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Republic Airways Holdings, Inc. (NASDAQ:RJET)

Q4 2013 Earnings Conference Call

February 24, 2014 11:00 a.m. ET

Executives

Bryan K. Bedford - Chairman, President and Chief Executive Officer

Timothy P. Dooley – Chief Financial Officer & Executive Vice President

Joe Allman – Treasurer and Vice President, Financial Planning & Analysis

Wayne Heller – Executive Vice President & Chief Operating Officer of Chautauqua Airlines, Inc.

Analysts

Michael Linenberg – Deutsche Bank

Jeff Eisenberg – Evercore Partners

Steve O'Hara – Sidoti & Company

Elie Mishaan – Corsair Capital Management

Bob McAdoo – Imperial Capital

Richard Haydon – Yield Capital Appreciation Partners

Stephen Marshall – Rockwood Investment Partners

Glenn Engel – Bank of America Merrill Lynch

Operator

Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2013 Republic Airways Holdings Earnings Conference Call. My name is Emily and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to hand the call over to Tim Dooley, Chief Financial Officer. Please proceed.

Timothy Dooley

Thanks, Emily. Good morning everyone. Welcome to the fourth quarter and full year 2013 conference call. In the room today I’m joined by Mr. Bedford, our Chairman, President and CEO; Wayne Heller, our Chief Operating Officer; Joe Allman, who’s our Treasurer, Vice President of FP&A; and Ryan Willman, our Vice President and Corporate Controller.

And before we get going on our prepared comments, I’ll first cover our Safe Harbor disclosure. Please note that the information contained in our earnings release and this call contains forward-looking information as defined by the U.S. Securities laws. Forward-looking information is subject to risks and uncertainties and we refer you to a summary of risk factors contained in our most recent filing with the Securities and Exchange Commission.

So 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. On behalf of the entire Republic management team I just want to thank my 6,000 coworkers for their excellent service both in fourth quarter 2013 as well as the full year. Our employees did their level best to provide outstanding customer service and certainly during one of the harshest winter seasons any of us can remember. Your dedication, hard work and commitment to continue to provide safe, clean, reliable service to both our passengers and our major airline partners brands makes a huge difference each and every day. So again on behalf of the entire management team, thank you for your continued hard work.

As I mentioned in our press release last night, 2013 was certainly a transformational year for Republic. We entered the year with several corporate objectives, including just to name a few, completing the sale of Frontier Airlines, enhancing our liquidity, executing on our significant growth plans on both the Q400 and E175 aircraft, extending expiring small jet agreements with our partners, and more importantly, completing new labor agreements with our pilots, flight attendants and dispatchers. I’m really pleased to report the management team accomplished almost everything that it set out to achieve in 2013 with a notable exception of reaching a new labor agreement with our pilots, something we sincerely hope we can resolve in the not too distant future.

As reported, we did complete the sale of Frontier Airlines to Indigo Partners on December 3. That transaction closed with net proceeds of approximately $77 million. Additionally, the transaction removed nearly $100 million of debt, $1 billion of lease obligations an $200 million of contingent liability exposure from Republic. Equally important now, our management team can fully focus its energies on our core fixed fee business.

We did grow our fixed fee business by a net of 25 aircraft last year. We placed into service 11 Q400s with United. We took delivery of 19 175s and placed 16 of those aircraft into service by the end of last year. We sold two 190s during the first quarter of 2013 and as we had hoped, we were able to extend all of our small jet CPAs that were scheduled to expire in 2013. In total, our consolidated departures and block-hour production increased by more than 7% over the prior year.

In the third quarter of 2013, we announced the successful ratification of new labor agreements with our flight attendants and our dispatchers. And despite the cessation of mediation services being provided by the NMB, Wayne and his team continued in his efforts to engage with the IBT to make progress on a new labor agreement for our pilots. And thanks to the efforts and hard work of members of both sides of the bargaining teams, we were recently able to announce that we have reached a tentative four year agreement with the IBT. We’re very restricted in what we can say regarding that tentative agreement. However, I should note it was a substantial increase over the company’s last best and final over the previous year. Wayne will provide some additional color later on the call.

