Republic Airways Holdings Inc. Q1 2008 Earnings Call Transcript

| About: Republic Airways (RJETQ)

Republic Airways Holdings Inc. (RJET) Q1 2008 Earnings Call April 24, 2008 11:00 AM ET

Executives

Warren Wilkinson - VP of Marketing and Corporate Communications

Bryan Bedford - Chairman, President and CEO

Joe Alman - Controller

Analysts

Ray Neidl - Calyon Securities

Michael Linenberg - Merrill Lynch

Duane Pfennigwerth - Raymond James

Bob McAdoo - Avondale Partners

Randy Saluck - Mortar Rock Capital

Jamie Baker - JP Morgan

Ethan McAfee - Ramsey Asset Management

Jeff Cade - Atlas Capital

Bradley Bennett - Goldman Sachs

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Republic Airways Holdings, Inc. earnings conference call. (Operator Instructions)

I would now like to turn the call over to your host, Mr. Warren Wilkinson, Vice President of Marketing and Corporate Communications. Please proceed.

Warren Wilkinson

Thanks, Cynthia. Good morning, everyone, and thanks for joining us for our first quarter 2008 earnings conference call. Before we get started, I want to just introduce everybody that will be on the call today, first of all, our President and CEO, Bryan Bedford; our Executive Vice President and Chief Operating Officer, Wayne Heller, and our Controller, [Joe Alman].

Before we start, let's just cover our safe harbor disclosure. Please note that the information contained in this release and call contains forward-looking information as defined by US 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.

I will now turn the call over to Bryan to highlight some of the items from our press release that was issued last evening. Bryan?

Bryan Bedford

Thanks, Warren. You guys may be wondering where Hal and Tim are today. They are actually in New York for the first meeting with the Frontier Trustee. So we'll be handling the call today without those guys. I'd like to open the call today with a sincere thanks to the entire Republic Airways team. As you guys know, winters are always an extremely challenging time for an airline and this one was no exception. But our folks showed tremendous perseverance. They ran a great airline operation in the first quarter in the face of some very challenging weather. So, again, my sincere thanks to my 4,700 coworkers out on the line.

Let me hit some quick highlights from the earnings release we put out last night. For the quarter, our operating revenues increased 25% to $364 million, up from $290 million in the first quarter of '07. Now, excluding fuel reimbursement, which is a pass-through cost to our partners, our airline service revenues increased about 28%, and that was driven by a 26% increase in our block hour activity over the prior year.

Operating costs for the first year, including interest expense but excluding fuel charges, which as you guys know are reimbursable by our partners, those revenues were $247 million. Again, that's about a 27% increase over the $194 million for the same quarter last year. So a good topline performance.

Operating unit costs for the quarter excluding fuel, but including our below the line interest expenses, they decreased about 4% to $0.0762 per ASM, down from $0.0791 in '07.

Net income for the quarter on a GAAP basis we reported $20.2 million. That's up slightly from $19.3 million for the first quarter of '07. And earnings per share were up 25% to $0.55 per share, up from $0.44 last year. And, of course, that's driven also by our share repurchase program.

Now, of course, we did have a couple of adjustments that we reported last night; that we had a non-cash mark to market adjustment on an interest rate swap transaction that reduced net income by about $2.4 million or $0.07 per share. And we reserved all of our Frontier receivables as of March 31, which reduced net income by $0.4 million or another $0.01 per share. So we had about $0.08 in below the line adjustments.

Now just a note on the interest rate swap, we did settle that swap position in April and we ended up settling that swap at a net cash gain of $5.8 million. So, when we see results for the second quarter, we'll have a reversal of the Q1 non-cash loss and then the pick up of the gain. So we should have a pre-tax non-operating gain next quarter of about $9.7 million.

RJET continued to buy shares in the quarter. We do have a 10b-5 plan that buys shares up to the daily limit based on a preset price. We have purchased 310,000 shares of RJET stock in the quarter. That was about $6 million of consideration and we have about $92 million left under our existing $100 million share reauthorization. We intend to keep that 10b-5 plan in place and also we'll continue to buy stock up to the trading limits established in the 10b-5 plan.

During the quarter, we took the liberty of 7 new 86-seat EJet aircraft. That brings our operating fleet total to 226 aircraft, of which 108 are the 70 to 86 EJet series airplanes. And we've financed all 7 of those new aircraft with fixed rate long-term debt agreements. So we put equity in the planes and matched them with bank debt, and all of our debt agreements are at fixed rates, so we don't have an interest risk on our balance sheet.

Of course, the big news actually happened after the quarter closed. Frontier Airlines filed for Chapter 11 protection on April 11. We currently have 12 aircraft flying on behalf of Frontier. We had another 5 aircraft scheduled to go into service for Frontier in the second half of this year. So, we have a total of 17 aircraft in that contract.

As oil passed $100 a barrel, we did engage Frontier to begin to try to understand their business plan and what their plan was for survival in such a hostile environment. During that process, we opened a discussion with Frontier about the possibility of not delivering the last 5 aircraft into the program. And for those 5 aircraft, we're a little bit farther ahead in the planning process.

