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Republic Airways Holdings Inc. (NASDAQ:RJET)

Q1 2009 Earnings Call

May 5, 2009, 10:00 am ET

Executives

Hal Cooper - CFO

Bryan Bedford - CEO

Wayne Heller - COO

Tim Dooley - VP, Finance

Joe Allman - Controller

Analysts

Duane Pfennigwerth - Raymond James

Jim Parker - Raymond James

Steve O'Hara - Sidoti & Company

Bob McAdoo - Avondale Partners

Operator

Welcome to the First Quarter 2009 Republic Airways Holding Incorporated Earnings Call. My name is Keisha, and I would be your operator for today. (Operator Instructions).

I would now like to turn the call over to Mr. Hal Cooper, Chief Financial Officer.

Hal Cooper

Thank you, Keisha and welcome everyone. Thank you for joining us today. Let me just introduce everyone in the room. I am joined by Bryan Bedford, our Chief Executive Officer, Wayne Heller our Chief Operating Officer, Tim Dooley, our Vice President of Finance and Joe Allman our Controller.

Let's start off by the Safe Harbor disclosure. Please note that information contained in our earnings release and this call contains forward-looking information, as defined by US securities laws. Forward 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 SEC.

That said, I want to turn the call over to Bryan. He is going to quickly highlight some of the items contained in our press release, that went out last night and then we will be happy to take your questions. Bryan?

Bryan Bedford

Thanks, Hal. I would like to start by giving my sincere thanks to our 4500 employees for their outstanding teamwork over the last several months, rising to operational challenges and delivering an outstanding product to our partners and our customers.

I had the opportunity to fly on Republic aircraft a lot over the last 90 to 120 days and I have tell you, I am just always inspired by the quality, the people that we have in this organization, and I truly think some of the best in the business, so again, sincere thank you to all my coworkers, and of course, we will answer your questions, after we get through the prepared remarks.

Let me cover couple of the highlights that, the handout I saw in the first quarter press release, we recently published.

On the airline service revenue side excluding fuel reimbursement, which is a pass-through cost to our partners. Our revenues increased 4% and that increase is due mainly to the gate change in mix adding more EJets the larger 76 to 86 seats aircraft, which produce higher revenue for block hour force and the smaller regional jets that we removed from service.

Our first quarter operating expenses including interest expense, but excluding fuel charges and excluding the non-cash goodwill write-off, those cost increased approximately 10% from the same quarter in 2008. On the operating unit cost side again same basis excluding fuel and the goodwill write-off, but including interest expenses, our unit cost increased to $8.14 that's up from $7.62 in the comparable quarter last year.

Those operating expenses as you may have noted in our press release, also included a $3.1 million expense for additional accruals for the return costs on CRJ-200 aircraft, we are removing from the Continental service agreement and also included a $3 million charge related to the recapitalization of Mokulele Airlines that we announced in March.

Adjusting CASM for those items would give you $7.96, which is still up 4% from last year’s results. We have about a 5% decrease in our block hour utilization in the first quarter when compare to prior year's first quarter and we also saw our stage length decrease by 5% or that's in line with our plan, again the combination does had some headwinds on the unit cost comps.

Net income for the quarter was $2.2 million, compared to $20.2 million last year, its $0.06 in EPS versus $0.55. Absent the goodwill write-off, net income was $15.5 million and EPS was $0.45.

During the quarter, we took delivery of the last three scheduled Ejet deliveries; we took those in for Delta. We also removed three small jets from our Continental operation. So, our operating fleet at the end of March remained unchanged from the end of December at 221 aircraft.

We currently don't have any additional aircraft on delivery, and therefore no significant capital expense items for the remainder of the year.

In March we agreed to extend our DIP loan to Frontier Airlines and increased our commitment from $12.5 million by replacing our partners in the DIP. We have a $40 million DIP in place at Frontier effective April 1st, and that debt loan matures on the early or at December 1, 2009 or upon Frontier's emergence from bankruptcy.

We do believe that Frontier will emerge from bankruptcy this year and remain optimistic that we will receive some measurable value for the $150 million unsecured bankruptcy claim that we currently hold.

Also in March, the company funded an additional $25 million pursuant to its credit agreements with US Airways that was entered in the fourth quarter of 2008. As we sit here today, we are fully funded the US Airways loan facility that's $35 million. That facility is scheduled to be repaid in eight quarterly installments beginning in January of 2010.

And again, as mentioned earlier, we did participate in recapitalization of Mokulele Airlines. We converted $3 million of our outstanding $8 million loan into equity and invested an additional $3 million in cash in exchange for 50% ownership of the airline, and that recapitalization agreement require Republic to invest an additional $2.5 million, which was funded on May 1st.

So, with that Keisha, would you please open the queue for questions from our listeners?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Duane Pfennigwerth with Raymond James.

