacity on Frontier, as measured by ASMs, increased 2.7% from the prior year’s second quarter, due to a change in the Airbus fleet mix in 2012. Load factor for the second quarter was a record 90.1%, and an increase of 1.7 points from the second quarter of 2011. Total revenue per ASM (“TRASM”) was 12.18¢, an increase of 8.3% from the same quarter in 2011.

For the quarter ended June 30, 2012, Frontier posted pre-tax income of $14.1 million compared to a pre-tax loss of $32.6 million for the quarter ended June 30, 2011. The significant improvement in Frontier’s financial results was driven by solid unit revenue increases and lower unit costs as a result of the network and financial restructuring completed in 2011.

The operating unit cost for Frontier operations, excluding fuel, was 7.18¢ for the quarter, a 5.7% decrease compared to 7.61¢ for the same quarter of 2011, due primarily to lower non-fuel expenses and an increase in the average aircraft seat density in the current quarter.

Under the Company’s arms-length pro-rate agreements, Republic is allocated an industry standard pro-rata portion of ticket revenue, while Frontier retains all connect revenues as well as ancillary revenues on regional flights. Frontier maintains certain rights to deploy the regional aircraft and maintains control of pricing and revenue management. Frontier also retains responsibility for all customer service expenses, including airport rents. Selling and distribution costs are shared between Republic and Frontier. Frontier’s unit cost for the second quarter of 2012 includes approximately 0.40¢ related to these expenses associated with pro-rate operations between Republic and Frontier.

Fuel costs for Frontier were $136.8 million for the quarter, a decrease of $1.7 million from the prior year’s second quarter. The fuel cost per gallon, including into-plane taxes and fees, decreased 4.0% to $3.35 for the second quarter of 2012, compared to $3.49 for last year’s second quarter. The second quarter result included expense on fuel hedges of $3.4 million, or $0.08 per gallon, for 2012 and $3.6 million, or $0.09 per gallon, for 2011. Of the $3.4 million second quarter 2012 fuel hedge expense, $1.2 million was settled during the quarter; the remaining $2.2 million was an unrealized loss as of June 30, 2012.

As of June 30, 2012, Frontier operated a total of 58 Airbus aircraft. During the second quarter of 2012, Frontier reconfigured its fleet of A320 aircraft to include six additional seats, increasing the seat density from 162 to 168 seats. Frontier added one A320 aircraft during the second quarter of 2012, increasing its A320 operational fleet to 16 aircraft. Two A319 aircraft were returned to lessors during the second quarter of 2012.

Recent Business Developments
On May 14, 2012, the Company announced that it had reached a tentative agreement with Continental Airlines, Inc. to operate 32 Q400 aircraft under the United Express brand. The agreement was finalized on July 20, 2012. The eight-year agreement includes the four Q400 aircraft Republic previously operated under pro-rate service in Denver for Frontier plus 28 additional aircraft leased from Export Development of Canada (“EDC”).

On June 26, 2012, the Company amended its capacity purchase agreement (“CPA”) between Chautauqua Airlines, its 50-seat subsidiary, and Continental Airlines. The amended terms of the CPA provide for an extension of service, and the operation of an additional four E145 aircraft through August 2014. Under the amended agreement, Chautauqua will operate a total of 12 aircraft by September 2012.

On July 25, 2012, the Company reached an agreement in principle to sell five E190 aircraft to US Airways. The sale of the aircraft is subject to final documentation. If completed, the first two aircraft would be scheduled for delivery in the fourth quarter of 2012, with the remaining three to be delivered in early 2013.

Balance Sheet and Liquidity
The Company’s total cash balance increased $39.7 million to $410.4 million as of June 30, 2012, compared to Dec. 31, 2011. Restricted cash increased $78.7 million, to $230.1 million, from Dec. 31, 2011. The Company’s unrestricted cash balance decreased $39.0 million, to $180.3 million, from Dec. 31, 2011. A condensed cash flow statement has been provided in the tables section of this release.

The Company’s debt decreased to $2.25 billion as of June 30, 2012, compared to $2.36 billion at Dec. 31, 2011. As of June 30, 2012, approximately 85% of the total debt is at a fixed interest rate. The Company has significant long-term lease obligations for aircraft that are classified as operating leases and are not reflected as liabilities on the Company’s consolidated balance sheet. At a 6.0% discount factor, the present value of these lease obligations was approximately $1.12 billion and $1.20 billion as of June 30, 2012 and Dec. 31, 2011, respectively.

Copyright Photo: Brian McDonough. Republic is now expecting to spin off Frontier Airlines in the first half of 2013. Frontier Airlines’ Airbus A320-214 N211FR (msn 4688) completes its river approach into Washington’s Reagan National Airport (DCA).

Frontier Airlines: