Republic Airways Holdings Inc. Q2 2009 Earnings Call Transcript

Jul.31.09 | About: Republic Airways (RJETQ)

Republic Airways Holdings Inc. (RJET) Q2 2009 Earnings Call July 30, 2009 10:00 AM ET

Executives

Hal Cooper - EVP, CFP, Treasurer and Secretary

Bryan Bedford - Chairman, President and CEO

Joe Allman - VP and Controller

Wayne Heller - EVP and COO

Analysts

Dwayne Pfenningwerth - Raymond James & Associates

Mike Linenberg - Bank of America-Merrill Lynch

Helane Becker - Jesup & Lamont

Bob McAdoo - Avondale Partners

Steve O'Hara - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Republic Airways Holdings, Inc. Earnings Call. My name is Christa and I will be your conference operator for today. At this time, all participants’ lines are muted. We will conduct a question-and-answer session towards the end of this call. (Operator Instructions).

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

Hal Cooper

Thank you, Christa, and good morning, everyone, and thank you for joining us for the second quarter earnings conference call. A little bit of a special addition today as we’re broadcasting from both Indianapolis and Milwaukee. We have Bryan in Milwaukee joining us today, as we’re expected to close on the acquisition of Midwest Airlines tomorrow.

Let me introduce my colleagues here in Indy. I’m joined by Wayne Heller, our Chief Operating Officer; Joe Allman, our VP and Corporate Controller; and Tim Dooley, our Vice President of FP&A.

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

Okay. We’re going to hope the technology works now, and I’ll turn the call over to Bryan. Again, he’s live from Milwaukee, and will highlight some of the items in our press release that was issued last evening. So take it away, Milwaukee.

Bryan Bedford

Good morning to you and good morning to our listeners on the call. We have a large lineup of folks on the call today, so I know there’s a lot of interest in what’s going on here and hopefully it will be a productive and informative call.

But first as usual, I want to extend a thank you to my 4,500 colleagues, my co-workers that make up the Republic Airways family. And I’d also like to extend a warm welcome to the more than 1,600 employees of Midwest Airlines that will soon be joining our team. It’s through the efforts of our employees that we’ve continued to produce high-quality performance results for our partners and our customers.

I’d like to acknowledge that next month, we’re going to celebrate our 35th anniversary of the commercial operations, and also mark the 10-year anniversary of our first entry into jet service. So I’m pleased to announce that we’ll also have another milestone in August as we introduce our first Embraer 190 into revenue service for Midwest. That first aircraft will be the start of the rebuilding process of the Milwaukee franchise as we reconnect Milwaukee to LAX on the Midwest network.

A big thank you to the E-190 program team. Their hard work made possible the ability to get that aircraft on our operating certificate in less than 90 days. It’s just another example of how impressed I am at how our team rises to meet every challenge that we throw at them. I hope they’ll continue to do that over the next six months as we work to transition both Midwest and potentially Frontier. It’s certainly been my privilege over the past 10 years to work with these folks, and I continue to look forward to working together for many years to come.

Of course, most of the focus on our company these days is discerning what our airline family is going to look like over the coming weeks and months. I’m sure we’ll have a good debrief on that on this morning’s call. But first, let’s cover the basics and go over some of the highlights from our earnings release. So for the second quarter, excluding fuel reimbursement from our partners, our base airline service revenues were essentially flat. We’re down about 1% on net revenues on an 8.5% decrease in block hours. Of course, this is due to our switch from smaller RJs into much larger higher revenue producing aircraft.

Total operating expenses for the second quarter, including interest expense but excluding fuel, they were up about 6% over the same quarter of 2008. Of course, that took our operating costs for ASM up from $0.0751 in the quarter last year to $0.0803 for the second quarter of ‘09. A lot of that, of course, is driven just by how our partners are scheduling our aircraft. We’ve seen a 6% decrease in our block hour utilization in the second quarter and a 5% decrease in our average stage length. So the results are a little disappointing on the cost side. They’re certainly in line with the plan and how the aircraft are actually being flown.

Net income for the quarter was $14.1 million. That compares unfavorably to the $28.4 million results we’ve put up in the second quarter of ‘08. Of course, earnings per share were down $0.41 this year versus $0.81 in the second quarter of last year. Of course, last year’s second quarter was benefited by a $6 million net of tax gain on the settlement of interest rate swap transaction, which contributed $0.17 in earnings last year. So a more comparative number would be $0.64 in Q2 ‘08 versus $0.41 this year.

A lot of activity in the second quarter. We removed twelve 50-seat aircraft from our Continental Airlines program. We added back one Embraer 135 into our operation. That asset was held for sale. That sale did not go through, and as it turned out we were able to put that aircraft back to work with Midwest. Our operating fleet stands at 210 aircraft, which is down from 221 aircraft in the second quarter last year.

As you’ll note in our report, we reported unrestricted cash of $97.4 million at June 30. Now it’s down $20 million from our March 31 balance. A lot of activity on the cash side, of course. We cash collateralized a number of our letter for credits, which accounted for about $12 million of that $20 million decrease. We also had $33 million of loan activity in the quarter. $25 million of that went to Frontier and the increase of the DIP loan, and then $6 million to Midwest and a small amount to Mokulele.

On the transaction front, as everyone’s aware, on April 1st we did become Frontier’s sole DIP lender. We increased our DIP from $15 million to $40 million. That DIP matures on December 1st, or upon Frontier’s emergence from bankruptcy, whichever happens first. In June, we announced a bid to be the equity plan sponsor for Frontier.

Frontier’s plan of reorganization was approved by the court, and that approval, if unchallenged, would allow us to purchase 100% of the equity of the airline for $108.75 million. Of that purchase price, $28.75 million would be paid to the unsecured creditors, and then $40 million of that price would be used to repay the DIP loan to ourselves. Of course, that transaction is a bid. We’re in the middle of an auction process with Frontier. That process ends on August 10th. And if there in fact is a competitive bid, an auction will occur on August 11th, and then a court would then be in a position to consider all qualified proposals and make a determination as to which is the best proposal for the estate.

Also in June we reached an agreement with TPG to acquire 100% of the equity of Midwest Airlines. Again, we’re hoping to close the deal tomorrow. Got a lot of work to do to get that done. As part of the consideration of that transaction, we would pay TPG $6 million of cash and issue them a $25 million unsecured note, a five-year note which would be convertible into RJET stock at a $10 conversion price.

By January of 2010, we expect to complete the transition and integration of Midwest Airlines into Republic. That transition is driven mainly by the fleet conversion. We’ll be converting nine Boeing 717s into 99-seat Embraer 190s. When that initial phase transition is complete, we should have roughly nine to ten E-190s, twelve to thirteen Embraer 170s, and roughly twelve 37 to 50-seat Embraer aircraft flying for Midwest. The additional 190s and small jets we’ll source through the third party lessors, or through our existing fleet options. Then finally, earlier this month, we took our ownership of Mokulele up from about 55% to just under 90% through an equity investment of $7.5 million.

I think that covers all of the transaction activity for the quarter and also the highlights from the earnings release. So with that, Christa, would you open the call for questions from our listeners, please?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Dwayne Pfennigwerth.

Dwayne Pfennigwerth - Raymond James & Associates

Just wondering what the response has been from some of your existing customers on the regional side. I guess some of your customers are reacting to one of their suppliers becoming perhaps a mainline competitor.

Bryan Bedford

I think the first thing you have to look at, Dwayne, is Frontier is a profitable airline operating in one of the most contested markets in the country in a very adverse economic condition, continues to actually produce solid profits. So if you start with the proposition that Frontier is going to emerge from bankruptcy, then the question that gets asked is, who’s going to be the owner? And I think it’s fair to say that some of our partners are agnostic. I me an they realize Frontier is going to emerge. So it’s not incremental competition; it is what it is. I think others view this as a way that maybe there’s a more rational Frontier in the marketplace than perhaps what exists today.

So we haven’t heard any huge complaints. There has been some head scratching and some work to do with our partners to make sure they understand what our intentions are. But that’s no different than where we were five or six years ago when we went from one partner to two, two partners to three, three partners to four, four partners to five, Dwayne. A lot of people were very confused or concerned how we were going to be able to maintain operating relationships with multiple partners, and many of which are operating in the exact same markets. Yet we’ve been able to do that successfully. So our intent is to continue to focus on what our customers want, which is safe, clean, reliable, cost effective service. Our belief is as long as we produce results for them, that’s what they’re most interested in.

Dwayne Pfennigwerth - Raymond James & Associates

Thank you. I think Jim may have a question.

Jim Parker - Raymond James & Associates

Bryan and Hal, just curious about Mokulele. It appears that you now have, let’s see, $18.5 million invested, and maybe they gave you some couple million in cash back. Is that correct?

Bryan Bedford

Yes, it’s just under $20 million.

Jim Parker - Raymond James & Associates

Okay. Now I’m curious what the end game is with Mokulele, because it appears that you’ve made that investment or started that relationship so that you could find some place to put four 170s. And so one, what is the end game, but also, you’ve put this money in them, are they actually paying you the rent on the 170s you have there as well?

Bryan Bedford

So let me take your questions in order, Jim. Certainly our intention back in September when we announced the relationship with Mokulele wasn’t to become the startup operator of an inner island Hawaii-based airline. And arguably in hindsight, it probably wasn’t the best time in the economic cycle to participate in an inner island franchise startup. But we are where we are, even if we didn’t get to where we are based on our intentions a year ago.

I will tell you, though, Mokulele continues to gain momentum in the market. We’ve seen double digit increases month over month over month on both fares and loads. We’re just about 50% load factor for the month of July, up from 40% in the month of June, up from 30% in the month of May. So we’re certainly building traction there. We continue to sign up partners. Distribution remains a problem, Jim. We had Kayak. It was our only Internet distribution channel until late May. We finally got Expedia going in late May. We turned Travelocity on last week. So we’ve still got Orbitz to deal with. So we do have some distribution challenges still with Mokulele. It’s possible our relationships with our other airline partners might be able to fix that quicker.

We signed up new partnering agreements with United Airlines. We’ve gone live on a fully integrated code-share with Alaska just last week, which is already producing results. So the point is, Jim, we’re gaining momentum. I still think we’re going to see Mokulele lose money for the next three quarters, albeit at substantially lower levels than what we saw in the second quarter.

What’s the end game? My sense is the inner island marketplace, although I don’t spend a lot of time on it, is a market that’s going to have to rationalize. You have a dominant, local competitor in Hawaiian. Unlikely that we’re going to see that change. Then you’ve got three small fries, sort of, nibbling at each other. That’s a marketplace that probably needs to have some rationalization, because it’s a market where, quite frankly, there can be a profitable duopoly the way it was back in the days with Hawaii and Aloha when the market was rational. How we get there from here, I’m not sure, but that’s probably the direction it needs to go.

Jim Parker - Raymond James & Associates

And Bryan, one is, are you getting rent on those aircraft that you have there?

Bryan Bedford

Are they performing? Yes, Jim. It’s left pocket, right pocket.

Jim Parker - Raymond James & Associates

Okay. And you’re consolidating? At what point did you begin or do you begin consolidating?

Bryan Bedford

Well, Joe, you want to pick up on that?

Joe Allman

Yes, Jim, Mokulele’s results are consolidated in this quarter’s operating results, and that started April 1. At March 31 we had included Mokulele’s balance sheet, but because we took the controlling interests right at the end of the first quarter, the operations were immaterial to the first quarter.

Operator

Your next question comes from the line of Mike Linenberg with Banc of America-Merrill Lynch.

