Republic Airways Holdings Inc. Q4 2008 Earnings Call Transcript

Feb.17.09 | About: Republic Airways (RJETQ)

Republic Airways Holdings Inc. (RJET) Q4 2008 Earnings Call February 17, 2009 10:00 AM ET

Executives

Robert H. Cooper – Executive Vice President, Chief Financial Officer

Bryan Bedford – Chief Executive Officer

Wayne Heller – Chief Operating Officer

Tim Dooley – Vice President, Financial Planning and Analysis

Joe Alman – Controller

Analysts

Duane Pfennigwerth – Raymond James

Bob McAdoo – Avondale Partners

James Parker – Raymond James

Keith Wiseman – Calyon Securities

Steve O’Hara – Sidoti and Company

Operator

Welcome to Republic Airways fourth quarter 2008 earnings conference call. (Operator Instructions) At this time, I would now like to turn the call over to Mr. Hal Cooper, Chief Financial Officer. Please proceed.

Robert H. Cooper

Thank you for joining us for our fourth quarter and 2008 full year call. Let me tell you who I’m in the room with. I’m joined, obviously, by Bryan Bedford our Chief Executive Officer, Wayne Heller our COO is here, Tim Dooley our VP of Finance is here and Joe Alman our Corporate Controller is here.

Let’s start with our Safe Harbor. Please note that the information contained in our earnings release and this call contains forward-looking information as defined by United States Securities laws. Forward-looking information is subject to risks and uncertainties, and we refer you to a summary of risk factors contained in our most recent filing with the Securities and Exchange Commission.

We will take your questions, but first let me turn the call over to Bryan. He will highlight some of the items from our press release that went out last night so, Bryan.

Bryan Bedford

First, I’d like to start by expressing our condolences to the families of the loved ones lost on Flight 3407 last Thursday night. It’s a painful reminder to all of us that despite having great people and great training and sophisticated aircrafts, that we can never let our guard down with respect to flight safety. And I know my 4,500 coworkers feel the same way, and while we collectively grieve for the loss of life, we remain committed to safety as our first priority.

I’d like to sincerely thank my coworkers and members of our Republic Airways family for continuing to remain focused on delivering a quality service for our partners and a positive travel experience for our guests on board and all in the midst of a very difficult economic environment.

So with that, let me jump into some of the highlights for the fourth quarter and for the year end results. Excluding fuel reimbursement, which as you all know is a pass-through cost to our partners, our airlines passenger service revenues increased about 7% in the fourth quarter. Due mainly to the operation of larger jets, which provide a higher revenue per block hour than our smaller regional jets, which in fact were shrinking.

Total operating expenses for the fourth quarter of 2008, including interest expense since we own the majority of our aircraft and excluding the fuel charges reimbursed by our partners, those operating expenses increased approximately 11% compared to the same quarter in 2007. Our operating unit cost for the quarter, again excluding fuel but including interest expense, increased to $0.0809 per ASM. That’s up from $0.0738 in 2007.

However, included in the ’08 results are some accruals for about $5 million for some accrued return costs associated with the phase out of our CRJ-200 fleet, a little over $5 million that we incurred for the carrying cost of aircraft that had not yet been placed into service, and some costs for aircraft that were either returned to lessors or sold. Absent those items, our X fuel CASM was $0.0778 that’s still up 5% from last year’s fourth quarter, but that’s also on a 7% decrease in block hour utilization. So the results were essentially in line with our plan.

Net income for the quarter was $19 million that compares to $24.3 million in the fourth quarter of 2007. Earnings per share was $0.56 compared to $0.65 and, as noted in our press release, we did have a year-to-date state tax adjustment last year that we booked in the fourth quarter, which contributed $2.7 million to net income or $0.07 per share.

During the quarter, we took delivery of eight 76-seat Embraer 175 aircraft bringing our operating fleet of regional jets to 221 aircrafts. While looking at the full calendar year results, and again all of this will be excluding fuel reimbursement, we had revenue increase of about 16% driven by a 9% increase in block hour activity over the prior year, and, again, also accounting for the shift in the mix of flying more heavily weighted to our larger 70 to 86-seat regional jets.

The Ejets produced approximately 70% of our ASMs in the fourth quarter of 2008 and, as we take delivery of our final Ejets and continue the removal of another 15 small jets, we’re going to see that our large jets will comprise about 75% of our capacity in 2009. And just to expand a little bit, those 15 small jets are coming out of our Continental CPA relationship. Now we were only scheduled to remove ten CRJs in the current year, but we also renegotiated the deal to accelerate the removal of five EMD-145LRs.

