Republic Airways Holdings Inc. (RJET) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: Republic Airways (RJETQ)

Republic Airways Holdings Inc. (RJET) Q2 2013 Earnings Conference Call July 26, 2013 11:00 AM ET

Executives

Tim Dooley – Senior Vice President and Chief Financial Officer

Bryan Bedford – Chairman, President and Chief Executive Officer

Joe Allman – Treasurer and Vice President Financial Planning & Analysis

Daniel Shurz – Senior Vice President-Commercial-Frontier

Wayne Heller – Executive Vice President and Chief Operating Officer

Analysts

Richa Talwar – Deutsche Bank Securities

Helane R. Becker – Cowen & Co. LLC

Duane Pfennigwerth – Evercore Partners

Jamie N. Baker – JPMorgan Chase & Co, Research Division

Steve M. O'Hara – Sidoti & Co. LLC

Bob McAdoo – Imperial Capital, LLC

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Operator

Good day, ladies and gentlemen and welcome to the Quarter Two 2013 Republic Airways Holdings Earnings Conference Call. My name is Caroline and I am your operator for today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, the call is being recorded for replay purposes, and I’d like to turn the call over to Tim Dooley, Chief Financial Officer. Please go ahead.

Tim Dooley

Thank you Caroline and good morning everyone. Welcome to our second quarter 2013 conference call. On the call today, I'm joined by Bryan Bedford, Chairman, President and CEO of Republic; Wayne Heller, Chief Operating Officer of Republic; Joe Allman, our Treasurer, Vice President of FP&A; Daniel Shurz, Senior Vice President of Frontier; and Ryan Willman, Vice President and Corporate Controller.

Before we get into our prepared comments, I’ll first cover the Safe Harbor disclosure. Please note that the information contained in our earnings release last night and this call contain 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 recent filing with the SEC.

Now, I’ll turn it over to Bryan to begin with some introductory remarks.

Bryan Bedford

Thank you, Tim, and good morning to all of our listeners. I’d like to open with a sincere thank you for the continued hard work and the dedication of my 10,000 coworkers at both Republic and Frontier. Despite the numerous distractions that they face, they continue to remain focused on providing safe, reliable, and high customer service for our passengers, which we are very grateful.

August is a milestone month for both Republic and Frontier. Republic celebrates its 39th year of commercial service, and Frontier celebrates its 19th anniversary. So again congratulations to all of our employees during this milestone month.

In less than a week, we’ll operator our first flight, under our new American Airlines, Embraer 175 agreement and I’d be remissive, if I didn’t take a moment to thank all of the many folks within our organization who have been so focused behind the scenes developing the program for its launch on August 1. So again on behalf of the entire senior management team, thank you. We’re very much looking forward of course to regrowing our long-standing relationship with the new American Airlines.

Turning to our business update; while our second quarter results show improvement from last year, we still have a lot of work to do to accomplish the last two key objectives in our 2013 business plan, which of course sort of complete the sale of Frontier and to obtain new labor agreements with all of our represented employees at Republic.

I am sure that Frontier sales process is at the forefront of most of your mind. So let me take a minute and share with you what I am legally permitted to discuss about where we are in that process.

We have entered into an exclusive non-binding term sheet with a third-party purchaser. The term sheet contain several conditions which must be met in order for the parties to enter into a binding commitment and thereafter complete the transaction. Some of those conditions require third-party agreements, which we can either control nor share a cooperation. If the binding sales agreement is reached and please understand, we are making no assurances as to whether such an outcome will occur or not, we currently would expect such a closing to occur late in the third quarter.

And finally, we do have confidentiality obligations with the prospective purchaser and therefore, we will not take any questions or make further statements about the agreement, the process, the conditions, or the status or any other possible outcomes at this time.

One other update for our shareholders on this call, because the exclusivity period with the potential purchaser currently extends beyond our current annual shareholder meeting date, which is August 13. And because it’s our hope that we can use that time to offer more clarity to our shareholders on our business going forward, our Board of Directors has decided to push back our meeting date into September and we will issue a press release later today with revised date, time, and location for that revised shareholder meeting date.

Wayne Heller will also give the labor update a bit later on the call, but for now, let me turn the call over to Tim, and the rest of the team to cover the financial highlights from the quarter.

