Republic Airways Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.28.13 | About: Republic Airways (RJETQ)

Republic Airways Holdings, Inc. (RJET) Q4 2012 Earnings Call February 28, 2013 10:30 AM ET

Executives

Tim Dooley – SVP and CFO

Bryan Bedford – Chairman, President and CEO

Joe Allman – VP and Controller

Daniel Shurz – SVP, Commercial, Frontier Airlines

Wayne Heller – EVP and COO

Analysts

Richard – Deutsche Bank

Robert Mikado – Imperial Capital

Steve O’Hara – Sidoti

Steve Wellington – Evercore Partners

Glenn Engel – Bank of America

Operator

Good day, ladies and gentlemen, and welcome to the Republic Airways Holdings Fourth Quarter and Full Year 2012 Conference Call. My name is Shenai and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today Mr. Tim Dooley, Chief Financial Officer. Please proceed sir.

Tim Dooley

Thanks Shenai. Good morning everyone and welcome to our fourth quarter 2012 conference call. On the call today, I’m joined by Bryan Bedford, Chairman and CEO of Republic; Wayne Heller, our Chief Operating Officer of Republic; Joe Allman, our Treasurer and Vice President of FP&A. Daniel Shurz is on the call from Denver, our Senior Vice President of Commercial at Frontier; Ethan Blank, Vice President and General Counsel is in the room; as well as Ryan Willman, our Vice President and Corporate Controller.

And before we get to our prepared comments, let me first cover our Safe Harbor disclosure. Please note that the information contained in our earnings release last night and this call contains forward-looking information as defined by the U.S. 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 with the Securities and Exchange Commission. With that out of the way, I’ll turn it over to Bryan to begin with some introductory remarks.

Bryan Bedford

Hey, thanks Tim and good morning to all of our listeners. It’s been a busy couple of months for us since our last call and we’ve got a lot to cover today, but first I would like to start with a heartfelt thank you to my 10,000 co-workers. Many of whom have been on the front lines of an operation that’s been challenged by extraordinary and recurring winter storms.

Of course, our people are doing a terrific job under difficult circumstances keeping their focus on running a safe and reliable operation for our airline partners and of course for our Frontier customers. So, again, just sincere thank you to everyone for all that you are doing. You do make a difference, and it’s very much appreciated. Before Tim gets into the highlights of our Q4 results, I do have a few business developments I’d like to cover first.

Of course, the first one is the recent CPA agreement with American Airlines to operate 53 new unused Embraer E175 aircraft beginning in mid-2013 under a 12 year CPA agreement. We previously disclosed that the agreement is subject to Bankruptcy Court approval. We initially expected American to seek approval of the CPA during a regulatory scheduled meeting on February 14, sub-sequentially American’s asked us to push the hearing back to February 26, which we of course agreed.

And as I am sure you’re all aware on February 14, US Airways and American announced a merger agreement. There were several objections filed to the CPA from various Labor Groups, there have been several questions raised by the unsecured creditors committee.

We’ve been working with American to respond to those concerns. We expect the agreement as it was initially negotiated will be modified to address those concerns, including the removal of six used aircraft. The motion to approve our revive CPA for 47 new E175s is now expected to be heard on March 12, and that’s about all the color I can give you at this point. Next, I would like to give you an update on our Frontier sales process. As our conversations are subject to non-disclosure agreements, we really can’t speak with any specificity on who is in the process.

But I can tell you that we are in discussions with a number of interested parties and we do expect to have a decision on the path forward in the next month or so. We would currently expect the transaction if one were to occur to be closed by the end of the second quarter subject to of course to any regulatory approval requirements.

Again, I am not speculating on whether or not we will receive any acceptable offers, I am just trying to provide some clarity on the timeline of the current process, which Barclays is running for us. And finally, last week I attended another federally mediated negotiating session with representatives of our pilots negotiating committee along side with Wayne and Tim and Ron Henson, our Vice President and Labor Relations, and Paul Kinstedt, our Vice President of Flight Operations. Tim opened the meeting with a detailed review of our 2012 financial results and our profitability in cash flow projections for each of the next five years under variety of different scenarios.

Wayne and his team followed with a detail presentation of a complete written proposal covering all unresolved contract items. The proposal also included the company’s last best and final compensation proposal. In responds to direct enquiry from the mediator the union representatives advised that they were not willing to accept the terms of the company’s last best and final offer. The mediator than adjourned the session advising both the union on the company that the NMB did not intent to schedule any further meetings for the foreseeable future. Our last best and final offer which we proposed significant pay increases and improved work rules for all republic pilots.

