Attached files
file | filename |
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EX-10.67 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex10-67.htm |
EX-31.1 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex31-1.htm |
EX-32.1 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex32-1.htm |
EX-31.2 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex31-2.htm |
EX-32.1 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex32-2.htm |
EX-10.68 - REPUBLIC AIRWAYS HOLDINGS INC | v201366_ex10-68.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
QUARTERLY PERIOD ENDED September 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE
TRANSITION PERIOD FROM TO
COMMISSION
FILE NUMBER: 000-49697
REPUBLIC
AIRWAYS HOLDINGS INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
06-1449146
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification Number)
|
incorporation
or organization)
|
8909
Purdue Road, Suite 300, Indianapolis, Indiana 46268
(Address
of principal executive offices) (Zip Code)
(317)
484-6000
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
þ Yes ¨ No
Indicated
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and
smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one)
Large
accelerated filer ¨
|
Accelerated
filer þ
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes þ No
Number of
shares of Common Stock outstanding as of the close of business on
November 8, 2010: 34,373,023.
TABLE
OF CONTENTS
Part
I - Financial Information
|
||
Item
1.
|
Financial
Statements:
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and
December 31, 2009
|
3
|
|
Condensed
Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2010 and 2009
|
4
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2010 and 2009
|
5
|
|
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
Item
4.
|
Controls
and Procedures
|
23
|
Part
II - Other Information
|
||
Item
1A.
|
Risk
Factors
|
24
|
Item
6.
|
Exhibits
|
24
|
Signatures
|
25
|
|
Exhibit
10.67* Purchase Agreement COM 0190-10, by and between
Embraer - Empresa Brasileira de Aeronáutica S.A. and Republic Airline
Inc., dated as of November 3, 2010.
|
||
Exhibit
10.68* Letter Agreement COM 0191-10, by and between
Embraer - Empresa Brasileira de Aeronáutica S.A. and Republic Airline
Inc., dated as of November 3, 2010.
|
||
Exhibit
31.1 Certification by Chief Executive Officer
|
||
Exhibit
31.2 Certification by Chief Financial Officer
|
||
Exhibit
32.1 Certification by Chief Executive Officer
|
||
Exhibit
32.2 Certification by Chief Financial Officer
|
* A
request for confidential treatment was filed for certain portions of the
indicated document. Certain portions have been omitted and filed separately with
the Commission as required by Rule 24b-2 of the Commission.
All other
items of this report are inapplicable
2
PART I.
FINANCIAL INFORMATION
Item
1: Financial Statements
REPUBLIC
AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share amounts)
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
(Unaudited)
|
|||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 199,031 | $ | 157,532 | ||||
Restricted
cash
|
191,382 | 192,700 | ||||||
Receivables—net
of allowance for doubtful accounts of $1,323 and $743,
respectively
|
74,097 | 69,510 | ||||||
Inventories—net
|
87,986 | 81,391 | ||||||
Prepaid
expenses and other current assets
|
62,211 | 42,568 | ||||||
Assets
held for sale
|
77,847 | 25,649 | ||||||
Deferred
income taxes
|
21,023 | 21,023 | ||||||
Total
current assets
|
713,577 | 590,373 | ||||||
Aircraft
and other equipment—net
|
3,179,440 | 3,418,160 | ||||||
Maintenance
deposits
|
145,991 | 143,868 | ||||||
Other
intangible assets—net
|
147,804 | 166,025 | ||||||
Other
assets
|
160,166 | 132,046 | ||||||
Total
|
$ | 4,346,978 | $ | 4,450,472 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 299,111 | $ | 243,259 | ||||
Accounts
payable
|
110,674 | 106,178 | ||||||
Air
traffic liability
|
208,859 | 138,242 | ||||||
Deferred
frequent flyer revenue
|
50,999 | 46,213 | ||||||
Accrued
liabilities
|
198,676 | 211,632 | ||||||
Total
current liabilities
|
868,319 | 745,524 | ||||||
Long-term
debt—less current portion
|
2,333,504 | 2,546,160 | ||||||
Deferred
frequent flyer revenue
|
104,035 | 108,545 | ||||||
Deferred
credits and other non current liabilities
|
104,557 | 97,788 | ||||||
Deferred
income taxes
|
427,822 | 434,575 | ||||||
Total
liabilities
|
3,838,237 | 3,932,592 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
Equity:
|
||||||||
Preferred
stock, $.001 par value; 5,000,000 shares authorized; no shares issued or
outstanding
outstanding
|
- | - | ||||||
Common
stock, $.001 par value; one vote per share;150,000,000 shares
authorized;
|
||||||||
44,071,324
and 43,931,116 shares issued and 34,318,528 and
34,598,683
|
||||||||
shares
outstanding, respectively
|
44 | 44 | ||||||
Additional
paid-in capital
|
302,407 | 299,257 | ||||||
Treasury
stock, 9,333,266 and 9,332,433 shares at cost,
respectively
|
(181,827 | ) | (181,820 | ) | ||||
Accumulated
other comprehensive loss
|
(1,897 | ) | (2,172 | ) | ||||
Accumulated
earnings
|
390,014 | 402,571 | ||||||
Total
stockholders' equity
|
508,741 | 517,880 | ||||||
Total
|
$ | 4,346,978 | $ | 4,450,472 |
See
accompanying notes to the condensed consolidated financial statements
(unaudited).