Mike Linenberg - Banc of America-Merrill Lynch

Couple of questions here. With respect to both of these mergers, or should I say acquisitions, is there a Hart-Scott-Rodino waiting period, and have you sought that in the case of Midwest?

Hal Cooper

Yes, we have, and I think we filed our paperwork with the Department of Justice I guess just this week for Frontier.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. Then my second question. When you look at the money being paid to Frontier, the unsecured creditors get the $28.75 million. The remaining $80 million, who does that go to?

Hal Cooper

$40 million of that is already funded via our DIP. So we look at it kind of like this, Mike. We’re going to get a portion of that $28.75 million back because of our status as the largest unsecured claimant there. We know that there’s about $20 million of exit costs for Frontier to pay administrative claims and professionals, et cetera. So that’s about $35 million of cash outflow. The remaining of our purchase price will still show up in our consolidated results.

Mike Linenberg - Banc of America-Merrill Lynch

The 100% of the equity of the company, is that held by the unsecured creditors?

Hal Cooper

No. It’s still held theoretically by the shareholders, I think. That’s really a legal question. The shareholders and management are working on behalf of the estate, which is on behalf of the unsecured creditors. So the old equity will get wiped out, and Republic or the winning bidder will obtain 100% of the new equity.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. The thing is, if we think of the size of the claim pool, right, what were you, roughly about half of the unsecured claims?

Hal Cooper

We think as it sits today, it’s about half.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. So the fact is whatever is getting paid into the company, the majority of that is coming back to you because of your position both as a DIP financier and being in a sizeable claims position. So really, at the end of the day it seems like just the cash outflow is some of these administrative costs, et cetera. Is that the way to think about that?

Hal Cooper

Yes, I think that’s the way we think about it.

Mike Linenberg - Banc of America-Merrill Lynch

With respect to Frontier, what is the latest cash position at that company, and what is the restricted cash level? Could you provide that?

Hal Cooper

We’re little hesitant to talk about Frontier.

Joe Allman

They do have publicly filed documents. Their June 30 cash balance unrestricted about $70 million, restricted cash of $160 million.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. That 160, that’s all tied to the whole deck?

Joe Allman

That’s right.

Hal Cooper

That’s right.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. That’s it. Those are my two.

Operator

Your next question comes from the line of Helane Becker with Jesup & Lamont.

Helane Becker - Jesup & Lamont

Thank you, operator. Hi, everybody. I think recently there was a court decision with respect to Frontier’s employees. Maybe you can’t answer this until you actually get approved to acquire the company, but I thought somehow the bankruptcy court was found to be wrong in allowing Frontier to lower salaries and so on. So can you just maybe talk about what happens relative to your plan going forward?

Bryan Bedford

The background on that, Helane, is the company went through an 1113 petition with the International Brotherhood of Teamsters, which represented the mechanics and some ancillary shops and cleaners sort of positions. Frontier was able to reach consensual agreements with all of its other workers, both represented and unrepresented. So nothing changes there necessarily. The IBT appealed the rejection of their contract or the sort of cram down amendment to their contract, and on appeal they won, essentially. They found that the bankruptcy court judge sort of administratively didn’t follow the right path of what the appeals court deemed to be a proper vetting of the 1113 motion. Frontier is appealing that, and at the same time they’re trying to negotiate a consensual deal with the IBT.

Does it impact our deal? It could. I mean if we deemed that the implications of the IBT successful appeal is a material adverse change, then that would give Republic the ability to terminate or renegotiate its agreement with Frontier. We haven’t made that decision yet, because we’re going to allow the company to work through its appeal process.

Helane Becker - Jesup & Lamont

Okay. Thank you. I really appreciate your explaining that to me. My other question is for Hal. I didn’t see this in the press release last night. Maybe it was there and I just missed it. There was a 51% tax rate in the quarter. Can you just explain that?

Joe Allman

This is Joe, Helane. The tax rate was higher than statutory rate. We recorded a valuation allowance on the Mokulele losses, so there was no tax benefit derived there for the quarter. We think that that’ll change now that we’re more than an 80% controlling owner of the company and they’ll fall under our consolidated filings. So we’ll likely see that number go down around the 41%, 42% for the remainder of the year.