While we’re pleased with our results and performance in 2013, unfortunately there are some new industry headwinds for us to contend with in the New Year. Entering into 2014, we had 41 small jet aircraft deployed under CPAs that were scheduled to expire this year. Those contracts have already been extended once and we were relatively optimistic that we were well positioned to extend them yet another year. However, one of the new headwinds I mentioned began to manifest itself late last year. The new 1500-hour pilot experience rule, which became effective in August, combined with the new pilot flight duty time regulations implemented in January, are adding new crew resource challenges for all regional airlines. This was not an unexpected development. However, the magnitude and speed of the crew resource challenge that we’re seeing has forced us to change our outlook for small jets in 2014.

So let me provide some context on our pilot recruiting issues. If we go back to 2012, in order to accommodate our growth and replace normal attrition, we had a goal to hire 400 new pilots and we had no difficulty hiring 400 highly qualified men and women. Last year, to support our growth and replace normal attrition, our hiring outlook was for 500 new employees. However, we were only able to hire 450 as of the end of last year. In 2014, we expected to see higher levels attrition as our partners have exhausted their furlough lists, and it was our view they would continue to look for qualified pilots from the regional airline partners.

So we increased our hiring outlook for 2014 to 550 pilots. But when we add in the 50 crew members that we were short in Q4, it began to become very clear to us that we were not seeing enough qualified crew members in the new hire pool that would enable us to meet our objectives. And so we made the difficult decision to allow some of our small jet contracts to expire. So sitting here today, we expect to remove 12 of our small jet aircraft line for United on April 1 and the 15 Embraer 140 aircraft operating for American will be removed as that contract expires between March 1 and August 15. And as previously disclosed, that change in the outlook drives negative financial impact of about $18 million for the year.

Finally, we think it’s reasonable to ask how the lack of a new CBA has affected our recruiting efforts. Certainly it’s reasonable enough to believe that not having a new CBA isn’t helping u and certainly is hurting our efforts in attracting qualified pilots. And it’s also hurting in our ability to retain the experienced men and women we already have at Republic. Many of our investors asked if we were able to see a new CBA ratify. Will that allow us to place some of the small jets back into service? That would certainly be our hope. But you also have to be realistic that the mere fact we’re having a new CBA isn’t going to actually create a single new qualified pilot in the United States. Hopefully it will allow us to retain the talent we already have. Hopefully it will better position us to attract new talent. But again that’s a hard thing for us to quantify sitting here today. If the TA is ratified and it leads to reduced attrition levels and increased hiring, then certainly we would have a positive outlook on placing our small jet aircraft back into service with our partners.

So with that introduction I will now turn the call over to Tim to cover our financial results for the quarter.

Timothy Dooley

Thanks, Bryan. This is going to be a pretty short summary because what we reported last night in our earnings pretty much matches the guidance that we had provided for the quarter. As I mentioned on our last call, the highlighted results here do not include Frontier’s financial and operating performance. So in our continuing operations for the quarter, we reported income of $16.5 million or $0.30 per diluted share. Now, this result is actually at the low end of our guidance range, but it came because of 44% tax rate for the quarter, which is much higher than our normal tax rate of 38% to 39% due to the effect of some state valuation allowances on our net operating loss that we retained in the Frontier transaction. We do expect that our tax rate in 2014 will return to normal levels. So for those of you modeling, you can use a 38% to 39% number. And as a reminder, we do not expect to be a cash tax payer in 2014 due to significant NOL balances.

For the quarter, operating revenues increased $19.1 million or 5.8% versus the fourth quarter of 2012. The increased revenues during the quarter relate to approximately a 10% increase in block hours and departures on our aircraft. And that’s offset by fewer E190 aircraft operating under pro-rate operations at Frontier and then the removal of certain pass through revenues and expenses for landing fees which United began paying directly in the back half of 2013. We operated our last flight for Frontier in early February 2014 and we do have five E190 aircraft that we’re operating under the prorate agreement with Frontier that will be subleased offshore during 2014. During the fourth quarter, we took delivery of 10 E175 new aircraft for the American operation. And by the end of the year, as Brian mentioned, we had placed 16 of the 19 deliveries we had taken throughout the year in service for American.

Now I’m going to turn it over to Joe to cover cash for the fourth quarter. Joe?

Joe Allman

Thanks, Tim. We ended the quarter with total cash of $300.7 million, of which approximately $277 million was unrestricted. Our restricted cash balances of $24 million relate to our charter escrow payments and various cash collateralized letters of credit.

Out total debt, including current maturities increased $194 million to $2.2 billion. The net increase in total debt relates to the new financings obtained on our E175 deliveries for American. During the quarter, we made mandatory principal payments of $57.7 million. And for the year, we paid down approximately $206 million of debt.