3
REPUBLIC
AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In
thousands, except per share amounts)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
OPERATING
REVENUES:
|
||||||||||||||||
Fixed-fee
service
|
$ | 261,648 | $ | 281,415 | $ | 772,834 | $ | 913,524 | ||||||||
Passenger
service
|
429,939 | 64,876 | 1,170,448 | 70,388 | ||||||||||||
Cargo
and other
|
20,278 | 13,336 | 60,579 | 20,982 | ||||||||||||
Total
operating revenues
|
711,865 | 359,627 | 2,003,861 | 1,004,894 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Wages
and benefits
|
143,953 | 76,864 | 423,876 | 207,446 | ||||||||||||
Aircraft
fuel
|
153,968 | 39,477 | 458,553 | 100,179 | ||||||||||||
Landing
fees and airport rents
|
46,205 | 20,026 | 129,444 | 55,434 | ||||||||||||
Aircraft
and engine rent
|
60,687 | 33,592 | 182,309 | 95,400 | ||||||||||||
Maintenance
and repair
|
68,778 | 58,852 | 190,057 | 151,487 | ||||||||||||
Insurance
and taxes
|
11,791 | 6,648 | 33,559 | 19,930 | ||||||||||||
Depreciation
and amortization
|
50,775 | 38,398 | 153,113 | 112,002 | ||||||||||||
Promotion
and sales
|
35,056 | 5,341 | 103,368 | 5,341 | ||||||||||||
Goodwill
impairment
|
- | - | - | 13,335 | ||||||||||||
Other
impairment charges
|
- | - | 11,473 | - | ||||||||||||
Other
|
67,630 | 43,834 | 221,549 | 109,340 | ||||||||||||
Total
operating expenses
|
638,843 | 323,032 | 1,907,301 | 869,894 | ||||||||||||
OPERATING
INCOME
|
73,022 | 36,595 | 96,560 | 135,000 | ||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
expense
|
(38,213 | ) | (34,862 | ) | (115,839 | ) | (105,246 | ) | ||||||||
Other—net
|
323 | 2,779 | 753 | 10,418 | ||||||||||||
Total
other expense
|
(37,890 | ) | (32,083 | ) | (115,086 | ) | (94,828 | ) | ||||||||
INCOME(LOSS)
BEFORE INCOME TAXES
|
35,132 | 4,512 | (18,526 | ) | 40,172 | |||||||||||
INCOME
TAX EXPENSE(BENEFIT)
|
13,845 | 1,864 | (5,969 | ) | 23,894 | |||||||||||
NET
INCOME(LOSS)
|
21,287 | 2,648 | (12,557 | ) | 16,278 | |||||||||||
Add:
Net loss attributable to noncontrolling interest in
|
- | (623 | ) | - | (3,270 | ) | ||||||||||
Mokulele
Flight Service Inc.
|
||||||||||||||||
NET
INCOME(LOSS) OF THE COMPANY
|
$ | 21,287 | $ | 3,271 | $ | (12,557 | ) | $ | 19,548 | |||||||
NET
INCOME(LOSS) PER COMMON SHARE - BASIC
|
$ | 0.62 | $ | 0.09 | $ | (0.37 | ) | $ | 0.57 | |||||||
NET
INCOME(LOSS) PER COMMON SHARE - DILUTED
|
$ | 0.58 | $ | 0.09 | $ | (0.37 | ) | $ | 0.57 |
See
accompanying notes to the condensed consolidated financial statements
(unaudited).