I have to admit we were surprised by the suddenness of the Frontier bankruptcy petition. But with oil over $115 a barrel, the outcome was probably inevitable. And since the filing, we've worked quickly with Frontier management to put an agreement in place for the orderly wind down of the existing 12 aircraft that are in service today. We're certainly not looking to add to the problems that Frontier is already facing, and we felt it was in everybody's neutral best interest to have an orderly wind down, both for ourselves, for Frontier and certainly for their customers.

Given that a lot has transpired in a very short period of time, we're just not in a great position today to tell our listeners with great specificity or precision exactly what we're going to do in terms of disposing of the Frontier planes. What we will do is we'll thoughtfully explore all of our options to reposition the planes to other network partners or to dispose of the aircraft offshore. We don't think this is going to be a long-term problem.

Republic remains a strong, well capitalized business, and while the Frontier bankruptcy was not unexpected, we are disappointed about losing a customer. We'll get past this in relatively short order. And this is exactly why maintaining revenue diversity so important and why keeping our focus on our operating reliability and our ongoing cost efficiency is just critical for the long-term health of our business. That's exactly what the management team intends to do.

So, yes, these are stressful times in our industry and it would be easy to lose focus. And, again, this is why I'm more grateful than ever for the dedication and professionalism of our 4700 frontline airline professionals who keep their eye on the ball everyday, on every Republic flight to provide our partners and our passengers with high quality service.

And so with those opening remarks, Cynthia, let's open the queue for questions please. Cynthia?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ray Neidl of Calyon Securities. Please proceed.

Ray Neidl - Calyon Securities

Good morning.

Bryan Bedford

Good morning, Ray.

Ray Neidl - Calyon Securities

Let's see. A couple quick ones here. Good quarter by the way. Going forward though, the industry is in turmoil, as you pointed out, and they're very rapidly cutting back domestic capacity, including looking at their regional partners. One, I just wanted to reconfirm what you have said before that you have ironclad contracts, long-term, I guess, going out over 4 to 7 years and you feel pretty well protected by those contracts. Is that still a true statement?

Bryan Bedford

Well, you know the big risk in these contracts, Ray, is the counterparty risk that we have with our partners. I mean, if we go back 90 days to the last call, the concern people had was what happens in consolidation and what's the risk that the contracts have exposure there? And our answer hasn't changed. We thought it was a great idea 90 days ago, think its critical today. There are too many, in my opinion, I certainly don't speak for our partners or guys who are talking about consolidation. But there's too many airplanes, too many flights, too much choice, and it doesn't seem like customers are willing to pay the amount of money that it takes to travel at $115 to $120 oil. And prices have to go up and when prices go up, demand is going to go down.

Now I can tell you, we have lots of different partners and our different partners have a different view on the world in terms of how to respond to increase in pricing and reducing demand. But I think if we were to segment the domestic marketplace, and you guys are probably more cognizant of this than I am, but domestic average fares, system-wide, are about $125. And, of course, and averages, meaning half the guys are paying and half the guys are paying less, and prices have to go up 20% or 25%, the guy who is going to not fly is the guy who is paying well less than the average price today. And that sort of implies to us that there's too many coach seats flying around.

So, you've got a choice. If you're in a network model, you have to decide do you remove cities off the map, therefore you reduce connectability and you reduce revenue. Do you reduce the number of flights moving through the hub? Hubs are high-fixed cost animals. So, anything that impacts connectability certainly seems to negatively impact revenue, or do you want to reduce the gauge of the equipment?

And at the end of the day, I think that we continue to provide a safe, clean, reliable experience on products that are more mainline seamless, the 70 to 86-seat products that we have today. We can get the customer a great product experience, seamless to the mainline expectation and we can do it at a trip cost that is substantially lower than what can be provided on larger capacity flights.

So, look, at the end of the day I think what we're going to find through consolidation, and hopefully, the regulators don't impede it. Hopefully, Congress understands that with $115 plus oil, flight choices are coming down and fares are going up. How we get there, there may be a better way working through consolidation to get to that outcome than not, but prices have to go up, and therefore, we're going to see fewer airplanes flying around.

Our task, Ray, is to make sure we're performing, make sure that we have a product that is more reliable with competitions running and more cost effective than what the competitions running. But to answer your question directly; yes our contracts are secure as long as our counterparty risk is reasonable.

Ray Neidl - Calyon Securities

Now to me it looks like your main risk might be your flying, I think, under a lot of your contracts above minimal guarantee levels. And if the big guys wanted to reduce ASMs, they could legally take away your bonus flying, you might say, which would bring down revenues. But on the other hand, I think your target market, as you pointed out, is the larger RJETs, and I would think that they would be less affected than the smaller RJETs. Do you see that as a risk and do you see as a counter-play the larger aircraft?