Tim Dooley

Thanks Bryan. Our year-over-year progress from restructuring Chautauqua brought us another quarter of financial improvement and on a consolidated basis, we reported second quarter 2013 diluted EPS of $0.46, that’s a net income of $24.6 million which compares favorably to diluted earnings per share of $0.40 on net income of $20 million in the second quarter of last year. The $0.46 diluted EPS result is just above the range given on our last call of $0.35 to $0.45.

On our Republic segment, pre-tax income for the segment improved almost $9 million to $27.7 million in the second quarter of 2013 compared to $19 million in the second quarter of 2012. Our Q2 margin on Republic this year of 8.2% is above our guidance, due mainly to the shifting of some calendar driven maintenance events into the third quarter. The year-over-year improvement was driven by two factors related to our 50-seat restructuring program.

During last year’s second quarter, we incurred approximately $6 million of idled aircraft cost on Republic. However by the start of this year, all the aircraft were back in operation. Secondly, the restructuring has provided improved operating economics for our small jet platform.

Republic revenues decreased approximately $21 million from the second quarter of 2012 to $336.8 million this year and the passenger service revenues which reflect the revenues from pro-rate operations with Frontier decreased significantly from the prior-year second quarter as year-over-year Republic removed 12 of the 17, E190 aircraft which were operating under pro-rate service with Frontier. Five of those aircraft were moved to our new fixed fee charter service operation, five of the aircraft were sold over the last few quarters, and two of the aircraft two of the aircraft were returned to lessors.

We continue to operate five E190 aircraft under the pro-rate agreement with Frontier, however those 5 aircraft would likely be phased out by the end of 2013 if Frontier is sold.

Fixed fee service revenues increased $35 million to $316.9 million and that was despite the removal of fuel expense and the related revenue reimbursement on our United E170 contract. United Express fuel accounted for $25.1 million of revenues in the prior year second quarter, so absent this change in fuel, fixed fee revenues were up 23% or approximately or $60 million. There were three main drivers to this growth in the Republic’s fixed fee revenues; first, our United Q400 operation, which began in the third quarter of last year; second, our E190 fixed fee charter program, which began earlier this year; and finally, placing idled aircraft back into fixed fee service.

The fuel cost on Republic were $42.3 million lower for the quarter, despite an increase in the price per gallon from $326 to $334 in the second quarter of 2013. The lower fuel cost were due to the removal of the United fuel expense as well as the significant reduction in our Frontier pro-rate operations.

Moving on now to the Frontier segment results; Frontier posted pretax income of $13.7 million during this year’s second quarter, down slightly from the income of $14.2 million in the second quarter of last year.

Capacity at Frontier declined 10.1% due to operating six fewer Airbus aircraft in its fleet quarter-over-quarter. Total revenues were down 11.6% to $327.6 million and so unit revenues decreased 1.6% to $11.98.

Frontier continues to set new records for load factor with this year’s second quarter coming in at 90.9%, that’s 0.8 points higher than the prior year’s second quarter, which was also a record. Frontier’s operating unit cost excluding fuel was $0.727 for the second quarter of this year and this represents a 1.3% increase from the second quarter of last year, which we view as reasonable cost performance in light of Frontier’s smaller operating footprint.

Frontier’s aircraft fuel cost including all into-plane taxes and fees came in at $3.14 per gallon for the quarter, that’s down $0.21 per gallon from the second quarter last year.

During the quarter, we recorded a fuel hedge loss of $1.7 million or $0.05 per gallon. Frontier had 70% of its July consumption hedged and 30% of August is hedged as well, nothing beyond that at this time.

I will turn the call over to Joe Allman, our Treasurer now to discuss the liquidity position we have in our cash flow results. Joe?

Joe Allman

Thanks Tim. We ended the quarter with total cash of $439 million, up $10 million over our March 31 balance. Of this, approximately $239 million was unrestricted, which was $9 million higher than the top end of our guidance for the quarter, but down about $8 million over Q1, driven by our investment in the E175 aircraft with American Airlines.

Our restricted cash increased $17 million to $200 million total related to the increased seasonal bookings at Frontier during the second quarter. We incurred non-aircraft CapEx of approximately $6.8 million during the quarter and made $25 million free delivery deposit payments with Embraer related to the 47 E175 aircraft order. We also repaid $55 million of principal on our debt during the quarter.

As you may recall, we will take delivery of 18 Embraer 175 aircraft over the remainder of 2013; nine of those will be scheduled for the third quarter and the remaining nine in the fourth quarter. As of today, we have taken delivery of the first three aircraft, the first two of which are scheduled in our service with American on August 1. We’ve updated our stats on our website, which hopefully will help you identify when the aircraft will be going into service with American.

