Republic Airways Holdings' (RJET) CEO Bryan Bedford on Q2 2014 Results - Earnings Call Transcript

| About: Republic Airways (RJETQ)

Republic Airways Holdings Inc. (RJET) Q2 2014 Earnings Conference Call August 7, 2014 10:30 AM ET

Executives

Timothy Dooley – EVP and CFO

Bryan Bedford – President and CEO

Joe Allman – Treasurer and VP, Financial Planning & Analysis

Wayne Heller – EVP and COO

Analysts

Michael Linenberg – Deutsche Bank

Helane Becker – Cowen Securities

Duane Pfennigwerth – Evercore Partners

Stephen O’Hara – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Republic Airways Holdings Earnings Conference Call. My name is Glenn and I will be your operator for today. At this time, all participants are in listen-only mode. And later we will facilitate 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 conference over to your host for today Mr. Tim Dooley. Please proceed.

Timothy Dooley

Thanks, Glenn. Good morning everyone and welcome to our call. In the room today I’m joined by Mr. Bryan Bedford, our Chairman, President and CEO; Wayne Heller, our Chief Operating Officer; Ethan Blank , our General Counsel, Joe Allman, our Treasurer and VP of FP&A; Ryan Willman, Vice President and Corporate Controller; and Matt Koscal our Vice President of Human Resources.

And before we get to the prepared comments, I’ll first cover our Safe Harbor disclosure. So, please note that the information contained in our earnings release last night 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, I’ll turn it over to Bryan to begin with some introductory remarks.

Bryan Bedford

Hey thanks, Tim, good morning everyone and thank you for joining us for our second quarter earnings update. As we pointed out in the release last night this past Friday Republic Airways celebrated its 40th Anniversary of commercial passenger service which is a significant milestone for any airline to achieve. We have come a long way from the early days operating two Turboprop Beech 99 aircraft under a per rate agreement with U.S. Airways to where we are today with a fleet of nearly 250 regional aircraft operating under fixed fee service agreements for American U.S. Air, United and Delta.

For 40 years this company has continuously delivered on its mission to provide safe, clean and reliable passenger service and certainly our mission today is to continue in that tradition of excellence. We feel blessed to have the best pilots, flight attendants, maintenance technicians, dispatchers, schedulers, administrative support staff, and management in the regional airline business.

And I can assure you that our management team is refocusing its efforts on identifying and prioritizing investments aligned with our 10 guiding principles which were to hire the best people, respect our people, create a culture of fun and action, strive for excellence in all we do, focus our energy on making good things happen, share and communicate accurate information, tell the truth, take responsibility for our actions, invest our profits back in our airline and recognize outstanding service.

These are the principals that enable Republic to deliver on its mission and which sustain us in difficult times. Our guiding principles ensure all 6,500 Republic Airways team members work together to deliver on our mission of safe, clean and reliable commercial passenger service to our mainline partners and our guests onboard. And if we continue to abide by these principals we expect to celebrate another 40 years of successful commercial services. So, again on behalf of the entire management team I’d like to personally thank each of my coworkers for another job well done.

At our May Investor Conference we announced the start of a plan to simplify and streamline our business through a reduction in a number of our Airline operating certificates and reducing the number of fleet types we operate. Today we have three airline operating certificates; last month we formally announced to our employees our intention to reduce that number to two operating certificates by the end of the year.

Wayne Heller and his team are currently with the FAA on a plan that will transition our 41 remaining ERJ aircraft currently operated at our Chautauqua airlines certificate to our Shuttle America Airline operating certificate.

And I want to be clear that this decision is not being made to shrink our business in fact it’s just the opposite our airline is growing while we announced our intent to remove 27 ERJ Aircraft from our operation this year that decision enabled us to add 47 E175 Aircraft to our fleet.

Today, 32 of those E-jets have been delivered and the remaining 15 aircraft will come online over the next eight months. We hope that we can complete the Chautauqua to Shuttle transition by the end of the year. However, that time line could shift depending upon how we interface to comply with FAA requirements and any transition issues we might have with our airline partner.

As it relates to the number of different aircraft types we operate we hope to go from four fleet aircraft types today down to two by the end of 2016. We have been anticipating the industry wide reduction in 50 seat regional aircraft capacity in the U.S. for quite some time and it certainly seems that we are at the tipping point in the process. We anticipate further industry wide reductions and 50 seat capacity will accelerate over the next 18 to 36 months.

You may recall at our peak we operated over 125 of these smaller regional jets. At the beginning of this year we were down to 68 of these aircraft and today we are at 45, by the end of the year we will be at 41. So, and this is a process that we have been working on for several years.