Our CapEx for the quarter was approximately $227 million, of which approximately $6 million was non-aircraft related CapEx, so IT and other spare assets. We also made an additional $5 million pre-delivery to deposit payment for E175 aircraft related to the new American CPA. And as a reminder, we still have 28 of those aircraft on order and scheduled to be delivered. 23 of those aircraft will come in 2014 and the last five aircraft will come in the first quarter of 2015, bringing the total E175 fleet at American to 47.

And now I’ll turn the call over to Wayne who will give you a brief update on the severe weather impact from January and February and an update on the status of our TA, which we have reached with the IBT. Wayne?

Wayne Heller

Thanks, Joe. As Brian already has indicated, and as many of you listening have experienced firsthand, the severe winter weather this season has had a significant impact on our operational performance. From the back half of December through today, we have canceled over 12,000 flights. And to give our listeners some perspective on the magnitude of that number of cancelations, that’s more than the total amount of cancelations we experienced in the first nine months of 2013.

I too would like to thank our pilots, flight attendants, mechanics, SOC teams and the countless number of other employees within our companies for their dedication, professionalism and patience in dealing with what will undoubtedly go down as one of the worst winters in aviation history. Their heroics and extraordinary efforts have not gone unnoticed.

Given the impact of the weather on the operation, it’s been a challenge to isolate the true financial impact of FAR 117, but we continue to believe that the significant and necessary changes we made to our crew planning and daily crew scheduling systems, along with the training and education of our crews, will help mitigate some of the restrictions associated with this new regulation. To that end, there has been no real change to our assumption of a 4% to 5% overall increase in crew staffing requirements associated with the new regulation.

Now turning to our ongoing negotiations with our pilots, as Brian mentioned we have at long last reached a tentative agreement. The process is now in the hands of Local 357 and the national airline division of the IBT. The agreement was presented to Local 357’s executive board last week by the IBT’s negotiating committee and we remain hopeful that the executive board will give a positive endorsement to the tentative agreement before it’s sent out for ratification, which is expected before the end of March. We have agreed not to discuss the terms and conditions of the tentative agreement until after the IBT has had the opportunity to present the details of the tentative agreement to their members, which we believe could be as early as next week.

Now I’m going to turn the call over to Tim for our 2014 financial guidance.

Timothy Dooley

Thanks Wayne. Yeah, I’d like to echo Wayne’s comments on the positive developments with the IBT Local 357. I too remain hopeful that our pilots will get a chance to vote on the TA here in the near future.

So certainly 2014 has not started off the way we’d like with the severe winter weather that Wayne mentioned. Through February, we estimate our results have been negatively impacted by about $7 million. Of course we’re already facing headwinds for the year related to the reduction in our small jet operations announced earlier this month and the increased cost of new pilot flight and duty time regulations. Combine those with potentially a significant increase in pilot costs under our new CBA, and unfortunately the financial impact of these headwinds puts us in a position where year-over-year financial results are expected to be lower.

So to be clear, the guidance I’m about to provide includes the negative impact of the weather that we’ve experienced thus far in Q1, the reduced level of 50 seat flying already announced and the related idle aircraft costs, as well as the impact of a new pilot TVA assuming it becomes effective April 1. This guidance is also for our continuing operations. We may see some lingering adjustments for discontinued operations related to our final settlement with Indigo related to Frontier and that is still in process.

So for the full year 2014, we currently expect operating revenues in the range of $1.35 billion to $1.40 billion. Our full year pretax margin should come in between 6.0% and 7.5%. That results in earnings in the range of $0.90 to $1.20 per diluted share for the year. Now, assuming we hit the midpoint of our earnings guidance, we would expect our unrestricted cash balance to decrease by approximately $60 million by yearend 2014 to a level of 2$215 million to $220 million. Now, the main reason we will see a significant drop in unrestricted cash is related to our investment in growing our Egypt business as we expect to invest a total of about $80 million in 2014 for new aircraft and other CapEx.

We also have a mismatch between our noncash aircraft depreciation expense that shows up on our income statement and our normal aircraft debt payments in 2014 and that will eat up another $50 million of our book earnings for the year.

Finally, we have included the assumption that we settled a convertible note that’s due in July of 2014 with $23 million of cash.

