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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowRepublic 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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