Additionally our E190 fixed fee charter service agreement is currently schedule to terminate at the end of ‘15. And we anticipated that the three of the five E190s will be at their lease exploration and returned to the lessors and the remaining two aircraft will be sold.

Change is never easy but managing our business with three operating certificates and four flee types is obviously very complicated. Getting down to two fleet types and two operating certificates should enhance our efficiency and allow us to focus on the products we feel have the strongest future value.

Areas like pilot training, supply chain initiatives, stocking cost, maintenance and support functions should all improve once the certificate and fleet consolidation and simplification process is finished. There will be some one-time expenses is associated with the consolidation effort in the back half of 2014 and we look forward to reporting on our progress in our next call.

Again despite some of the short-term challenges and distractions that this strategic undertaking may cause we are confident that we will continue deliver on our mission, critical values of safe, clean and reliable both for our guest on board and for our major airline partners.

With that let me turn the call over to Joe Allman to cover some of highlights of our financial results for the quarter. Joe?

Joe Allman

Thanks, Bryan. We were very pleased with the second quarter results which we thought were very solid. For the quarter, we reported pre-tax income of $33.3 million, or $0.63 per diluted share this results in an income from continuing operations of $20.1 million, or $0.38 per diluted share roughly a 25% increase over the second quarter of 2013.

Our operating revenues increased $6.3 million, or 1.9% which primarily related to a $20.2 million increase in fixed fee revenues from increased flying on Q400s at United and our E175 operation at American. This increase was offset by a reduction in our pro-rate revenues that we had earned on Frontier, we had 13.8 million of that revenue in the prior period of 2013. And our last flight for Frontier was in early February of 2014 this year, so we no longer have any aircraft operating under pro-rata operations at Frontier. Our charter and other revenues decreased by $0.1 million as compared to the second quarter of 2013.

On the wages and benefits line we saw increases of roughly $7.3 million due to three factors. First we had the increased flying at both American and United, second, we’ve had increased healthcare and other benefit costs we provide to our employees and lastly we have the financial impact of the new pilot flight in duty rest regulations FAR 117.

FAR 117 increases both our wages and benefits and other operating expenses line items, due to the higher levels of required reserve crews which is resulting in an increased pilot headcount and in turn drives higher expense on crew salaries and crew hotel rooms for those crew members. I’d like to pass along my gratitude to Wayne and the entire operations team who coordinated with our outstanding flight crews and worked so hard to smoothly adopt the new FAR 117 standards while maintaining solid operational reliability.

On the maintenance expense line, we saw slight decreases from the second quarter of 2013 despite increased flying on the Q400 and at United and the American E175s. This was made possible of course by the removal of higher maintenance cost ERJ aircraft during the quarter. Also our maintenance expenses were slightly ahead of plan due to the timing – or came in under plan due to the timing of some of the event based maintenance that was originally scheduled for the second quarter of 2014 and we now anticipate will incur in the second half of the year. So some of the improvement in maintenance expenses is just the timing difference.

Now for some highlights on the balance sheet and cash flows. We ended the quarter with total cash of $286.5 million down $16.8 million from the first quarter of 2014. Our total debt including current maturities increased a $106.4 million to $2.3 billion. The decrease in total cash and net increase in debt relates to the investment in our new E175 aircraft for American. During the quarter we made normal principal payments of roughly $66.4 million and we retired convertible note for $22.3 million.

I think that wraps up the financial highlights for today. And now I’d like to turn the call over to Wayne who will give you a brief update on our labor and pilot staffing.

Wayne Heller

Thanks, Joe. While there is no progress to report and no negotiating session scheduled in our ongoing efforts to achieve a new collective bargaining agreement with our pilot group, there have been a couple of recent developments in the last few weeks that I’d like to share with you.

The first is that a new union negotiating committee has been named and we have a meet and greet session scheduled at the end of this month to get acquainted and receive polling results from surveys that the union conducted identifying areas of focus for when negotiations do resume.

Additionally the NMB which has not met with the union or the company since the fall of 2013 has requested a meeting in September to receive an update of activities or any progress that has occurred over the last year. These are and will be the first steps in determining a path forward towards resuming negotiations and an effort to reach an agreement with our pilots that allows us to remain competitive as well as recognizing the significant contributions our flight crews make on a daily basis.

Turning to crew staffing, as we mentioned on our first quarter call, we continue to see normal attrition levels consistent with our forecast for the year. We did see somewhat of an upward spike immediately after the TA was voted down in April, however that elevated level of attrition has fallen back to forecasted levels in the last couple of months.