We recently secured fund financing for all 47 aircraft with an affiliate of the Brazilian Development Bank, on more favorable terms than our initial estimates which is leading to improved cash guidance going forward. Tim will provide you some color on our expectations for Q3 cash later on the call.

Now, I will pass the call over to Daniel who will give you can update on Frontier’s network and commercial developments. Daniel?

Daniel Shurz

Thanks Joe, and good morning to our everyone listening. As Tim mentioned earlier on the call, there have been a lot of changes within the Frontier network on a year-over-year basis. During the second quarter, Frontier operated six fewer Airbus aircraft and Republic operates twelve fewer E190 in the Frontier network on a pro-rate basis.

Obviously this created some challenges as we needed to make adjustments to our network with significantly fewer airplanes and also accomplish our goal to open an East Coast focus city in Trenton, New Jersey.

Our revised schedule structure in Denver is designed to improve local market performance. Now we’ve seen strong improvement in both our local mix and in the share of our bookings generated at flychautauqua.com.

Additionally we’ve been pleased with the reception we’ve experienced at Trenton, where we had two aircraft deployed in most of the second quarter. Our TRASM performance was weaker than in Q1 driven by this year’s earlier restart, we confirm by an out of peer revenue accounting adjustment. We saw similar trends to other carriers with revenue comps improving each month during the quarter. And the rough effect of the out-of-period adjustment reduced TRASM by slightly over 1%. We are continuing in our determined focus on transforming Frontier into an ultra-low cost carrier.

During the quarter we continue to improve ancillary revenues per passenger with our seat back changes increasing slightly year-over-year. Further improvement can be expected in the third quarter as we started charging most customers for soft drinks as of July first and we will implement our recently announced fees for carrying bags in August. We expect to make continued progress on our internal distribution mix and add also an solid revenue per passenger during the third quarter.

We are seeing good industry capacity trends in the Denver market. Total domestic seat capacity including that generated by Frontier will be down around 4% in the third quarter and between 2% and 4% in the fourth quarter. And the same store data in markets that we flew both last year and this year tells a similar story with Q3 same store industry capacity dropping around 2.5% and in Q4, we expect it to be down between 1% and 2%.

Finally, turning to the third quarter, we are seeing similar revenue trends to those reported by some of our competitors earlier this week with July revenue comps as of now being stronger than June and bookings for August and September are looking good.

Now, I’ll turn the call back to Tim, who will provide you with some guidance for the third quarter.

Tim Dooley

Thanks Daniel. Yeah, so for the third quarter financial guidance, this is based on our continued ownership of Frontier for the full quarter and so it doesn’t give any effect to a possible transaction outcome. So with that, our consolidated diluted EPS range of guidance is between $0.55 and $0.65 for the quarter and we expect an unrestricted cash balance at September 30, between $235 million and $245 million.

For the Frontier segment, we’re looking at unit revenues to increase in the range of 1% to 3% which would put total revenues in the range of $350 million to $360 million on our Frontier segment. The chasm on Frontier excluding fuel is expected to be up 3% to 5% from last year’s result of $6.86. Capacity on Frontier is expected to be down approximately 7% and stage length is projected to be 8% lower than last year’s third quarter.

We expect Frontier’s oil and fuel cost per gallon to be in the range of $3.20 to $3.30 per gallon, which would be slightly down from last year’s $3.31 per gallon result in the third quarter. Considering all of these factors on Frontier, we would expect Frontier’s operating margin to be in the range of 8% to 10% or in line with the prior year’s third quarter performance.

On our Republic segment, we expect revenues of approximately $335 million to $345 million and a pre-tax margin percentage of approximately 6% to 8% in the third quarter.

Now, I'll turn the call over Wayne to provide labor update. Wayne?

Wayne Heller

Thanks Tim. As mentioned in our earnings release, in late June, we reached tentative agreements with both our flight attendant and dispatch groups. Both TA’s are five-year agreements and recognize the outstanding contributions that our flight attendants and dispatch groups have made in making our airline successful, whilst still allowing us to remain competitive as we pursue additional business opportunities. The ratification process for both agreements should come to a close within a week and an announcement expected shortly thereafter.

