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Republic Airways Holdings Inc. (NASDAQ:RJET)

Q3 2009 Earnings Call Transcript

November 5, 2009 10:00 am ET

Executives

Hal Cooper – EVP, CFO, Treasurer and Secretary

Bryan Bedford – Chairman, President and CEO

Sean Menke – EVP and Chief Marketing Officer

Joe Allman – VP and Controller

Tim Dooley – VP, Financial Planning and Analysis

Analysts

Alex – BAS-ML

Duane Pfennigwerth – Raymond James

Jim Parker – Raymond James

Helane Becker – Jesup & Lamont

Quincy Lee [ph] – Tieton Capital

Bob McAdoo – Avondale Partners

Steve O'Hara – Sidoti & Company

Mike Marburg – Ramsey Asset

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2009 Republic Airways Holdings, Inc. earnings conference call. My name is Katrina and I will be your operator for today. At this time, all participants’ are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Mr. Hal Cooper, Chief Financial Officer. Please proceed sir.

Hal Cooper

Thank you, Katrina, good morning everyone, and welcome to our third quarter conference call. Let me introduce the team members in the room here joined by Bryan Bedford, our Chairman, President & CEO; Wayne Heller, our Chief Operating Officer is here; our newest member of the team, Sean Menke, our Chief Marketing Officer is also present; and Joe Allman, our VP Controller; and Tim Dooley, our VP of FP&A join us as well.

I will turn it over to Bryan with a brief update of the earnings release but first let’s start with the Safe Harbor. Please note that the information contained in our earnings release and this call contains forward-looking information as defined by United States securities laws. Forward-looking information is subject to 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.

Let me turn the call over to Bryan now who is going to give some introductory remarks and provide you with some highlights in our press release that was issued last night. Bryan?

Bryan Bedford

Thanks, Hal. Welcome to all of our listeners this morning. I want to make sure I leave plenty of time for questions so we are going to try to power through the initial commentary. Certainly, there is no get around the fact that the numbers this number are a little messy, like the noise going on with the restructuring process at Midwest, and that is going to continue to be the case for the next couple of quarters as we finish that process and also complete the integration of Frontier.

First, I really want to start by congratulating my newest coworkers, the folks at Midwest Airlines and all the folks that we now have joining us in Denver and throughout the entire Frontier network, I think that everybody in the industry congratulates the Frontier folks who kept their eye on the ball during their reorganization process and continued to deliver a great product to the customers, continued to enjoy a lot of support from the Denver community. I want to welcome all of you to the Republic family. It is great to see so many of you a week before last out at the Denver merge incident. Our acquisition of Frontier now makes us more than an 11,000 strong here at the RJET family.

It is an exciting time for us and I offer my sincere thanks to everyone for all the things that you are doing everyday to help accomplish our mission. I got to tell you our team did a great job in the third quarter. They operated an outstanding airline and continued to deliver on our promise of safe, clean, and reliable service. So, again, sincerely thanks to each of you for all your continued performance.

No doubt, you are all aware the company now has two distinct ways in which we produce revenues. Our revenue diversity has always been a key success attribute for Republic certainly through multiple partners in our fixed-fee service agreements and now through branded flying at Midwest and Frontier. Beginning this quarter, you are going to see us report financial information separately for these two distinct segments of our business (inaudible) we are going to try to continue to talk about things either fixed-fee or branded, again the numbers are – we have got a little bit of noise in there, so we are going to do our best to walk you through the third quarter, and give you some insights as to where we are going over the next couple of quarters.

So, let’s focus on the fixed-fee business first. Total revenues, headline revenues reported a very large reduction, $100 million reduction in revenue, but when we take out the fuel reimbursement from our partners, which was down $82 million, the net change in our fixed-fee revenues was about $18 million, which is down 6%. That 6% decrease is driven by a 10% reduction in block hours and reduction in block hours is driven by two factors; one, about a 6% reduction in our aircraft utilization in our fixed-fee business, and then the removal of 22 aircrafts from our Continental capacity purchase agreement. Those aircrafts removed is part of the normal contract process. Those aircrafts are either being returned to lessors or being subleased offshore.

Our operating cost for the quarter excluding fuel but including interest expenses increased to $0.0761 per ASM, that is up again slightly from $0.0757 for the third quarter 2008. Pretax income for the quarter on the fixed-fee business was about $20 million and it compares to $28 million last year, again the main difference with those results is a 6% reduction in aircraft utilization on the fixed-fee fleet and an increase in our maintenance expenses on our 50 seaters, which are entering a time in their airframe cycles where the life-limited parts on the engines are being replaced. We spent about $6 million more in the third quarter replacing LLPs than we did in the third quarter of 2008.

One other item that negatively impacts fixed-fee results for 2009 is the negligible increase in our fixed-fee rates, which we reimbursed due to historically low CPI. The number of our contracts actually received no rate increase this year due to the CPI mechanics; of course, the cost for our employees and the costs to maintain the aircraft were increasing, which was producing a little margin pressure for us.