On the hiring front we continue to receive a steady stream of qualified applicants and that along with reductions in small jet flying should enable us to properly staff our operations through the induction of our final 17 aircraft under our American CPA.

And looking forward just the given anticipated acceleration of small jet retirements next year which Bryan discussed earlier we believe there will be a significant number of currently qualified commercial airline pilots looking for a place to land whether at a mainline carrier or another regional airline.

We believe our focus on operating large regional jet aircraft put us in a good position to recruit these pilots. Of course reach in a new pilot contract that properly compensates our pilots especially our first officers will remain one of our top goals and as a necessary step in our long range business plan.

Now I’ll turn the call over to Tim to give you a brief update on the share repurchase authorization and some commentary on our third quarter and full year guidance.

Timothy Dooley

Thanks Wayne and just a brief comment on why our streamlining and simplification strategy is important to us financially. While our mainline partners have never been more profitable than they are today, they remain laser focused on minimizing the cost of their regional capacity purchase agreements, while demanding the safest and thus reliable product.

So we in turn must ensure that we maintain a competitive cost structure within the regional industry, doing so will allow us to participate in future growth opportunities and so we’re doing what we can to simplify as much of the business as we can.

We’ve done a lot of work over the last three years to successfully get this company back to sustained financial health, but we recognized that staying there includes being culturally healthy as well which is why you will continue to hear our management team stressing the importance of our guiding principles and strengthening our winning corporate culture amongst our 6,500 employees. That effort comes with a cost but we view that as an investment in our employees and an investment in the future of Republic Airways.

Few comments on our share repurchase program. The Board approved the program in early April when the stock was trading around 850. Given that we were authorized to utilize roughly a third of the authorization in the first few days, the Board placed a conservative limit on the price at which management was authorized to execute further buybacks. Given that we did not have a 10b5-1 in place at the time we had to wait until after our Q1 earnings call to be active in the plan. And by the time we got to that point which was in early May the stock had made significant gains.

Before we went into the quite period in mid-June we initiated the 10b5-1 that ran through the end of July but again the stock price during that period held above our target price. We still have roughly eight months remaining under the authorization and we intend to be opportunistic in our market purchases. Sitting here today trading below eight times the midpoint of our full year EPS guidance we believe RJET is an undervalued equity and we will align our repurchase plan accordingly.

As Joe mentioned earlier in the call we had a solid second quarter performance. Some of which was aided by the timing of certain event based maintenance which we now anticipate occurring in the back half of the year. We also have slightly lower forecasted second half production as our partners have attempted to optimize their regional carrier schedules going into the holiday season.

So given those considerations here is an update on our full year guidance. We anticipate full year operating revenues in the range of $1.35 billion to $1.40 billion which is unchanged.

Our full year pre-tax margin range we’ve tightened to be between 8.0% and 8.5% and that would result in earnings per share in the range of a $1.25 to a $1.40.

Assuming we fully utilize the remainder of our share repurchase authorization we would expect our unrestricted cash balance to decrease by roughly 75 million by the end of the year to be around $200 million.

Now for our third quarter 2014 guidance we expect operating revenues in the range of $340 million to $350 million. Expect a pre-tax margin range in the third quarter of 7.5% to 8.5% and that should produce earnings in the range of $0.30 to $0.35 per diluted share. We expect to see our unrestricted cash balance down approximately $10 million to $250 million to $255 million of course less any cash used to repurchase shares during the quarter.

And with that Glen I think we’re ready to take questions from our listeners.

Question-and-Answer Session

Operator

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

Michael Linenberg – Deutsche Bank

Hey good morning everybody just a couple of questions here. Joe you sort of laid out some of the issues as a result of FAR 117, the different line items that would be impacted. Can you give us a rough sense of maybe what the annual impact of that is the FAR 117, what’s the sort of headwind that we should think about when given that you have to change with the rules?

Joe Allman

I think on an annual basis Mike great question, thanks for the question. On an annual basis we think of it somewhat in the neighborhood of just under a margin point.

Michael Linenberg – Deutsche Bank

Okay, and thank you for that. And my second question. You are taking delivery of the 47 E175s you’re putting them into service for American. At what point do you have to exercise the options on the remaining 47, what’s the timing on that and I guess sort of related to somewhat as it relates to exercising options. Just update us on the milestones for the C Series at what point do you have to exercise, where things stand with that program? So a two part question here.

Bryan Bedford

Well, thanks, Mike. It’s Bryan, I’ll take that one, the option agreement.

Michael Linenberg – Deutsche Bank

Hey, Bryan.