Turning to our open labor agreement with our pilots, as many of you know, the National Mediation Board has put us in recess since March of this year. We do have an expectation that the board will have a meeting sometime in August with both the company and the IBT to determine whether there is a basis for resuming mediated talks or continuing on with the recess.

I'll now turn the call over to Bryan for closing remarks.

Bryan Bedford

Thank you, Wayne. Again, I simply want to thank all my coworkers and our management team for their continued performance and another solid quarter on behalf of our shareholders and our partners. So with that Caroline, I think we're ready to open the call for questions.

Question-and-Answer Session

Operator

Thank you, Bryan. (Operator Instructions) Please standby for your first question, which comes from the line of Michael Linenberg. Please go ahead.

Richa Talwar – Deutsche Bank Securities

Hi, everyone. This is actually Richa Talwar in for Mike.

Bryan Bedford

Hi.

Richa Talwar – Deutsche Bank Securities

Hi, just a few questions here. First, you saw United reported yesterday and they made some comments in their press release about introducing new E175 into their business operated by SkyWest, and another United Express carrier, and I know you probably can’t comment on that Joe specifically, but can you give us a sense of what the RFPs in the market look like right now. And Bryan I believe in the past you’ve indicated that your cost could get a little bit more competitive on the large jets to compete for business, I wanted to see how much low hanging fruit or how much more work you think you could do there to improve your competitive position?

Joe Allman

Well, as we said on previous calls, we are in a bit of a holding pattern right now until we can get our labor costs with greater visibility. So we really do need to reach firm agreements with all of our represented labor groups. As far as our fees in the market, the general belief there is that Delta is essentially fully satisfied at this point.

United, there is this element of the 30 currently unallocated aircrafts, although Republic is not currently competing for those 30 shells. And then finally, there is additional work to be had with American, we have 47 Option Aircraft that are well positioned in the early 2015-2016 time frame. And it’s our expectation that there is a couple of uncertainties there that have to be resolved before American is going to be in a position to make an announcement. And again, at this point, our focus is on getting our – going from an unclear situation with labor cost to some thing that would give us more clarity in terms of how we can bid and whether or not, there was a adequate return on invested capital to grow.

Richa Talwar – Deutsche Bank Securities

Okay, great. That was helpful. And then just generally, it seems that there has been strong demand for larger region on jet slightly. We’ve seen a lot of orders come through. And I was hoping you could give us a sense of your ability to get your hands on new aircraft and pursue those growth opportunities as they present themselves.

Bryan Bedford

Well, it’s our belief that Embraer for the most part is booked through the middle of 2015 to the end of 2015. Again, we think that the delivery positions that we have which began in Q2 of 2015 and run out through the end of 2016 are solid. They’re well positioned. We think we bought them at a good price. We think that’s a competitive advantage for us. But again, that’s still 18 plus months out and so our focus internally is just getting our arms around labor.

Richa Talwar – Deutsche Bank Securities

Got it. Thank you.

Operator

Thank you. The next question we have comes from the line of Helane Becker. Please go ahead.

Helane R. Becker – Cowen & Co. LLC

Thanks very much, operator. Hi, guys. Thanks for the time this morning.

Bryan Bedford

Hi, Helane.

Helane R. Becker – Cowen & Co. LLC

Just I have a question about the Republic, the fixed fee operation. It looks like close to 70% and why the margins were above the guidance? So it looks like 70% of your business comes from airlines that are in Delta and I was just kind of wondering, if that’s why you get better margins from those airlines than you do from Delta or can you maybe go through why you saw the better numbers like where that was coming from.

Bryan Bedford

Yeah, so there were a couple of things there Helane. I mentioned one of them in the preamble, which was, we had some maintenance events that were scheduled in the second quarter, which moved into the third quarter. So, relatively I think quarter-over-quarter, sequentially we’re actually forecasting results down from where we ended in Q2. The second thing is, there are some passthrough costs that has come out of both the expense and the revenue. And so since they’re passthrough, they don’t have any effect on income and that tends to drive up your margin percentage. So, those two reasons are essentially why we’re seeing a little bit higher margin on Republic.

Helane R. Becker – Cowen & Co. LLC

Okay, thanks. And then, I don’t know if you can answer this, but I am going to give it a go. Does your agreement contemplate what you're going to do with the Airbus order book?

Bryan Bedford

It does. The expectation is that the Airbus order would be assigned to Frontier.

Helane R. Becker – Cowen & Co. LLC

Okay, thank you. Well, I appreciate your help. Thanks very much for the time.