Our fixed-fee fleet will continue to decrease over the next two quarters. As we have announced, we are removing seven 50-seat aircraft under their normal contract expiration with United at the end of the year, and then the final seven CRJ-200 aircraft are being removed from the Continental program, again this is hardly the normal time expiration of the agreements. The CRJs are being returned to the lessors which will benefit us by getting rid of the fleet type and then the seven 50 seaters from coming out of the United will be returned to the lessors or subleased offshore. We continued to actively manage our fixed-fee fleet to reduce our exposure to 50-seat aircraft. We are transitioning our mix to more desirable 70 and 99-seat regional jet products. In 2010, more than 75% of our fixed-fee capacity in revenues will be derived from our EJet product.

On the branded business side, total revenues were $73.9 million for the quarter, which includes revenues for Midwest airlines for August and September and for (inaudible) for our three months of the quarter. This revenue produced a total revenue per ASM of $0.01283, a load factor of just about 78%. Operating cost excluding fuel were $0.01064 and that drove the pretax loss for the quarter on the brand business of about $16 million of which about $6 million was related to (inaudible). As a reminder, there are no results for Frontier Airlines included in the third quarter as our transaction closed on the 1st October. So next quarter you are going to see a full quarter of results for Frontier included in the branded operation. I will note that Frontier did produce strong results for the third quarter. Sean and his team did a great job. Pretax income of about $30 million before reorganization costs, which produced about a 10% operated margin for Frontier.

So putting the fixed-fee and branded businesses together, our consolidated results for the third quarter, net income was $3.3 million compared to $17 million for the third quarter last year, EPS of $0.09 versus $0.50 for the same quarter last year. We ended the quarter with $148.7 million of cash, of which $63.2 million was restricted. Going forward, we are projecting a year-end cash balance of about $275 million of which $150 million would be on restricted, and that is based on an assumption that there is no change in our credit card hold back, which is essentially fully reserved today.

So now, I am really thrilled to turn over the call to Sean Menke, who is running the branded business for both Midwest and Frontier, I will let him walk you guys through some of the competitive environment we are seeing in Denver and Milwaukee and also cover some key items on the agenda for the brand business over the next few quarters. Sean?

Sean Menke

Thanks, Bryan. First, I would like to say I am pleased to have been passed heading [ph] the branded business within Republic and I am excited about the opportunity we have at Frontier and Midwest brands.

As it stands now, it is our intent to maintain the two brands, Frontier and Midwest, run by one management team focused on driving efficiencies and leveraging the quality that each brand exemplifies. A foundation of both brands has been their commitment to quality, customer service, and that commitment has been rewarded by the overwhelming support that both brands have received from the loyal customers in their hometown markets of Denver, Milwaukee, and Kansas City.

We think quality of service and product offering matters to the customer. Of equal importance to our long-term success is the underlying cost structure to produce the product and how it compares to our rivals in the marketplace. Frontier through its restructuring focused on becoming a leading low-cost operator without sacrificing product quality. In the most recent quarter, Frontier posted a CASM excluding fuel of approximately $0.059. On a stage length adjusted basis, Frontier’s CASM excluding fuel was basically a push with their trends over 5% lower than Southwest and nearly 40% lower than United Airlines. This cost advantage allowed the company to post an exciting pretax profit of $30 million for the third quarter of 2009. In addition, the company (inaudible) domestic market share during the quarter, which was just shy of 25%, which was actually slightly higher than its pre-bankruptcy filing market share.

There is still a lot of talk about how the Midwest brand no longer has value. Midwest, at its peak, operated nearly 60% of the domestic capacity to fund Milwaukee. Due to its ongoing restructuring over the past two years, the carrier’s market share dropped to approximately 33% in July and August of this year. However, as we began to rebuild the Milwaukee network with the E190, we experienced a turning point in September as Midwest market share improved 2.5 points to 35.4%. Midwest consistently ranks as one of the best domestic airline brands. In fact, Midwest just placed third on the (inaudible) most recent ranking coming in behind Virgin America and Jet Blue. So, obviously, the brand still has value. In fact, in coming markets, Midwest has been able to maintain significantly higher yields and RASM production versus its primary competitor in Milwaukee.

So why then is Midwest losing money? Quite simply, it is a cost problem. We intend to fix this cost problem by using Frontier’s operated Airbus A319s in the high demand low-yield market and by using very cost-efficient EJet operated by Republic in Midwest core business market. In other words, we turn Midwest into a virtual airline and the Midwest brand is alive, well and rebuilding. Effective this past Tuesday, all Boeing 717 aircrafts have been removed from service. We now operate cost-efficient Airbus equipment from Milwaukee to Los Angeles, Phoenix, Las Vegas, Orlando, Tampa, Fort Myers, and Boston. As we work through the integration, we hope to continue to build on our recent momentum and reestablish our preferred position in Milwaukee.

As we begin the integration, my team is very focused on the next two quarters on accomplishing the following, really continue to optimize the network. We feel that there are areas that we can continue to financially stabilize the network. We are already adding capacity to strong performing markets in both networks. We are now seeing and launching new service to previously market served and other new opportunities. On the revenue side, we are spending a lot of time on integrating revenue management systems as well as pricing systems. We are evaluating steps to increase more ancillary revenue production through the a la carte product as well as the branded fair products that we offer. We continue to spend time with our technology vendors to meet our requirements to offer and sell even more ancillary revenue and services into the future.