4
REPUBLIC
AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2010
|
2009
|
|||||||
NET
CASH FROM OPERATING ACTIVITIES
|
$ | 166,466 | $ | 133,519 | ||||
INVESTING
ACTIVITIES:
|
||||||||
Purchase
of aircraft and other equipment
|
(28,365 | ) | (28,448 | ) | ||||
Proceeds
from sale of aircraft and other equipment
|
73,935 | 72,708 | ||||||
Aircraft
deposits
|
(22,150 | ) | (4,000 | ) | ||||
Aircraft
deposits returned
|
- | 7,405 | ||||||
Fundings
of notes receivable
|
- | (61,025 | ) | |||||
Acquisition
of new business, net of cash acquired
|
- | (2,463 | ) | |||||
Other,
net
|
15,599 | (3,740 | ) | |||||
NET
CASH FROM INVESTING ACTIVITIES
|
39,019 | (19,563 | ) | |||||
FINANCING
ACTIVITIES:
|
||||||||
Payments
on debt
|
(156,853 | ) | (100,302 | ) | ||||
Proceeds
from debt issuance
|
54,735 | - | ||||||
Payments
on early extinguishment of debt
|
(60,045 | ) | (56,772 | ) | ||||
Payments
of debt issue costs
|
(1,816 | ) | (1,013 | ) | ||||
Other
equity transactions
|
(7 | ) | - | |||||
NET
CASH FROM FINANCING ACTIVITIES
|
(163,986 | ) | (158,087 | ) | ||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
41,499 | (44,131 | ) | |||||
CASH AND CASH
EQUIVALENTS—Beginning of period
|
157,532 | 129,656 | ||||||
CASH AND CASH
EQUIVALENTS—End of period
|
$ | 199,031 | $ | 85,525 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
CASH
PAID FOR INTEREST AND INCOME TAXES:
|
||||||||
Interest
paid
|
$ | 105,096 | $ | 99,595 | ||||
Income
taxes paid
|
568 | 417 | ||||||
NON-CASH
INVESTING & FINANCING TRANSACTIONS:
|
||||||||
Aircraft,
inventories, and other equipment purchased through financing arrangements
from manufacturer
|
16,434 | 64,187 | ||||||
Parts,
training and lease credits from aircraft manufacturer
|
(16,630 | ) | (15,706 | ) | ||||
Liabilities
assumed in Mokulele transaction
|
- | 9,300 | ||||||
Conversion
of Mokulele note to equity
|
- | 3,000 | ||||||
Liabilities
assumed in Midwest business acquisition
|
- | 184,558 | ||||||
Convertible
debt issued in business acquisition
|
- | 25,000 |
See
accompanying notes to the condensed consolidated financial statements
(unaudited).
5
REPUBLIC
AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Organization and Business
The
accompanying financial statements of Republic Airways Holdings Inc. (“Republic”
or the “Company”) have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements include the accounts of Republic and its
wholly-owned subsidiaries including Frontier Airlines Holdings, Inc.
(“Frontier”), Chautauqua Airlines, Inc. (“Chautauqua”), Republic Airline Inc.
(“Republic Airline”), Shuttle America Corporation (“Shuttle America”), and
Midwest Air Group, Inc. (“Midwest”). Unless the context indicates
otherwise, the terms “the Company,” “we,” “us,” or “our,” refer to Republic
Airways Holdings Inc. and our subsidiaries.
In the
opinion of management, these financial statements reflect all adjustments that
are necessary to present fairly the results of operations for the interim
periods presented. All adjustments are of a normal recurring nature, unless
otherwise disclosed. The results of operations for the three and nine
months ended September 30, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010. These
financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009, filed March 16,
2010.
As of
September 30, 2010, the Company’s operating airline subsidiaries offered
scheduled passenger service on 1,594 flights daily to 126 cities in 45 states,
Canada, Mexico, and Costa Rica under branded operations as Frontier and Midwest,
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
“Partners”).
The
Company acquired Midwest and Frontier on July 31, 2009 and October 1, 2009,
respectively. The acquisitions provided the Company additional
revenue diversity from its traditional fixed-fee services and allowed it to
expand operations into branded passenger service. The purchase price
paid was allocated to the tangible and identifiable intangible assets acquired
and liabilities assumed from Midwest and Frontier based on their estimated fair
values as of the closing dates. The Company has finalized its evaluation of
the fair value of the air traffic liability, the deferred frequent flyer
revenue, and the income tax implications of these transactions, and there were
no adjustments to the purchase price allocation during the current
quarter.