Operator

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

Bob McAdoo - Avondale Partners

Has anybody seemed like they might be gathering information and trying to get involved in this bidding process for the Frontier thing? At this point, nobody’s really look like they’re actively getting ready to do anything there.

Bryan Bedford

There’s been actually a significant amount of interest in the Frontier reorganization process. That’s part of the reason why we put our bid in as we think being the first mover was helpful for protecting Republic’s interest in the process. Whether or not that draws somebody else out, we’re just going to have to wait and see. The table stakes are set. It is an auction process and it’s a very transparent and, quite frankly, very rapid auction process. So we’re going to know tomorrow or Monday I think, Bob, if a competitive bid is coming in. Hal, correct if I’m wrong. Doesn’t the auction window, or the expression of interest of the bid, doesn’t that come in tomorrow or must by close of business on Monday?

Hal Cooper

Yes, Initial bids are supposed to be in August 3rd.

Bob McAdoo - Avondale Partners

August 3rd, so somebody is going to be there. They got to surface is what you’re saying?

Hal Cooper

That’s right.

Bob McAdoo - Avondale Partners

We’ll have a sense whether you’re going to be successful on this one.

Bryan Bedford

I think we’ll know by next Tuesday without any doubt. If there’s no competitive bid, then it’s our expectation next Tuesday this thing will just sort of take its natural administrative course to reorganize.

Bob McAdoo - Avondale Partners

Wasn’t it like the 10th or the 11th of August you said in your prepared remarks?

Bryan Bedford

Yes. That’s under the assumption that there is in fact a competitive bid. So if we do see another bidder or two emerge over the next two business days, or maybe that’s three, because they will close of business on Monday. If we see other bidders emerge, then there will be a seven-day window from the 3rd to the 10th. Essentially to allow Republic to respond to a potential competitive bid; give us an opportunity to assess what we want to do. Is it the10th or 11th, Hal, there will be a hearing where the judge will look at both of the offers and decide what he wants to do?

Hal Cooper

The hearing is the 11th.

Bryan Bedford

11th. Okay.

Bob McAdoo - Avondale Partners

On the 11th, is it the kind of situation where the judge can say he went up X dollars, do you want to go higher? You mean it can literally be that kind of an auction?

Hal Cooper

I suppose it could, Bob. I’ve never been to one of these things before. Our best offers are supposed to come in on the 10th, and then it could spill into the 11th.

Bob McAdoo - Avondale Partners

I guess the judge’s obligation is to try to get the most for the estate I guess.

Bryan Bedford

Yes, I’m sure it will turn out to be a very complicated process, Bob. It will just depend on who the bidders are. The bidder is private equity bidders? Are the bidders strategic investors? What’s their plan for the airline? But I’m sure there could be complications. Un fact, again, Hal, correct me if I’m wrong, the investment agreement allows the judge basically a week. I think he can go all the way to August 17th to consider the bids. So it’s basically the court’s discretion between the 11th and the 17th. But under the terms of our agreement, the court is obligated to make a decision on the 17th.

Bob McAdoo - Avondale Partners

If there are no other bidders and everything kind of goes smoothly along here, what all has to happen in terms of how long before you actually could start exercising control, start including it in your financials and all that kind of stuff? When would all that happen potentially? How much more is there to do?

Hal Cooper

The exit date, assuming everything goes smoothly, is scheduled to be September the 17th, I believe, Bob. So another 30 days, call it.

Bob McAdoo - Avondale Partners

Okay.

Bryan Bedford

Of course, there are conditions precedent in our deal that we still have to clear. We have some of our own conditions on labor, conditions on the fleet, and conditions on financing for firm and undelivered aircraft. So we’ve got some [CPs] that we are diligently working to clear. I believe we can clear them, but I don’t want to mislead anybody thinking that there still isn’t work on our side to be accomplished before our bid can move forward.

