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RJET > SEC Filings for RJET > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for REPUBLIC AIRWAYS HOLDINGS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for REPUBLIC AIRWAYS HOLDINGS INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating air carrier subsidiaries:
Chautauqua Airlines, Inc. ("Chautauqua"), Shuttle America Corporation ("Shuttle"), Republic Airline Inc. ("Republic Airline") and Frontier Airlines, Inc. ("Frontier"). Unless the context indicates otherwise, the terms the "Company," "we," "us," or "our," refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2012, our operating subsidiaries offered scheduled passenger service on 1,578 flights daily to 141 cities in 45 states, the Bahamas, Canada, Costa Rica, Dominican Republic, Jamaica, Mexico, and the Turks and Caicos Islands under scheduled passenger service or pro-rate operations as Frontier Airlines and through fixed-fee code-share agreements with AMR Corp., the parent of American Airlines, Inc. ("American"), Continental Airlines, Inc. ("Continental"), Delta Air Lines, Inc. ("Delta"), United Air Lines, Inc. ("United"), and US Airways, Inc. ("US Airways") (collectively referred to as our "Partners"). Currently, we provide our Partners with fixed-fee regional airline services, operating as AmericanConnection, Continental Express, Delta Connection, United Express, or US Airways Express, including service out of their hubs and focus cities.

Fleet Composition

The following table outlines the type of aircraft our subsidiaries operate and
their respective operations within our business units as of December 31, 2012:

                                                             Schedule of Operational Aircraft
               Aircraft
 Operating       Size                                                                                                  Number of
Subsidiaries   (Seats)     Frontier     American     Continental      Delta      United      US Airways     Spares      Aircraft
Chautauqua     37 to 50          1           15              12          31           -              9           3           71
Shuttle
America        70 to 76          -            -               -          30          38              -           -           68
Republic
Airline        69 to 99         12            -              17           -           -             58           -           87
                120 to
Frontier         162            55            -               -           -           -              -           -           55
Total number of
operating aircraft              68           15              29          61          38             67           3          281

During 2012, our operational fleet remained the same at 281. The Company returned to the lessor or sold: two ERJ 135s, five E190s, two A318s, and four A319s. Three ERJ 170s were subleased, and the Company took delivery of one A320 aircraft and fifteen Q400 aircraft. Included in the operational fleet there are three ERJ aircraft that operated as charter service, serve as operational spares, or are temporarily parked.

Our Frontier operations consist of all Airbus operations at Frontier. Additionally, included within the Republic segment are regional jet aircraft operated by Republic under a pro rate agreement with Frontier. Frontier, which we purchased out of bankruptcy in 2009, is a low-fare carrier in Denver, Colorado. During 2011, we successfully restructured Frontier and reported operating income improvement of $118.1 million in 2012. We view Frontier as an efficient, low-cost producer of narrowbody capacity and believe it is well-positioned to compete in Denver.

We have fixed-fee regional jet code-share agreements with each of our Partners that require us to maintain specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.


Separation

The Company continues to make progress with its efforts to sell Frontier, however, we can provide no assurance as to the exact timing of when, or if, such a transaction could be consummated. We do believe any such transaction would have a material impact to our financial position and results of operations, and could have a significant impact to the price of our common stock.

Segments

Based on our continual monitoring of the long-term economic characteristics, airline processes, class of customer, and route operations flown as a part of our operating segments, we identified a change in our operating segments during the first quarter of 2012. The Company has adjusted its presentation of business segments in 2012 and has revised the prior two year's information to conform to the current period segment presentation. We believe this segmentation is appropriate based upon operating decisions and performance assessments by our chief operating decision maker.

The Company has identified two reportable segments: Republic and Frontier. Our Republic segment includes all regional flying performed under fixed-fee and pro-rate agreements, subleasing activities, regional charter operations and the cost of any unallocated regional aircraft. The Frontier segment includes passenger service revenues and expenses for operating our Airbus fleet, as well as charter and cargo operations at Frontier.

