Mergers & Acquisitions and Airlines and Republic Airways and Labor and Transportation, Distribution & Logistics

Pilots OK cuts, allowing Republic to pursue restructuring plan

June 17, 2011

Frontier Airlines pilots have approved concessions that will allow parent Republic Airways Holdings Inc. to pursue a $120 million restructuring at the unprofitable unit.

Pilots voted 498-58 to delay pay increases and accept cuts in vacation, sick days and company 401(k) contributions in exchange for an unspecified equity stake in Frontier, Jeff Thomas, president of the Frontier Airline Pilots Association, said Friday in an e-mail.

The approval clears the way for Indianapolis-based Republic to seek givebacks from other Frontier employees, vendors and aircraft lessors and to raise $70 million in new capital. Republic bought Frontier out of bankruptcy in October 2009.

The vote “is important from the point of view of shaping the attitudes of the entire workforce,” Robert McAdoo, an analyst at Avondale Partners LLC, said in an interview. “That’s also the biggest pool of salary dollars. If you can’t get the savings on that, you’re not going to get enough out of the ticket agent or flight attendant salary pool.”

As IBJ reported earlier this month, shares of Republic Airways Holdings Inc. have fallen within pennies of their 52-week low of $4.43 per share recently as the airline struggles with rising fuel costs for Frontier. Republic shares rose 17 cents, or 3.8 percent, to $4.61 Friday.

Republic may end up owning a minority stake in Frontier if the restructuring is completed. As part of the pilots’ agreement, Republic must make a “good-faith effort” to attract equity investors that would reduce its holdings by the end of 2014. The company hired a consultant to help with the Frontier plan.

In addition to the new capital, the airline projects $25 million in labor-related cuts, on top of at least $25 million in savings from moving some regional jets from Frontier to contract flying at Republic.

“Our board will move forward with its commitment to invest additional liquidity in Frontier to fund the airline’s operations and future growth,” Republic Chief Executive Officer Bryan Bedford said after the pilot vote.

The agreement with the pilots also calls for the carrier to order new narrow-body jets and establish a profit-sharing plan. The current labor contract would be extended by two years.

“In ratifying this agreement, the pilots have made a significant equity investment in Frontier Airlines and look forward to contributing to its future success,” Thomas said.

Bedford took on a new business model when Republic’s $108.8 million bid for Frontier beat Southwest Airlines Co. in a 2009 bankruptcy auction. Republic has posted losses in three of the six quarters since.

Republic operates commuter flights ferrying passengers to major airports for larger carriers like Delta Air Lines Inc. and United Continental Holdings Inc. Frontier makes commercial passenger flights under its own name from its base in Denver, where it is third in the number of passengers, after United and Southwest.

Before buying Frontier—and Milwaukee-based scheduled carrier Midwest Airlines in 2009—Republic had exclusively flown smaller, regional jets on contract for scheduled carriers. Contract flying is not as vulnerable to spiking jet-fuel costs, as the brunt of such expenses are borne by the scheduled carrier that hires Republic.


 

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