Other things of note that are taking place is we are in numerous discussions with our carriers’ partners, both our marketing partners on the Frontier and on the Midwest side as well as other potential partners to determine the appropriate steps forward. Again in managing two brands one thing that we do need to be very careful with is ensure that we are lining the products and the services well as well as the policies and the procedures. There has been an abundant amount of time spent over the last 30 days in doing this and finally on the brands, we continue to focus on trying to leverage the 2.8 million frequent flyers we have between the two programs.

Before I pass the call over to Bryan, I would like to make some comments on the fourth quarter as well as an insight on 2010. For the December quarter, for the branded network, we are looking at capacity being up approximately 3% on a year-over-year basis. As w e look into the first quarter of 2010, capacity is going to be up in the range of 6% to 8%. To give you a little commentary while on October load factor but then give you a little commentary on what we are seeing in November and December, on a consolidated basis, the load factor for the airlines was 81.2% which rose up 2.6 points on a year-over-year basis with capacity being up a little over 2% for the consolidated airlines. For November, we actually entered the month on a consolidated basis, 1.5 low factor points ahead of last year, and we actually operated on a consolidated basis on low factor 74.5% in November of 2008.

As we look at December, we are currently tracking 1.7 points behind. It is important to know when you look at the same timeframe prior to the entrance into the month of November, we were actually tracking 4.8 points behind and as I mentioned earlier, we entered the month at 1.5 points ahead. This is indicative of what we have been seeing as it relates to bookings meaning bookings are coming in at a much closer rate, and we expect that our performance in the month of December will be good; on a consolidated basis last year load factor for December was 76.5%.

For revenue on a unit basis, we are looking at the fourth quarter, the December quarter, we are expecting a unit revenue of TRASM of about 11% to 13% down on a year-over-year basis and total unit revenue down between 8% to 10%. Now, the primarily difference between the two as many know is the ancillary revenues and other revenues associated with the business. What we are seeing right now as it relates to ancillary revenue on a consolidated basis is approximately $11 per passenger. One note that I would like to mention at this point is Frontier has just actually begun to increase the pitch on the first (inaudible) of its Airbus products, the product will be called Stretch, which we will be charging additional fee for, the plan is that that will be implemented by the end of January and begin to sell.

That is my summary for the branded side, now I would like to turn the call back over to Bryan for some final comments.

Bryan Bedford

Thanks, Sean. Again, great to have you onboard here. Before we get into the Q&A, I just want to close by saying that though our business model has been altered, our mission has not changed.

Our goal is to continue to work together, to provide the safest and most reliable and convenient travel experience for our passengers, a positive and rewarding work environment for our employees, and to develop mutually beneficial working relationships with our network business partners. We have an offside of that mission and how far it has gotten us over the last ten years. Revenue diversity again has always been a key attribute of our success. We continue to be a solutions provider for our network partners. We remain fully committed to providing safe, clean, reliable, cost efficient regional air service and our hope is that our branded business will provide us new tools to enhance our mission.

Finally, I want to wish a happy anniversary to all our employees. It is a little (inaudible) as Republic is celebrating its 35th year of providing commercial air service, coincidentally Frontier is celebrating 15 years, and Midwest 25 years of service. So, I got to tell you, I am just again thrilled to have all of our new people working for a common mission here, and I am more convinced than ever that we are positioning Republic to reach even greater heights over the next 35 years.

With that Katrina, would you open the call to questions please?

Question-and-answer session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Michael Linenberg of BAS-ML. Please proceed.

Alex – BAS-ML

Good morning everyone. This is actually Alex from London [ph] on behalf of Mike. I just had a couple of quick questions regarding the combined entity, what are the debt maturities looking like for the fourth quarter and 2010 in terms of debt maturities and CapEx as well?

Hal Cooper

Sure, I will start with the 2010 number. We have debt repayment just under $200 million, $195 million actually for the combined business. We think CapEx for 2010, again for both the branded and the fixed-fee business, is going to be around $45 million. Q4 our debt repayments, we are looking at $40 million and CapEx of a pretty minimal amount, $5 million to $6 million.

Alex – BAS-ML

Okay, great, thanks. As I am looking at the block hours scheduled for 2010, I had noticed that there were still 15 aircrafts at Continental, does that represent the subleased aircrafts that you guys are returning or is there something else behind that?

Bryan Bedford

Those 15 aircrafts remain under a CPA agreement with Continental through mid 2012.

Alex – BAS-ML

Okay great, thanks very much.

Bryan Bedford

You bet.

Operator

Your next question comes from the line of Duane Pfennigwerth of Raymond James. Please proceed.

Duane Pfennigwerth – Raymond James

Hi, thanks, good morning.

Bryan Bedford

Hi, Glen.