Now, turning to the first quarter, our guidance, we would expect operating revenues in the range of $340 million to $350 million. Our pretax margin should range between the 4.5% to 6.5% range, and that does include the $7 million negative weather impact through February which costs us about 2 points on margin for the quarter. So that should produce earnings for us in the range of $0.15 to $0.25 for the quarter and that would be in line with our Q1 result from last year.

We also expect to see our unrestricted cash balance down roughly $10 million to the $265 million to $270 million range. I should note that we just updated our website this morning for the reduced first quarter operation result related to the severe weather impact. So you can get new ASMs and block hours from there.

And with that guidance update, turn it back to Bryan for just some final prepared remarks. Bryan?

Bryan Bedford

Thanks, Tim. Of course that’s not the message for 2014 that we’d hoped to share with our investors at this point in the year. We can’t overstate the challenges that the weather had faced and certainly the other headwinds that were discussed on this call during Q1. Republic is not alone in facing these challenges. This is an industry challenge. But I believe Republic is well positioned or at least as well positioned as anyone in the industry to work through these issues.

We look forward to celebrating our 40th year of operations on August 1. We as a management team we’re taking a long view of how to ensure that Republic and our 6,000 coworkers are well positioned to remain successful for another 40 years. And while that includes some short term pain such as the potential removing of small jet aircrafts sooner than we might otherwise have preferred, again we continue to believe that Republic is well positioned amongst our peers.

And with that said, Emily, we’re ready to take questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Please standby for your first question. And the first question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed

Michael Linenberg – Deutsche Bank

A couple of questions here. I think just first, yesterday Embraer had their conference call and I think they were asked about the status of the airplanes going to American Eagle and their response was -- and I think it was within the context of the fact that Eagle has now not reached a deal and it looks like that there’s maybe a bit of a wind down of their larger jet flying and they won’t take delivery of the E175s. And Embraer was very clear in saying that that order stands and that those airplanes if they’re not going to go to Eagle, they’re going to go to someone else. So I guess the question within this is, is there an opportunity for you to get more American planes and how much of that is contingent on you getting a CBA done? If you don’t get the CBA, do those airplanes not -- not only do they not go to Eagle, they don’t go to you, they go to someone else.

Bryan Bedford

Hello Mike. Probably the easiest way to answer that question is just with the truth. We’re not having any conversations with American about additional growth. We have talked very publicly about our own staffing challenges. So our focus is on fulfilling the obligations that we currently have. We have significant growth on the books right now through first quarter 2014 and that’s really what our focus is on. So I don’t have any insight to share with you about what American’s plans are for its allocation of its large jets.

Michael Linenberg – Deutsche Bank

And then just another, Bryan, when I look at some of the data on block hour utilization of aircraft and I look specifically at the Q400 fleet, it seems like your block hour utilization is significantly lower than other carriers. You can get the data up through form 441. And I realize that there are some distortions in that data, but is there -- I know there was talk that there were some potential issues, maybe the fleet wasn’t’ running as well. And so maybe that is showing up in the data. What is going on there? Is there an issue? Maybe if there is, is there a way to resolve it?

Bryan Bedford

So I’m not exactly sure what was said publicly about the Q400, but these aircraft all came out of the Pinnacle bankruptcy and unfortunately they were not particularly well maintained. In fact getting those aircraft to a reliable status has been much more challenging than anybody would have guessed going into the program. We’ve worked very closely with Bombardier and United trying to find the right program to get those airplanes back up to snuff. We’ve put all 32 aircraft -- I’m sorry, 31 out of 32 aircraft through a significant mod program in Q4. That’s had some very positive impact on reliability. And so now we’re having the discussion with United to start putting those additional spare aircraft back into scheduled service. So I think it certainly is low compared to what the aircraft is capable of doing. But these particular aircraft again had some significant ongoing maintenance challenges as they had been sitting quite a while and getting them back into service. So we don’t think that’s a long term issue.

Michael Linenberg – Deutsche Bank

Bryan, what was the cost headwind in putting them to that mod program?

Bryan Bedford

I don’t think we have a number to ascribe to that today, Mike. So let’s not hip shoot it, but we might be able to provide something in the future.

Michael Linenberg – Deutsche Bank

And then just lastly, there’s been a lot of commentary out there about the regional space and I think those of us who are watching it closely, we see what’s going on at American. SkyWest is clearly having challenges in fixing or sort of righting the ship over at ExpressJet. I saw an article recently where there was some discussion about whether the regional model is dead. Look, you’ve been in this business for a long time. What can you say that maybe provides a compelling argument against that perspective, that negative viewpoint that maybe the regional model isn’t dead?

