and customer Republic Airways, the parent company of three regional airlines and money-losing, low-cost carrier Frontier Airlines, will present a business plan to its board Nov. 2 that could include deferring the remainder of its order indefinitely, selling off the 10 E-190s it already owns and selling the 113 slots it holds at Reagan Washington National Airport to .
Republic also plans to add seats to Frontier’s Airbus A320-family aircraft. It will make room for three more seats on theand A319s by removing one of the three lavatories from each aircraft, and will add six more on each A320 by installing slimmer seats. The company also will be more aggressive in eliminating Frontier flights during seasonally weak periods and on low-demand days.
Most of the plans are part of Republic’s ongoing effort to save Frontier, which lost more than $90 million during the first six months of the year and pushed the holding company to a $14.9 million second-quarter loss. But Republic also expects to begin negotiations soon with stakeholders to try to reduce the cost of operating the 50-seat regional jets that its regional subsidiaries fly for mainline partners.
“We have a significant operating cost problem on our 50-seat ERJ fleet,” Republic CEO Bryan Bedford says in a recent memo to employees that was obtained by Aviation Week. “We can no longer afford to ignore rapidly escalating maintenance costs, above-market lease rates and uneconomic fixed-fee reimbursement rates.
“Once the Frontier process is complete, the team will begin a similar process with all our key stakeholders to lower our costs on the ERJ fleet with the goal of improving our economics so that we can fly these products for many years to come,” he adds. Republic subsidiary Chautauqua Airlines operates 50 of the.
But Frontier is the more immediate issue. The company’s restructuring plan for Frontier had included eliminating $120 million in annual costs and raising at least $70 million in new financing before this winter.
Republic has made substantial progress on the Frontier restructuring, although Bedford says cost-reduction efforts with stakeholders have been delayed by some European banks and vendors because of the debt crisis on the continent. “Those people seem almost paralyzed by the financial crisis,” he says. “It is all very unsettling to witness.”
Nonetheless, Bedford expresses confidence that “Phase One” of the Frontier restructuring is nearing completion. More problematic is maintaining the goal to keep Republic’s unrestricted cash above $200 million and to raise that by $70 million. An International Brotherhood of Teamsters legal challenge to a cost-cutting deal reached between Frontier and the former union for its pilots has contributed to difficulty in raising the new cash.
“Due to the fact we were not able to complete our debt deal as planned, we ended Q3 about $15 million below our targeted cash level; and absent asset sales, we will be even further below that target by the end of the year,” Bedford says. “So again, we have to make tough choices, and we will.”
One of those tough choices, he says, involves the E-190. Republic already owned 10 of the 99-seat jets and was leasing five others when it finalized a deal with Embraer a year ago to buy as many as 24 more, six of which were on firm order. Bedford says the E-190 has been very beneficial in some markets, but he also says, “We need to conserve cash, so investing limited cash resources in new aircraft is just impossible right now.”
As a result, Beford says Republic has reached a tentative agreement with Embraer to accept two of the aircraft in November and “defer the remaining order indefinitely.” That would save Republic $20 million that was earmarked in this year’s cash flow plan for new aircraft equity, and the tentative deal also calls for Embraer to return about $3 million of Republic’s original cash deposits.
As of the writing of Bedford’s memo, Republic had not definitively decided whether to sell the 10 E-190s it already owns. But Republic did recently appoint U.K.-based Skyworld Aviation, a regional aircraft marketing company, to assist in the marketing of four E-190s built in 2008.
Bedford says Republic did that solely to “test the water on cash values. Assuming we could unlock roughly $4 million in equity per aircraft, that is potentially another $40 million in liquidity.” Republic also might sell off the fourturboprops and three jets being operated for Frontier if it cannot place them via marketing agreements with mainline airline partners. Skyworld already is marketing them, as well as about a half dozen Republic ERJ-145s that are not mentioned in Bedford’s memo as being up for sale.
In another potential cash-raising effort, Bedford says Republic could sell its slot holdings at Washingtonto US Airways to raise about $50 million. Republic holds 113 commuter slots at National under a financing deal with US Airways, with Republic using the slots to provide US Airways Express service on a fee-for-service basis.
One potential complication in such a sale, however, could be the slot swap betweenand US Airways. The just gave its final approval to the transaction, under which US Airways will acquire 42 slot pairs from Delta at National and Delta 132 slot-pairs at New York LaGuardia Airport from US Airways. But the Justice Department (DOJ) says it still is investigating the US Airways acquisition of slots at National.
The DOJ says it is still determining whether that acquisition raises antitrust concerns because of its impact on competition at what the DOJ calls a high-fare airport. US Airways might complicate that investigation if it adds the Republic slots to its portfolio.
Bedford makes no mention in his memo of Republic’s orders for 80 Airbusaircraft and as many as 80 Bombardier CSeries aircraft, both of which are slated for operations at Frontier. But it seems likely the carrier will be asked about them Nov. 8 during its third-quarter earnings conference call, at which time Bedford says the airline will lay out its strategy.