Bryan Bedford

Sure, Helane.

Operator

Thank you for that question. The next question we have comes from the line of Duane Pfennigwerth of Evercore Partners. Please go ahead.

Duane Pfennigwerth – Evercore Partners

Hi, good morning.

Bryan Bedford

Hi, Dwayne.

Wayne Heller

Hi, Dwayne.

Duane Pfennigwerth – Evercore Partners

I'm going to try here a couple of questions, you can probably shut me down. But just in terms of the duration of time that you’ve been speaking with this party in particular and when does that exclusivity period expire?

Bryan Bedford

Here, Ryan to shut you down on that one. The only hint we gave you is that exclusivity was behind our scheduled meeting date of August 13.

Duane Pfennigwerth – Evercore Partners

Okay, fair enough. I guess what's the Plan B, right, because it doesn't feel like you’re communicating leverage to sort of motivate this process. So I mean what is the Plan B, if the party you’re dealing with or these third parties that you can’t control can’t get their act together in sufficient time?

Bryan Bedford

Well, again, I think we have said this over and over again. Plan A is to sell the business, because essentially that’s what our shareholders have told us to-date. They want us to accomplish and that’s where the management team is spending its time and then that’s our intend as we sit here today. Having said that, Frontier is not consuming capital for Republic. Now Republic has decided it’s not going to make the investments in Frontier that are necessary to take it to that next level of ultra low cost carrier transformation. So that’s something we believe the new investor should do and would do if the sales consummated.

So, again, Plan A is to sell the business and when we get together in September with our shareholders, that’s what we intend to talk about. But if for some reason, let’s say it was not completed, then we’ll have a discussion about where we go from there.

Duane Pfennigwerth – Evercore Partners

Okay. Thanks for the time.

Bryan Bedford

You bet. Thanks Dwayne.

Operator

Thank you. Our next question comes from the line of Jim Baker.

Jamie N. Baker – JPMorgan Chase & Co, Research Division

Good morning guys.

Bryan Bedford

Hello Jim.

Joe Allman

Hi Jim.

Jamie N. Baker – JPMorgan Chase & Co, Research Division

So more perhaps maybe Frontier questions, but all right. So the 190’s five that you have there, you say if you sell Frontier or do something with it, I guess there is no go, what would you do with those aircraft?

Bryan Bedford

Well, we are looking at options to sell the aircraft and if not we will look at ways to continue to expand our charter programs.

Jamie N. Baker – JPMorgan Chase & Co, Research Division

Okay. I am curious from a potential buyer perspective and then from your perspective if you keep Frontier, how difficult is it to get out of Denver, I mean you have gate commitments there and so forth, so, obviously the two best airlines at the lower end of the fair and cost structure are Spirit and Allegiant. So, I believe Frontier has tried to be maybe both of those and you’re still how up in spokes there, I guess as well, so one, what is Frontier, what can it be and then how difficult is it for that Frontier to essentially downsizing Denver in a pretty big way.

Bryan Bedford

Well, I appreciate the question Jim, but again we get too speculation about what’s beyond the current plan. So if we have to cross that bridge in September, we’ll cross that with our shareholders at that time. But right now again the focus is on completing a transaction and that’s what the management team is going to keep its vision.

Jamie N. Baker – JPMorgan Chase & Co, Research Division

Okay. Hopefully, luck is with it.

Bryan Bedford

Thanks Jim.

Operator

Thank you. The next question we have comes from the line of Steve O'Hara. Please go ahead.

Steve M. O'Hara – Sidoti & Co. LLC

Hi, good morning.

Bryan Bedford

Hi, Steve.

Steve M. O'Hara – Sidoti & Co. LLC

I was worried if you can just talk about some of the challenges you think you may face and maybe how you expect to sum out those in terms of attracting pilots, maybe assuming a pilot deal is reached, but given new regulations and so forth ?

Bryan Bedford

Yeah, that’s a fair question. Well, I think on our last call, we talked a little bit about some of the changing dynamics in the regional airline space, driven primarily by consolidation and revisions to our network airline partners scope. And essentially we’re going to see a regional airline industry that’s significantly smaller than the industry that we have today and therefore there will be frankly overall lower demand for pilots. So the real question is, who are the winners and losers within the space and what’s ultimately the timing.