On
February 4, 2010, the Company announced its intention to wind-down the
operations of Lynx Airlines, Inc. (“Lynx”). The Company recorded
approximately $11.6 million of lease termination costs during the nine months
ended September 30, 2010. Additional lease return costs will be
accrued ratably over the remaining lease term while the aircraft are operating
once such costs are probable and reasonably estimable. The closure of Lynx,
which is expected to occur in April 2011, will result in the reduction or
reallocation of approximately 175 positions; accordingly, the Company recorded
approximately $1.1 million of severance related charges for the nine months
ended September 30, 2010. The remaining six owned Lynx Q400 aircraft
were reduced to the lower of carrying value or estimated fair value less cost to
sell and classified as held for sale, as the aircraft are removed from
service.
During 2010, the Company entered into
agreements to lease seven A320 aircraft for six years from the date of
delivery. These aircraft will be delivered between January 2011 and
June 2011.
In July
2010, the Company signed a letter of intent to acquire 24 new E190 aircraft with
the option to convert any of the aircraft in the order to the larger E195 model.
The letter of intent is subject to final documentation, including final
commercial terms. Under the agreement, deliveries would begin in mid
2011. On November 5, 2010, the Company announced it had placed a firm
order for 6 E190 aircraft with Embraer for delivery in 2011 starting in
August. The Company also has conditional firm orders for 18 E190 or
E195 aircraft. Both aircraft types would be configured with STRETCH
seating. These aircraft will be used to replace smaller regional jets
in the Company as well as provide flexibility for growth at Frontier through
2013.
In
October 2010, the Company entered into agreements to lease three A319 aircraft
for eight years from the date of delivery. These aircraft will be
delivered between October and November 2010 and are expected to enter revenue
service for Frontier between February and April 2011.
2.
Summary of Significant Accounting Policies
Revenue
Recognition – Under the Company’s fixed-fee code-share agreements, the
Company is reimbursed an amount per aircraft designed to compensate the Company
for certain aircraft ownership costs. The Company has concluded that
a component of its fixed-fee service revenue under the agreement discussed above
is rental income, inasmuch as the agreement identifies the “right of use” of a
specific type and number of aircraft over a stated period of time. The amounts
deemed to be rental income during the three months ended September 30, 2010 and
2009 were $79.2 million and $88.8 million. The amounts deemed to be
rental income during the nine months ended September 30, 2010 and 2009 were
$238.2 million and $273.7 million, respectively, and have been included in
fixed-fee service revenues in the Company’s condensed consolidated statements of
operations.
6
Assets Held for
Sale – Assets held for sale at September 30, 2010, consist of six
Q400 grounded aircraft, flight equipment and spare aircraft parts recorded at
the lower of carrying value or their estimated fair value less cost to
sell. In the current year, we sold certain Midwest grounded aircraft,
two A318s, and one ERJ170 aircraft for total consideration of $68.5
million. The Company recorded a loss of approximately $1.0 million
and used $60.0 million in proceeds to reduce the related debt secured by these
aircraft.
Stockholders’
Equity - The following summarizes the activity of the stockholders’
equity accounts for the period from December 31, 2009 through September 30,
2010. Additional paid-in capital increased from $299.3 million to
$302.4 million due to $3.1 million of stock compensation
expense. Accumulated other comprehensive loss decreased to $1.9
million from $2.2 million due to the reclassification adjustment for loss
realized on derivatives, net of tax. Accumulated earnings decreased
from $402.6 million to $390.0 million based on current year to date net
loss.
