Republic Airways Is Coming Back to Life

On Wednesday evening, Republic Airways (NASDAQ: RJET  ) reported adjusted EPS of $0.35, which beat the average analyst estimate of $0.31 and was near the high end of recent guidance for EPS of $0.30-$0.36. As I noted in a previous article, Republic Airways has experienced a rough period of restructuring since its questionable decision to get into the mainline business by purchasing Frontier Airlines and Midwest Airlines. However, the company's strong Q4 and good outlook bode well for the future, and the likely sale or spin-off of Frontier later this year provides additional upside potential. Furthermore, full-year adjusted EPS of $1.15 gives Republic a very reasonable P/E of eight.

Stabilization at last
Republic now has two main businesses: mainline flying as Frontier Airlines, and regional flying under a variety of brand names. Frontier Airlines managed to grow unit revenue (total revenue per available seat mile) by 5.8% for the full year, from 11.30 cents to 11.96 cents. Meanwhile, cost per available seat mile actually declined from 11.77 cents to 11.66 cents. This helped Frontier swing from a pre-tax loss of $63 million in 2011 to a pre-tax profit of $29.6 million in 2012.

According to Republic's late December guidance, Frontier Airlines will grow TRASM again in 2013, to a range of 12.4 cents-12.8 cents. This will boost pre-tax margin to 3%-5%. Frontier is achieving these gains primarily through its transition to an "ultra-low-cost carrier" model, similar to Spirit Airlines (NASDAQ: SAVE  ) . Like Spirit, Frontier is reducing costs by putting more seats on its planes than more traditional low-cost carriers like Southwest or JetBlue. However, Frontier is not relying as heavily on fee revenue as Spirit, which may help Frontier achieve stronger customer loyalty.

Meanwhile, Republic has essentially completed the restructuring of its core regional flying business. The regional airline industry has been hurt by the rapid obsolescence of 50-seat (and smaller) regional jets. These planes allowed airlines to serve smaller destinations frequently, but they are gas guzzlers, making them uneconomic in the current high-price fuel environment. Republic is fortunate that it only has 70 of the smaller regional jets, compared to more than 150 larger regional jets and turboprops. Furthermore, it recently won a contract that will (pending bankruptcy court approval) allow Republic to purchase 47 new Embraer (NYSE: ERJ  ) E175 regional jets and operate them on behalf of American Airlines. Republic's management expects the legacy carriers to add about 300 large regional jets over the next few years, so the opportunity to grow this business should more than offset the gradual loss of 50-seat flying.

Conclusion
After a few dark years, Republic Airways is finally back on track. The conversion of Frontier to an ultra-low-cost carrier has quickly put it back in the black. A spin-off or sale of this business could generate additional value for shareholders. Most importantly, the core regional airline business has improved, and the agreement to fly large regional jets for American provides an important driver of growth.

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  • Report this Comment On March 03, 2013, at 1:34 PM, Inspectigator wrote:

    Republic is having trouble staffing new flights. They recently added Durango for United Airlines after buying 30 planes from defunct Colgan Air, but service is spotty as they don't have enough pilots. They hope to resolve it by March, but most experts are expecting an increasing pilot shortage, especially at the smaller carriers. Pilot job fairs are not getting the attendance they used to, regional carriers have added hiring bonuses and referral bonuses to attract more pilots. A new rule raising minimum hiring experience from 250 to 1500 hours will take effect this Summer, and new crew-rest rules will raise manning requirements at all airlines. Major airlines are all planning to hire soon, those pilots are expected to come from the smaller airlines. I would like to hear Republic's plan for staffing expansion.

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