We’re very disappointed by the negotiating committee’s refusal to reach mutually beneficial conclusion to what has been a very long and difficult bargaining process. However, yesterday, we received a letter from National Director of the IBT Airline division, advising the company, the IBT will allow our pilots the opportunity to vote on the company’s last best and final offer. This is a surprising and yet hopeful development. So Wayne Heller is here with us today and he’ll provide more details on this process later in the call.

So, now with those high level items covered, let me turn the call back over to Tim to go through the highlights of our full year and fourth quarter results.

Tim Dooley

Thanks, Bryan. The press release we issued last evening presented a number of reconciliations of our GAAP results to X items results for both the fourth quarter, as well the full year as of 2012 and 2011. And before I get into the results, let me just for – share with you a summary of the items that we reported during this quarter.

On our Republic segment, we recorded $4.3 million of professional and legal fees related to successful restructuring effort at Chautauqua, our 50 seat regional jet subsidiaries and on our Frontier segment we recorded 15.5 million of charges related to a write-off with maintenance reserves on Airbus aircraft that are scheduled to be returned of lease in 2013 and early 2014. We also recorded a one-time additional passenger revenue of $9.8 million related to the change exploration of Frontiers early returns frequent fire miles from 24 months to 18 months.

So, excluding the effect of these items we reported consolidated net income in the fourth quarter of this year of $18.5 million or $0.35 per diluted share, which is toward the top end of our most recent guidance range. This result is down slightly from last year’s fourth quarter net income of $20.7 million, or $0.41 per diluted share. And we’ll get into the segment breakdown here in a second, but let me first address why we don’t see a positive progression given the closing of our Chautauqua restructuring in the fourth quarter.

We have publicly stated that the restructuring provides us with $45 million of cash flow improvements on average over the next five years, but that is not a period-over-period improvement rather it represents a pickup from the results we otherwise would have achieved absent restructuring. Without the restructuring and the corresponding extension of aircraft under CPA achieved during 2012, the Chautauqua results were quickly integrated and ultimately would have overcome the cash profits on our larger RJ flying.

As long as we keep aircraft operating under Chautauqua, it should produce near breakeven results. So it continues to be a priority at this management team to keep our 50-seat program economically viable for our partners for the next four to five years until our small jet regional aircraft obligations are fully satisfied. Now let me provide some color on the segment results this quarter. At Frontier, we’re reporting total revenues of $334.9 million, that’s a decrease of 1% from last year and a 4% decrease in capacity. So unit revenues on Frontier up 2.9% from the fourth quarter of last year to a $0.1188 this quarter. And Daniel will have a little more color on the unit revenue performance and expectations going forward later in this call.

Frontier’s fourth quarter load factor was 88.9%, that was another record for the quarter. And this is all the more noteworthy considering we had completed Phase I of our increased seat density program on our 16 A320 aircraft, which increased available seats from 162 to a 168 seats per aircraft. Phase II of that seat program will involve new slimline seats, which will allow Frontier to comfortably add six more seats to all A319 and A320 aircraft.

Our oil and fuel cost for the quarter came in at $3.42 per gallon and that’s up over $0.20 per gallon from the Q4 2011 results, which was $3.21. That created a fuel headwind for Frontier of $8 million for the quarter.

Our fuel hedge expense in the quarter was $0.5 million or a $0.01 per gallon and we have $3.5 million or $0.09 per gallon of hedge benefit in the prior year’s fourth quarter. As we sit here today Frontier has approximately 15% of its projected Airbus fuel consumption hedged through the second quarter of 2013.

We reported frontier pre-tax results of 7.3 million in the fourth quarter, as compared to pre-tax income of $10.1 million in the prior year’s fourth quarter. Now if you recall we closed our Frontier restructuring efforts in the last quarter of 2011. However, the aircraft lease agreement restructuring had retract to benefits to the third quarter. So, the fourth quarter of 2011 results had approximately 4.5 million of those out of period restructuring benefits.

Absent this out of period rent concession Frontier, did show improvement in its pre-tax results. And its operating margin for the fourth quarter of 2012, which was 2.6% was in fact in line with our most recent guidance range. The unit cost on Frontier for the quarter was excluding fuel was $7.03 compares to last year’s fourth quarter result of $6.80 which again included some out of period concession benefits on the restructured Airbus leases.