Net Income (Loss)
Per Common Share – The following table is based on the weighted average
number of shares outstanding during the period. The following is a
reconciliation of the weighted average common shares for the basic and diluted
per share computations:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
and diluted income(loss) per share:
|
||||||||||||||||
Net
income(loss) available to common stockholders (000)
|
$ | 21,287 | $ | 3,271 | $ | (12,557 | ) | $ | 19,548 | |||||||
Plus
income effect of assumed-conversion interest on 8.0%
|
||||||||||||||||
convertible
debt
|
310 | - | - | - | ||||||||||||
Income
(loss) after assumed conversion (000)
|
$ | 21,597 | $ | 3,271 | $ | (12,557 | ) | $ | 19,548 | |||||||
Weighted
average common shares outstanding
|
34,318,275 | 34,448,683 | 34,294,939 | 34,448,683 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Stock
options
|
111,618 | 80,007 | - | 13,109 | ||||||||||||
Convertible
debt
|
2,500,000 | - | - | - | ||||||||||||
Shares
used to computed diluted earnings per share
|
36,929,893 | 34,528,690 | 34,294,939 | 34,461,792 | ||||||||||||
Basic
income(loss) per share
|
$ | 0.62 | $ | 0.09 | $ | (0.37 | ) | $ | 0.57 | |||||||
Diluted
income(loss) per share
|
$ | 0.58 | $ | 0.09 | $ | (0.37 | ) | $ | 0.57 |
The
Company excluded 5,003,199 and 4,000,179 of employee stock options from the
calculation of diluted net income per share due to their anti-dilutive impact
for the three months ended September 30, 2010 and 2009. The Company
excluded 5,293,199 and 4,020,179, of employee stock options from the calculation
of diluted net income per share due to their anti-dilutive impact for the nine
months ended September 30, 2010 and 2009. The convertible note
payable has a $25.0 million face value and is convertible in whole or in part up
to 2,500,000 shares of the Company’s common stock. The convertible
note payable was anti-dilutive for the nine months ended September 30, 2010,
given that the Company was in a net loss position.
Fair Value
Measurements -
ASC Topic 820, “Fair
Value Measurements and Disclosures” requires disclosures about how fair
value is determined for assets and liabilities and a hierarchy for which these
assets and liabilities must be grouped is established. The Topic
establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:
Level 1
|
quoted
prices (unadjusted) in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement
date.
|
|
Level 2
|
quoted
prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
|
|
Level 3
|
unobservable
inputs for the asset or liability.
|
Aircraft Fuel Derivatives –
Recurring - The Company’s derivative contracts are privately negotiated
contracts and are not exchange traded. Fair value measurements based on
level 2 inputs are estimated with option pricing models that employ observable
and certain unobservable inputs. Inputs to the valuation models
include contractual terms, market prices, yield curves, fuel price curves and
measures of volatility, among others. The fair value of fuel
hedging derivatives of $1.3 million is recorded in prepaid expenses and other
current assets in the consolidated balance sheets at September 30,
2010. The Company does not hold or issue any derivative financial
instruments for speculative trading purposes. The Company chose not
to designate these derivatives as hedges, and, as such, realized and unrealized
mark-to-market adjustments are included in aircraft fuel expense in the
consolidated statements of operations.
7
Tradename Intangible – Nonrecurring – as a result of
the Company’s decision to unify its brand names, the Company announced its
intent to discontinue the use of the tradename Midwest Airlines. During the
three month period ended March 31, 2010, the Company fully impaired the value of
the Midwest Airlines tradename intangible of $7.6 million to its fair value of
zero based on level 3 inputs. The estimates of fair value
represent the Company’s best estimate based on industry trends and reference to
market rates and transactions. See Note 5.
New Accounting
Pronouncements –
In July
2010, the FASB issued Accounting Standards Update (ASU) No.
2010-20, Receivables (Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. ASU 2010-20 requires that more information be disclosed about the
credit quality of a company’s loans and the allowance for loan losses held
against those loans. A company will need to disaggregate new and existing
disclosure based on how it develops its allowance for loan losses and how it
manages credit exposures. Existing disclosures to be presented on a
disaggregated basis include a rollforward of the allowance for loan losses, the
related recorded investment in such loans, the nonaccrual status of loans, and
impaired loans. Additional disclosure is also required about the credit quality
indicators of loans by class at the end of the reporting period, the aging of
past due loans, information about troubled debt restructurings, and
significant purchases and sales of loans during the reporting period by class.
For public companies, ASU 2010-20 requires certain disclosures as of the end of
a reporting period effective for periods ending on or after December 15, 2010.
Other required disclosures about activity that occurs during a reporting period
are effective for periods beginning on or after December 15,
2010. Management is currently evaluating the impact that the ASU will have
on its consolidated financial statements.
In
January 2010, the FASB issued an amendment to the Fair Value Measurements
and Disclosures topic of the ASC. This amendment requires disclosures about
transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements.