Duane Pfennigwerth – Raymond James

Just firstly, on the sort of profitability on the fixed-fee side, you mentioned in your comments you had some impact from maintenance, so again referring to that sort of block hour schedule, it looks like it is down about 6% in the fourth quarter and then down about 16% in 2010. So, other than sort of the block hour production impact on profitability, how should we think about rate, and can you get any relief from the $6 million headwind this quarter?

Bryan Bedford

Duane, we don’t see that utilization is going to change production in 2010 and we are going to have some maintenance cost pressure in 2010 as the aircrafts get older. So where we are at in Q3 is pretty typical for where we see things in 2010.

Duane Pfennigwerth – Raymond James

Okay, on the Frontier side you mentioned sort of profitability in the most recent quarter, can we get any sort of guidance on margin or profitability expectations in the fourth quarter?

Bryan Bedford

Well, I think what we can tell you rather than break it out between brand or the fixed-fee service, we are expecting the fourth quarter to look very similar to Q3 with the exception that we are going to have – again there is a lot of noise in the quarter for the purchase accounting for both Midwest and Frontier. So you are going to see most likely, we don’t have this mail down yet or we would give it to you but you are going to see a significant charge to write-off goodwill at Midwest, where you kind of see a significant gain for the negative goodwill that we have to adjust out of the Frontier business and the net of those two will probably be a meaningful gain in the fourth quarter, again it is all non cash.

Results are going to be a slide, a slide of $5 million to $6 million non-cash charge to deconsolidate Mokulele. Again, there is going to be a lot of noise as we go through the transition in bookkeeping process none of which affects cash but our expectation is net of all of this purchase accounting stuff, we are going to see a fairly sizable pickup, non-cash pickup in the fourth quarter, but if we just look at sort of the underlying earning performance net of all of that noise, we are sort of anticipating fourth quarter is going to look very similar to third quarter for the business.

As we go into 2010, obviously we are expecting the branded business to produce positive earnings and cash flow results for us. It is going to be more skewed to the final three quarters of 2010. We think we are still going to have transition, restructuring, and integration headwinds in Q1, probably going to push us to a breakeven a potentially slight loss in Q1. We think for the 2010 year we are going to be somewhere in the $50 to $75 range and again as we finish the integration process Duane, we know we are going to have to explain how this business works to the analyst community and to our investors and so something we – historically we have shied away from doing this, giving guidance but there is no getting around, we are going to have to do more of that going forward. We do think that we are going to have a pretty solid year in 2010.

Duane Pfennigwerth – Raymond James

I appreciate that detail, Bryan, and I think Jim has a question.

Jim Parker – Raymond James

Good morning guys. Some of us have a pretty good history with Frontier and I am curious about the 170 that were with Frontier at one time and apparently did not work out because Frontier when it went into Chapter 11, rejected the contract and those aircrafts appear to be coming back to Frontier and Midwest. I am curious as to why you think they may work now, they did not work in the past but they would work now. Do you expect them to be profitable and what is the logic behind that?

Sean Menke

Hi Jim, it is Sean. If you look at it, you have really two distinct networks and you are beginning to see how we are looking with the networks, one in Denver, there is still a vast majority Airbus capacity is deployed there. We have begun to deploy some of the 190s, we believe it is the right aircraft and it stays in the market that we serve there. We will continue to use the higher density equipment because of the competitive factor that we are seeing. It does not mean that we will not continue to look at other opportunities with other aircrafts within the fleet, that is for the Denver network. The Milwaukee network is somewhat of a different piece and what I mean by that is I have markets that actually are better served by the lower density aircrafts, the 170 for example, and the ability to match the capacity to the demand is really what we are focused on right now. So, as we continue to move forward, the fleet flexibility that we have right now is going to allow us to look at things in a number of different ways but we also have to understand the uniqueness of the two networks Denver being one that is highly competitive, not to say that Milwaukee is not but there are markets that the smaller gauge equipment works very well in the Milwaukee marketplace.

Bryan Bedford

Yes, I would add also that the 170s are not programmed to go back into Denver, Jim. There are a number of markets that Frontier exited when it exited the 170 program; Louisville is a good example of that. The fact is we are running great load factors but the CASM was such or maybe the RASM is a better look at it where you needed more seat density. While the A318 and 319 is too big, the 190 is just right. So 190 is in Denver to reconnect markets that the 170 used to be operating in that Frontier vacated, we think is a positive, the 170s will continue to operate in Milwaukee but in a perfect road, we will upgrade 170s to 175s, that would be a better product and better size offering for the Milwaukee business markets. We are keeping the 190s in a dual class, it is the ten aircrafts that are coming out of US Airways for us, not a big difference in operating trip cost between a 190 and 170 but we are going to pick up 23 additional seats and dual class. That is a huge upgrade for us going into 2010.

Sean Menke

Jim, another thing on that, I don’t like to reveal a lot of history but it is also important to point out that the carrier at the time was actually taking A320s, the 170s were coming as well as there was a new SQ400 [ph] that was coming at the time, so there was a significant amount of capacity that was flying into the Denver marketplace into Frontier network. On a year-over-year basis, we were looking at 20% to 25% capacity increase that makes it very difficult to grow any type of fleet at that time.