Bryan Bedford

Well, certainly the trend to lower utilization seems to be targeted more at the smaller capacity planes. And you know our goal over the next several years is to move methodically out of this small capacity RJ supplier business and into the larger RJ supplier business. So there's no change in our model there. We may be working a little harder to accelerate those transitions at $115 plus oil. But that's a process that has to be done in harmony with our partners. They have to want those larger planes, they have to be willing to let the smaller planes go. I can tell you we have been trying to work with some partners to actually remove some small capacity planes, and nobody wants to let anything go right now. So I don't control that process of my own accord.

Having said that, those are trades that we're certainly willing to do and we think they make sense both for our network partners as well as our own needs. Was there anything else in that question, Ray? Utilization, I'm sorry, you asked about the utilization. Again, different partners have different perceptions about that. Some of our partners continue to operate the small RJs at high levels of utilization because the marginal cost of that extra flight is virtually zero. And then other partners are pushing us down to the minimum. We're certainly down to the minimum with Delta, and you've seen our utilization tick down from, I believe, 10.2 hours a day to 10.1 hours a day. I honestly don't see it going much lower, but again, different partners are moving in different directions. So, I think we're sort of where we would expect to be this time next year.

Ray Neidl - Calyon Securities

Okay. And one technical question. With the Delta putting back 15 aircraft and with the Frontier situation, I know you said it's a little early to figure out where those aircraft are going to go, but from our modeling purposes over the next quarter, should we assume that revenues will be a little bit less than what we were projecting because those aircraft might be idle? And in the case of Delta, I think those aircraft were due to come offline anyway later on this year or early next year, is that correct?

Bryan Bedford

Yeah. Everything that you guys have available to your models that you get off of our website are updated. And what you are going to see and what you saw last quarter is the Delta 135s, those aircraft are dealt with. We don't have any long-term exposure on the 135s. They'll come off the Delta program and they'll come off our operating certificate without any impairment risk, and the same with the CRJ-200s at Continental. Those aircraft are on short-term operating leases and the leases expire when the duration of the term expires with Continental.

So, we have no differential risk between the asset and the co-chair term, other than the exception of we've got this curve-ball thrown at us on the 17 planes. And I'm happy they are 170s, because I think we're going to have a much easier time moving those airplanes around than perhaps if they were the smaller capacity shells.

Ray Neidl - Calyon Securities

Okay, great. Thank you.

Bryan Bedford

You bet, Ray.

Operator

Your next question comes from the line of Michael Linenberg from Merrill Lynch. Please proceed.

Bryan Bedford

Mike, what's going on Mike?

Michael Linenberg - Merrill Lynch

Hi.

Bryan Bedford

Hi, Mike. Hello.

Michael Linenberg - Merrill Lynch

How cordial, Bryan. A little housekeeping or accounting here, the two one-timers, where do they show up on the P&L? You got the interest rate swap piece, which maybe that's an interest expense and then the reserve that you took, which line items are those in?

Bryan Bedford

Joe, you want to take that one?

Joe Alman

Sure. The mark to market loss on the swap is down in non-operating, other net.

Michael Linenberg - Merrill Lynch

Okay.

Joe Alman

And that's where the gain will be recorded in the second quarter. The reserve for the Frontier receivables is in our other operating expenses. So, it's an option.

Michael Linenberg - Merrill Lynch

Okay, good. That's helpful. And then, Bryan, Delta's out there and I know you've talked about the 15 135s, and they're out there talking about reducing their commitment 60 to 70 airplanes and they are targeting their contract operators. Can you talk about some of the put rights that you have and maybe just update us, I think it's on your 145s, maybe it's on your 170s; that element of the contract?

As well as, as I recall in your contract if you go through a merger the major carrier, I believe, may have a right to terminate without cause, obviously, they have to give some sort of notice. What sort of right do you have if your partners decide to go through a merger, for example? Do you have any rights on that front? Any color on both those topics would be great.

Bryan Bedford

Sure. Let me take the second question first. The rights that you refer to are reciprocal. So, in a world where we were to have a change of control that would give our partners the right, not necessarily the obligation, but it would certainly give them the right to terminate the agreement. And the reason those rights are in there is in a world where one of their competitors were to buy us, it certainly reasonable to assume they would not want to do business with Republic if it were owned by, say, American Airlines.

So, the reason those provisions are in there are really to make sure that at the end of the day our co-chair partners understand who they are doing business with and it's with someone they want to do business with. Those provisions are, in fact, reciprocal. So in a world where they were merging with somebody that we would object too than we would have the right to terminate the agreement without cause or that would be considered good cause. As it relates too, I think your first question, first part of the question was early termination rights?

Michael Linenberg - Merrill Lynch

Yeah, whether it's partial or early, to go through and talk about your ability to put back, and I'm not sure if that's in the latest contract with Delta. Do you still have that right to put airplanes back to them in the event that they did an early termination?

Bryan Bedford

Yes. I'm not sure I have those termination dates memorized, but there's an ETO on both the Delta 145 and the Delta 175 agreements. I think the 175 ETO right is 2016, something like that. I mean so they're both fairly far out into the future, but in the world where Delta were to decide to terminate the contract early, they would be required to buy the aircraft from us and pay us our cost of capital, insure a return of fair cost to capital which is pre-negotiated. So, there's no asset risk continuing under that program associated with an ETO.