It also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. This amendment is effective for periods beginning after December 15,
2009, except for the requirement to provide the Level 3 activity of purchases,
sales, issuances, and settlements, which will be effective for fiscal years
beginning after December 15, 2010. Accordingly, the Company has adopted this
amendment in the current year by adding additional disclosures, except for the
additional Level 3 requirements which will be adopted in fiscal year
2011.
In
October 2009, the FASB issued guidance that changes the accounting for revenue
arrangements with multiple deliverables. The guidance requires an entity to
allocate consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices and eliminates the use of
the residual method of allocation. The guidance establishes a
hierarchy for determining the selling price of a deliverable, based on
vendor-specific objective evidence, third-party evidence or estimated selling
price. In addition, this guidance expands required disclosures
related to a vendor’s multiple-deliverable revenue arrangements. The
guidance will be effective for the Company prospectively for revenue
arrangements entered into or materially modified on or after January 1, 2011,
with early adoption permitted. Management has elected not to early adopt this
guidance and is currently evaluating the impact that this change will have on
its consolidated financial statements.
3. Debt
During
the nine months ended September 30, 2010, the Company entered into a credit
agreement and borrowed $22.9 million which is secured by certain equipment and
accrues interest at a rate of LIBOR plus a margin. Payments of
$2.1 million are due quarterly and began in April 2010, with the final balance
outstanding payment due on October 31, 2012. In addition, the Company
debt financed other equipment increasing the Company’s debt balances by an
additional $31.8 million.
During
the nine months ended September 30, 2010, we sold certain Midwest grounded
aircraft, two A318s, and one ERJ170 aircraft for consideration of $68.5
million. The Company used $60.0 million of proceeds received from
sale of aircraft to reduce the related debt secured by these
aircraft. At September 30, 2010 the Company has classified
$57.2 million of debt as current related to Q400 aircraft which are currently
held for sale.
We are
required to comply with certain financial covenants under certain of our
financing arrangements. We are required to maintain a certain level
of minimum unrestricted cash and maintain certain cash flow and working capital
covenants. As of September 30, 2010, we were in compliance with all
our covenants.
8
4.
Commitments and Contingencies
During
the nine months ended September 30, 2010, the Company entered into a purchase
agreement with Bombardier for the purchase of 40 CS300 aircraft and the option
to purchase up to an additional 40 aircraft with delivery beginning in the
second quarter of 2015. In connection with the purchase agreement,
the Company also signed an exclusive 15-year maintenance contract with Pratt
& Whitney for support of the aircraft engines and agreed to purchase six
spare engines. The combination of these agreements increases our
outstanding purchase commitments by approximately $2.84 billion in the periods
beyond March 15, 2015.
During
2010, the Company entered into agreements to lease seven A320 aircraft for six
years from the date of delivery. These aircraft will be delivered
between January 2011 and June 2011. The total lease commitment for
the lease term is $160.3 million with payments being made on a monthly
basis.
In October 2010, the Company entered
into agreements to lease three A319 aircraft for eight years from the date of
delivery. These aircraft will be delivered between October and
November 2010 and are expected to enter revenue service for Frontier between
February and April 2011. The total lease commitment for the lease
term is $80.6 million with payments being made on a monthly basis.
In
November 2010, the Company announced a firm order for six E190 jets and a
conditional firm order for 18 E190 or 195 jets. The six aircraft will
be delivered between August and December 2011. The total commitment
for the six firm ordered aircraft is $27.0 million and the total commitment for
all aircraft is $111.4 million.
5. Asset
Impairment
The
Company announced publicly on April 13, 2010, that Frontier Airlines was
selected as the name for its consolidated branded network. As a
result, the Midwest tradename intangible was fully impaired and certain other
assets related to the Midwest brand and aircraft liveries were written down to
their fair values. These impairments totaled $11.5 million in the
first quarter and are included in other impairment charges in the Statements of
Operations.
6.
Segment Reporting
Generally
accepted accounting principles require disclosures related to components of a
company for which separate financial information is available to and regularly
evaluated by the company’s chief operating decision maker (“CODM”) when deciding
how to allocate resources and in assessing performance.
The
Company has identified three reportable segments, fixed-fee service,
branded passenger service, and other.