So as an example, Delta has talked about this in great length reducing the number of overall aircraft deployed in the regional program, United has got similar requirements within their scope. Now that mix is changing, so the good news is we dealt and particularly we’re going to see a reduction of somewhere around 225, 50 seat regional jets deployed and then an increase by 70 of the number of large capacity regional jets. And so that same kind of mix change we’re going to see both the United and ultimately American.

Although due to the merger situation and ultimately how the agreements get aligned, so let’s clear what the amalgamated US Airways, American airlines scope will be. But I think the trend will be similar. So we are projecting in total, roughly 600 small jets going out of the market over the next three plus years and only about 300 aircraft replacing them. So, again that’s going to leave us with about 3,000 surplus pilots, which I believe the industry will clearly absorb. But now again the question is going to be who are the carriers, regionals that are growing and who are the regionals that are shrinking.

Steve M. O'Hara – Sidoti & Co. LLC

Okay, that’s interesting. And I guess may be on moving to kind of the tail risk on the aircraft that you have, maybe the 50 seaters and I think you’ve with the restructuring changed that quite a bit. Tell me, where does that stand today in terms of the tail risk on the aircraft and is it where you want it to be.

Bryan Bedford

Yeah, so we have CPA agreements that extent anywhere from 2014 through 2016. The aircraft obligations under lease and the debt financing anywhere from sort of 2015, upto to 2018. So there is some tail risk in there, that we certainly we need to cover and feel good about the economics on the small jet aircraft now post restructuring that the aircraft will stay employed in the industry.

Joe Allman

Yeah, again we’ve got nearly a 1,100 of these aircraft and the industry today, that’s going to shrink down we think again to around 500. So our requirement is to keep 70 aircrafts busy within that portfolio of 500. Again we don’t think that 50 seater is going away. We think all the network airlines will continue to have solid deployment opportunities where Republic as to fit – it is an asset management process for us, it’ certainly not a margin producer for us. But our goal is to keep those airplanes busy with our network airline partners due to the fact that we think that is going to continue to be in demand for safe, reliable and economical 50 seat lift.

Steve M. O'Hara – Sidoti & Co. LLC

And then maybe just as a follow up on that, I mean in terms of the conversation that you have with your partners, maybe versus 3 years ago. I mean are those – I don’t want to provoke you, but are those negotiations or discussions less contentious maybe than they were?

Bryan Bedford

Well, I don’t know if I had used the word contentious, but they’re certainly when you leave in a world where there is an abundant supply and marginal demand, there is certainly a downward view on what the price of those aircraft was. We have taken somewhere around $200 million write-down on the fleet. We’ve obviously gone through restructuring that we think marks the product to the market value. So, again we think the work that we accomplished last year puts us in a relatively strong position, but again, we don’t see that 50-seat portfolio is a margin contributor to our business. We simply need to get to an outcome that minimizes the downside, keeps the airplanes busy through their remaining commitments.

Steve M. O'Hara – Sidoti & Co. LLC

Okay, thank you.

Bryan Bedford

Thanks Steve.

Operator

Thank you. The next question we have comes from the line of Bob McAdoo. Please go ahead.

Bob McAdoo – Imperial Capital, LLC

Yeah, just a couple more non-Frontier questions if I could.

Bryan Bedford

Thanks Bob.

Bob McAdoo – Imperial Capital, LLC

The E175 that are going in now, are those one-for-one replacement for the small Eagle Flights that you had over the last several years?

Bryan Bedford

No, the…

Joe Allman

Cargo is additional flight.

Bryan Bedford

This is a separate agreement from the existing Chautauqua 140 CPA. And so as an example, the Chautauqua 140 CPA was originally scheduled to expire in February of this year. That’s been extended out into 2014. It’s unclear whether or not that will be further extended. So we don’t have any visibility on that as we sit here today, but it’s not designed to be a replacement for 175s or 140s.

Joe Allman

Yeah. And keep in mind there is just 15 of those 140s and there will be 47 175s under the program.

Bob McAdoo – Imperial Capital, LLC

So the pilots for the 18 airplanes that are going into service this year are those in fact driving new pilots off the streets or?

Bryan Bedford

Yeah, to some degree we’ve obviously had some pullback in the number of 190s that we’ve deployed. So we’ve retained those pilots in the system. So those pilots will ultimately be redeployed into the 175 growth for America. And yes, we certainly are in a growth and hiring mode for regional airline pilots.

