Airlines and Republic Airways and Aviation and Banking & Finance and Investing and Transportation, Distribution & Logistics

Republic shareholders cheer plans to shed Frontier

February 11, 2012

Republic Airways Holdings Inc. shares are flying high as investors grow optimistic about the company’s plan to sell or spin off its Frontier Airlines unit.

The Indianapolis company’s stock is trading at around $6.10, up 78 percent since the start of the year and nearly 150 percent from its 52-week low last October.

Republic, a regional carrier that contracts its services to major airlines, bought Frontier, a scheduled-service airline, out of bankruptcy in 2009. High fuel prices and other challenges caused steep losses at the unit, and Republic last year announced it planned to reverse course and shed the business.

Bryan Bedford Bedford

Republic CEO Bryan Bedford said his company will decide what to do with Frontier by the third quarter. It’s aiming to close a deal by the fourth quarter of this year. Bedford said Republic is close to hiring an adviser to start the process, and expects to decide on one by the end of this month.

Bedford recently hired former US Airways CEO David Siegel to run Frontier. Siegel has moved to Denver, where Frontier is based, and is putting together a management team that will run Frontier until it separates from Republic, Bedford said.

Separating Frontier will let Republic return to its traditional role of providing regional flights for carriers such as Delta Air Lines Inc. A $120 million restructuring of Republic that included job cuts and cost reductions has returned the unit to profit, allowing Republic to move ahead with the separation.

“We’ve had a number of calls from potential interested parties, saying, ‘When you’re ready to talk we want to talk with you,’” Bedford said. “We haven’t been ready to talk yet.”

Despite investor enthusiasm for the divestiture, completing it won’t solve all of Republic’s problems, analysts say.

Airlines like Republic that contract their services to major carriers are suffering because higher fuel prices have made their small jets less cost-effective. While the major carriers pay those fuel costs, they’re shedding unprofitable contracts.

Ray Neidl, an aerospace analyst for Maxim Group, said in a report that the regional airline industry is in the process of a major restructuring, “and we only expect a few to survive. In an era of what we believe will be permanently higher fuel costs, the sector should be much smaller.”

While Bedford agrees that a wave of consolidation is likely for regional airlines like his, he said, “I don’t see it involving Republic in 2012.”

For now, Bedford said, his main focus is preparing Frontier for divestiture—a process that will require additional cost reductions at the airline.

Bedford said he’s trying to make Frontier more like lower-cost rivals Spirit Airlines and Allegiant Travel Co. But he’s not going all the way. He said he’s not willing to start charging lots of new fees like rivals have done.

Bedford said he doesn’t plan to add new fees for carry-on bags, printing a boarding pass, or calling a reservation center.

Frontier collects more per-passenger revenue than Allegiant or Spirit, he said.

So “there’s no reason in pursuit of efficiency and low costs we have to alienate our customers,” Bedford said. “We’re not reinventing the wheel; we’re just changing to a different wheel.”

Allegiant and Spirit promote unusually low fares—Spirit has advertised flights for $9—but tack on fees for items that travelers on other airlines would get for free.

Republic beat Southwest Airlines Co. in bidding to acquire Frontier in 2009. Eighty percent of Frontier traffic passes through Denver, where it is the No. 3 airline behind United Continental Holdings Inc. and Southwest Airlines Co. The rest goes through Milwaukee or Kansas City, Mo.

An example of a possible move Siegel will examine is replacing Frontier workers with contractors to handle ground duties in cities where Frontier might have only two or three arrivals per day, Bedford said.

“Those are hard decisions that, frankly, we’re going to have to take a look at,” he said.•

ADVERTISEMENT

Recent Articles by IBJ Staff

Comments powered by Disqus