On the Republic Business segment, revenue was down 8.9% or approximately $31.9 million compared to prior year’s fourth quarter, due in part to the fact that Republic no longer records fuel expense and the related passthrough revenue under any of its fixed-fee agreements. And for the quarter, this accounted for approximately $23 million of the drop in revenues from last year.

Also for the quarter, Republic produced pre-tax income of $24.1 million compared to $23.3 million in the fourth quarter of the prior year and this result falls at the top end of our most recent guidance range of $20 million to $25 million.

Unit cost on Republic increased 4% to $8.55 from $8.21 quarter-over-quarter. Our unit cost on Republic will face continued headwinds as we eliminate long-haul E190 flying on behalf of Frontier and we add short-haul Q4 100 flying for United in the first half of 2013.

With that summary of our business segment results, I’ll turn the call over to our Treasurer, Joe Allman, to discuss our liquidity position and cash flow. Joe?

Joe Allman

We ended the year with $247 million in unrestricted cash, which was an increase of about $20 million from the third quarter result and $28 million from our prior year 2011 unrestricted cash. This exceeded our estimate of $230 million to $240 million from the guidance we issued at the end of December due to the receipt of maintenance deposit reimbursements from a couple of our less orders and the closing of the third E190 aircraft of the five scheduled E190 aircraft to be sold to US Airways.

We ended the year with a restricted cash balance of roughly $147 million, a decrease of $43 million from the third quarter and $4 million from the prior year results. The reduction in restricted cash quarter-over-quarter is consistent with normal seasonal changes and advanced ticket sales and reflective of Frontier’s current holdback which remains around 95% to 100%. So our total cash was $394 million, up $23 million or a 6% increase over the prior year result of $371 million.

CapEx for the quarter was approximately $8 million and we pay down approximately $58 million of principal during the quarter. We also extinguished roughly $52 million of aircraft debt related to the three aircraft sold to airways during the quarter. At December 31, the company was in compliance with all of its financial covenants.

As I previously mentioned in late July, we agreed to sell five E190 aircraft to US Airways, and during the quarter we transitioned three of those aircraft to US Airways. As of today, all five aircraft have transitioned and that leaves us with a total of ten E190 aircraft at Republic, five that will remain in operation with Frontier, and five that are now dedicated in charter service.

Now, let me provide you some guidance for our first quarter 2013 cash balances, and of course, none of this of the following information includes any liquidity impact related to the potential new CPA agreement with American or the purchase of the related E175 aircraft or resolution of a new labor agreement with our pilots should want to occur. We expect unrestricted cash to be in the range of $225 million to $235 million and we expect restricted cash to increase to a range of $205 million to $215 million. The total cash then would be $430 million to $450 million for Republic at the end of Q1.

We expect CapEx in the first quarter to be approximately $8 million and we expect $47 million of principle reductions during the quarter. Now, I am going to turn the call over to Daniel Shurz to give you an update on Frontiers Network and commercial development. Daniel?

Daniel Shurz

Thank you, Joe, and good morning everyone on the call. Tim previously mentioned Frontier achieved a 2.9% increase in the fourth quarter. We think it was a good performance. It was achieved against the backdrop of both 1.2% increase in stage length and a 2.1% increase in average seat density. The effects of our ongoing network redesign are helping our revenue performance. We continue to be pleased with our ancillary revenue progress. Revenue from our STRETCH and SELECT seats and products increased by 40% year-over-year and we expect to generate over $20 million in 2013 from these two products offerings.

Looking into the first quarter, we’ve reported another record January load factors. And now, we have increased January load factor by over 15 points over the last four years. We expect to report another record load factor in February and our March booking trends are looking good. We have made some good progress on our direct booking mix, since we introduced our basic sale of September, but we still have work to do in this area to reach the level of – that of our LCC and ULCC peers.

Our fleet is now primarily made up of our Airbus A319 and A320 aircraft as we are scheduling on the four – probably E190s in the Frontier network for the remainder of the selling schedule. We’ve removed the three early lease return A319s plan for Q1 from the schedule and we now expect to remove the last two A318 aircraft from our schedule one in each of Q2 and Q3 of this year.

Offsetting these removals replacement capacity, we have at least one A319 that will end its service in April and two A320 that will end its service respectively in Q3 and Q4.