Bob McAdoo - Avondale Partners

Okay. If we change the subject for a second. Over to the financial statements, you’ve got the line that says, removing the net loss attributable to the non-controlling interest. What percentage would that have been? You were 55 and then you’re 89 and I don’t know what you were at various times. The 2.6 represents kind of what percentage of a loss for the period? What percentage of Mokulele is to be included in you for the period, however you want to say it?

Bryan Bedford

For the second quarter, Bob, the non-controlling interest was about 47%, which means our weighted average interest was about 53%. For the third quarter, that number is going to be close to 90%.

Bob McAdoo - Avondale Partners

So the [2647] was a 47% interest, and then you’re going to own 90% thereafter.

Bryan Bedford

That’s correct.

Bob McAdoo - Avondale Partners

Okay. When you talk about on Midwest, the day when you expect to have all the airplanes swapped out and whatever, can you talk about going forward in terms of how you operate the place? It’s easy for us on the outside to kind of visualize, okay, so there aren’t 717s, so there’s certain kinds of things related specifically to the 717 operation that don’t have to exist anymore over into the Midwest Corporation, the Midwest FA certificate and whatever. But there are other kind of chunks that you guys yourselves have never had to operate. Things like loading bags and ticket counters and all those kinds of people and stuff. Are those guys going to stay in a Midwest company, or are they going not move to the company that operates the E-170s? Tell us about how that whole thing’s supposed to operate? How are we supposed to be thinking about that?

Bryan Bedford

Today, Bob, we own and operate three certificated air carriers. So we have Chautauqua, Shuttle America, and Republic, and they all operate separate and autonomously from each other from a pure blocking and tackling perspective. They have all the regulatory management team members to dispatch planes, train crews, fly the airplanes, fix the airplane. So the threshold question is, Midwest will become a wholly-owned subsidiary of Republic, and it will act like all of our other wholly-owned subsidiaries act.

You’re correct, there are things that we don’t do, such as the airport customer service operation. We have done that in the past for various partners. It’s just a business that we haven’t tried to exploit, because we’re not sure that we actually bring a whole lot to the table there. So from that perspective we would see all of the customer contact folks, whether they’re airport customer service, luggage handling, aircraft grooming, call center, reservations, IT, marketing, distribution, revenue accounting, all of those functions that we don’t do, Midwest as an entity, headquartered in Milwaukee, will continue to do all of those functions.

There are obviously sort of two synergy opportunities. All of the other back office stuff, accounting, finance, treasury, payroll, HR, all the benefits, administration, all of that sort of stuff that will go through a transition period where that work will move from Milwaukee to Indianapolis. There will be the second transition issue, as you pointed out, is the fleet and the operating certificate. If in fact we end up with a fleet plan that’s based on operating 190s and 195s out of Milwaukee, those aircraft will operate on the Republic certificate and there will not be a need for a Midwest operating certificate. Therefore, all of the costs associated with maintaining the operating certificate would be eliminated.

Bob McAdoo - Avondale Partners

So as I’ve descried to people what I thought was going to happen, things like the Milwaukee-based flight dispatch center, crew scheduling, stock room inspectors, all those kinds of things, because there won’t be airplanes on that certificate, that kind of expense is expense that should disappear, and they’ll be replaced by incremental volumes at the Republic Indianapolis-based certificate. Is that a proper way to describe it?

Bryan Bedford

That’s a correct framing. Of course, there’s going to be a transition. Those jobs are going to be what they’re doing today, they’ll be doing tomorrow, they’ll be doing next week, they’ll be doing a month from now. As long as we have Boeing aircraft on the Midwest certificate, all of the jobs associated with the safety maintenance and compliance, those jobs are going to be maintained. Of course, our hope is that as we transition the aircraft from Midwest to Republic, that’s going to create job opportunities within the family, and we hope we can encourage the folks who are doing that work here to accept those job opportunities as they arise.

Operator

(Operator Instructions). Your next question comes from the line of Steve O’Hara with Sidoti & Company.