Pro-rate Agreements

Under the Company's pro-rate agreements, Republic is allocated an industry standard pro-rata portion of ticket revenue, while Frontier retains all connect revenues as well as ancillary revenues on regional flights. Frontier maintains certain rights to deploy the regional aircraft and maintains control of pricing and revenue management. Frontier also retains responsibility for all customer service expenses, including airport rents. Selling and distribution costs are shared between Republic and Frontier. Republic incurs fuel expense based on gallons consumed flying under the pro-rate agreement.

Business Strategy

Republic

Continue to operate a high-quality fleet of aircraft across an efficient network - We intend to maintain a modern, high-quality fleet of regional aircraft that meets or exceeds stringent industry operating standards and complies with the terms of our fixed-fee regional aircraft code-share agreements. We believe we have highly efficient flight and maintenance operations due to leveraging large crew and maintenance bases across multiple Partners' networks.

Continue to provide efficient and effective solutions to our Partners - We have strong, long-term relationships with each of our Partners and have historically worked together with them to meet their operational and network needs. Historically, we have provided safe, reliable, and cost-efficient solutions for our Partners. We remain focused on anticipating and continuing to assist our Partners with their business strategies.

Take advantage of growth opportunities to operate larger regional jets - Network carrier consolidation, along with high fuel prices, has limited the economic use of smaller regional jets. Our Partners have shown an interest in having more, larger regional jets in their networks. We believe our existing relationship with our Partners and our strong relationship with Embraer make us well-positioned to take advantage of any growth opportunities. On January 24, 2013, the Company announced that it had reached an agreement with American to operate 53 Embraer E175 aircraft under the American Eagle brand with service to start in June, 2013. This agreement was subsequently amended on February 28, 2013 to reduce the number of covered aircraft from 53 to 47. The amended agreement was approved by the Bankruptcy Court on March 12, 2013 in the American Bankruptcy proceedings.

Frontier

Compete effectively by providing our customers with low fares on our low-cost, narrowbody aircraft - Frontier offers a differentiated customer experience with its LiveTV and bundled fare offerings through its Classic and Classic Plus products, which are available for purchase on flyfrontier.com. We believe the restructuring completed in 2011 provides Frontier with low-cost narrowbody aircraft, which allows us to compete effectively in our highly contested markets.

Further lower our unit costs (Cost per available seat mile "CASM") to become an ultra-low cost carrier - We are focused on our effort to further reduce operating costs at Frontier by increasing seat density and reducing sales and distribution costs. Frontier continues to simplify its fleet by removing regional aircraft flown by our other subsidiaries. Additionally,


Frontier will continue to replace smaller A318 and A319 aircraft with larger A320 aircraft as opportunities arise, which will help reduce CASM.

Continue to work towards brand preference in Denver, Colorado and expand Frontier's network in other strategic locations - We remain focused on right-sizing our network in Denver and we are developing new point-to-point opportunities in markets where we have competitive advantages because of our low costs.

Increase ancillary sales per passenger by utilizing ultra low cost carrier methodologies - Historically, Frontier's ancillary revenues have been lower than other low cost carriers. We are evaluating other ancillary revenue opportunities and anticipate an increase in our ancillary sales per passenger in future periods.

Revenue

Fixed-Fee Service - Under our code-share arrangements with our Partners, we receive fixed-fees, as well as reimbursement of specified costs on a gross basis with additional possible incentives from our Partners for superior performance. For the years ended December 31, 2012, 2011 and 2010, all of our fixed-fee revenue was earned under our fixed-fee arrangements. The number of aircraft we operate and aircraft utilization are the most significant drivers of our revenue, as opposed to the number of passengers we carry or the fare the passengers pay.

Passenger Service - Branded passenger service includes passenger ticket revenue and pro-rate revenue on our Frontier airline. Unlike our fixed fee business, the most significant drivers of our revenue are the number of passengers we carry and the fare paid by the passenger.