We have announced new summer of service from Denver to four destinations, Cincinnati, Ohio, Eugene Oregon, Fresno California and Greensboro North Carolina.

We continue to replace with the results for same Denver markets added over the last 12 months. We also announced in January that when based from a schedule perspective, a second airplane front and effective in April. And that will allow us to start five new routes, bringing our total non-stop destination trends in to 10.

Customer acceptance on our new trends and services presently exceeded our expectations. The competitive situation in the Denver market remains calm. We expect total domestic industry capacity in Denver to be down between 1% and 2% in the first quarter and to fall by 2% to 4% in the second quarter. Same-store capacity will be between flat and down 1% in Q1 and will be between down 1% and up 1% in Q2 2013.

Now I will turn the call over to Wayne Heller for a more detailed update on Republic’s labor situation.

Wayne Heller

Thanks Daniel. As Bryan said, we had another round of negotiations in Washington D.C. last week with the IBT pilot negotiating committee. Those meetings were supervised by the NMB in their offices and we actually had members of the IBT national leadership present in some of the sessions.

The company supplied significant economic data for the IBT to evaluate, including the financial impact of the recent American Airlines business agreement, should it be approved by the Bankruptcy Court. Additionally, we supplied detailed financial models of the cost associated with the company’s last best and final offer.

On the last day of the session and as a result of a direct enquiry from the mediator, the negotiating committee stated that they were not willing to accept the terms of the company’s last best and final offer, shortly thereafter the mediator advised both the company and the union that she would be suspending negotiations indefinitely. As Brian also mentioned, we’ve been advised that the IBT National and not the pilot’s Local Union 357 will be conducting a vote on the company’s last best and final offer among our 2,300 pilots.

Now we view these actions that are being taken by the IBT National has a positive development, as it will give our pilots the opportunity to vote on a new agreement sooner rather than later that provides them with significant improvements in terms of quality in life and compensation over and above the current collective bargaining agreement. In an industry that is seeing concessionary agreements, continuations or extensions of agreements that maintain the status quo, as well as other carriers that have ceased operations because they can no longer do so profitably. We have offered our pilot group an agreement that puts them in the upper tier of our competitive peer group.

And while, I have no doubt that the rhetoric and debate in crew rooms and the Internet will be fierce and vigorous between now and time the ballots are actually counted. I can honestly say that we have worked hard to be responsive in offering an agreements that meets the needs of our pilots remains affordable to the company, allows us to retain and attract the best pilots and keeps us competitive in terms of winning new business.

Now, I’ll pass the call back to Tim for a guidance update.

Bryan Bedford

Thanks Wayne, our latest guidance.

Tim Dooley

Thank, Wayne. Our latest guidance was published on Form 8-K on December 31 of last year and provided a full year 2013 view of our segment results. And that guidance assumed no sale of Frontier, no new regional jet business, and it did include some provision for new pilot labor agreement.

As previously discussed we hope to have more clarity on the Frontier sales process on our next call. And as Brian mentioned earlier, still unclear whether our AA American CPA will be approved by the court, but we hope to have an official answer on March 12.

And now as Wayne just mentioned we may get a resolution on the pilot labor agreement. The current guidance does include some provision for a new agreement. However, our last best and final offer is higher then what was anticipated in our guidance. So as we look forward to 2013, we will once again have a comparable reporting year-over-year, because of the change in segment reporting that happened at the start of 2012. The full year guidance as it relates to our Republic segment was that we’d see a pre-tax margin of 5.5%, 6.5% for the full-year.

For the first quarter, we are affirming that margin range on operating revenues of approximately $330 million. For our Frontier segment, we reported a pre-tax loss in the first quarter of 2012 of $21.6 million. And while we still believe Frontier will post a full-year 2013 profit in the range of our recent guidance, we expect our Q1 2013 results to be only slightly better than last year’s results.

We do expect to see a unit revenue increase of 3% to 4% for the quarter, but our average jet fuel price will be higher than the $3.39 per gallon we reported in last year’s first quarter. Currently, we’re forecasting a range of $3.40 to $3.50 for the all cost of fuel per gallon. Our unit cost at Frontier is expected to range between $0.077 and $0.079 which is slightly above the Q1 result.