And we did that because we were able to successfully remarket those aircraft and had a need to reposition them in the second quarter of this year, and Continental was helpful to allow us to remove those early and extend the term on the remaining aircraft such that there was basically no change to the overall agreement. Just, again, great partners there so, again, as we continue to see opportunities to place 50-seaters outside of our current relationships we’re going to try to capitalize on those as those opportunities arise.

Operating costs per ASM for the year, excluding fuel but including interest expense, was $0.0779 that’s up slightly from $0.0758 in 2007. Net income for the year, again, record results on revenues, operating profits, pre-tax profits and net income, so earnings for the year was $84.6 million or $2.42 per diluted share up slightly from $82.8 million or $2.02 per diluted share in 2007.

For the year, we took delivery of 26 Embraer 175 aircraft. We also removed 24 of our smaller aircraft. As you recall, we removed 135s from Delta and the first seven Continental CRJ-200s. Of the Embraer 135 aircraft, we’ve taken 17 offline. Eight of those aircraft have been sold and redelivered. Eight of the nine remaining aircraft are also under firm agreements to sell.

We do have one deal that fell through on a 135 sale so we still have one of those aircraft to remove. The seven CRJ-200s have been in fact removed from service with Continental and are in the process of being returned to their lessors.

During the year, we repurchased 2.3 million shares of Republic stock for approximately $39.4 million. We ended the year with approximately $130 million I cash, again, that’s down $34 million from the December 31, 2007 balance of $164 million.

And just for a little bit of detail, the largest uses of free cash flow over the course of the year were aircraft equity investments and the 26 E175s, $55 million loaned out to a variety of partners, Midwest, US Airways, the Frontier dip, Mokulele Airlines Hawaii, and then the $39 million we spent on share repurchases. So absent those three significant items we produced positive cash flow of $140 million in 2008.

A brief update on the airline loans that we have out there, Midwest, Frontier, US Airways all continue to perform. We do have a default situation with Mokulele. We have an $8 million line of credit outstanding to Mokulele that has been fully drawn. We have a payment default under the ASA of about $300,000, which if the default is not cured by the close of business tomorrow, we will assume control of our collateral. The loan is collateralized by all of Mokulele’s unencumbered assets and a pledge of the equity holdings of the Mokulele’s majority shareholders.

The company and Mokulele’s majority shareholders are in the middle of negotiation terms of a possible recapitalization with outside investors and because part of this recapitalization process we have reviewed the underlying security for our loan and we’ve taken an impairment allowance in the fourth quarter of $1.5 million.

And then a final comment on just industry dynamics in general, I think it goes without saying that we’re in a period of profound economic uncertainty and it’s being felt in the demand for air travel. Now historically in times like these, again characterized by low demand and low fuel prices, there historically has been a fairly significant growth for regional carriers as our network partners eliminate Wasp making mainline flying by taking out their older less efficient aircraft and replacing them with regional jets.

But that is not happening in the current business cycle and I think that's not happening for a number of reasons. And, while the bad news is that we're not seeing a huge uptake in demand for new larger RJ's has not materialized yet. But the good news is the pressure to remove small jets is significantly abated.

There does seem to be a tremendous amount of uncertainty as to both the depth and length of the current recession. And it's our view that until the business climate becomes more stable, we just don’t anticipate any growth under the current capacity bi-model. And so for those reasons we are going to forecast limited growth for 2009. Now over the past nine years Republic has maintained over 40% compound annual growth rate.

And the fact that we're not going to see that growth in 2009, we're going to have to use our time wisely, to focus on digesting the growth that we've had streamlining our business operations to maintain a position of cost leadership and quality leadership in the regional airline industry, and prepare the business for new challenges and new opportunities ahead. And I can assure our listeners and our shareholders that the management team at Republic is indeed focused on exactly that.

So with that introduction operator will open up the queue for questions from our listeners please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Duane Pfennigwerth – Raymond James.

Duane Pfennigwerth – Raymond James

Just in regards to your updated guidance, can you talk specifically about what led you to reduce your block hour expectations for the first quarter in '09?

Bryan Bedford

What we do is use the website to try to give our friends in the analyst community the best insight that we have as we're getting it from our mainline partners. We've certainly seen utilization come down. I think you see that in the stats just a little over nine hours a day down from a little over ten hours a day historically. So we are seeing utilization pressure in the first quarter.

