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Republic Airways Holdings Inc (NASDAQ:RJET)

Q4 2007 Earnings Call

February 7, 2008 10:30 am ET

Executives

Hal Cooper – Executive Vice President, Chief Financial Officer, Treasurer, and Secretary

Bryan Bedford – Chairman, President, and CEO

Wayne Heller – Executive Vice President and Chief Operating Officer

Analysts

Dewayne Pfennigwerth - Raymond James

Analyst for Mike Linenberg - Merrill Lynch

[Fung Lee] - Royal Capital

Operator

Welcome to the Republic Airways fourth quarter 2007 annual earnings conference call. My name is Carmen and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Assistance) I would like to turn the presentation over to your host for today’s call, Mr. Hal Cooper, Executive Vice President and Chief Financial Officer. Please proceed.

Hal Cooper

Thank you Carmen and good morning everyone. Thank you for joining us for our fourth quarter in 2007 earnings conference call. I’m joined here by Bryan Bedford, our Chairman and CEO and by Wayne Heller, our Executive Vice President and Chief Operating Officer, the guy that actually he makes his airplanes go every day. Let’s start by our Safe Harbor. Please note that the information contained in this release and this call contained forward looking information as defined by United States 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. With that out of the way, let me turn the call over to Bryan. He is going to highlight some of the items that are in our press release, speak a little bit more in depth about some of the pressing issues of the day then we will field your questions.

Bryan Bedford

Thanks Hal and again looks like we have a large group of folks on the call. Thank you for taking the time to join us this morning. I would like to start by thanking our 4700 employees, the people that comprise the Republic Airways family. This is another outstanding year of accomplishment for us and for our team and a special congratulations to them for being recognized by the editors of Air Transport World as 2008 Regional Airline of the Year. It’s just the second time we won this distinction in the last four years so, kudos to all of our employees.

Of course as Hal said, I’ll be happy to answer your questions but first let me just talk a little bit about the highlights from the quarter and for the year which is the easily been the busiest year of our 34-year history. Looking at the fourth quarter, our operating revenues increased 19% to $352 million up from $295 million in 2006 excluding fuel cost which was passed through to our partners. Our airline service revenues increased approximately 26% which was driven by a corresponding 26% increase in block hour activity over the prior year’s fourth quarter. Total operating expenses for the quarter including interest expense but excluding fuel charges which were reimbursable by our partners, those totaled $237 million and net increase is about 27% from a $187 million for the same quarter in ’06. Our operating unit cost per ASM for the quarter again excluding fuel but including interest expense decreased about 3% to $0.0738 per ASM, that’s down from $0.0763 per ASM in the fourth quarter of ’06. We are pleased to report net income for the quarter increased 19% to $24.3 million that compares to $20.4 million in the fourth quarter of ’06. Earnings per share increased 41% to $0.65 per share up from $0.46 per share in the fourth quarter of ’06.

Hal, as we noted in our press release, we did have a year-to-date tax adjustment which contributed $2.7 million to net income which we picked up in the fourth quarter, that’s about $0.07 per share. Now of that, unless some folks will try to do the math to figure out what fourth quarter net income actually should be, about $0.02 of that tax adjustment actually relates to the fourth quarter and $0.05 relates to the prior 3 quarters. So if you try to get the math right on the fourth quarter the number is $0.60. Our transition costs for the quarter were approximately $2 million and that’s in line with the guidance that we gave you on the third quarter call. We bought approximately 1.8 million shares of our jet stock during the quarter, total consideration of $37 million and this includes $1.4 million spent under the new $100 million share repurchase authorization that we received in December. During the quarter we took the liberty of 8 new 86-seat EJet aircraft bringing our operating fleet to a total of 219 aircrafts. We actually took delivery of our 100 and 101st Eseries jet, just another significant accomplishment for our business especially when we consider we put the first E-Jet to work in August of 2005 so, little less than 2 and a half years over a hundred aircraft.