Bryan Bedford

Hey, how are you? The option agreement on the E-jet program essentially requires just over a year of just in order to exercise an option. To the extent we don’t exercise the options we view those positions as rolling to the back end of the option period.

So we’ve had 10 – I believe it’s 10 options that have essentially rolled out being available to us in Q1 and Q2 of 2015 that are now pushed back in to the 2017 time frame. So think of it as just over a year in order to exercise an option. So [inaudible] on E-jet.

Michael Linenberg – Deutsche Bank

Yeah I was going to say now what is driving that. Does that have to do with the commitment by American or is that you not wanting to commit until you have a pilot agreement, like what’s the gating issue that has prevented you from exercising those options?

Bryan Bedford

Well they go hand in glove, Mike. I mean so we’ve got a – obviously we have to reach an agreement where we have partner that will want to take the capacity and put it to work. And I don’t know that we’ve been particularly aggressive at this point impressing those opportunities, although that may change in the future.

As far as the C-Series is concerned, we haven’t spent a whole lot of time since the last quarter thinking about it there has been a little bit of a speed bump in the C-Series flight test program your probably aware of in May end of May there was a un-contained engine failure which I believe they’ve identified the root cause on that the flight test program has not resumed yet. So thus far we’re sitting here with about three month delay and how much slack there is in the schedule to mitigate some of that delay is unclear.

And we’ve historically told folks that we just don’t see a world where those airplanes deliver or available to be delivered not before the midpoint of 2016. So we still think we’re solid two years away from when C-Series might be available. And so we really don’t have any substitute comments on the future of that program with Republic at this point.

Bryan Bedford

Okay, thanks Mike. Appreciate it.

Operator

And your next question comes from the line of Helane Becker with Cowen and Company. Please proceed.

Helane Becker – Cowen Securities

Thank you very much, operator. Hi guys, thank you for the time. I just have maybe one question. So you heard the SkyWest call or you may be heard whatever about the SkyWest call. So I’m curious why you’re so much more successful at implementing FAR 117 than they have been. And also they tried to collapse ASA into XJET and they did it rather by their own, by the way. And I’m just wondering if you have similar concerns when you go from three operating certificates to two.

Bryan Bedford

Well Helane how are you it’s good to hear your voice. We won’t make any comments on the SkyWest call. We’ve obviously have plenty of challenges we’ve self-induced and had to overcome over the year, so we’re the last guys who are going to throw any stone. But having said all that I think the industry in general we’ve heard that United and some of the other large companies JetBlue et cetera – the industry I think did a pretty admirable effort across the board in implementing FAR 117, but the way FAR117 is ready and even today there is a lot of uncertainty on how to interpret certain provisions and the industry is been trying to find alignment on exactly how to put this thing together and having to work with our organized labor unions in the process.

So perhaps due to the fact that our team spent a whole lot of time preparing for it and getting the automation pulled together. Even though no doubt we were also like we were scrambling at very end just trying to make sure we had all the I’s dotted and T’s crossed. But I think a lot of planning went into that effort with the ops team and working with our organized labor groups for a successful implementation.

But we can’t get away from the fact that it’s a pretty expensive undertaking to comply with FAR 117. We’re doing it and we’ll continue to do it. Sorry, you had a part two to that question which do we have any issues on Chautauqua to Shuttle America certificate consolidation. Wayne I don’t think we view that as a pacing item in the process. Do we?

Wayne Heller

No there is nothing, we’ve submitted the plan to the FA last Friday. They are reviewing it and we hopefully have that process completed by the end of the year.

Helane Becker – Cowen Securities

Okay. So how long – I guess it’s open ended right for their review. They can take as short or as long time they want?

Wayne Heller

That’s true to a certain extent, yes.

Bryan Bedford

Yeah we’re not certainly in control of the timing. Although we have a really solid working relationship with our local partner. And again a lot of this comes down to just having a very thorough plan which the team has. Now to put this under perspective, this isn’t like implementing an FAR regulation. Our goal is to essentially align, harmonize the two operating certificates of the all the existing pilot training qualifications are accepted and the pilots will rollover from one certificate to other on a seamless basis.

Anyway, but the reason that we’re doing this is not similar to what we have seen at other companies. The reason we have three operating certificates to begin with was it was a way to comply with all of the major airline scope restrictions. The most restrictive of course was American Airlines whose scope made it – put a cap essentially on the biggest aircraft we could operate with that within a particular certificate at 50 seats. So Chautauqua was capped at 50 seat regional jet limit because of its relationship with American. Well through American’s bankruptcy and renegotiation of their scope agreement, that limitation was removed. And so we no longer need – we simply don’t need to have an operating certificate that only operates 50 seat aircraft.