We expect that pressure is going to continue into the second quarter plus we're taking out quite a few aircraft this year. We're taking the 15 airplanes out of the Continental relationship. We're only taking delivery of three 175s for Delta. We're also going to take out two 140s for American in June.

So, again, you're seeing a fairly noticeable drop in the small jet composition of our fleet and our flying and you're getting the full year effect of the growth that we added in 2008, which mutes the block hour and capacity reductions.

Duane Pfennigwerth – Raymond James

Can you just qualitatively talk about Midwest, how that operation is performing and if you're seeing payment terms that are acceptable to you from Midwest?

Bryan Bedford

Well, clearly, the payment terms are much less favorable than what we had with Frontier, which is one of the reasons that gave cause to a $215 million claim being filed against the estate of Frontier Airlines.

As far as Midwest performance, they do continue to perform. We're probably a little more intimate with their restructuring plans than what we might be with other partners. I can tell you they are having terrific success in the restructuring process and we believe Midwest is going to continue to be beyond the aviation landscape for years to come.

Duane Pfennigwerth – Raymond James

Thanks and then just lastly, are there any other investments that you foresee with the current set of partners that you have here in 2009?

Bryan Bedford

Well, it's hard to talk about, Duane. We obviously have one follow up loan available to US Airways. It’s our expectation that they'll take that loan down provided they are in compliance with the loan agreement, which we suspect they will be. And so that's a $25 million follow on commitment set to take down on March 31st of this year.

Operator

Your next question comes from Bob McAdoo – Avondale Partners.

Bob McAdoo – Avondale Partners

The $215 million Frontier claim, what percent of the total pool at Frontier is that in round numbers? I’m sure that pool isn't exactly firm but any sense of how that ranks, I mean not how it ranks but what it amounts to in relative to the total scope of things out there?

Robert H. Cooper

Yes, we’re pretty certain it ranks first.

Bob McAdoo – Avondale Partners

I know it ranks first. That's why I said not ranks but that was the wrong word.

Robert H. Cooper

We think, Bob it will be more than half of the total claims pool.

Bob McAdoo – Avondale Partners

If things kind of go like you think they should or will, is this something that could come out of bankruptcy in another three or four months or is it going to take another year? When might we see something come out and you guys end up with something of value there?

Robert H. Cooper

Well I have to be very careful how I speak about what's happening at Frontier having a seat on the creditors committee and being bound by confidentiality, but there original plan was to come out of bankruptcy this year and we think that'll happen.

Bob McAdoo – Avondale Partners

In terms of the Hawaiian, the default in whatever you're talking about, so this $0.56 we got today included $1.5 million of write-down on their impairment or whatever you want to call it on the Hawaiian operation, is that correct? Did I understand that right?

Bryan Bedford

That's correct. So we have $8 million line of credit that's fully drawn. Of that we have $2 million in deposits from Mokulele to secure the four aircraft that are under the ASA.

But looking at the collateral pool our accountants felt that if in fact we were to have to satisfy the line of credit based on the unencumbered assets, that there was a potential difference between the value of those assets and the outstanding line, hence the impairment expense of $1.5 million in the fourth quarter. That's pre-tax, Bob.

Bob McAdoo – Avondale Partners

Sure, so if I did my numbers right you had eight minus a two deposit left you six and you've written one and a half off so potentially if it all fell apart there might be four and a half more. Is that round numbers the way to think about that?

Bryan Bedford

Well that certainly would be the absolute worse case, yes.

Bob McAdoo – Avondale Partners

Should we assume given where this thing is right now, and evidently it's not doing well, that the next airplanes are not probably going to go on over there?

Bryan Bedford

Well I think it's too early to say, Bob. Mokulele's a private air carrier but they actually have some pretty substantial guys with net worth behind the airline that have an obligation to put additional capital into the business. It needs to come in a little bit sooner than what was originally anticipated and it remains to be seen whether that capitalization will be complete.

So at this point all we can do is perform and exercise remedies as appropriate and let the business develop as it's intended to develop.

Bob McAdoo – Avondale Partners

Then just one last thing, I hate to hog this thing here but you talked about remarketing the five LR aircraft. Does remarketing mean you gave them back to Continental so they can eventually sale the airplanes to somebody else or does that mean that you were able to start flying them for somebody other than Continental?

Bryan Bedford

Well, no, let me be more clear since if you have the question, others might as well. We actually were able to sublease those aircraft outside the United States. So they're on a long-term lease with another operator. It's a Mexican airline who we've done business with before, so they actually currently operate six aircraft that we've had on lease down there for about four years.