For the calendar year of ’07, operating revenues increased 13% up to $1.29 billion up from $1.14 billion in ’06. Again, excluding fuel reimbursement, which was passed through to our partners, our underlying airlines services revenues increased approximately 23% which was driven by 22% increase in block hour activity over the prior year. Our operating cost [inaudible] for the year within [fuel] but including interest expenses with $0.0758 per ASM in ’07, that’s down from $0.0761 per ASM in 2006.

Net income for the year increased to $82.8 million or $2.03 per share, that’s up from $79.5 million or $1.82 per share in 2006. It was a busy year; in ’07 we took the liberty of 25 new E-Jet aircraft and 24 CRJ-200 aircraft. This resulted in approximately 26% increase in capacity for 2007, an industry leading growth rate I would note. We also added two new partnership relationships with Continental Airlines and Frontier Airlines in 2007. Of course between the induction of 49 new aircrafts and two new partnering relationships, we did incur some sizable transition cost for the year. In total, we have about $19 million in free tax expenses. As reminder, due to what we still think is going to be higher than what we would say 5-year average historical pilot attrition we still expect to see an extra $1 million to $2 million in free tax impact for quarter going forward as a result of higher training cost.

During the year, we amended our Delta Connection Agreements as part of Delta’s emergence from bankruptcy. And just to recap those major changes and agreements, we agreed to remove all 15 of our smallest 37-seat E135s. Our program is going to start in September and we are going to remove those aircraft at a rate of about two airplanes per month through the first half of 2009. Our reimbursement rates on the remaining 40 shells in the Delta program were reimbursed, reduced approximately 3%. Delta surrendered its $3.4 million warrants of our jet stock and we were awarded a pre-petition claim of $91 million, which we subsequently sold for about $45 million in cash proceeds.

During the year, we repurchased $142 million of our jet stock and we reduced our share count outstanding by approximately 16% or 7 million shares. We ended the year with a $164 million in cash, which was down about $32 million from our balance at the end of ’06. Of course this is after spending $142 million on our stock repurchase programs and investing another $92 million in aircraft equity and free delivery deposits for our growing fleet of 86-seat aircraft. We increased capacity by $2.4 billion ASMs in 2007. Again, that’s about a 26% growth rate over ‘06 and based on business that we have under firm contract committed for 2008 we expect to see another approximately 20% increase in capacity. Of course this is a much more manageable growth program for Republic with only 26 new 86-seat aircraft being delivered in 2008. So we are not nearly [inaudible] we had last year and yet there is still plenty of work to be done and I have no doubt that we have the right people in place to accomplish our goals this year. 2007 was extraordinarily busy. Busy one for employees and amidst those all of our growth in transition, our coworkers continued to provide superior levels of quality in customer service second to none in our industry. I just can’t thank our employees enough for their hard work day to day to serve our customers and our partners and I just ask them to keep up the good work as we start another record year for 2008.

Now, it’s being reported that there is some new comments about consolidation. So let me just go ahead and front this a little bit. Certainly, we hear all the same rumors that you guys do, that some of our partners might be engaged in some M&A activities this year. At a high level there seems to be a view that whatever is good for our partner carriers and consolidation is universally bad for all regional carriers and the primary concerns we’ve continue to hear is that I believe that there is some risks of contract termination or perhaps renegotiation and margin compression in the event of M&A activities with our partners. And the second concern we hear is that they’re simply not going to be any growth for regional carriers after networks are rationalized after hub rationalization occurs. So let me just start with the first concern and reassure each of you and all of our investors and all of our employees that none of our contracts would be terminated or renegotiated in the event of any M&A activity with any of our partners. So, I guess in the worst case scenario our business could level off in 2009 but I’ll come back to that in a minute.

If we go back over the last 4 years the big worry everybody had about our industry was that all of our partners were in bankruptcy and of course the very real fear that our margins would be eliminated or perhaps worse, our businesses would be eliminated and certainly there would be no growth, and for some high cost inefficient regional carriers that turned out to be true. But it was always our opinion and we’ve consistently said this over the years that for high quality, low cost regional operators, we felt we’ve come out on the other side of these bankruptcy processes both in good financial shape and with new opportunities, and that’s exactly what happened.