Frontier will continue to incur unit cost headwinds in the first couple of quarters due to the aircraft lease return obligations under that restructuring program. So on a consolidated basis, we’d expect to see a breakeven first quarter, which would be an improvement over the $7.1 million net loss or a loss of $0.15 per diluted share we reported in the first quarter of 2012. So with that update, I will turn it back to Bryan for our final prepared remarks.

Bryan Bedford

Okay, Tim, as you can note, I will tell we have a lot of issues in the air right now. So, what else is new here? We remain hopeful that we can provide more clarity on all of these items in the very near future. One thing we haven’t discussed thus far is how the potential merger of U.S. Airways and American airlines might affect Republic.

In general just about anything that helps our partners achieve stability and sustained profitability is in our own best interests. The downside of course is we will have one fewer customer to serve. Having said that the most recent changes in main line pilots scope provisions should open up new marketing opportunities to fly larger regional jets. Again the offset will be the most of these aircraft will replace smaller 50-seat RJs in service today. In round numbers, there are roughly 1,150 seat RJs and about 600 large RJs operating domestically in CPA type agreements across the country.

It’s our belief that over the next four to five years, we’ll likely see about 600 of these small 50-seat regional jets replaced by about 300 additional large RJs. Again it’s our belief with the regional airlines, we will collectively share about 100 small regional jets a year for the next several years and that about half of those displaced RJs will likely be replaced by new large regional jet aircraft. So while we are focused on new growth opportunities, we must also remain mindful that we are 70 small regional jets that we need to keep competitive, so that they can remain part of the smaller, but active domestic fleet for several years to come.

Sitting here today, I can tell you the management team, feels like they are in a much better position to navigate these uncharted waters, certainly more than we were a year ago. We realized regional airline industry is fundamentally changing and as regional airlines lose control of the cost, we are operating reliability, our mainline partners simply move the aircraft from one carrier to another.

Colgan, Mesaba, Pinnacle, Comair, again, these are hard lessons which I think everyone in the regional airline industry has to consider. While some might be aware of all the changes taking place in the industry, we feel both optimistic and prepared to meet the challenges and the opportunities as they arise. So, again, let me close by thanking my coworkers and my management team for an outstanding job that they are doing both for our shareholders and our partners and I would like to also send a thank you to our partners for their continued trust in Republic.

So, with those prepared remarks, Shenai, we are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Mike Linenberg with Deutsche Bank. Please proceed.

Richard – Deutsche Bank

Hi, hello everyone this is actually Richard (inaudible) filling in for Mike.

Bryan Bedford

Hi, Rich.

Richard – Deutsche Bank

Hi, thanks for taking my question. First ask just a quick one can you tell us who the third party is who you issued the convertible to and what the conversion price is?

Bryan Bedford

Good question, I don’t know that we have.

Tim Dooley

The conversion price is $10.

Bryan Bedford

Yeah I don’t know if we can disclose to yet but we will check our NDAs and get back to you.

Richard – Deutsche Bank

Okay, thanks and then on your pending Embraer order associated with American Airlines, can you talk about what options you are considering to finance those aircrafts and if you plan to ask us the debt market can you elaborate on the financing environment and how you feel about your ability to assess funding?

Bryan Bedford

Sure. As the agreements approved, we have financing already arranged. That is debt financing. It’s done on terms that are consistent with current export credit agency of rules and regulations.

Richard – Deutsche Bank

All right. And then, my final question is, I was hoping you could elaborate on your thoughts regarding Colorado Springs. It seem like previously that was a market you are building out, sort of like a mini-hub, but recently we’ve been noticing some scale back. So I was just hoping you could comment on your strategic thinking around that market. Thanks.

Daniel Shurz

Yes. Good morning. This is Daniel. We’ve been experimenting with flying. Given that Colorado is our home state, we were hopeful that there was an opportunity in Colorado Springs and it performed very well – and it performed well during the summer season of 2012, but we saw a much weaker economy in performance in the market than we had expected. We’ve been fundamentally, the market in Colorado is now seller tune to the low cost available in Denver that is always now the natural first choice for most customers. Without seeing the results we were hoping for, we’ve made a decision to eliminate all the non-stop Colorado springs and move the capacity back into Denver where the aircraft platform better.

Richard – Deutsche Bank

Great, thank you.

Operator

Your next question comes from the line of Robert Mikado with Imperial Capital. Please proceed.