A very strong company, good guarantees, so we feel very good about the sublease of these additional aircraft, and the fact is they had a need I believe due to the fact that some aircraft that they aren't coming from the source that they were anticipating so we were able to negotiate a good deal that was good for us, good for them. We needed Continental to cooperate to release the aircraft early. They were good guys to let us get that deal done.

Bob McAdoo – Avondale Partners

As I remember, the overall Continental thing was kind of a two-year deal with you and Continental is that right?

Bryan Bedford

Well the remaining 15 145s that we have there run out through 2012.

Operator

Your next question comes from the line of James Parker – Raymond James

James Parker – Raymond James

I want to follow up on Bob what he said, is this Mokulele? Just say you get it, that actually that you won’t ending up owning the majority if these investors don’t follow through, is that an opportunity or a black hole?

Bryan Bedford

I can you tell this, the product that’s out there is really appreciated by the market. It may be one of the worst times you can think of of starting a leisure airline. Having said that, today 100% of their distribution channels are in two forms, their 800 number and their proprietary website, so they do have a number of relationships that are coming online with both mainline and Pacific Asian carriers.

Those relationships, those interline agreements, frequent flyer agreements and coach air agreements should probably start producing revenue in the April timeframe, but they’ve got a hurdle to get over. A lot of those distributions channels were anticipated to have been operating by the end of December, but they’re probably running three months behind actually getting those channels functioning.

And, therefore, the revenue has certain not been coming in at a level as robust as what they had in the plan and that’s creating some liquidity pressure on them. I don’t know how the investors are going to react, Jim. I don’t want to speculate, but we do think there is underlying asset value there that you can either get a recovery in the form of a sale or some other fashion. I just don’t think we are in a position to speculate until we know how it’s going to play out.

James Parker – Raymond James

So Bryan, you’re saying their underlying assets that have value, what about just the business?

Bryan Bedford

It may. We are obviously, if we have to, we are going to become a lot more intimate with what it means to be a Hawaiian airline. We’re not there yet and that certainly wasn’t the intent when we went into this relationship with these guys, but we’re certainly not going to shut it down and go sale the assets. I mean we’ll certainly take a hard look, if in fact the recapitalization isn’t successful, we’ll take a hard look at is that a business we want to be in or is it not? We just haven’t decided.

Operator

Your next question comes from the line of Keith Wiseman – Calyon Securities

Keith Wiseman – Calyon Securities

First question is, with respect to the day utilization dropping, I was wondering if you’re flying below minimum contracted levels or not at this point.

Bryan Bedford

With one partner we are below the minimums, we have an adjustment mechanism that makes us whole economically, they honor that. It’s not an ideal situation for us. They’re not dramatically below the minimums. It’s more of a day-a-week issue with us. Again, not preferred, but it’s something that we’ve been operating on with these guys for a little over almost two years now. It is what it is.

The other partners certainly have responded to the reduction in demand by scaling back the use of the aircraft, especially on a day-a-week basis. So we are seeing a lot more tactical scheduling adjustments to accommodate traffic on peak demand days and the takeout capacity on off peak days. That’s fairly consistent throughout the entire range of partners that we have.

Keith Wiseman – Calyon Securities

So is it fair to say that there is not much farther to drop these partners that are still above minimum levels to get to minimum levels?

Bryan Bedford

Well, historically Keith, Q1 is in fact the low point on utilization and we do tend to see a fallback in second quarter and certainly a peak in the third. I don’t think we are going to see a significant increase, and again, the utilization numbers that you can get off our website really do reflect the best visibility that we have. So hopefully, it’s as close to accurate as possible and conservative if anything, but it does reflect how we are actually managing the business.

Keith Wiseman – Calyon Securities

In the release, there was mention of I wouldn’t necessarily call them the special items, but some specific items that were affecting results in fourth quarter. I wonder if you can just touch on each of those quickly, just give a little qualitative discussion because they weren’t clear if they were special items. I’m just trying to provide color in the movement year-over-year comparison.

Bryan Bedford

Well, I guess you can call them special. We booked about $4.9 million worth of expense to accrue return costs for 16 of our 24 CRJs. That suggests there will be more to come in ‘09 and there will be more to come in ‘09. We think that number will be $3 to $4 million as we continue to return these aircraft to the lessors.

Keith Wiseman – Calyon Securities

Which line item is this in on the income statement?

Bryan Bedford

That’s in other. The $5.1 million of carrying costs for idled aircraft, for the last few quarters we’ve been giving some color on that number just to articulate the fact that we do have aircraft in transition. That spread in depreciation and rent and in interest, I honestly don’t have that in front of me, but can certainly give it to you if you want to call back after this call. The fuel expense adjustment is in fuel.