Michael Linenberg - Merrill Lynch

Okay, just to your knowledge, is that maybe an element of your contract that you have and maybe your competitors don't, and when I say competitors, other regional carriers? I mean I'm just bringing up only because as we see oil climb higher, we get nervous about 50-seaters, and so we start looking at regional carriers who have 50-seat contracts that afford them the most protection and if you have a better written contract than your competitor, you're better off in my view.

Bryan Bedford

Well, I think our contracts are good, Mike. I think the issue that we've always had, whether you're an aircraft lessor or a regional operator or any other supplier to the industry, you have to be worried about the overall health and wellbeing of your partners. And I think that's the issue. And so we have to work collaboratively with our airline partners. And the best way we work collaboratively with our partners is if they feel like they are better off with a 76 or 86-seat aircraft versus 50-seat aircraft; how can we enable those transactions to occur for our mutual benefit. And that's what we're going to continue to try to focus on.

Michael Linenberg - Merrill Lynch

Okay. And then just one last one, Bryan, you threw out the revenue impact of the Frontier airplanes. Can you give us a sense maybe walk us through the map on what the bottomline impact would be on one hand? On the other hand, obviously you want to put these airplanes to work, but because of the sort of reoccurring expense or hit that you've been seeing as a company because of pilot attrition, do we see some relief? So, while maybe you lose some on the revenue side, maybe you have less of a pilot shortage as pilots move around within the system because this could potentially free up some pilot time. How do we think about all that?

Bryan Bedford

Well, I'll let Wayne Heller, our COO, touch base with you in just a second on the pilot staffing situation. So let me address the first part of your question, Mike.

In the worst case scenario, meaning we get aircraft back from Frontier and we simply park them, do nothing with them, for each aircraft month they are down, that cost which is a reflection of lost profit, lost contribution to overhead, the rent costs for the planes, the hull insurance, the property taxes, the daily recurring calendar maintenance items to keep the airplanes ready to go, that number is going to be somewhere between $270,000 and $300,000 a month.

Michael Linenberg - Merrill Lynch

Okay.

Bryan Bedford

And that's before we do anything to either reduce overheads or reduce calendar maintenance demands or put them in a place where there is no property tax. There's certainly ways we can get the number down, but I think in the worst case scenario, I think that's what we are modeling out right now; $270,000 to $300,000 per shell per month.

So it's not insignificant. I don't think that we're going to be sitting on these aircraft terribly long. But, the focus for the management team is to figure out what's the best case? Is the best case to sit tight on the airplanes for a couple of months and find a longer term home for them or to move them abroad? The good news is there is plenty of demand for the aircraft overseas. So we simply have to make sure that we don't panic and we come up with what's the best long-term solution for our shareholders, our employees and our customers.

Michael Linenberg - Merrill Lynch

Okay. Great. Thank you.

Bryan Bedford

You bet.

Operator

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

Duane Pfennigwerth - Raymond James

Hi, Bryan. Thanks for taking the questions.

Bryan Bedford

Good morning, Duane.

Duane Pfennigwerth - Raymond James

Just in terms of a follow-up to Mike's question there, I mean if you do decide to sell them, when is the earliest that you could get the entire 12 out of your fleet? And could you elaborate a little bit more on the planning that you had for the additional 5 you were going to take deliver of later this year?

Bryan Bedford

Well, yeah, again it's a 17 aircraft issue, not just the 12, but we have been working on a couple of deals to sell some shells further out into the year. Now the question is whether or not we should try to bring those sales closer in. So in other words, they'd come out of the first 12 versus the last 5. Do you follow that?

Duane Pfennigwerth - Raymond James

Yes, thank you. And when you sell them, on a per aircraft basis, how much cash would you actually bring back?

Bryan Bedford

I wish we had Hal and Tim here because I'm not sure I have that number, but hang on a second. I don't have the exact numbers here, but they numbers are -- they're good guys.

Duane Pfennigwerth - Raymond James

Great. And then last thing, wondering in terms of the Frontier claim, what are the next steps in pursuing that? And given your sort of successful experience in navigating that area, when do you think a secondary market could exist for that claim?

Bryan Bedford

Well, of course, we've got Hal Cooper and Tim Dooley in New York with our bankruptcy lawyers. They're meeting with the US Trustee, along with the other significant secured and unsecured creditors and the Frontier management team, and their advisors from Seabury. So we're going to have a lot more clarity on that this afternoon or tomorrow. And we will try to keep the market fully informed of what's transpiring on that situation, because we know it's such a significant item in the minds of our investors and our employees. So we're going to give you guys as much transparency as allowable.

Having said that, the claim that we file or the claim that we've talked about in our press releases, we think those numbers are actually pretty good. Obviously, it's up to the US Bankruptcy Court jurisdiction, potentially some negotiation with Frontier to come up with the ultimate allowable claim will be. And then moving on to the recovery aspect, it's just way too early to determine what's the opportunity to recover and how is it recovered. We have not seen the Frontier plan of reorganization, not sure there is a Frontier plan of reorganization today.