Financial
information as of and for the three and nine months ended September 30, 2010 and
2009 for the Company’s reportable segments is as follows (in
thousands):
9
Three
Months Ended
|
Fixed-
|
|||||||||||||||
September
30, 2010
|
fee
|
Branded
|
Other
|
Total
|
||||||||||||
Total
operating revenue (1)
|
$ | 261,661 | $ | 445,834 | $ | 4,370 | $ | 711,865 | ||||||||
Aircraft
fuel
|
16,730 | 137,238 | - | 153,968 | ||||||||||||
Depreciation
and amortization
|
31,376 | 18,129 | 1,270 | 50,775 | ||||||||||||
Income
(loss) before income taxes
|
22,721 | 11,551 | 860 | 35,132 | ||||||||||||
Total
assets
|
2,709,721 | 1,427,250 | 210,007 | 4,346,978 | ||||||||||||
Total
debt
|
1,760,451 | 799,226 | 72,938 | 2,632,615 | ||||||||||||
Three
Months Ended
|
Fixed-
|
|||||||||||||||
September
30, 2009
|
fee
|
Branded
(2)
|
Other
|
Total
|
||||||||||||
Total
operating revenue (1)
|
$ | 281,415 | $ | 73,892 | $ | 4,320 | $ | 359,627 | ||||||||
Aircraft
fuel
|
37,420 | 2,015 | 42 | 39,477 | ||||||||||||
Depreciation
and amortization
|
32,479 | 4,366 | 1,553 | 38,398 | ||||||||||||
Income
(loss) before income taxes
|
19,218 | (15,907 | ) | 1,202 | 4,513 | |||||||||||
Goodwill
|
- | 84,143 | - | 84,143 | ||||||||||||
Total
assets
|
2,727,725 | 544,027 | 139,886 | 3,411,638 | ||||||||||||
Total
debt
|
2,105,548 | 98,416 | 25,167 | 2,229,131 | ||||||||||||
Nine
Months Ended
|
Fixed-
|
|||||||||||||||
September
30, 2010
|
fee
|
Branded
|
Other
|
Total
|
||||||||||||
Total
operating revenue (1)
|
$ | 772,895 | $ | 1,216,604 | $ | 14,362 | $ | 2,003,861 | ||||||||
Aircraft
fuel
|
50,225 | 408,301 | 27 | 458,553 | ||||||||||||
Depreciation
and amortization
|
93,335 | 54,362 | 5,416 | 153,113 | ||||||||||||
Goodwill
and other impairment charges
|
- | 11,473 | - | 11,473 | ||||||||||||
Income
(loss) before income taxes
|
55,160 | (73,120 | ) | (566 | ) | (18,526 | ) | |||||||||
Total
assets
|
2,709,721 | 1,427,250 | 210,007 | 4,346,978 | ||||||||||||
Total
debt
|
1,760,451 | 799,226 | 72,938 | 2,632,615 | ||||||||||||
Nine
Months Ended
|
Fixed-
|
|||||||||||||||
September
30, 2009
|
fee
|
Branded
(2)
|
Other
|
Total
|
||||||||||||
Total
operating revenue (1)
|
$ | 913,524 | $ | 79,404 | $ | 11,966 | $ | 1,004,894 | ||||||||
Aircraft
fuel
|
98,012 | 2,015 | 152 | 100,179 | ||||||||||||
Depreciation
and amortization
|
101,564 | 5,309 | 5,129 | 112,002 | ||||||||||||
Goodwill
impairment
|
13,335 | - | - | 13,335 | ||||||||||||
Income
(loss) before income taxes
|
64,016 | (21,495 | ) | (2,349 | ) | 40,172 | ||||||||||
Goodwill
|
- | 84,143 | - | 84,143 | ||||||||||||
Total
assets
|
2,727,725 | 544,027 | 139,886 | 3,411,638 | ||||||||||||
Total
debt
|
2,105,548 | 98,416 | 25,167 | 2,229,131 |
(1) Fixed-fee
and Branded segment revenues include cargo and other revenues attributable
to these segments
|
||||||||
(2) Branded
amounts for the three months and nine months ended September 30, 2009 only
include operations from Mokulele and
Midwest.
|
7.
Subsequent Events
On November 2, 2010, the Company
entered into a third amended and restated employment agreement with each of
Bryan K. Bedford, Chairman, President and Chief Executive Officer, and Wayne C.
Heller, Executive Vice President and Chief Operating
Officer.
On
November 3, 2010, it was announced that Hal Cooper, Executive Vice President,
Chief Financial Officer, will be retiring in the first quarter of
2011.