Bryan Bedford

I think even our partners would tell you just how critical our ability to feed their hubs remains to their long term success. So getting business travels from small town America that need to go to Asia or Europe or South America is still very relevant and very meaningful. But the business is evolving. The regional airline industry is going to shrink over the next three years. Just if we look at the current amount of scope that’s allowable, Delta is going to drop from call it 600 airplanes down to 450. United is going to drop in a similar manner. We’re not entirely clear where the amalgamation of U.S Airways and American works out as it relates to scope. But our view and we’ve said this consistently, as the industry is getting smaller in terms of the number of units that will be deployed, there’s still going to be a mission for the 50-seater. It’s still again very relevant, but as we sit here today there’s something akin to a thousand 50-seater regional jets in service under mainline partner brands.

So that number is probably going to shrink to call to 400, 450 over the next two to three years. Republic’s view has always been trying to move out of those assets. But again that’s not reflective if we don’t think that there’s value added. It’s just that we feel like we’re in a better position relative to our peers given the fact that we only have sitting here today about 70 aircraft. So again I think adapting to the changing business climate is what’s really most important. There’s certainly more value on 70 and 76 seat regional jets. That’s what our partners demand. There’s a huge premium on being able to operate with the same brand standards as our partners, the same level of service, quality of service and that’s really where the focus needs to be. Unfortunately we’re still in an industry that tends to go to the lowest cost bidder and I do think that’s something that’s going to have to change as the industry continues to evolve. And that’s where we’re going to have to figure out who the winners and losers are long term.

Operator

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

Jeff Eisenberg – Evercore Partners

This is Jeff Eisenberg in for Duane. Just a quick question on those 27 Embraer small jet expirations in 2014. It looks to be about 18 shells based on the timing and given your guidance that it's pre-tax hit around $18 million, it seems to imply that each plane is a $1 million contributor on an annual basis, where my bias would be to think of them as somewhat marginally positive. Can you offer any additional color on that penalty and what -- how that number is calculated?

Timothy Dooley

Your math probably works just fine, Jeff. This is Tim by the way. I think if you think about what’s in that, it’s the cost to park the airplane and then really it’s the any contribution margin of the airplane which is minimal. These are aircraft that generally don’t produce profits for us, but they are covering some overheads. So it is reflective of lost overhead coverage as well.

Jeff Eisenberg – Evercore Partners

And then I guess my second question would just be that, could you comment on the utilization profile of the large RJ versus the 50 seat jet and effectively how many incremental block hours per day should we think about each kind of swap that comes in in 2014?

Timothy Dooley

The larger jets are utilized heavier on a block hour basis over 10 hours a day. And you’ll see that the small jets dilute our total fleet number below 10. So you would tend to see that block hour utilization number creep up throughout 2014 as we put new airplanes in for American and park smaller aircraft.

Operator

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

Steve O'Hara – Sidoti & Company

In terms of the amount of cash that you have on hand, how much do you need? Do you have enough to run -- what do you need to run the business? And then if you could just touch on that timing issue you had mentioned. I think I wasn’t quite sure what that was.

Timothy Dooley

Sorry. Steve, can you repeat the second part of your question? I got the first part.

Steve O'Hara – Sidoti & Company

I think you’d mentioned the timing issue with depreciation and book earnings or something. I didn’t quite get it.

Timothy Dooley

I’ll cover that one first. So it’s just on our P&L we have depreciation expense on the aircraft which for the year was roughly $150 million and yes we paid down debt which doesn’t show up on our P&L of roughly $200 million. And so there is this mismatch between what we show as GAAP pretax earnings and then what the cash flow of the business is. That continues out in the future. So we were just highlighting that our earnings in 2014 have that same mismatch. So as it relates to how much cash do we need to run the business, that depends on whether we’re in a growth mode. You see what the guidance is for 2014 that says we’re going to use $60 million of cash. So starting with $270 million is a nice place to be. It’s much better than starting at $100 million. But there’s some level of cash that we need for future growth opportunities. And those are the discussions we have at the board level.

Steve O'Hara – Sidoti & Company

I guess even what I would say Bryan’s more maybe somber outlook, it seems I guess maybe encouraging that you still think there are growth opportunities out there.