Steve O’Hara - Sidoti & Company

I was just wondering if you could talk about the E190s, and is there going to be any additional pilot training or is that pretty much covered with the E170s and 75s? And then also in terms of per commonality, is that fairly high between the two models?

Wayne Heller

Yes. It is fairly high. However, we are doing a little bit more in the training arena as it relates to getting current qualified 170 pilots checked out on the 190. But it is minimal. It involves a sim session and some IOE basically.

Steve O’Hara - Sidoti & Company

Okay. And then for the 717s coming out, what kind of charges do you anticipate with the leases going back to the lessor?

Bryan Bedford

All the restructuring work is complete, but there’s essentially a $600,000 exit payment that covers all of the return costs and claims related to the early termination of the lease. That will be paid to the lessor as each of the aircraft transition out. So the obligation to return the aircraft is basically just in air-worthy condition, clean and free of any MELs.

Operator

(Operator Instructions). Sir, you do have a follow-up question from the line of Mike Linenberg.

Mike Linenberg - Banc of America-Merrill Lynch

If I could just throw in a few more with respect to the Midwest operation. You’ve already announced new service with two 190s. Are those new airplanes coming from Embraer? Then in today’s press release you talk about a need for nine. So the remaining seven, where are you sourcing those? Any color on that would be helpful.

Bryan Bedford

The first two aircrafts are 2008 model year aircrafts. They were aircraft that were operated under a lease in another country. Those aircraft were returned to the lessor unexpectedly, and we were able to take advantage of that opportunity. We’ve got four. I think the next three to five aircraft are coming off the production line at Embraer directly, but those aircraft are also coming to us with leases in place. Again, I’m very flexible in what we think are very favorable market conditions or market term.

We’ve probably got another call it six to eight aircraft that we’re evaluating. We don’t need six to eight aircraft, but that’s about the size of the 190 pool that we’re currently evaluating. We’ll try to round out the population with the best terms we can negotiate from the pool that’s available. So we’d anticipate that essentially all of the aircrafts are going to be 2008, 2009 model year aircraft, most of them coming directly from the factory. All coming under let’s call them two, three, to five-year operating leases.

Mike Linenberg - Banc of America-Merrill Lynch

Then Hal, on the Frontier stuff you talked about a certain amount of administrative costs and transition costs. Can you also give us what that number is for the ramp up or transition with Midwest?

Hal Cooper

We think the Midwest transaction will be about a $35 million use of cash over the back half of the year. We think that’s as follows. It’s about $19 million to $20 million of pure restructuring, part of which Bryan articulated a second ago. There’s $6 million that will go to TPG for the acquisition, and then there’s a $10 million backfill for a letter of credit that has gone away. That was a letter of credit that Northwest Airlines put up to release $10 million of the holdback. So if you total that, that’s about $35 million of cash used from now until the end of the year.

Mike Linenberg - Banc of America-Merrill Lynch

Okay. Then just, if I can just one last one related to this. Right now Midwest has the one-way code-share with Northwest Delta. One, do you anticipate that that will continue? Two, any opportunity or any chance to maybe turn that into a two-way? Your thoughts on that.

Bryan Bedford

Our expectation is that Midwest longer term is successful with Frontier. We believe it’s important that that network participate in a domestic alliance. That’s going to be Delta’s decision. So we’re with those guys unless they don’t want us. I’m sure we’ll flush that out over the course of the next 90 days, and if not sooner depending upon whether or not there’s a Midwest relationship with Frontier, or Republic relationship with Frontier, perhaps.

Putting that aside, the second part of your question about the dual directionality of the code-share, as I understand it, that’s a pilot scope issue for Delta and so I don’t think Delta management necessarily can do that, certainly not without some consideration from the pilots. Whether or not that that rises to the level of something they want to go tackle or not, I think is highly questionable. So we’re certainly not anticipating a reciprocal code-share relationship with Delta anytime in the near term.