Charter and Other Revenue - Charter and other revenue primarily consists of revenue related to our dedicated and co-sold scheduled charters, the marketing component of our co-branded credit cards, cargo revenues, interline and ground handling fees, and lease revenue for aircraft subleased under operating leases. Charter and cargo revenues are recognized at the point that our charter service and cargo revenue is realizable and earned, which is when the transportation is provided. All other revenue is recognized as revenue when the related goods and services are provided.

Charter revenue for the twelve months ended December 31, 2012 , 2011 and 2010 was $95.6 million, $16.7 million, and $5.8 million respectively. The increase in charter revenues is due to the start up of our relationship with Apple Vacations that began in October 2011.

Operating Expenses

A brief description of the items included in our operating expenses line items follows.

Wages and Benefits

This expense includes not only wages and salaries, but also expenses associated with various employee benefit plans, employee incentives, stock compensation, and payroll taxes. These expenses will fluctuate based primarily on our level of operations, changes in wage rates for contract, and non-contract employees and changes in costs of our benefit plans.

Aircraft Fuel

As of December 31, 2012, all of our aircraft fuel for the fixed-fee operations is supplied directly by our code-share partners, and thus, we do not record expense or the related revenue for those gallons of fuel. Beginning in July 2012, we did not record fuel expense and the related revenue for the United operations. We also did not pay for or record fuel expense and the related revenue for Continental, American, Delta or US Airways operations. All fuel costs including into-plane fees and taxes are expensed as incurred for our Frontier operations. Aircraft fuel also includes the realized and unrealized mark-to-market adjustments on fuel derivatives.

Landing Fees and Airport Rents

This expense consists of an estimate of fees charged by airports for each aircraft landing and airport rental fees for ticket counter, gate and common space. Under our fixed-fee agreements, we are generally reimbursed for the actual costs of landing fees. Landing fees and airport rents are expensed as incurred for the Frontier operations.


Aircraft and Engine Rent

This expense consists of the costs of leasing aircraft and spare engines. The leased aircraft and spare engines are operated under long-term operating leases with third parties. Aircraft rent is reduced by the amortization of deferred credits received from the aircraft manufacturer for parts and training. The credits are deferred and amortized on a straight-line basis over the term of the respective lease of the aircraft.

Maintenance and Repair

Maintenance and repair expenses include all parts, materials, tooling and spares required to maintain our aircraft. We have entered into long-term maintenance "power-by-the-hour" service contracts with third-party maintenance providers under which we are charged fixed rates for each flight hour accumulated by the majority of our engines and some of the major airframe components. The effect of such contracts is to reduce the volatility of aircraft maintenance expense over the term of the contract. All other maintenance is expensed as incurred under the direct expense method of accounting.

Insurance and Taxes

This expense includes the costs of passenger liability insurance, aircraft hull insurance, war risk insurance and all other insurance policies, other than employee welfare insurance. Additionally, this expense includes personal and real property taxes, including aircraft property taxes. Under our current fixed-fee agreements, we are reimbursed for the actual costs of passenger liability insurance, war risk insurance, aircraft hull insurance and property taxes, subject to certain restrictions. Under our US Airways and United fixed-fee agreements, we are reimbursed for the actual costs of such items other than aircraft hull insurance, which is reimbursed at agreed upon rates.

Depreciation and Amortization

This expense includes the depreciation of all fixed assets, including aircraft, and the amortization of intangible assets with definite lives.

Promotion and Sales

This expense is incurred on our Frontier operation only and consists of advertising costs, passenger reservation and booking fees, credit card processing fees and commissions.

Other Impairment Charges

This expense includes the impairment of aircraft and other equipment, trade names, and other assets.

Other

This expense includes the costs of crew training, crew travel, airport, passenger and ground handling related expenses, all hangar and administrative lease expenses, professional fees, and all other administrative and operational overhead expenses not included in other line items above. Additionally, if incurred, this expense will include aircraft return costs, gains and losses on disposal of assets, reorganization costs, severance costs and bad debt expenses.