Jim Parker – Raymond James

Sean, in that context it appears that in Milwaukee in the first quarter, there is going to be a 40% increase in capacity, what kind of RASM or impact do you expect from that?

Sean Menke

There are a couple of factors. If I take a broad look at the entire network, if I look at from a branded network and then I will drill into your question Jim. If you look at the two networks, we have capacity that will be up on a year-over-year basis, but if you actually go back and compare it with 2008, capacity for the branded networks will actually be down 11% for that period. If you actually compare to 2007, it is going to be down a little over 18%.

The capacity that we are seeing on increase again on a year-over-year basis in Milwaukee, you are correct, is well between that 40% range when you look at it versus two years ago it is approximately 20% capacity increase. So there is no doubt that we are going to see and we have been seeing a significant amount of pressure on the yield side, but again, we have this new cost structure with the Airbus equipment as well as the EJets that we believe till we build that network and that is our focus.

Bryan Bedford

No doubt about that, Jim. Look, Milwaukee is going to be a drain for everybody who is operating there despite all the harsh words and the strong rhetorics, the fact of the matter is Midwest continues to produce a double digit – and you can go look at the T100 data and figure this out yourself, and head-to-head market producing a double-digit premium on RASM to our competitors in Milwaukee and now we have got products with Frontier A319s and the Republic operated Embraer 190s that are in worst case are going to be a push with the operating cost of our competitors and in some cases we think lower than our competitors. So you take the brand value, which again despite the harsh words, the brand has real support in Milwaukee, we have got over 1000 people in Milwaukee –

Jim Parker – Raymond James

A million.

Bryan Bedford

I said 1000, did I say million? No, 1000 employees in Milwaukee and that is a community that has continued to support Midwest through all of its travails, and the words that I am hearing from the business community is that support is going to continue. So, look, if we are telling you that we expect Milwaukee to be a drag on consolidated results for 2010 and we have got a revenue premium and comparable TRASM, you can figure out what the results are for the other guys.

Sean Menke

Another thing what Frontier has lived through, a number of people have really questioned the survivability and one thing that really became clear the company was finding footage and finding success, the brand really held up and a lot of that had to do with its home town nature and people supporting that, and again I think you will find very similar quality than in the Milwaukee marketplace and brands can be very resilient as we move forward.

Jim Parker – Raymond James

Okay, thank you.

Operator

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

Helane Becker – Jesup & Lamont

Thank you very much. Hi, gentlemen. Can you say if there is a chance that renegotiating that credit card processing agreement to release some of that cash back into the balance sheet?

Joe Allman

Hi Helane, this is Joe Allman. Yes, we are currently actively in the market evaluating our credit card processing agreements.

Helane Becker – Jesup & Lamont

Do you have like a timing on that?

Joe Allman

We would look to see that there will be some selection by year-end or near-end and transition in the first quarter if there is a transition warranted.

Helane Becker – Jesup & Lamont

Okay, good, thank you and then my next question is I noticed that your seat density in the branded market is 68. So, with the Airbuses moving into Milwaukee, how will that change that number, how should we think about that capacity going forward?

Joe Allman

Just because we have deployed the 319s in the marketplace and they have a seating of 136, you are going to begin to see that move up just a weighted average you will begin to see that move up.

Helane Becker – Jesup & Lamont

Great, okay, so by this time next year are we looking at that seating density being twice what it is now, is that kind of what we should think about it?

Joe Allman

No, it would not be in that range.

Bryan Bedford

We will give you some guidance on that Helane, give us a call Helane and we will do the math for you.

Helane Becker – Jesup & Lamont

Okay, thanks. I really appreciate that modeling. Okay, that is really it for me.

Bryan Bedford

Okay, see you.

Operator

Your next question comes from the line of Quincy Lee [ph] of Tieton Capital. Please proceed.

Quincy Lee – Tieton Capital

Hi, I just wanted to clarify, earlier you mentioned $1.60, was that supposed to be EPS on the branded only or is that a consolidated number for 2010?

Bryan Bedford

The high level EPS guidance for 2010, $1.50 to $1.75 that is consolidated.

Quincy Lee – Tieton Capital

Okay, consolidated, and I do not know if you care to breakout what your projected 2010 Milwaukee/Midwest losses might look like?

Bryan Bedford

We are not going to report the business that way, they are going to be fully transparent, we expect Milwaukee to be a drag on earnings in 2010 although we do expect the brand business to be a positive contributor to both earnings and cash flow for the year so if you can sort of read between the lines on that. I will tell you that the plan for 2010 is still a work in progress. Sean and his team are doing a significant amount of analytics on what is the right way to optimize fleet deployment, what are the right markets that we should be looking at to build back into the schedule plans, so I think as we go into our next quarterly call, we are going to have that business plan for 2010 refined, we going to be able to then refine guidance and give the analysts community a lot more clarity on our expectations for 2010 and 2011.

Quincy Lee – Tieton Capital

Okay, alright, and I guess in Denver, I just want you to give a sense of how rapidly things are improving. As far as sequential yield changes, are you seeing pretty strong improvements there or is it more muted?

