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Great Lakes Aviation Is Trading Below Liquidation Value

|Includes: Great Lakes Aviation, Ltd. (GLUX)

GLUX is a regional airline, operating in the Western U.S. as an independent carrier and as a code share partner with United Air Lines and Frontier Airlines. 47% of revenue comes from the Essential Air Service (E.A.S.) program, which subsidizes regional airliners in providing air services to unprofitable or minimally profitable markets. As of May 9, 2014, the company served 20 EAS communities on a subsidized basis. Great Lakes Aviation, Ltd. was founded in 1979 and is based in Cheyenne, Wyoming.

Why a downtrend in the stock price?

A new rule imposed by the FAA (effective August 2013) limited first officers to 1,000 hours in an air carrier operation prior to being eligible to serve as a captain. Prior to this new rule, regulatory requirements provided for pilots to become eligible as first officers with a minimum of 250 hours of experience. The current supply of pilot candidates who qualify under the new regulations is severely limited and became difficult for Great Lakes, which operates Beech 1900D turboprop aircraft, to compete for qualified pilots with other airlines operating 50 seat regional jets and larger equipment.

As a result, GLUX had to reduce scheduled departures by suspending service to multiple communities eligible for Essential Air Service, and other non-EAS markets. These actions resulted in a reduction of revenue and operating expenses. The rate of expense reduction will inherently lag the revenue drop-off as the company aggressively adjusts its operating expenditures to match the new level of operations. In April of 2013, Great Lakes submitted a written proposal to the FAA seeking authority to operate Beech 1900D aircraft in a nine seat passenger configuration utilizing the new pilot hiring requirements, while maintaining and complying with all other operational and maintenance standards. On March 18, 2014, GLUX received new operations specifications from FAA allowing the company to hire pilots under the new regulatory requirements in a nine-seat capacity.

Valuation

The way we see it, if GLUX decides to liquidate the company, it is worth more than it's current market cap. (Refer to the table below). Note that PP&E includes aircraft and major parts. Property is stated at cost and depreciated on a straight-line basis, which could be worth more at selling time.

(in millions) As of 03/31/14 Discount Factor Adjusted Value
Cash and equivalents 3.3 100% 3.3
Account receivables 4.1 75% 3.0
Inventories 7.8 65% 5.1
Other current assets 4.0 50% 2.0
Property, plant & equipment 47.6 60% 28.5
Other assets 2.1 50% 1.1
Total assets $68.9   $43.0
       
(minus) Total liabilities ($34.6)   ($34.6)
Liquidation Value     $8.4 (m)
       
Current market-cap     $4.6 (m)
Potential upside     83%

Disclosure: The author is long GLUX.