Helane Becker – Cowen Securities

Okay got you. Okay. Well this was very helpful. Thank you so much for your help.

Bryan Bedford

Well, thanks Helane. I appreciate the kind words.

Operator

And your next question comes from the line Duane Pfennigwerth with Evercore. Please proceed.

Duane Pfennigwerth – Evercore Partners

Hey guys good morning.

Bryan Bedford

Hey Duane.

Duane Pfennigwerth – Evercore Partners

As you think about your free cash flow next year and maybe the optionality around that either deleveraging share repurchase or maybe some growth investments. The story from Investor Day was certainly one of deleveraging and capital return. I wonder if you could just kind of update us on your thoughts is maybe perhaps some more growth on the table or should we be thinking about 2015 as the sort of start of the deleveraging process beyond your growth investment at American?

Timothy Dooley

Yeah Duane this is Tim. I think you hit the possibilities for cash directly. On Investor Day what we presented was the sort of the no growth scenario. Of course our long-term strategic plan is not to shrink this business it’s to grow this business. So to the extent there are growth opportunities out there yet for 2015. Yes we’d like to take advantage of those.

Duane Pfennigwerth – Evercore Partners

Okay I guess, since that time do you feel I guess more optimistic or less optimistic about potential opportunities in 2015.

Timothy Dooley

We feel more optimistic than we did in May, Duane.

Duane Pfennigwerth – Evercore Partners

Okay. Thank you.

Timothy Dooley

Sure.

Operator

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

Stephen O’Hara – Sidoti & Company

Hi, good morning.

Timothy Dooley

Hey Steve.

Stephen O’Hara – Sidoti & Company

I was just curious in terms of your share repurchase authorization. How much of that going forward is factored into the guidance or is that kind of what’s determining a range?

Timothy Dooley

Yes, so Q3 guidance assumes that we get some more of that done I don’t have a specific number for you but we gave the full year guidance end of the year cash number assuming it’s all done by the end of the year.

Stephen O’Hara – Sidoti & Company

Okay. And then just in terms of in the past you guys talked about the potential for subleasing aircraft but I think you have some tail risk on the smaller E-jet’s. I am just wondering what the outlook there is and how you feel about that going forward?

Timothy Dooley

You said smaller E-jet’s I think you mean the 50 seaters, I don’t believe we today sit here thinking the E-jets have a significant tail risk but on the ERJ side Bryan.

Bryan Bedford

Yeah, on the ERJ side I think the irony here is that there actually is demand for reliable, cost efficient, 50 seat lift. But this is really where the pilot supply problem I think hits the hardest. Historically we have to be honest that crew members have preference and today they have choice there are lot of regional airlines that are hiring into CRJ900 and E175 aircraft types. So it’s a certainly a better office to work in than a 50 seater.

So I think that there is demand for the aircraft, there is just a cloud of uncertainty over whether or not there is adequate pilot supply to support them. So in some respects we actually feel pretty good about our ability to mitigate, our tail risk exposure due to the fact that the ERJs does have some demand to it. So not losing a lot of sleep over that right now but that’s certainly management’s priorities is to continue to focus on mitigating that exposure.

Stephen O’Hara – Sidoti & Company

And just to kind of as a follow up to that. You had given guidance previously in terms of what the pre-tax income impact was going to be in 2014 I mean how do you think about that going into 2015?

Timothy Dooley

Well first of all Steve the ‘14 number has been mitigated somewhat, so we’re going to see less than the number we put out there as we have been successful in some mitigation strategies. The 2015 number then should be approximately what we see in ‘14 without further mitigation but of course our plan is to fully mitigate the carrying cost of ERJ aircraft.

Stephen O’Hara – Sidoti & Company

Okay. And by mitigating you mean sub-leasing them or something like that, is that right or maybe you are extending the lease or can you just clarify what you mean there?

Bryan Bedford

Yes. Selling the asset or sub-leasing the asset to someone else who has demand for it.

Stephen O’Hara – Sidoti & Company

Okay. All right. Thank you.

Bryan Bedford

You’re welcome.

Operator

At this time we have no further questions. I will now turn the call over to Mr. Brian Bedford, CEO, please proceed.

Bryan Bedford

Thanks Glenn. Well thanks all of you for again your interest in the Republic Airline story and one last time please let me offer my sincere thanks to my 6,500 teammates. They are working hard every day to make it all happen and I would also like to thank our major partners who continue to trust us this with their brands. And for our investors we look forward to providing another update on our progress on these initiatives in our third quarter call, so talk to you soon. Thank you.

Operator

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

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