Duane Pfennigwerth - Raymond James

Just on Mokulele, can you remind us what the net investment is, at this point in total minus any deposits that you held previously?

Hal Cooper

I think as we're sitting here today Duane the numbers about $13 million, well less than $2 million in deposits we hold. So, net of 11.

Duane Pfennigwerth - Raymond James

Okay and then are you going to be consolidating the results going forward and if so, can you give us any sense for the magnitude of the operating profit or loss in that operation?

Bryan Bedford

Well, we will be consolidating them as a 50% owner and I can't give you a magnitude of what the numbers look like today. I can tell you Duane that we are fully committed to the Mokulele operation. We see a viable business there and we are very encouraged by the revenue bill that we are seeing and the traction that we are gaining with airline partners, distribution channels and the wholesalers.

So, we certainly saw a negative impact of the announcements that we made in our fourth quarter call with the Mokulele default, which was unfortunate, but it is what it is. I think we have recovered from that, and are now making very good progress to establish in Mokulele, is the viable number to carrier in the islands.

Duane Pfennigwerth - Raymond James

Beyond your fleet, what is their fleet look like? Is it just the 170s you have in service there?

Bryan Bedford

We've got a commitment for four 170s and there are four 90 caravans flying on the very small, remote island destination. So, it's total of eight shells.

Duane Pfennigwerth - Raymond James

Got it, that's great. Just regarding Delta, I’m wonder if you contract with them, includes any relative cost provisions versus the other Delta connection carriers. In other words, is there any opportunity for reset on Delta rates versus how your costs are trending versus their peer group?

Bryan Bedford

No.

Duane Pfennigwerth - Raymond James

That's helpful, thanks. I think Jim may have a question.

Jim Parker - Raymond James

Okay. I got a couple of questions. Guys, one is these return costs with Continental for those CRJ-200s. Why was that included in the contract? Why isn't Continental reimbursing new, because you all knew when you sign the contract, you would have some return costs?

Bryan Bedford

Well, I’ll tell you two things, Jim. First, when we signed the deal for the CRJs, we honestly thought that we had all of the maintenance essentially under power-by-the-hour agreements and so, I think, to be perfectly block we got flat put it on some of these return costs.

During the dispute process with the vendor, of course, we’re also obligated to continue to pay rent. I think, you’re going to see continued return cost in Q2, as we take another 7 shell out, although it's not going to be at the same level that we saw in Q1. Because in another way sort of resolve these disputes we are going to have a much lower level of non-productive costs, but we probably should have done a better job on the return costs on the CRJs then what we had in the Continental agreement so.

Jim Parker - Raymond James

Okay Bryan. How many did you have go back in this quarter and the quarter they just ended, March quarter?

Bryan Bedford

Well, there is two ways to look at that question, Jim. How many came out of the contract and how many were actually returned. We actually got one returned in the quarter. I think we took six from out of service. So, we are hanging on to buy the aircraft.

Jim Parker - Raymond James

So, what I'm looking at is really the cost going forward, so you had six in the first quarter that you paid for. You got seven in the second quarter and how many you’re going to have third, fourth and what's the magnitude going forward of these charges?

Bryan Bedford

The second quarter looks like it will be somewhere between $1 million and $2 million. We don't anticipate anything in Q3 or 4 and then we have another round of return cost that will come back again in Q1 of 2010.

Jim Parker - Raymond James

You have an idea of that might be.

Bryan Bedford

Again $1 million to $2 million bucks.

Jim Parker - Raymond James

Okay and just the logic behind taking the $35 million loan to US Airways that just cost for doing business with them?

Bryan Bedford

Well, I think you've seen US Airways at first quarter financial results. You've heard their conference call. I think we can all say now that have up work through the financial restructuring that they completed in October of last year. They would have reached the minimum cash covenants and I don't think any of those of would have like that outcome.

So, we participated in a comprehensive workout along with other very large creditors, who are committing a substantially more money than Republic and I think the result was not only good result, but certainly in everyone's best interest. So, I think that was the right call to make and continue to believe that was the right call as we sit here today.

Jim Parker - Raymond James

In general bottom line is one is, that just a cost of doing business with them.

Bryan Bedford

Well, we could have said no, Jim. You know, so and there is certainly no obligation to participate. I think everybody looked at the US Airway situation, came to the same conclusion. US Airways structure is better than US Airways and bankruptcy.

Operator

Your next question comes from the line of Bob Mcadoo of Avondale Partners.

Bryan Bedford

Bob? I guess, we've lost Bob, Keisha why we don't go to the next call please?

Operator

Your next question comes from the line of Steve O'Hara with Sidoti & Company.

Steve O'Hara - Sidoti & Company

Hi, good morning. I just had a quick question on the Mokulele ownership, I mean, what's the long run plan and there is an option to purchase the other 50% or at some point you're looking to sell this to someone else, just wondering Bob, if you could talk about the long-term strategy?