I have to tell you I felt the exact same way with consolidation, the biggest underlying risk in any of our regional contracts is the counter party risk that we have with our partners. These contracts are very long term in nature and so anything that makes our partner carrier stronger and more viable financially reduces the counter party risk that we are exposed to. And over the long term that’s a very good outcome for us. Now, regarding the second concern that there’ll be no growth. Again, we just closed the year on a 26% growth rate in ‘07. We got another 20% growth already under contract for ‘08. We’ve got growth going into ‘09, although a very small level at this point and there is, of course no guarantees that we’ll have growth in ‘09 but, you know, if I were sitting here in 2006 having this conversation, I wouldn’t have been able to give you any guarantees about ‘08 growth either. So, this is no change from where in regional airlines are year in and year out. But what I can tell you is that, if we continue, the management team and our coworkers out on the front line, we continue to operate a high quality low cost regional business and we continue to give our employees the right tools and the right products, we believe we are going to be very well conditioned to respond to what will certainly be real opportunities that will present themselves, if and when transactions are executed. So we certainly prefer to be helpful and play a helpful role in consolidation and we’re prepared to continue to manage our business prudently and keep our eye in the ball and make sure that we can respond to opportunities as they present themselves. So, with that, Carmen, would you please open up the queue for questions from our listeners?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll wait one moment while questions are compiled. And the first question comes from the line of Dewayne Pfennigwerth from Raymond James. Please proceed.

Dewayne Pfennigwerth - Raymond James

Hi, thanks for taking the questions and nice quarter. Our first question with regards the fourth quarter, I think initially you had guidance out there for 25% block hour growth, that was reduced sometime in the fall to the sort of low 20’s range and you came in at 25%, anyway so, I’m wondering, are you seeing less impact from the pilot or crew in issues regarding your initial reason probably more conservative on the fourth quarter?

Hal Cooper

Wayne will deal with the pilot question of Dewayne.

Wayne Heller

Hi, Dewayne. Yeah, in the fourth we did see a bit of a dip in pilot attrition. We actually ended around 13% which gave us the ability to fly a few more block hours than what we initially thought.

Dewayne Pfennigwerth - Raymond James

And is there something that you see now that suggests those rates are going to take back up to support the --

Wayne Heller

Of course, we have age 65 out there but we have not taken that into any of our attrition assumptions for 2008. Going forward, we’re planning on the same level that we experienced. We’re hopeful that age 65 will lower that number but until we actually see a drop, we’re going to leave those assumptions as we experienced in ’07, in place. We do have a bit of anomaly, the first quarter of 2008. We have most if not all of our jets for jobs pilots leaving but that is already into the ‘08 plan and that we anticipate no issues really as a result of those pilots leaving.

Dewayne Pfennigwerth - Raymond James

Thank you. And then just generally on 2009, if you assume sort of the most conservative route scenario, you know, what do you think the cash flow generation potential to business would be and what would be your thoughts regarding reducing the share count if internal growth does not materialize? Thanks for taking the question.

Bryan Bedford

Sure Dwayne, it’s Bryan. I think, and I’ll have the guys double check this if I speak incorrectly, but I think if we just look at business under contract for ’09, it’s about a 7% growth rate. So obviously, we start going off a lot of cash in a lower growth rate scenario because obviously it’s reproducing significant amount of cash. We’re also reinvesting the cash flow into equity on our aircraft. We actually own the vast majority of our Eseries jets and probably don’t have of our smaller jets. So, I guess that’s the same side of the coin, you know, if the growth rate slows, cash on the business actually increases substantially. As far as giving visibility on the future stock buy backs or stock dividends or things of that nature, I think what we have to do is be prudent how we manage our business. We certainly don’t have a need for a substantial amount of cash on our balance sheet given the way our contracts work. So we’re going to look for ways and make sure that our business strategically is getting stronger. As we go out further in time, making sure that we are able respond to opportunities that our partners might have for us as we look further out in time. And to the expense that we have cash flow that we don’t need and to accomplish either one of those goals then we’ll figure out the right way to return it to our investors.