Results of Operations

Based on our continual monitoring of the long-term economic characteristics, airline processes, class of customer, and route operations flown as a part of our operating segments, we have identified each of our operating segments below as reportable segments. We changed our presentation of business segments in 2012 primarily due to changes in management and organizational structure; and we have revised information for all periods presented to conform to the current period segment presentation. We believe this segmentation is appropriate based upon operating decisions and performance assessments by our chief operating decision maker.

We have identified two reportable segments: Republic and Frontier. Our Republic segment includes all regional flying performed under fixed-fee and pro-rate agreements, subleasing activities, regional charter operations and the cost of any unallocated regional aircraft. The Frontier segment includes passenger service revenues and expenses for operating our Airbus fleet, as well as charter and cargo operations at Frontier.


Under our pro-rate agreements, Republic is allocated an industry standard pro rata portion of ticket revenue, while Frontier retains all connect revenues as well as ancillary revenues on regional flights. Frontier maintains certain rights to deploy the regional aircraft and maintains control of pricing and revenue management. Frontier also retains responsibility for all customer service expenses, including airport rents. Selling and distribution costs are shared between Republic and Frontier. Republic incurs fuel expense based on gallons consumed flying under the pro-rate agreement.

The following tables sets forth information regarding the Company's statistical performance for the years ended December 31, 2012 and 2011.

Operating Highlights - Republic                           Twelve Months Ended December 31,
                                                         2012              2011          Change
Total revenues (millions)                           $    1,377.4      $    1,534.0       (10.2 )%
Total fuel expense (millions)1                      $      161.4      $      303.3       (46.8 )%
Total operating and interest expense, excluding
fuel expense                                        $    1,153.7      $    1,377.8       (16.3 )%
Operating aircraft at period end:
  37-50 seats                                                 71                73        (2.7 )%
  69-99 seats10                                              155               148         4.7  %
Block hours7                                             701,040           731,440        (4.2 )%
Departures                                               409,058           429,564        (4.8 )%
Passengers carried                                    20,112,289        20,773,219        (3.2 )%
Revenue passenger miles ("RPM") (millions) 2              10,120            10,691        (5.3 )%
Available seat miles ("ASM") (millions) 3                 13,437            14,449        (7.0 )%
Passenger load factor 4                                     75.3 %            74.0 %   1.3 pts
Cost per ASM, including interest expense (cents) 5
6                                                           9.79             11.64       (15.9 )%
Cost per ASM, including interest expense and
excluding fuel expense (cents)6                             8.59              9.54       (10.0 )%
Gallons consumed1                                     48,842,044        91,890,705       (46.8 )%
Average cost per gallon                             $       3.30      $       3.30           -  %
Average daily utilization of each aircraft (hours)
8                                                            9.8               9.9        (1.0 )%
Average length of aircraft flight (miles)                    469               498        (5.8 )%
Average seat density                                          67                68        (1.5 )%


Operating Highlights - Frontier                            Twelve Months Ended December 31,
                                                          2012              2011          Change
Total revenues (millions)                           $     1,433.5      $    1,330.5         7.7  %
Total fuel expense (millions)                       $       532.3      $      517.8         2.8  %
Total operating and interest expense, excluding
fuel expense                                        $       877.3      $      908.0        (3.4 )%
Operating aircraft at period end:
  120 seats                                                     2                 4       (50.0 )%
  136-138 seats                                                37                41        (9.8 )%
  162-168 seats                                                16                15         6.7  %
Passengers carried                                     10,700,669        10,583,331         1.1  %
Revenue passenger miles ("RPM") (millions) 2               10,579            10,271         3.0  %
Available seat miles ("ASM") (millions) 3                  11,908            11,779         1.1  %
Passenger load factor 4                                      88.8 %            87.2 %   1.6 pts
Total revenue per available seat mile (cents)               12.04             11.30         6.5  %
Operating cost per ASM (cents) 5 6 9                        11.79             12.05        (2.2 )%
Fuel cost per available seat mile (cents) 9                  4.47              4.40         1.6  %
Cost per ASM, excluding fuel expense (cents)6                7.32              7.65        (4.3 )%
Gallons consumed                                      158,361,595       159,145,671        (0.5 )%
Average cost per gallon 9                           $        3.36      $       3.25         3.4  %
Block hours7                                              214,494           219,359        (2.2 )%
Departures                                                 85,328            87,938        (3.0 )%
Average daily utilization of each aircraft (hours)
8                                                            11.0              11.2        (1.8 )%
Average length of aircraft flight (miles)                     976               957         2.0  %
Average seat density                                          143               140         2.1  %