Robert Mikado – Imperial Capital

Hi guys, just trying to understand the E190s a little bit, obviously you said you had five in charter, I assume that’s the casino work that you’ve talked about, the other five that are there, I assume if Frontier is not actually sold and you actually end up spinning it out or doing something like that obviously you will continue to prorate, is it generally assumed all that if you were to sell it, that those five airplanes would continue to do pro-rate work. And I assume that that these pro-rate works is for a Republic numbers don’t total the same as the fixed-fee numbers, going when we look at the line of business versus the consolidated numbers, is that correct?

Tim Dooley

Yeah, this is Tim. I’ll answer your last part of your question. Well, that is correct. Bryan, you want to take the 190?

Bryan Bedford

Well, yeah. We’re certainly looking for opportunities on the 190 whether that’s leasing the aircraft offshore or selling them out right as we did with the five U.S. Airways aircraft. So that’s the game plan is working out of the pro-rate flying under the Frontier brand.

Robert Mikado – Imperial Capital

So the hope is that – your plan is to keep the five that are doing casino work or would you even try go get rid of all 10 over time, if you could?

Bryan Bedford

Well, I think right now we’re very pleased with the relationship that we have with the – with our charter partners it does work for us and works for them and as long as that agreement continues to produce positive results, one, we would continue to do it and frankly, we may expand it, so that maybe an alternative views for the 190s that are currently in service at Frontier.

Robert Mikado – Imperial Capital

So as we think about turning the model going forward, if we assume that this – you get this things sold where you’re going to try to bring those back and just find a way to get them kind of out of the pictures, but you are saying I guess...

Bryan Bedford

Well, I guess that what I would tell you as we don’t view that as a headwind we’ve had pretty good success either finding alternative work for the aircraft or selling them.

Robert Mikado – Imperial Capital

Okay.

Bryan Bedford

And I feel confident that as we get to a point where it makes sense to separate from Frontier, we won’t have any difficulty disposing of the assets or redeploying them elsewhere.

Robert Mikado – Imperial Capital

All right, well, thanks, I appreciate it.

Bryan Bedford

Thanks Bob.

Operator

Your next question comes from the line of Steve O’Hara with Sidoti. Please proceed.

Steve O’Hara – Sidoti

Hi good morning.

Bryan Bedford

Morning Steve.

Steve O’Hara – Sidoti

I don’t know, if maybe you are not ready to give a little more info on AMR contract, but just kind of wondering how can we think about the returns on those aircraft, maybe returns on invested capital or what do you think, the net EPS contribution might be going forward?

Tim Dooley

Yeah, so Steve this is Tim. Our plan is to – if anyone of these significant events actually occurs and March 12 will be the date that the American agreement could be approved. We would soon thereafter post revised guidance, especially for the Republic segment that for 2013 would give you a view into that and in terms of the follow-up program, we can’t go into specifics now, but what we will tell you is that I mean we evaluated the agreement and made sure that it offered a proper return on our upfront investment.

Steve O’Hara – Sidoti

Okay, and then maybe switching to Frontier. I mean, I guess, if I look at Frontier I guess, the business model seems to be more like with the extra legroom and so forth, it seems to be more like a JetBlue product and have you thought about maybe moving more towards a Spirit type product, maybe filling the plane a little more. I mean, it seems like the returns versus, now at JetBlue versus Spirit, it’s compelling the early time kind of go with the Spirit model. Just wondering what the thought process is there?

Daniel Shurz

Steve, this is Daniel. I think, let’s take a look at some of the A320. JetBlue has 150 seats on our A320s. We are already up to 168 seats. As Bryan mentioned, we’re looking at a way to add another six, which would get us to 174, Spirits to 178. So in terms of density per aircraft, we are already significantly closer to Spirit’s density than to JetBlue’s density, and we suddenly would look in the future we’re getting closer still.

We do believe that the premium seats and products, which reduce the capacity of aircraft a small amount from the maximum certification limit on that positive to that business, they do create some differentiation, but more importantly, they do create some additional ancillary revenue flow, that’s meaningful. And we’re absolutely going to – we’re absolutely pushing the LCC direction, where it makes sense to have ways to generate more ancillary revenue and maybe differentiate the ancillary revenue generation from some of our peers in that space. I would certainly look at it. If it doesn’t – if it doesn’t end up making sense, we can always put more seats on.

Steve O’Hara – Sidoti

Okay. And just quickly in terms of the – going back to the AMR deal. So at this point, you assume that there is going to be some printing of that contract in terms of the number of aircraft, is that true?