Bryan Bedford

We are seeing actually in the November, December timeframe some improvement on a year-over-year basis. Capacity in the marketplace is relatively flat year-over-year, if you look at United, they are down approximately 5% to 6%, actually Southwest for that period of time is down slightly. The one thing that we have been able to see in the marketplace, and this is to route fairly the branded airline network, some of these fare increases are sticking, we are actually seeing yields over the holiday period hanging in there pretty well and I am feeling pretty comfortable with what we are seeing in November and December as it relates to some improvement on the yield side.

Quincy Lee – Tieton Capital

Okay, good and my last question is to make sure I understand this so, it looks like in Q4 in 2010 there is 14 further fixed-fee plane returns scheduled, is that right?

Bryan Bedford

That is correct, seven CRJ-200s and seven Embraer 145s. CRJ is coming out of the Continental program; the 145s are coming out of the United program. Out of the 12 aircrafts, nine of them are returned to lessors and –

Joe Allman

Out of the 14, nine are returned to lessors, the other five we expect to replace CRJ aircrafts that are currently operated by Skywest out of Milwaukee.

Bryan Bedford

The first quarter of 2010.

Quincy Lee – Tieton Capital

And then you mentioned that with some of the planes that have been returned in Q3 and that you sublease them overseas, what is the incremental profit drain of that arrangement, I mean obviously I would assume they are less profitable, how big of a drain is it?

Bryan Bedford

It is very negligible. In fact in the Q that we will be filing on Monday is it Joe –

Joe Allman

Yes.

Bryan Bedford

You are going to see the segment reporting between the fixed-fee, branded and other and in that other construct is where you are going to see the aircraft leases that are subleased offshore.

Quincy Lee – Tieton Capital

Okay, alright.

Bryan Bedford

You will be able to discern that.

Quincy Lee – Tieton Capital

Okay and the 14 plane returns, it looked like some of the plane returns for 2009 were greater than what you projected in the 2008 10-K, so they had accelerated a little bit, is there room to – is that 14 kind of a maximum or is there some wiggle room in the contracts where your partners can accelerate returns?

Bryan Bedford

No, there is no acceleration. The contracts have not changed at all. I think we reported the United reduction roughly two quarters ago and the Continental is just again a function of the normal contract exploration and the aircraft leases were said to expire. Coterminus [ph] was the underlying capacity purchase agreement. So this is a sort of operation of time exercise on both of these agreements. But to answer the other part of your question which is how much wriggle room are there in the contracts, the only contract that we have any early termination options then is the 145 agreement with Delta but in the event Delta were to exercise an ETO they would be required to buy the 24 Embraer 145s from us and essentially pay us a guaranteed return on our invested capital and assume the debt. That is certainly an option but the aircraft would go –

Quincy Lee – Tieton Capital

It would not be – yes, got you. Okay, great, thanks.

Bryan Bedford

Welcome.

Operator

And your next question comes from the line of Bob McAdoo of Avondale Partners. Please proceed.

Bob McAdoo – Avondale Partners

Hi guys. You mentioned the trip cost on the 170 and the 190 are pretty much the same. When we think about the trip cost that way, how should we look at the trip cost of 319 versus like the 170, 190, what kind of relationship shall we think they are given we have obviously got extra seats, trying to think about putting the model together.

Bryan Bedford

Yes, certainly the trip costs on a 319 are much higher than a 190 and you pick up 37 extra seats, it is going to produce a lower CASM at a higher trip cost.

Bob McAdoo – Avondale Partners

Sure. I was trying to get a sense of – now that you kind of mentioned that the 170, 190 are pretty much the same, I am just trying to figure out how much more should we think about in terms of the trip cost on a 319 versus a 190?

Bryan Bedford

Yes, I am not sure how to give you guidance on that Bob, we will noodle it and get back to you.

Bob McAdoo – Avondale Partners

Okay. Then, the other thing is you said you have the dual configuration on the 190s that came out of US Air; you have some other 190s that don’t, is that correct? What is the mix of those?

Bryan Bedford

We have five 190s, you heard Sean mention this Stretch product that Frontier is bringing on in Q1 of next year where they will have four rows at premium economy pitch, sorry 6.

Sean Menke

36-inch pitch.

Bryan Bedford

Yes, 36-inch pitch, and essentially we have got the 190s configured very similarly, we have five rows of high pitch so you will see a product continuity between the A319 and 320 and the Embraer 190s that are flying out of Denver, then in the Milwaukee business of course we have nine Boeing 717s that we are replacing with the 10 Embraer 190s. The nine Boeing 717s were a traditional Midwest signature product as well as their Sabre coach product, so the 190s will be a seamless transition. Midwest has 99-seat 717s and we will have 99-seat E190s replacing them.

Bob McAdoo – Avondale Partners

Okay. So the – I am just making sure I understood, I just got of kind of confused there, the 99 seaters are all going to be in Milwaukee but the ones that you are getting back from US Air are not going to be 99, it is going to be something less than that because you have got the extended seat there.

Bryan Bedford

No. We will try one more time Bob.