Bryan Bedford

We do. Again the -- Steve, this is Bryan. I don’t know if I was trying to be somber or not. Look, we actually felt like we did really well last year and we feel we’re really well positioned for the future all things considered. But the industry, not just Republic, but the industry is facing some really significant challenges this year. Again I like where we’re sitting as opposed to many of our competitors, but we can’t ignore the fact that there is a crew challenge, crew resource challenge here and that’s more impactful on small jets than on large jets. And so we’re just facing the realities of the business and that’s going to take some time to adjust. But clearly we do believe there are growth opportunities in the large jet space and we believe we’re well positioned to take advantage of those if they arise. Certainly getting a new labor agreement in place will allow us to understand what our costs are, allow us to understand whether or not we can recruit and retain our current pilots. Those are things we have to figure out before we over extend ourselves.

Steve O'Hara – Sidoti & Company

And then maybe one last one if I could. In terms of the labor issues that the industry is facing, does this create any maybe long term benefit for a carrier like Republic in that pilots may want to -- smaller carriers are affected more and a larger carrier like Republic has a little more pull than others. It sounds like the wage rates and so forth were pretty positive from a pilot’s standpoint and maybe that makes recruiting easier as well. But does this squeeze and maybe help the entrenched players in the industry long term?

Bryan Bedford

Again, I think that the industry outlook for new hire pilots is -- depending upon whether you’re the new guy or whether you’re hiring, I think that the outlook is good. It’s very favorable as a career opportunity for young men and women right now. But we’ve seen similar points in time where the trends look good and then we have a 9/11 or we have a SARS, or we have an Asian currency crisis or we have a great recession. So hopefully young men and women understand that you want the career opportunity, but you also want to build your experience at a place that has a solid financial footing and good opportunities. And again, I don’t think we’re the only one that can make that argument, but I think we’re really well positioned to make that argument.

Operator

Your next question comes from the line of Elie Mishaan for Corsair Capital Management. Please proceed.

Elie Mishaan – Corsair Capital Management

On the guidance, Tim, did that include -- the guidance for 2014, does that include -- and obviously we don’t know what the numbers are, but does that include one-time bonuses for the pilots if they approve the tentative agreement?

Timothy Dooley

It does, Elie.

Elie Mishaan – Corsair Capital Management

Okay. So on a -- if we're trying to look at continuing operations on a going forward basis, it would be some number above the $0.90 to $1.20?

Timothy Dooley

That’s fair. Yes.

Elie Mishaan – Corsair Capital Management

Okay. And the $0.90 to $1.20 was an after tax GAAP number, right? And you guys aren't paying taxes for --

Timothy Dooley

Also correct.

Elie Mishaan – Corsair Capital Management

And do you guys have a sense for when you think you would be a cash taxpayer?

Timothy Dooley

Yeah. Again that depends on the future of the business, but the aircraft that we’re taking in 2013, 2014, 2015, the depreciation book’s tax difference is helping to push that out. So it’s not in the next few years.

Operator

Your next question comes from the line of Bob McAdoo for Imperial Capital. Please proceed.

Bob McAdoo – Imperial Capital

Just a couple of things. When you talk about the -- what do you want to call it, the restoration costs on the Q400 or to get them so they run at cost that you said you didn't have you have number on, are those costs being capitalized? Are they being billed to United or somebody else, or are they included in your actual number and you just don't have a number there in front of you that you can quote?

Bryan Bedford

Bob, they’re not being capitalized, but everybody that’s involved in the Q400 restoration program is picking up their fair share. So it’s been a shared endeavor. There is certainly some negative component built in Q4. We don’t think it’s significant or we would have called it out.

Bob McAdoo – Imperial Capital

But your numbers in Q4 were in fact penalized a little bit. So going forward we wouldn't -- your guidance wouldn't necessarily have that kind of thing going forward? You're pretty much through that now, are you, you think?

Timothy Dooley

Yes.

Bob McAdoo – Imperial Capital

Say that again, please?

Timothy Dooley

Yes, Bob. That’s correct.

Bob McAdoo – Imperial Capital

Okay. Good. And then the other thing, and this is not necessarily specifically to you, but it does go to this question of pilot hiring. Every once in a while you read stories, and maybe they're put out by the pilot union with a particular goal in mind, but that there really are a bunch of pilots out there that are not flying. They talk about hundreds of ex-Comair guys and whatever. Is there -- is that really a group that's out there, or are those people -- have they all been assimilated somewhere else? What's your gut judgment on that?

