Republic pins Frontier Airlines’ fate to pilot vote on savings

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Republic Airways Holdings Inc. is counting on pilots approving concessions to kick-start a $120 million restructuring plan at its Frontier Airlines unit, 20 months after buying the carrier out of bankruptcy.

About 650 pilots at the unit are voting through midday Friday on whether to delay pay increases and accept cuts in vacation and company 401(k) contributions in exchange for an unspecified equity stake in Frontier. Approval would trigger efforts to seek givebacks from other employees, vendors and aircraft lessors, and raise $70 million in new capital.

“Ratification will be the watershed event to get other significant stakeholders across the finish line,” Republic Chief Executive Officer Bryan Bedford said in a June 10 e-mail to employees. “It wouldn’t be an overstatement to say that failure to ratify would likely derail the entire restructuring effort.”

Indianapolis-based Republic may end up owning a minority stake in Frontier should the restructuring be completed. As part of the pilots’ pending 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.

The full $120 million would let Frontier make a profit this year, Bedford said. In addition to the new capital, the airline expects $25 million in labor-related cost cuts, on top of at least $25 million in savings from moving some regional jets from Frontier to contract flying at Republic.

If pilots accept the concessions, the plan still depends on other stakeholders and employees taking part. Republic intends to seek similar accords with additional Frontier worker groups.

A deal with the pilots would be the “linchpin” for the Frontier plan, said Jim Reichart, Republic’s vice president for sales.

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.

“Successful execution of the restructuring plan should put us in a very competitive position,” said Jeff Thomas, president of the Frontier Airlines Pilots Association.

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, and its shares fell 50 percent from the Oct. 1, 2009, acquisition through Wednesday, while the Bloomberg U.S. Airlines Index rose 29 percent.

Frontier “has become a major distraction for management,” Michael Linenberg, a Deutsche Bank AG analyst in New York, said in a June 13 report. He recommends buying Republic shares.

Republic operates commuter flights ferrying passengers to major airports for larger carriers like Delta Air Lines Inc. and United Continental Holdings Inc. Under such fixed-fee contracts, Republic is paid a predetermined amount per flight, then reimbursed for specified costs, including fuel, and revenue is driven by the number of planes operated and how much they are flown. That segment reported $17.6 million in first-quarter pretax income.

Frontier’s scheduled service is responsible for all its own costs, and revenue is based on the number of passengers flown and the fares they pay. Frontier’s first-quarter fuel expense per gallon rose 24 percent from a year earlier, contributing to a $55.2 million pretax loss.

“We’re taking the action necessary to make sure the Frontier business is sustainable even at very high fuel prices,” Reichart said of the proposed restructuring.

Republic bought Frontier months after purchasing Midwest Air Group in a bid to diversify its sources of revenue by expanding into branded flying in addition to the fixed-fee flights, which it operated under the names of other carriers. Midwest was later absorbed into Frontier.

Republic projected in late 2009 that its branded businesses, including Midwest and Frontier, would produce positive earnings and cash flow within the final three quarters of 2010.

In May, Republic blamed fuel prices for its decision to pare planned capacity growth this year to little changed from 2010, compared with an original plan to expand as much as 5 percent.

Finding investors for Frontier may be difficult as the industry contends with higher fuel costs and less success in raising fares, said Vicki Bryan, a senior bond analyst at Gimme Credit LLC in New York.

“We can all put things out on the lawn and put a tag on it for sale, but that doesn’t mean someone is going to drive by and pick it up,” Bryan said. “This is a high- fixed-cost business with a lot of volatility in operating costs, and you need lots of cash.”

Helane Becker, a Dahlman Rose & Co. analyst in New York, said she expects Republic to raise the $70 million in debt markets with spare parts as collateral. She rates the company’s shares “hold.”

Reichart said Republic has looked at several options for raising the money. He declined to give specifics.

Frontier’s operations are focused on Denver, where United Airlines has a hub and Southwest has steadily built service since resuming flights there in 2006.

“You’re fighting against the world’s largest carrier and the premier low-cost carrier in the U.S.,” said Jeff Straebler, an RBS Securities Inc. analyst in Stamford, Connecticut. “It’s tough to go up against that in your home airport.”



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  1. Now if he'd just stay there...

  2. Daniel - what about the many US citizens who do NOT follow what the Bible teaches? The Hindus, Jews, Muslims and others who are all American citizens entitled to all rights as Americans?? This issue has NOTHING to do with "What the Bible says..." Keep all Churches separate from State! Pence's ongoing idiocy continues to make Indiana look like a backwards, homophobic state in the eyes of our nation. Can't we move on to bigger issues - like educating our kids?

  3. 1. IBJ should link to the referenced report. We are in the age of electronic media...not sharing information is lazy. Here is a link http://www.in.gov/gov/files/Blue_Ribbon_Panel_Report_July_9_2014.pdf 2. The article should provide more clarity about the make-up of this panel. The commenters are making this item out to be partisan, it does not appear the panel is partisan. Here is a list of the panel which appears to be balanced with different SME to add different perspectives http://www.in.gov/activecalendar/EventList.aspx?view=EventDetails&eventidn=138116?formation_id=189603 3. It suggests a by-pass, I do not see where this report suggests another "loop". 4. Henry, based on your kneejerk reaction, we would be better off if you moved to another state unless your post was meant as sarcasm in which case I say Well Done. 5. The article and report actually indicates need to improve rail and port infrastructure in direct contradiction to Shayla commentary. Specifically, recommendation is to consider passenger rail projects... 6. People have a voice with their elected officials. These are suggestions and do not represent "crony capitalism", etc. The report needs to be analyzed and the legislature can decide on priorities and spending. Don't like it, then vote in a new legislature but quit artificially creating issues where there are none! People need to sift through the politics and provide constructive criticism to the process rather than making uninformed comments in a public forum based on misinformation. IBJ should work harder to correct the record in these forums when blatant errors or misrepresentations are made.

  4. Joe ... Marriage is defined in the Bible ... it is mentioned in the Bible often. Marriage is not mentioned once in the US or Indiana Constitution ...

  5. Daniel - Educate me please: what does the Bible have to do with laws? If the government wasn't in the business of marriage to begin with, then it wouldn't have to "define" marriage at all. Marriage could be left as a personal, religious, or otherwise unregulated action, with no ties to taxes, legal status, etc. Then people could marry whomever they want, and all this silliness would go away. Remember to vote Libertarian in November.