Robert Hal Cooper

Well, we certainly have options to increase our equity participation in Mokulele and/or participate in Mokulele with other interested investors. So, we have some flexibility there. We do believe that having a local ownership presence in Hawaii is really important. I mean the Hawaiian community we've learned is, unique and it has its own culture and it has its own ways of doing business and it’s important to have local ownership in the inter-island market.

So, from that perspective, we're happy to have partners there, partners that are good business people and all respected in the community. So, I doubt, we're going to ever own a 100% in Mokulele. You know, but we do think that there is a viable business there and now with the right leadership team in place, we’re seeing good things to happen.

Steve O'Hara - Sidoti & Company

Okay. I think planes going back for Delta that you are selling. I think it was to happen this quarter and I’m wondering, where that stands, if that still in place?

Bryan Bedford

Well, we have Delta is operating two 170s through the fall. So, those airplanes actually don’t come out of service with Delta until the September-October timeframe. That certainly, they may choose to hang on to those, we don’t know, but at that point, if we do have the two 170s coming back from Delta then, we either have to put them in with another partner or we will have to find another use for the aircraft.

Operator

Your next question comes from the line of Mike Linenberg with Bank of America.

Unidentified Analyst

It's actually Alex from London on behalf of Mike. I just had a quick question regarding your credit facility, the $15 million. I believe it’s with Banc of America. I think it had expired at the end of the March quarter. Could you guys just comment on, if something was extended or any update on that?

Tim Dooley

It was extended for 60 days. So, we go through the end of May there. I would also comment that that facility was a letter of credit only facility. So, we are in the process of figuring out whether that’s the best and the cheapest mechanism to use, to issue letters of credit for airports and workers comp, etcetera.

I suspect we will go down the road of surety bonds versus that facility. It’s a pretty expensive way to put up somebody's airport, letters of credit, but is through the end of May and we will evaluate it. We are evaluating it.

Unidentified Analyst

Okay, great and then the 9 E135 that were on your balance sheet, as it held for sale as of the end of the year. Is there any update on that or has anything being sold or?

Wayne Heller

Yes, Alex, we have actually sold five more. So, there is just four left now and three are under agreement to be sold in the second quarter.

Unidentified Analyst

Okay great, and if I could just squeeze one more in. The goodwill impairment that the charge that you guys took this quarter, was that mainly to write-down the book value in the market valuation or?

Hal Cooper

Alex, basically the market cap of the company is [DIP] well below in this quarter, which was kind of the triggering with that of the evaluation.

Operator

(Operator Instruction). Your next question comes from the line of Bob McAdoo with Avondale Partners. Please proceed.

Bob McAdoo - Avondale Partners

Jim and Duane asked the most questions that I want to ask about, but one more little thing on the Mokulele thing. You talked about the cost of the recapitalization, where there any of the ongoing operating costs within of this quarter, that are actually in this quarter or you didn't take, when did you actually get to the point, where you have to start recording the losses and consolidating the revenues and whatever. How much of a quarter was actually in there, where there was a much that at all. Can you walk us through that a little bit?

Hal Cooper

Sure, Bob. We didn't actually consolidate into our income statement, the Mokulele numbers. I think we only had 10 days after we gained a 50% stake in that. We did however, include the balance sheet. So, the balance sheet that we file with our 10-Q will contain the Mokulele balance sheet, but the 10 or 11 days of operations was just not material to the quarter, but that will be consolidated second quarter.

Bob McAdoo - Avondale Partners

Okay and as to going forward there will be revenues in there that you’ll build to them basically, but and then there will be a chunk of where this is sliced off and there will be lying somewhere that says the amount that is excluded or belongs to the not consolidated. How does that's going to get shown?

Tim Dooley

Well, we'll show, I think there is a new name for it in the accounting whether its whereabouts we all know what is minority interest. So, we'll consolidate it and then back out the non-controlling interest I believe is called.

Bob McAdoo - Avondale Partners

Non-controlling, okay. So, there will be one liner that's they share of the losses for Mokulele.

Tim Dooley

That's right, yes.

Bob McAdoo - Avondale Partners

They are 49 percentages?

Hal Cooper

Well, right now its 50-50.

Bob McAdoo - Avondale Partners

50s, Okay.

Hal Cooper

At quarter end it was 50-50.

Bob McAdoo - Avondale Partners

Operator

With no further questions in the queue, I would now like to turn the call back over to Bryan Bedford for closing remarks. Please proceed.

Bryan Bedford

Well, thanks Keisha and all of our listeners, we appreciate your questions and your continued support. I look forward to talking to you after the second quarter results, 90 days from now. So, thanks very much. Have a good day.

Operator

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

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Source: Republic Airways Holdings Inc. Q1 2009 Earnings Call Transcript

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