Bob McAdoo – Imperial Capital

Who needs the grief?

Bryan Bedford

I’m sure that there is some number. I can’t quantify it. I’m sure there are some number of former pilots that have just given up on the industry and moved on to do other things. And again if we look back over the past decade, maybe the past 12 years, this has been a pretty tough profession for pilots. Every major airline in the country has gone bankrupt. Several regional carriers have gone bankrupt with their liquidations. So it has been a tough call it 12, 13 years in the aviation business. So I’m sure there are several. And whether that’s hundreds or thousands I don’t know that have just decided they’re done and they’ve left the business. I don’t think it’s a matter of how much money they can make that’s going to bring them back. I think it’s once bitten twice shy kind of thing.

Bob McAdoo – Imperial Capital

Who needs the grief, huh?

Bryan Bedford

Pardon?

Bob McAdoo – Imperial Capital

Who needs the grief kind of thing.

Bryan Bedford

Again I think the bigger question is if we take a long term view, Bob, and this is something we spend a lot of time looking at. Age 65 is going to have a huge impact on our main line partners demand for experienced crew members. So we do believe we’re going to enter into a period of prolonged hiring by the network carriers, which is going to principally be satisfied by regional airline carriers. So that’s certainly going to create pull out of the regionals. Now, the question is what’s the pipeline to fill those jobs? Historically it’s been young men and women coming out of university programs with terrific experience. The 1500-hour rule though has severed that traditional pipeline and I don’t know how hard things are going to have to get in terms of potential loss of service, actions like United’s dehubbing of Cleveland before people are going to get engaged on finding a solution to this challenge. But Republic’s mission is to stay ahead of the bear if you will, outrun the other guys.

Operator

Your next question comes from the line of Richard Haydon for Yield Capital. Please proceed.

Richard Haydon – Yield Capital Appreciation Partners

You outlined what your CapEx program is for this year. How about 2015?

Timothy Dooley

It would cut in half or more. So some of that $80 million is normal annual CapEx that will exist into 2015, Rich. But then we’ve got another five airplanes that we’ve got to invest in. so I think you could say it’s a $30 million to $40 million nod in 2015.

Richard Haydon – Yield Capital Appreciation Partners

So you're experiencing a gap this year with a cash run down. You should have a cash build up in 2015. Is that correct?

Timothy Dooley

Absent any significant growth, the number for CapEx would improve year-over-year. That’s correct.

Richard Haydon – Yield Capital Appreciation Partners

And have you ever given out what base amount of cash you need to operate the business?

Timothy Dooley

No. We don’t really give a number because as I mentioned a little bit before, it depends on what season we’re in. so the season we’re in now is a growth season, hopefully.

Richard Haydon – Yield Capital Appreciation Partners

But is it reasonable to assume by us that there might be excess cash over and above the -- whatever your operating needs are?

Bryan Bedford

You mean if we were in a sustained period of static operations?

Richard Haydon – Yield Capital Appreciation Partners

Beyond this year, yes.

Bryan Bedford

Oh, this year? I don’t know how we would put a number to that sitting here today, Richard.

Richard Haydon – Yield Capital Appreciation Partners

But there is a number on the plus side. Is that fair?

Bryan Bedford

Again I’m not trying to be evasive here. It’s just I don’t know how we can answer the question. And as we sit here today, we have a forecast now that we’ve issued that shows cash shrinking by $60 million in 2014. We do have in that number a $23 million buyback of a dilutive convertible note which we think will be positive on a diluted share count which should also be positive on EPS. So we think there’s some good use of that cash already that will ultimately have a positive effect on our shareholders.

Richard Haydon – Yield Capital Appreciation Partners

Another hypothetical question. If you had to make a decision between a common share buyback or dividend, which one would you prefer?

Bryan Bedford

Again when we’re in a position where we can talk about use of excess cash, Richard, we’ll give everybody solid guidance on that.

Operator

Your next question comes from the line of Stephen Marshall for Rockwood Investment Partners. Please proceed.

Stephen Marshall – Rockwood Investment Partners

I had a similar question. I guess looking at many of the capital levels, I guess, just in terms of like cash and cash levels for you compared to where you were the last time you guys were engaging in share repurchases, or even comparing it to someone like SkyWest who is still doing share repurchases, it seems like you still -- even with the guidance for the increase in aircraft in 2014, would still have a significant level of excess cash, provided even the growth that you currently forecasted. I guess what's different now than versus then in terms of your thinking about share repurchases?