I can tell you Sean Menke has done a heck of a job, and I think there's a lot of folks on the call today that have probably spoken to Sean and know he's done an awful lot of good work there in the past six months. He's facing a very difficult task at $115 plus oil. He knows that, their advisors know that, I think the market knows that. So the question is going to be, is the best chance of recovery for the creditors in a plan of reorganization or in some other outcome? And it's just too early to tell.

I certainly expect we will have some recovery. Frontier is a business today that has a pretty significant surplus of assets over liabilities. They have pretty good unrecorded value in the aircraft that they have on the books today. So, we expect that there is value in the Frontier estate. Is it best harvested with a reorganization and emergence to Frontier or some other option, I mean it's just too early to tell.

Duane Pfennigwerth - Raymond James

Okay. Thanks.

Bryan Bedford

You bet.

Operator

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

Bob McAdoo - Avondale Partners

Hi, a couple of quick ones I guess. On the 12 airplanes that are coming back, how are they financed? Are they typical bank debt like you do a lot of your airplanes, or is there anything special about those?

Bryan Bedford

No, they are all straight bank debt. We own them. There are no limitations on what we can do with them.

Bob McAdoo - Avondale Partners

And when you talk about the $270,000 to $300,000 a month cost, you said that included lost profits and variety of other things. In terms of those basic things that you couldn't get out of in a relative, reasonable timeframe, like the property tax and the mothballing and things like that. How much of that is the loss profit and whatever versus the stuff you can't get rid of? And I guess the other piece is depreciation, when you take the $270,000, does that include some depreciation in there too?

Bryan Bedford

Hang on a second. Bob, I'm sorry to say, again, I don't have the details of that here. But, I'll swag something for you, then I guess we can come back and chat with you.

Bob McAdoo - Avondale Partners

I'll be on the list for Hal to call when he gets back or something?

Bryan Bedford

Yes, exactly. But I'm going to guess it's probably one third, two thirds.

Bob McAdoo - Avondale Partners

You're stuck with two thirds and one third is maybe stuff that's not going to be hitting the books forever if you were to decide to park them for a while or had to park them for a while. Is that the way you're thinking about it?

Bryan Bedford

Let's get you more accurate information, because I'm getting some shrugs over here. But I think the numbers we gave you was for guys to try to at least model what the earnings hit might look like in Q3 and Q4 versus what was already being modeled.

Bob McAdoo - Avondale Partners

Okay. Put me on the list of calls I'd like him to make when he gets back, if you would. The demand that's overseas for these kinds of airplanes, when you think about that, are you thinking about actually -- do you envision that demand as good long-term permanent demand, let's just sell the planes and get them off the property or are you thinking about trying to retain an interest in them? What is the demand, what's it like overseas for these kinds of airplanes?

Bryan Bedford

The deals that we have currently lined up, nothing's firm. We've got a couple of parties where we've got some deposits on aircraft, no firm deals done yet. But hopefully, we'll see some things close in the not too distant future. Those deals are straight sells. One, there's demand for the product. Two, there's no used aircraft on the market today. And three, let's be honest, the dollar is heavily depreciated against foreign currencies right now. So, given the currency translation that we've seen over the last two months, the airplanes appear like they are on sale.

Bob McAdoo - Avondale Partners

It's cheaper to buy them here than it is to buy them in Brazil, given what the Brazilian currency has done I guess.

Bryan Bedford

Well, I think cheaper to buy them with euros than it is to buy them with dollars.

Bob McAdoo - Avondale Partners

Then kind of one other thing as trying to assess how people might be thinking, you made the comment that people maybe aren't willing to give up their small planes, I think you made some kind of statement like that. If you're trying to think about the decision that somebody out of US Air, or brand X, whatever, is thinking about if you were to come up to them and say, would you like to have a 170 versus a 145, let us take a 145 back and put a 170 on your property. In round numbers, how much an hour or how much extra does a guy have to pay to have a 170 operate on his property versus a 145? Obviously, you get 50% more seats, but is it 20% more cost and 50% more seats in terms of the cost per trip? How would you think about that kind of equation?

Bryan Bedford

In round numbers it's about 30% more cost for 50% more seats.

Bob McAdoo - Avondale Partners

Okay. I'll quit there. That's good. Thanks a lot.

Bryan Bedford

You bet.

Operator

Your next question comes from the line of Randy Saluck from Mortar Rock Capital. Please proceed.

Randy Saluck - Mortar Rock Capital

Most of my questions have been answered. I just wanted to again ask you about the planes that you are taking back. It would seem to be, given the demands for those planes you don't appear too worried about having them sit for a long period of time. Have there been expression of interest from other carriers in having those planes?

Bryan Bedford

Well, too worried, I'm not terribly worried. I'm not losing sleep over it, Randy. I mean what I want to figure out is what's the right disposition strategy for the planes? And that's what the team here is working on. Is it better to sit on some airplanes for a quarter and find a home for them going into partners in the fall? Is it better to trade small jets for large jets? Is it better to just keep the small jets in there and sell the planes? And it's going to come down to looking at the deals on the table from potential buyers, looking at the gains on the sale, looking at the cash, taking the debt off the books versus what the long-term earning opportunity is to put it into another partner, and whether or not we have to remove a small jet?