That was just an issue where we had been negotiating with one of our partners on how to record the fuel expense related to some of our ferry plane, maintenance positioning plane. That had been going for two to three to four years, I guess, a long time. We’ve been booking that expense and we’d recently done an amendment that, among other things, sort of settled this and this is a result of that settlement.

Keith Wiseman – Calyon Securities

This is a fourth quarter impact only?

Bryan Bedford

Yes.

Keith Wiseman – Calyon Securities

One last question on Mokulele, not to beat a dead horse but have you thought about alternative uses for the aircraft, just contingency planning in case of not being able to continue when you decide that you don’t want to be an operator in that market? Are there other avenues available for those aircraft?

Bryan Bedford

The answer is yes, we certainly have thought about all of our options. It runs the spectrum of being an owner/operator of a Hawaiian-based airline and foreclosing on the collateral, liquidating it and taking our aircraft and going elsewhere.

We have to look at all of the remedies that are at our disposal. In terms of possible repositioning of the aircraft, here’s where on one hand the economies bad, but on the other hand the economy’s bad, so therefore, financing is almost impossible to get.

There are a number of carriers who are committed to taking aircraft, in fact, one aircraft that are unable to finance them, so this is a global phenomenon. We actually have seen a fairly noticeable uptick in the potential demand for aircraft. I think we prefer to keep them close to home, if we can. I guess the only thing I can tell you, Keith, is we’re looking at all the options right now.

Operator

Your next question comes from the line of Steve O’Hara – Sidoti and Company

Steve O’Hara – Sidoti and Company

First question I have and I hate to go back to this again, Mokulele, is the date tomorrow is that what you said?

Bryan Bedford

That’s correct, Steve.

Steve O’Hara – Sidoti and Company

The financing for the three planes that you are getting in the first quarter of ‘09, was that substantially more onerous than in the past?

Bryan Bedford

No it’s not. Their term is consistent with the financings that we completed in 2008.

Steve O’Hara – Sidoti and Company

And then the last thing, in terms of RASM if I kind of take the passenger X fuel number and get a RASM on that there seems to be a pretty good bump in the fourth quarter. Is that due to the planes, are you guys getting compensated for people flying below their minimums or is that a number I can kind of think will go forward at that rate.

Bryan Bedford

Honestly, Steve, I think it’s a meaningless number but the reason that it’s up is the same reason CASM's up. We’re seeing less utilization of the fleet, so the reimbursements rates we’re compensated for all of the fixed costs whether the plane flies or it doesn’t. So just by nature of math if there’s less utilization we’re going to see both costs and RASM increase.

It won’t be linear with the reduction in utilization but it’ll be a function of reduced utilization. And as we see utilization pickup and going into the summer, we’re going to see a reduction in both CASM and RASM again. Our focus is, obviously, on looking at the cost that we can control and making sure that we’re as efficient and as high quality low cost as we can be without having the distractions of a Frontier bankruptcy and repositioning aircraft that we were dealing with last year.

And certainly I would like to pat the management team on the back here. When we entered into 2008 we knew we had a tough year taking delivery of 26 new regional jets, getting the financing done, getting the training accomplished. We knew we had some transition activity on the small jet side so we knew it was going to be a busy, busy year.

Having the Frontier bankruptcy laid on our shoulders certainly added to the pressure of trying to put another record year of earnings in the books for Republic, and so I think these guys deserve a lot of credit for having accomplished that under some extreme adverse conditions.

That’s going to be a tough hill to climb in 2009 given the lack of growth that we are anticipating, which is none, and then looking at the headwinds on the macroeconomic condition. So we know we’re having to spend more time figuring out ways to run the business better and being more creative on creating new opportunities within the current business model.

Operator

At this time there are no additional questions in queue. I would now like to turn the call back over to Mr. Bryan Bedford for closing remarks.

Bryan Bedford

Well, again, I rally want to send a strong thank you to the Republic Airways employees despite some major challenges moving aircraft around dealing with difficult weather, hurricanes in August and September, and obviously, difficult weather conditions in the normal winter months.

Our team continues to do an exemplary job, high quality, high reliability and very efficient call, so we’re very grateful to our employees out on the frontline, grateful to our partners and to the management team and I assure you we’re going to do our very best to continue to be industry leaders and the RJ space in 2009. So thanks for your support and we’ll talk to you in another three months.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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