Bryan Bedford

Steve, I don’t know that we have anything new to add than what we’ve already chatted about with Richard.

Operator

Your next question comes from the line of Glenn Engel for Bank of America. Please proceed.

Glenn Engel – Bank of America Merrill Lynch

A couple questions. One, for 2015 are there more 50-seaters that are scheduled to come off?

Timothy Dooley

No, not during 2015. So we have still 14 airplanes that are out in the fall of 2014 that we’re hopeful that we can extend as Bryan said by at least a year. So those could potentially move. The only other aircraft we have in CPA besides those 14 are airplanes that are May 2016 CPA termination.

Glenn Engel – Bank of America Merrill Lynch

Okay .So the 50 seat headwind next year should not be there?

Timothy Dooley

It could absolutely be there if those airplanes remain idled into 2015.

Bryan Bedford

Part of the requirement that we have is either of the 27 aircraft, either to hopefully resolve a way to get them back to work or to get them off the property. We do think that there’s some number of those aircraft, maybe as many as 15 that we do have some opportunities to move off of our fleet count during the year. That remains to be seen though. And can we get the other ones put back to work, again don’t know. So to the extent we either can’t remove them from our fleet and we can’t put them back to work and that headwind remains into 2015 and 2016.

Glenn Engel – Bank of America Merrill Lynch

I meant there was no new planes to find a home for. You've got the existing ones you still need to find a home for, but there's no additional ones to find a home for, at least for 2015.

Timothy Dooley

Yeah. Just those other 14 airplanes that are not yet extended.

Glenn Engel – Bank of America Merrill Lynch

Your guidance implies a reduction in unit cost in 2014. When you look beyond 2014, what type of cost inflation do you think you can maintain?

Timothy Dooley

So the unit cost decrease year-over-year is driven by adding a bunch of 76 seat airplanes into the plane. We’re moving the higher chasm 50-seat airplanes. It’s a little hard to determine what is 2015 beyond without knowing exactly what the fleet plan is. But generally taking 50-seaters out is going to decrease chasm. Putting larger jets in is going to decrease chasm. So if we put 50-seaters back to work, chasm may be up year-over-year. We’re going to see the natural cost headwinds on labor as contracts move year-over-year. We’ve got aging aircraft that are going to be more expensive to maintain in the future than they are today, especially on our E-Jet aircraft. So we’ve got cost pressures, but you’re not necessarily going to see that in how our chasm is going because of the fleet mix, if that makes sense.

Glenn Engel – Bank of America Merrill Lynch

It does. Thank you very much.

Operator

Your next question comes from the line of Bob McAdoo with Imperial Capital. Please proceed.

Bob McAdoo – Imperial Capital

Just one last quick follow up. When we start thinking about large aircraft being added to the fleet either later this year or into next year if things come along, what should we think of as a typical financing arrangement in terms of how much cash of yours versus debt or whatever financing? What percentages should we assume?

Timothy Dooley

So we’re investing roughly 15ish% into the aircraft. Of course we have some deposits that are down with the manufacturer today which will come back as the aircraft are delivered.

Operator

Your next question comes from the line of Michael Linenberg with Deutsche Bank. Please proceed

Michael Linenberg – Deutsche Bank

Yes, hey, just a quick one, sorry. On the convert, what was the maturity date, and then the underlying shares of that convert? And then I think, Joe, maybe you had mentioned that. I think you had indicated that you said you thought it would be taking care of with cash. So it sounds like there's also the option that people can accept stock as well. Just those details, that's it. Thanks.

Timothy Dooley

Sure, Mike. This convert is specifically -- this is Tim -- this matures in July of 2014. It’s counting as 2.2 million shares in our dilutive share count today and it needs to be satisfied with cash unless converted by the shareholder at a price of $10.

Michael Linenberg – Deutsche Bank

Okay. Great. And that was that private deal, right? It's one shareholder?

Timothy Dooley

Yeah. This was part of the payment we made to acquire Midwest back in 2009.

Operator

Thanks for your questions. I would now like to turn the call over for closing remarks.

Bryan Bedford

Thanks, Emily. Again, guys we appreciate all of the interest in the story. We’ve got a lot of work to do and we look forward to giving you the progress report for the Q1 numbers. So again thank you and we’ll be talking to you then.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect. Good day.

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