Bob McAdoo – Imperial Capital, LLC

Okay. And then one final part of the pilot question. When you shrunk the fleet over Frontier by whatever it was, six or seven or eight planes, what happens to those pilots? Do they have any ability to get over to the Republic side and be hired over there or was there a furlough, or what’s going on over there?

Bryan Bedford

Well, again, I don’t know that we can get deep into the weeds on Frontier staffing and but there was no furlough and that the Frontier business plan anticipates a resumption of growth going into 2014, but again that’s really up to the new potential investor.

Bob McAdoo – Imperial Capital, LLC

So basically just utilization slipped down a little bit over there, it sounds like.

Bryan Bedford

Yeah, I think that’s right.

Bob McAdoo – Imperial Capital, LLC

Okay, then one final thing. Have you ever talked about on the 175 project with this Brazilian financing that you just got, what kind of an advance rate there is, or how much cash you have to put into each airplane or whatever? What does that do to your pay? What’s the drain on your cash as you go through this process?

Bryan Bedford

Bob, I don’t think we’re really due to confidentiality on that agreement and then some competitive concerns. I don’t think we want to get into the weeds on that.

Bob McAdoo – Imperial Capital, LLC

Okay. All right. I just was wondering if you’d ever said anything. It’s not a big deal one way or the other, just more curious as to what it does to your cash. All right. Thanks a lot.

Bryan Bedford

I think as Joe mentioned on the call, it’s better than what we originally anticipated, so it has been less of a cash.

Joe Allman

Yeah. I think on our last quarter call, we indicated it was close to $50 million and we think we’re better than that. That’s for the 18 coming in 2013.

Bob McAdoo – Imperial Capital, LLC

So something less than $50 million for the 18?

Bryan Bedford

A net number, yes.

Joe Allman

Yes.

Bob McAdoo – Imperial Capital, LLC

All right. Super. All right, thanks a lot. Good quarter.

Bryan Bedford

Sure, Bob.

Operator

Thank you. The last question of the call comes from the line of Glenn Engel. Please go ahead.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Good morning. Bunch of questions, one, there is new pilot work rules early next year. Will that have much of an impact on your cost?

Bryan Bedford

It will have a slight impact, but not a great one at all. We anticipate an uptick in the required number of pilots that over and above what we have today but nothing significant.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Second, I assume that your guidance includes the higher labor costs for the flight attendants and the other contract, but not yet anything on the pilots.

Bryan Bedford

So, that’s true Glenn for the third quarter. We had some full-year guidance out there that did include a provision for the pilots. But now our newly guided third quarter numbers don’t have any assumption that a pilot agreement is reached in the third quarter. I think the one is the guidance would be revised downward.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

You mentioned that Airbus goes with Frontier. Where would the Bombardier orders go with?

Wayne Heller

They remain at Republic.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

On Frontier, can you talk about what percent of capacity now is outside of Denver and how that has performed?

Bryan Bedford

Daniel?

Daniel Shurz

Yes, Glenn. Good morning. Currently on our scheduled capacity, about 90% of our scheduled capacity in the third quarter is in Denver, about 10% of it is outside and out of that 10%, about half of it is in what we call Apple cobranded service when we sell some seats on what are mixed on what are partially scheduled flights to vacation destination.

Bryan Bedford

That leaves slightly less than 5% of the capacity being deployed in Trenton and Wilmington. Our Wilmington folks started service July 1 with one airplane and it’s too early because we’re very happy with the volumes, but it’s too early to make some comments on how it’s performing. As we said, we are seeing Trenton perform inline with our expectations, we have seen good load practice, we have seen steady growth in yield since we started service, and we’re happy with how we’re doing that.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Finally, I still think there is a lawsuit out there from the pilots. I forget who they are suing, you or everybody or each other. Can you update us on that?

Bryan Bedford

Yeah, there is no update Glen.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay.

Bryan Bedford

There has been no activity on the suit.

Glenn D. Engel – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thank you very much.

Operator

Thank you. Ladies and gentlemen that concludes your Q&A session, I’d now like to turn the call back to Bryan, for closing remarks.

Bryan Bedford

Okay, thanks Caroline. Well, again, we appreciate the robust participation on the call today, and again we will get a update to the revised shareholders meeting, time, date, location out this afternoon, so keep an eye out for that. And again, thanks to my team here in Indianapolis and in Denver and we’ll look forward to updating you again in the near-future. Thank you.

Operator

Okay, Bryan. Thank you for your participation in today’s conference. That’s concludes your presentation you may now disconnect. Have a good weekend.

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