Bob McAdoo – Avondale Partners

Okay.

Bryan Bedford

So, the US aircraft to aircraft are dual class 99 seaters.

Bob McAdoo – Avondale Partners

Dual class 99, okay.

Bryan Bedford

They have a true first class product as well as coach product in the 99-seat configuration and those are going to be flying out of Milwaukee. The Stretch version of the 190 again is a 99-set product but it has more strength –

Bob McAdoo – Avondale Partners

Okay, so they are the same number of seats, it is just whether they are really dual class or just more legroom kind of thing?

Bryan Bedford

That is correct.

Bob McAdoo – Avondale Partners

Okay and then when you put the Stretch product in the 319s, do you end up with less than 136 seats?

Bryan Bedford

No, it will stay at 136 seats. So the 319 will be 136 seats, 320 will stay at 162 and the 318 will stay at 120.

Bob McAdoo – Avondale Partners

At 120, but they will all have the four rows or –

Bryan Bedford

That is correct. It will be consistent across all three Airbus products that way it gives us flexibility on swapping the equipment.

Bob McAdoo – Avondale Partners

Okay. And the 170s are all going to be in Milwaukee and those will not have the dual class, is that what you are saying or an extended pitch in the front or the –

Bryan Bedford

That is correct.

Bob McAdoo – Avondale Partners

And those are all still 70 seats.

Bryan Bedford

They are 76 seaters.

Bob McAdoo – Avondale Partners

Okay. The other things is, with all the stuff that is going on, I would have thought that you would have had some stuff in here this quarter that we would have probably want to pull out as kind of extraordinary stuff not necessarily purchase accounting but just for low cost and things like that they kind of burden this quarter that would not be ongoing kinds of cost. And as I read this thing, you are basically did not isolate anything as being kind of one-time stuff that is involved in all these transitions you are doing, is that correct and I thought you were telling us in earlier quarters that you were going to have some stuff that was kind of one-time stuff that we would probably not want to count as part of the ongoing look at the place.

Bryan Bedford

Okay Bob. I think Bob I will just revert back to the initial comments, yes there is a lot going on in the numbers this quarter that will be in the next two quarters and I think rather than try to micromanage the bookkeeping we are just going to continue to report the split between branded production and fixed-fee production and we are going to work through the integration and all the transition issues just as quickly as we can although we do think that we are certainly going to see it in Q4, we are going to see it in Q1 in next year, and I suspect we will be basically finished with it, have a reasonably clean quarter by Q2, 2010.

Bob McAdoo – Avondale Partners

Did not you once say that you are going to have $20 million to $30 million worth of miscellaneous kind of nonrecurring stuff; is that still kind of a number that makes sense?

Tim Dooley

Yes that does make sense Bob, this is Tim. With the purchase of Midwest though we were able to accrue those restructuring charges most of them prior to the acquisition so those are not included in our Q3 results.

Bob McAdoo – Avondale Partners

Got it, okay, that makes sense. Okay, thanks a lot.

Tim Dooley

You are welcome.

Operator

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

Steve O'Hara – Sidoti & Company

Hi, good morning, if I missed it, I apologize, but I am just wondering your thoughts on kind of preserving the Midwest brand in Mokulele there has been some comments made on some of your competitors’ calls about the brand and I am just wondering what steps you are going to take and how you can kind of preserve that strong brand?

Bryan Bedford

You know, the brand is a function of loyalty programs, the product, the safety, reliability and the economy. So by rebuilding the network out of Milwaukee by strengthening the access to earn and redeem miles on the Frontier network now getting the frequent flyers to not only keep business destinations to the west coast but also great leisure destinations in the mountain territory, all of these things are going to enhance the brands. Again, this is Sean’s vocation on running the brand business, but we are certainly committed to our hometown markets in Milwaukee, Denver and Kansas so continuing to rebuild what we once had.

As Sean pointed out, if we go back two years before the restructuring process began for both Frontier and Midwest, these airlines were substantially larger in size and scope. Midwest unfortunately has always had a handicap in terms of its cost to production and through turning the brand virtual being able to put the right products with the right cost structure, large cost-efficient Airbus products in the low yield high density. Leisure markets like Vegas, Phoenix, Florida markets, etc, that is a real win for that brand and look, let’s be honest, Frontier has got a great product with Stretch it gets it a little bit closer to the dial on the Midwest product offering year to date and again great service from the Frontier crews.

On the Republic side again, it is more frequency on smaller gauged airplanes to get to the key business markets. New York, Boston, DCA, etc, and again we maintain terrific share and premium yield in those markets. So derivative side is working pretty well, the brand is working pretty well. We have got a cost problem in Milwaukee. Clearly in 2010, we have got an over-capacity problem, competitive over-capacity problem, we just are going to have to gut it out.

Steve O'Hara – Sidoti & Company

Okay. And I think you said you think your cost structure can approach some of the lower cost competitors in the market, is that fair to say?