Operator

You have a follow-up question from the line of Dwayne Pfennigwerth.

Dwayne Pfennigwerth - Raymond James & Associates

If things go your way in terms of the auction process, just wondering when Frontier would actually be consolidated, approximately. Two, what would the consolidated cash position of the company look like? I assume that we’re heading into a seasonally weaker time of year for airline cash flow, but given the level of the holdback, I’m not sure how to think about that in the second half of the year.

Hal Cooper

Okay. Let me try to add some color to that, Dwayne. We think if things go our way that Frontier will exit in the middle of September. So from then forth, they will be reported in our consolidated results, adding just a little color to the whole cash situation as a consolidated business. Don’t forget that we have a core business of our fixed fee business that produces $100 million, $120 million of free cash after debt payments but before CapEx on an annual basis. So from the back half of the year, we think that business will still produce $50 million to $60 million of net cash.

We’ve already talked about a total of about $70 million that will be a use of cash in the back half of the year for both of these transactions. We think that both companies, Midwest and Frontier, will probably be slightly cash negative. So when you get down to our year-end cash balance, Dwayne, we think that’s going to be in the $70 million to $75 million range.

Now what we haven’t talked about, Bryan may have alluded to it just a little bit, are any liquidity opportunities that we really think are out there, subject to negotiation, of course, and that would be opportunities with the affinity card and the holdback for both of these companies. Both companies are at 100% holdback on their credit card transactions. We just don’t think that’s going to be the case post-restructuring. So that will be a liquidity opportunity, but subject to negotiation, of course. But that could be every 10% or so that the holdback is reduced is, I’ll call it, $20 million. We think we have ample cash without that, but we do think there’s an opportunity.

Dwayne Pfennigwerth - Raymond James & Associates

That’s very helpful. And then on Midwest, what debt are you assuming, if any, other than your $25 million note?

Hal Cooper

There’s no debt that’s being assumed.

Operator

You have a follow up question from the line of Bob McAdoo with Avondale Partners.

Bob McAdoo - Avondale Partners

When you talked about the $600,000 exit payment, is that per airplane or is that for the balance of the 717 fleet?

Bryan Bedford

No, that’s times nine.

Bob McAdoo - Avondale Partners

Okay. And is there any kind of meaningful amount of spare engines? Obviously expendables are probably not as easy to sell, but are there spares of any meaningful amount related to the 717s that are on the shelf that don’t go back automatically as part of the plane package that you could turn into some cash maybe?

Hal Cooper

Well, Bob, yes, there are. We think there’s in the $20 million range of some piece and parts that could be sold off at market value.

Bob McAdoo - Avondale Partners

By the way, one other thing, are you still there?

Hal Cooper

Yes.

Bob McAdoo - Avondale Partners

I know you guys are busier than the dickens over the next day or two it sounds like, if we have come up with a few more little (inaudible) questions like that, where’s the best place to try to get some answers over the next few days?

Hal Cooper

Call myself or Tim.

Operator

You have a follow up question from the line of Steve O’Hara.

Steve O’Hara - Sidoti & Company

I guess the question going forward is in terms of if you have the, let’s say, branded flying from Mokulele and Midwest consolidated, would that be reported separately in a separate table or something like that to kind of clear up some of the differences there?

Hal Cooper

Yes. This clearly gets us in the segment reporting, Steve. So that’s a part of our disclosure, will be the segment reporting, which I anticipate will be segregated between our fixed fee business and our branded or at-risk business.

Operator

At this time there are no further questions.

Bryan Bedford

Okay. Well, that was every bit the spirited dialogue we were hoping to have with the analyst community. So thank you for your participation and your good questions. If you do have any follow up, as Bob was asking, don’t hesitate to reach out to us. While we may not return your call immediately, we’ll absolutely get back to you. So we’re going to spend quality time in the future once we know what the landscape looks like. Let’s call it the second half of August we’ll be following up with the community on how things are shaping up here.

So thanks so much, and we’ll be talking to you soon. Have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!