Dewayne Pfennigwerth - Raymond James

Thanks very much.

Bryan Bedford

Okay.

Operator

And the next question comes from the line of Mike Linenberg from Merrill Lynch. Please proceed.

Analyst for Mike Linenberg - Merrill Lynch

Good morning gentlemen. This is Lily on behalf of Mike. My first question is regarding the 7 CRJs that’s leaving in the fourth quarter of ’08 from the Continental Express Line. I know those planes were on short term leases between 2 to 5 years, if I remember correctly. If memory serves me right, I don’t think they were actually in there for full 2 years. Was there anything unexpected going on there, or maybe they were up for the few years and that’s it. And a follow up to that is that, what does 2009 look like on the Continental Express business?

Hal Cooper

Well, Lily we’re making the assumption that all of the CRJs will be returned as they come off their leases, which is no deviation from what we’ve been telling people since we started that process. So I think we got 7 aircrafts in ‘08 and 10 aircrafts in ‘09, and then the balance in 2010. Those again are a mirror image of the underlying sublease obligation.

Analyst for Mike Linenberg - Merrill Lynch

I see. And then my second question is, are there currently any RFPs out there from the major carriers?

Hal Cooper

I’m not aware of any RFPs that are out there. But then again, so our listeners understand that there was an RFP out from Delta or United to upgrade 170s to 175s and then move to 170s to United. There was an RFP up from US Airways to remove 20 145s and replace them with 30 175s. So the absence of RFPs doesn’t mean we’re not having conversations about opportunities with our partners.

Analyst for Mike Linenberg - Merrill Lynch

Got it. Great. Thank you so much.

Hal Cooper

You got it.

Operator

And the next question comes from the line of [Fung Lee] from Royal Capital. Please proceed.

[Fung Lee] - Royal Capital

Hi. Thanks for taking the question. Just a quick question on the other line that you had, the other cost line, it seems like it was considerably higher this quarter than it was in prior quarters. Could you just talk to that?

Wayne Heller

It’s mostly training cost. I mean we have a significant ramp up to get ready for the jets for jobs attrition and [it happen]. The training costs were significantly high in Q4.

[Fung Lee] - Royal Capital

Got you. So that’s more of a preparation for the jets for jobs. So, I mean, might it be slightly elevated in the quarter?

Wayne Heller

Oh absolutely.

[Fung Lee] - Royal Capital

Great! And just a follow up on the question of ‘09 cash flow potential, if there aren’t any growth opportunities, can you just sort of directionally help me? I have a number that’s, you know, in excess of $250 million potential generation ‘09, how off am I?

Hal Cooper

So, in probably it would be better for us to just have a conversation with you offline and --

[Fung Lee] - Royal Capital

Okay, are you --

Hal Cooper

[Inaudible] to your models.

[Fung Lee] - Royal Capital

Great. You’ve spoken in the past about, you know, what cash regeneration might look like any direction on this call?

Hal Cooper

Well, I don’t think that’s going to be in order for $200 million.

[Fung Lee] - Royal Capital

Got you. In ‘09, when your growth slows potentially?

Hal Cooper

You know I don’t have the number in front of me, so…

[Fung Lee] - Royal Capital

Okay.

Hal Cooper

I don’t want this to leave you and see the guys screwing around for sheets of paper.

[Fung Lee] - Royal Capital

Right. Okay. Thanks.

Hal Cooper

You got it.

Operator

(Operator Instructions)

Hal Cooper

Well, looks like we’re done on the Q&A. You guys are letting us off easy this quarter. So, again hopefully you guys [inaudible]. This is a great quarter for our business, given all the headwinds that we had in ’07. Feel like we end at the quarter on a strong note, feel like we’re very well positioned going into ’08, and let’s see where consolidation takes us if it happens at all. We will look forward to updating you again at the end of the first quarter. Thank you. Bye bye.

Operator

This concludes the presentation for today ladies and gentlemen. You may now disconnect.

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