Bryan Bedford

The A319, 320 costs are already there. What we have got to do is to make it better and the way we make it better is through synergies. We have not spent a lot of time talking about synergies here, but our expectation is we are going to pull $40 million to $50 million of consolidated cost out of the brand business in 2010, again we will have to endure some pain in Q1 and our (inaudible) Q1 to harvest it, but we will do that and then we are going to be sitting in a pretty strong position to be a cost leader in the back half of 2010.

Steve O'Hara – Sidoti & Company

And lastly, on the regional side, have you seen that market going forward and do you see any opportunities out there, is that kind of maybe opening up after being closed down for new business for a while?

Bryan Bedford

I got to tell you Steve, you know, in our view it is pretty jaundiced on the RJ side right now. I think that is certainly easy to see with some of the latest deals that have been announced. There is clearly over capacity on the small jet side right now as networks are being restructured, Americans sort of industry leading moves in St Louis, and what we expect we are going to continue to see is Delta Northwest finalize their consolidation integration, the fact is there is just too many small jets out there for the market need, and then of course that creates margin compression and an exercise at stealing shares. That is just the conditions that we lived in. The Republic plan has been to de-emphasize the smaller jets in favor of the larger capacity EJets and as market conditions change, hopefully the economy stabilizes in 2010 maybe we start seeing some growth in 2011. We are going to be prepared to contest heavily for that business.

Steve O'Hara – Sidoti & Company

Okay, thank you very much.

Bryan Bedford

You are welcome.

Operator

And we have time for one last question; your next question comes from the line of Mike Marburg of Ramsey Asset. Please proceed.

Mike Marburg – Ramsey Asset

Hi, guys.

Bryan Bedford

Hi, Mike.

Mike Marburg – Ramsey Asset

Just a couple of questions, some of them were answered. As it related to the restructuring oriented charges or the one-time charges that the previous person asked about you said you were not going to be disclosing, just to be clear, the $1.50 to $1.75 guidance or range for next year includes things that generally Wall Street would say is one time in nature, correct?

Bryan Bedford

Yes, that is all in Mike.

Mike Marburg – Ramsey Asset

That is all in. And then are any of those restructuring costs non-cash or is it all –

Bryan Bedford

The goodwill in Q4 will be non-cash –

Mike Marburg – Ramsey Asset

But in 2010 –

Bryan Bedford

In 2010, I would expect most of the charges to be cash related.

Mike Marburg – Ramsey Asset

Okay. In terms of the cash balance guidance at the end of the year, is there any opportunity for that to be increased to better financing program or anything of that nature or is that sort of what the numbers are going to be?

Bryan Bedford

In the absence of something material with our credit card holdback, which we did not assume, I think $1.50 unrestricted is about the right number. That said, we are looking at any liquidity initiative that will give us a stronger balance sheet and more flexibility going forward but we think $1.50 is the right number.

Mike Marburg – Ramsey Asset

And we had in terms of the debt pay down for next year we had $140 million and you suggested $190 million, is that increase related to the branded business that you brought online or is that we just had the wrong number?

Bryan Bedford

It is what we have done recently the acquisition of Frontier and the acquisition of $190 million.

The $190s are debt financed and so what we did is as we recorded the $35 million unsecured note with the US Airways as the equity strip purchasing the aircraft and then assumed – we got the banks to allow us to assume the debt that US Airways was carrying on the aircraft. The good news is the Airways bought the aircraft very competitively and the debt is – and I guess we should note also that the debt is a floating rate debt. So as we sit here on the current interest rate environment, the assets are very well priced.

Mike Marburg – Ramsey Asset

Yes, okay and then finally, it sounds like you are going to on the next call you are going to lay out a little bit more of the business, the results of your business planning efforts as it relates to expectations in 2010 and 2011 and sort of lay out the strategy for this transformation you have undergone, with a little bit more clarity so that is going to happen in early February, is there any public appearance, conferences or anything like that between now and then what we can expect to get some more detail or is it a pretty much a wait till February?

Bryan Bedford

We will actually be participating in a couple of conference that are scheduled in December and of course we are always available of calls but the summary you just gave Mike is spot on. Till 2010 is the work in progress, we want to get it right, we want to make sure we get this integration pulled together, get the team moving in the same direction on both brands, ultimately we are going to have to lead to probably looking to what is the right brand long term to develop for the brand business, trying to find what the right attributes are between Midwest and Frontier, that is probably going to be a longer term exercise for us. Job one, as Sean mentioned, is to get the network right, to get the right aircraft in the right markets and rebuild the network. Job two is making sure that we got good alignment between customer expectation and employee delivery and then along with both of those things is harvesting the synergies and that is both a revenue opportunity as well as a reduced spending opportunity.

Mike Marburg – Ramsey Asset

Okay, great, thank you.

Bryan Bedford

You are welcome.

Operator

That concludes the Q&A portion. I will now turn the call back to Bryan Bedford, Chairman and CEO, for any closing comments.

Bryan Bedford

Well, I don’t have any closing comments Katrina, but thank you guys for the great questions and strong participation and we look forward to give any more detailed updates as we develop our 2010 plan. Thank you.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Republic Airways Holdings Inc. Q3 2009 Earnings Call Transcript
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