Now, for the 5 airplanes that we were looking to take back in the back half of the year, our plan was simply to dispose of them. Now that we're talking about 17 versus 5, there may be other options that are better for us in the long-term. Now, we've only been working on this for a week, so we don't have anything firm. All we know we've got lots of conversations going on and we've got a lot of work to do, but we will get that work done and we're going to come up with the best strategy to mitigate this setback. And I just don't know what that's going to take, but believe me at the end of the day, it's going to be something that is in the best interest of everybody that's on this call and everybody that works for our business and for our partners.

Randy Saluck - Mortar Rock Capital

Okay. The other thing is there anything else you could tell us about your buyback? It sounds like it's as you've discussed, now and in the past, it's some sort of 10b-5 regimen. But is there any way with your stock lower at certain times, like yesterday and today, you can accelerate that?

Bryan Bedford

Again, wish we had Hal here. I'm not the 10b-5 expert, although I know enough to be dangerous. I know that there are daily trading limits based on the volumes. The plan will buy up to those volumes as long as the price is below the targets that we've established in the plan. Certainly, if investors were to come to us, like I wish somebody who was selling at $11.21 yesterday would have come to us and said, hey, you want to buy some stock? I think we can do that. I think we can do that outside of the plan. So, if there's anybody else out there that wants to dispose RJET stock at those prices, you should call us.

Randy Saluck - Mortar Rock Capital

What about at this price? It seems pretty cheap here.

Bryan Bedford

I'm pretty sure we're buying at these prices, Randy.

Randy Saluck - Mortar Rock Capital

Okay.

Operator

Your next question comes from the line of Jamie Baker from JPMorgan. Please proceed.

Jamie Baker - JP Morgan

Hi, Bryan.

Bryan Bedford

My goodness, we get Mike Linenberg and Jamie Baker in person.

Jamie Baker - JP Morgan

I don't know what it means. Some people accuse us of being the same person, the LaToya Michael Jackson phenomenon. Less of a question than actually a suggestion for you. The legacy obviously once again getting vocal about wanting to resize the regional programs and notwithstanding contract duration, most of these decisions are probably going to be made on the basis of price. And there simply isn't the level of disclosure out there for us to identify RJET as the low-cost producer. If you line up everybody operating margins, that doesn't answer the question, and might even hurt RJET if somebody looks at that in that flawed way. So, I'll still try to frame this as a question; do you think it would be in your stakeholders' best interest if you could afford more clarity as to what you actually charge your partners?

Bryan Bedford

Our stakeholders' best interest, well, I mean it's not like we're hiding information, Jamie, I think everything is disclosed. I mean if someone were to say what's the margin in each one of our deals, which we don't disclose, I'm not sure at the end of the day what that accomplishes. The fact is, for example, was Frontier paying a slightly higher margin than some of our other partners, well, yeah, because the risk for Frontier was higher than our other partners. So there is a risk adjustment that's based on the pricing of the deals, and thank God that's the case.

Jamie Baker - JP Morgan

Just to interrupt you, Bryan. It's not really the margin that answers this question, though. And perhaps, I posed the question poorly to you. I mean, think about it from Delta's point of view. How do your costs compare to what SkyWest charges Delta? Because I think longer term, and again notwithstanding near-term contract restrictions and what have you, that's the big airlines are going to be looking at this question, who provides us with the lowest cost feed, who provides us with the highest cost feed? Now let's cut off those high-cost producers. And margin just doesn't come anywhere near answering that question.

Bryan Bedford

Well, Jamie, let me tell you who I believe was the lowest cost seller of capacity to Delta. I believe that was Mesa.

Jamie Baker - JP Morgan

And we see how that turned out. Okay. So it's price and quality?

Bryan Bedford

You can make a pizza so cheap nobody will want it and there is an element of you get what you pay for. I mean if you want the absolute lowest cost or pay the absolute lowest margin or ask somebody to fly for you at a loss; chances are you're not going to get the product that your customers are going to want to pay higher fares for. So, I don't know how to be more clear. We try to strike the right balance between being a very efficiency cost producer, a very efficient seller of lift to our partners, and the fact that we continue to win business I think is a good indication that we're striking the right balance between what's the product.

Look, a 170s more expensive than a CRJ-700, but at the end of the day, I think we were actually giving Frontier lift on a 170 cheaper than what they were paying Horizon for it. Call Sean Menke and ask him. So that's tastes great, less filling, better product, better pricing, better customer experience, better reliability. I think that's where the RJET story is differentiated from many guys in our peer group.

But you are absolutely right. I man the industry is under a tremendous amount of duress. And as I said earlier, different network partners are moving in different directions. Delta is an outlier. And maybe it's a function of the fact that their mix of regional jets to mainlines is just different, larger, more skewed to the small jets than what the other network guys are dealing with today. Therefore, their response is different than what the other network guys are responding too.