1. Includes $48.2 million and $102.5 million of fuel expense reimbursement for the year ended December 31, 2012 and 2011. Effective July 1, 2012, United agreed to supply fuel directly to our flights under its code-share agreements and the Company will no longer recognize the cost of fuel and related revenue for fuel used under the United Code-Share Agreement.

2. Revenue passenger miles are the number of scheduled miles flown by revenue passengers.

3. Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.

4. Passenger load factor is revenue passenger miles divided by available seat miles.

5. Total operating costs divided by available seat miles.

6. Costs (in all periods) exclude impairments and other expenses not attributable to either Republic or Frontier segments. Total operating and interest expenses excluding other impairment charges is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses. Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.

7. Hours from takeoff to landing, including taxi time.


8. Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).

9. Includes mark-to-market fuel hedge expense (benefit) of $2.2 and $(3.8) million for the years ended December 31, 2012 and 2011.

10. There were 15 Q400 aircraft added to service in the second half of 2012.


The following table sets forth information regarding the Company's expenses for the years ended December 31, 2012 and 2011. Individual expense components are also expressed in cents per ASM (in millions unless otherwise indicated).

                                                                       Republic
                                                              Cost per ASM   Cost per ASM
Years Ended December 31              2012          2011       (cents) 2012   (cents) 2011    Variance    % Variance
Fixed-fee service                 $ 1,102.1     $ 1,079.0
Passenger service                     247.9         406.7
Charter and other                      27.4          48.3
TOTAL OPERATING REVENUES          $ 1,377.4     $ 1,534.0
OPERATING EXPENSES:
  Wages and benefits                  298.5         289.6       2.22           2.00             0.22         11.0  %
  Aircraft fuel                       161.4         303.3       1.20           2.10            (0.90 )      (42.9 )%
  Landing fees and airport rents       61.7          66.6       0.46           0.46                -            -  %
  Aircraft and engine rent            110.7         116.9       0.82           0.81             0.01          1.2  %
  Maintenance and repair              235.2         237.9       1.75           1.65             0.10          6.1  %
  Insurance and taxes                  24.6          27.1       0.18           0.19            (0.01 )       (5.3 )%
  Depreciation and amortization       162.4         172.3       1.21           1.19             0.02          1.7  %
  Promotion and sales                  12.7          24.0       0.09           0.17            (0.08 )      (47.1 )%
  Other impairment charges                -         191.1          -           1.27            (1.27 )     (100.0 )%
  Other                               126.7         122.1       0.94           0.90             0.04          4.4  %
Total operating expenses            1,193.9       1,550.9       8.88          10.73            (1.85 )      (17.2 )%
OPERATING INCOME (LOSS)               183.5         (16.9 )
Total non-operating expense, net     (121.2 )      (130.2 )    (0.90 )        (0.90 )              -            -  %
INCOME (LOSS) BEFORE INCOME TAXES $    62.3     $  (147.1 )

                                                                       Frontier
                                                              Cost per ASM   Cost per ASM
Years Ended December 31              2012          2011       (cents) 2012   (cents) 2011    Variance    % Variance
Passenger service                 $ 1,308.9     $ 1,287.8
Cargo and other                       124.6          42.7
TOTAL OPERATING REVENUES          $ 1,433.5     $ 1,330.5
OPERATING EXPENSES:
  Wages and benefits                  263.8         271.0       2.22           2.30            (0.08 )       (3.5 )%
  Aircraft fuel                       532.3         517.8       4.47           4.40             0.07          1.6  %
. . .
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