Bryan Bedford

That’s correct. One of the concerns was over the used aircrafts. Those are no longer part of the mix, so we are left with the 47 new deliveries from Embraer that were contemplated in the agreement.

Steve O’Hara – Sidoti

Okay, thank you very much.

Bryan Bedford

Thanks, Steve, and you are welcome Steve.

Operator

Your next question comes from the line of Duane Pfennigwerth with Evercore Partners. Please proceed.

Steve Wellington – Evercore Partners

Hi, this is actually Steve Wellington speaking on Duane’s behalf.

Bryan Bedford

Hi, Steve.

Steve Wellington – Evercore Partners

Hey, how are you doing?

Bryan Bedford

Good.

Steve Wellington – Evercore Partners

My first question is regarding the potential sales Frontier. As a duration of time to get your bid on Frontier surprised you internally and what are the reasons it would take longer other than a lack of interest.

Bryan Bedford

Well, it could be a lack of adequate value from our perspective that could drive a longer process. I can tell you that we did have some difficulties getting the process underway that was part and parcel of trying to finish executing the restructuring plan and given the local management team, which was put in place in early 2012 an opportunity to really get to understand the business and figure out what the right levers were to pull to start having an impact on the business model.

So while there may be some frustration over the amount of time that it’s taken. I think the time has been well spent. And we have a business today that’s heck of a lot more healthy and has demonstrated a track record to it that we didn’t have six to nine months ago.

So, we are – where we are the process is going. And again as we’ve intimated, we can’t get into the specifics of the bidders. But we do have multiple interested bidders and whether or not any of that translates into an offer that our Board might find acceptable remains to be seen, if it’s not, we will tell you what our next steps are.

Steve Wellington – Evercore Partners

Great. And my second question is can you quantify the cost uptick related to a potentially new highlight labor agreement under the last best and final offer this year?

Bryan Bedford

Yes, we can, but on this call, we’re not going to do that Stephen only, because we’ve got a blanket on information going out as it relates to the economies of the deal today. We are still working with the IBT to try to figure out what’s the appropriate way to get information out of the pilots. This call is probably not that way. So as soon as we understand that – understand how we communicate with our employees and will communicate with the market.

Steve Wellington – Evercore Partners

Understood. Thank you so much.

Bryan Bedford

You’re welcome.

Tim Dooley

Thanks Stephen.

Operator

(Operator Instructions) Your next question comes from the line of Glenn Engel with Bank of America. Please proceed.

Glenn Engel – Bank of America

Good morning. The two questions, one its seems like Frontier is starting to adopt a little bit more of the EJet model when you fly routes infrequently to some of these leisure destinations. Do you have a variable cost structure for this to work as well and is this something that you think there is further opportunities?

Daniel Shurz

Good morning, Glenn. Thank you. It’s Daniel again. We are certainly adopting some of that thought process. For the time being we’re still utilizing the aircraft recently intensively. What we’re doing is combining multiple roots on a single aircraft onto a lower frequency approach. If you look at the way the way we’re starting transient service between two aircrafts we’re flying 10 routes. The highest frequently is six flights a week.

The lowest frequency is two flights a week. We are continuing to work on how to reduce our variable costs and continue to look for opportunities to do, certainly less the work to be done in that area, but we are simply at the moment taking it on to the fact that better capacity discipline and better management of capacity leaves to better returns. We have seen this is Denver as we enter new routes in Denver at less than daily frequency. It’s not in our self-driving utilization lower. It’s simply lacing together the aircraft in a different way.

Glenn Engel – Bank of America

And can you do me a favor and break out your capacity by region right now.

Bryan Bedford

We can get back to you later, I don’t have that in front of me.

Glenn Engel – Bank of America

But Denver is now roughly 85% or –

Bryan Bedford

That’s roughly, correct.

Glenn Engel – Bank of America

Okay and then finally any update on these CSeries.

Bryan Bedford

Well no change we’re not thinking on CSeries sitting here today.

Glenn Engel – Bank of America

Thank you very much.

Bryan Bedford

You are welcome.

Operator

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

Bryan Bedford

Thank you. Well, again a lot going on as we appreciate the interest that our investors and other parties are having in the company and I do believe we are going to be in a position in the next – certainly by the next conference call to address a lot of the open issues that we are facing today. So again thank you for your interest and we’ll talk to you in a couple of months.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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