So, what are we going to continue to do? We're going to continue to work with all of our partners to make sure we've given them a product that's every bit as good as what they are offering their customers and do it at the most efficient pricing we can.

Jamie Baker - JP Morgan

Yes. No, that's fair. And secondly, just a quick follow-up on this issue of minimal block hour guarantees. My understanding is that there's not necessarily any penalty that has been spelled out in typical regional contracts if a partner does drop below the guaranteed block hour minimums. Is that accurate? What's the point of having a minimum, a floor on flying if there's not an actual penalty for bumping up and cutting below it?

Bryan Bedford

Yes. I can't speak to other contracts, Jamie, but clearly if we're flying below or scheduled below the minimum, there is a cost to that.

Jamie Baker - JP Morgan

Is it a cost to you or to the partner?

Bryan Bedford

To the partner.

Jamie Baker - JP Morgan

Can you add any additional clarity on that? Is there a step up in the departure rate, or block -- depending on the basis of which are compensated, is there some step-up in the reimbursement rate?

Bryan Bedford

Yes, there is.

Jamie Baker - JP Morgan

Okay. All right. Fair enough. Thanks a lot, Bryan, appreciate it.

Bryan Bedford

No problem.

Operator

Your next question comes from the line of Ethan McAfee from Ramsey Asset Management.

Ethan McAfee - Ramsey Asset Management

Hi, Bryan.

Bryan Bedford

Hi, Ethan.

Ethan McAfee - Ramsey Asset Management

I just had a question. I was looking with Mesa Airline stock down at $0.45 on the market cap at $20 million. So there is a pretty good likelihood that that would actually go bankruptcy over the next couple years, especially with the stuff going on with Delta and whatnot. And I was just wondering your thoughts on the ramifications of that through the rest of the regional jet airline industry, considering they've always been most undisciplined…

Bryan Bedford

Ethan, I can barely hear. You can you speak up and give us your question again, please?

Ethan McAfee - Ramsey Asset Management

Sorry, can you hear me now, Bryan?

Bryan Bedford

I sure can, thanks.

Ethan McAfee - Ramsey Asset Management

I was just asking about Mesa Airlines and with the market cap at $20 million or so, it's looking more and more likely at that company to go bankrupt, especially with what's going on with Delta. And I was just wondering the ramifications of a Mesa bankruptcy for the rest of the regional jet airlines, such as yourself, if that were to happen; considering they've always been considered the most irrational pricer of new contracts.

Bryan Bedford

I'm not sure how to comment on that. Obviously, we're not privy to the situation that's going on between Delta and Mesa or any of our competitors and their network partners. I'm sure everybody is trying to figure out the answer to that question and we certainly have ideas. You hate seeing any airline go into bankruptcy. We haven't seen a regional airline do it and I don't whether I expect that will the case with Mesa or not. I think it depends on what happens with the ultimate wind down on the Delta flying. And I just don't know enough to be able to give you a response. So, we're certainly not looking at the market and saying, there's going to be some opportunity out there directly correlated to what's going on at Mesa.

Ethan McAfee - Ramsey Asset Management

Great, thanks.

Bryan Bedford

Okay.

Operator

Your next question comes from the line of Jeff Cade from Atlas Capital. Please proceed.

Jeff Cade - Atlas Capital

Good morning, Bryan. Most of my questions have been answered. Just wanted to clarify, you talked again about the contracts in the event of your merger, but in the case of Northwest and Delta, just to be clear, are there any outs for any of the flying that you're doing for Delta at the time? Thanks.

Bryan Bedford

Hi, Jeff. By the way, good morning. I think the answer is in the event that they merge, we would have the right to terminate the agreement.

Jeff Cade - Atlas Capital

I'm sorry. And they have no rights to terminate the agreement pursuant to a merger?

Bryan Bedford

That's correct.

Jeff Cade - Atlas Capital

Thank you.

Bryan Bedford

And I don't know why we would, but I think we have that right.

Jeff Cade - Atlas Capital

Yes, I wouldn't expect you too. Thank you.

Operator

And your final question comes from the line of [Bradley Bennett] from Goldman Sachs. Please proceed.

Bradley Bennett - Goldman Sachs

Hi, good morning. I'm just following up on the question that Bob McAdoo asked regarding the opportunity abroad or otherwise to place the 50-seaters that, Bryan, you're talking about the industry is shedding. Can you give us a little bit of more information on who the likely buyer is for some of those aircraft?

Bryan Bedford

Well, I would prefer not too. But I can tell you when we started about a month ago talking to Frontier about the possibility of just not putting in those last 5 aircraft, we quietly put some aircraft out on the market and we got 26 different parties that expressed interest in them. I can't tell you and wouldn't tell you who they are, and maybe half of those are actually legitimate sales opportunities.

But there seems to be a pretty strong market demand for the products abroad. We've had some crazy ideas about guys in foreign countries that would actually like us to operate the airplanes for them and partnership with them. That is something we're just not ready to pursue. We're not even ready to think about it. So, I don't want to mislead anybody and think that there's anything like that going on.

Bradley Bennett - Goldman Sachs

Really, that's interesting. What are some of the reasons that you've decided not to pursue that international opportunity from a business perspective?

Bryan Bedford

Mainly, just focus. There is a lot going on in the North American marketplace, and I think we really, now more than ever, need to have ways or focus on running the business, making sure that we're flying the airplanes as efficiently as possible, that we're the most cost efficient operator that we can be and to be able to respond to opportunities if they arise. And I actually think those opportunities will present themselves in time.

Bradley Bennett - Goldman Sachs

I agree.

Bryan Bedford

The industry is very distracted right now, as it should be, with the consolidation mating dance, and how do we recover, through higher pricing, oil and certainly what's the impact on demand at higher prices and a soft economy. So, I think we're going to have to a little bit patient for the industry to get it's footing for our network partners to regain their own focus on what their networks need to look like in 2009 and beyond, and so that's going to be the balancing act that we have to just address right now.

Bradley Bennett - Goldman Sachs

I think that makes good sense. And actually you can always reinvest your cash in your own stock. Can you talk to me a little bit about what the tax implications might be if you were to sell a fully depreciated 50-seater? What sort of impact that would be from a tax perspective?

Bryan Bedford

Joe, do you want to -- what's our current tax position?

Joe Alman

Sure. Obviously there'd be some depreciation recapture, but we're currently still in a substantial net operating loss carry-forward, so we would utilize some of that and it may trigger some [AMT] but we would be okay from a tax perspective.

Bradley Bennett - Goldman Sachs

Okay. That's great. You guys have been very aggressive recently repurchasing your shares. Can you talk a little bit about how much cash you feel is the right amount of cash to have on your balance sheet for running your business?

Bryan Bedford

The actual cash need for the business is fairly low. Again, the risk we have is the counterparty risk in the performance. So I would guess, like any prudent lender if you feel like your counterparty risk is going up then perhaps the amount of capital you want to retain also increases. But I think the real reason the preserve cash right now is in consolidation, we feel, depending upon how the pairings come together; that some of the network carriers might consider selling non-core assets. And in that situation, there are certain assets out there that we might be very interested in.

Bradley Bennett - Goldman Sachs

I see. That's very helpful. Given what I would consider to be abnormally high volatility for a company that effectively earns a margin on it's cost, guaranteed basis or for long-term, you're stock is extremely volatile. Have you ever thought about private ownership for this business?

Bryan Bedford

I mean, I would tell you every now and then we get a private equity guy that will come in and give us the pitch on taking the business private. We haven't found anybody that has given us a compelling reason to go to our shareholders with a deal. At the end of the day we work for the shareholders, so if somebody comes in and presents an offer that is something that we think the shareholders should consider, we'll take it to them.

Bradley Bennett - Goldman Sachs

Thank you. And I guess one last question, I appreciate the patience. With respect to the issue that's been evolving regarding scope clauses at the majors, can you comment on to what extent you think the majors have room today to increase the number of 70-seaters across your partners and the other opportunities that you're looking at? And then to what extent you think scope clause relief at carriers that don't have the ability at the current time is likely given the fuel environment?

Bryan Bedford

Okay, Brad. I'm not sure I can address the first part of your question in terms of what's the status of availability to put in larger capacity RJs with the different partners. I know some partners, like US Airways, like Delta, like United, I believe, do have some inflection points based on the size of either the number of aircraft in the mainline fleet and/or the number of hours operated by the mainline fleet. And I just haven't refreshed that analysis to know.

Bradley Bennett - Goldman Sachs

I got it, so do you think there's certainly enough to absorb the Frontier aircraft?

Bryan Bedford

Yes. That I believe is the case. Now, what happens in consolidation if there's any retrenchment, that, I don't know. My suspicion is in consolidation the scope clauses are going to have to be addressed because they are disparate between the various consolidating parties. And the rumored case as you would conceive between Continental and United, for example, or United and even US Airways that's been talked about. I mean the scope provisions are substantially different between either of those parties. US Airways with flexibility to go up to 90 seats, United capped at 70 seats, and Continental capped at 50 seats.

So we've always had the belief that at the end of the day, Continental, for example, participating in the SkyTeam Alliance has been disadvantaged by its scope provision relative to Delta Northwest that something there should happen as a part of their existing negotiations.

Bradley Bennett - Goldman Sachs

Right.

Bryan Bedford

Who knows where that goes? But certainly, I think everybody will concede that larger capacity RJ's operated by efficient regional carriers and financed by efficient regional carriers are part of the solution and not part of the problem.

Bradley Bennett - Goldman Sachs

Right. Okay. Well, thank you very, very much for your time.

Bryan Bedford

You're welcome, Bradley.

Operator

(Operator Instructions)

Bryan Bedford

Well, I think we had a couple of folks who were in the cue when we said we were at our last question. So, you can give us a call after we hang up and we'll get your questions answered. For everybody else, it was a great call. Thanks for your participation. We really appreciated the opportunity to give you the first quarter update. I certainly look forward to having a lot more information for you guys as we progress over the next 90 days.

So thank you very much and we'll talk to you soon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.

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