On November 5, 2010, it was announced
that the Company made a firm order for six Embraer 190 jets and a conditional
firm order for 18 Embraer 190 or 195 jets.
10
On November 8, 2010, it was announced
that the Company was commencing an offering to raise $150.0 million. We
will use the net proceeds from the sale of securities for general corporate
purposes, including among other possible uses, the repayment of debt or lease
obligations, capital expenditures and working capital.
In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward-looking statements. Republic Airways Holdings Inc. (the “Company”) may,
from time to time, make written or oral forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
encompass our beliefs, expectations, hopes or intentions regarding future
events. Words such as “may,” “will,” “should,” “expect,” “plan,” “intend,”
“anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the
negative of such terms or other terminology are used to identify forward-looking
statements. All forward-looking statements included in this release
are made as of the date hereof and are based on information available to the
Company as of such date. The Company assumes no obligation to update any
forward-looking statement. Actual results may vary, and may vary materially,
from those anticipated, estimated, projected or expected for a number of
reasons, including, among others, the risks discussed in our Annual Report on
Form 10-K and our other filings made with the Securities and Exchange
Commission, which discussions are incorporated into this Quarterly Report on
Form 10-Q by reference. As used herein, "unit cost" means operating cost per
Available Seat Mile (ASM).
Overview
We are a
Delaware holding company that offers scheduled passenger services through our
wholly-owned operating subsidiaries including Frontier Holdings, Inc.
(“Frontier”), Chautauqua Airlines, Inc. (“Chautauqua”), Republic Airline Inc.
(“Republic Airline”), and Shuttle America Corporation (“Shuttle
America”). The Company acquired Midwest and Frontier on July 31, 2009
and October 1, 2009, respectively. The acquisitions provided the
Company additional revenue diversity from its traditional fixed-fee services and
allowed it to expand operations into branded passenger
service. Unless the context indicates otherwise, the terms “the
Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our
subsidiaries.
As of
September 30, 2010, our operating subsidiaries offered scheduled passenger
service on 1,594 flights daily to 126 cities in 45 states, Canada, Mexico, and
Costa Rica under branded operations as Frontier and Midwest, 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”).
Our
branded network has a regional focus in Milwaukee, Kansas City, and
Denver. The branded passenger service operation exposes us to changes in
passenger demand, fare competition and fluctuations in fuel prices. We are
currently the largest carrier in Milwaukee and the second largest carrier in
Denver. The branded network has a significant base of frequent flyer
members and strong support in the hub cities.
Fleet
transition
On
February 4, 2010, the Company announced its intention to wind-down the
operations of Lynx Airlines, Inc. (“Lynx”). The Company recorded
approximately $11.6 million of lease termination costs during the nine months
ended September 30, 2010. Additional lease return costs will be
accrued ratably over the remaining lease term while the aircraft are operating
once such costs are probable and reasonably estimable. The closure of
Lynx, which is expected to occur in April 2011, will result in the reduction or
reallocation of approximately 175 positions; accordingly, the Company recorded
approximately $1.1 million of severance related charges for the nine months
ended September 30, 2010. The remaining six owned Lynx Q400 aircraft
were reduced to the lower of carrying value or estimated fair value less cost to
sell and classified as held for sale, as the aircraft are removed from
service.
During
the nine months ended September 30, 2010 the Company took delivery of three A320
aircraft and four E190 aircraft previously purchased from US Airways. The
Company removed six Q400 aircraft and the final seven CRJ-200 aircraft from
service, sold two A318 aircraft and one ERJ170 aircraft, and returned three Q400
aircraft and one A318 aircraft to the lessor, bringing our total operational
fleet to 277 aircraft at September 30, 2010 from 290 aircraft at December 31,
2009. The seven new aircraft were placed into service in our Frontier
operation. The Q400 aircraft and the A318 aircraft were removed from
our Frontier operation and will be returned to the lessor or
sold. The other eight aircraft were removed from fixed-fee service
and were returned to the lessor or sold.
We have
firm orders for fifteen A320 aircraft that have scheduled delivery dates
beginning in January 2011 and continuing through November 2014. Seven
of the fifteen A320 aircraft will be leased and are expected to enter revenue
service with Frontier between January and July 2011. In addition we
have commitments to purchase 40 CS300 jets and the option to purchase up to an
additional 40 aircraft. In connection with the CS300 purchase
agreement, we also signed an exclusive 15-year maintenance contract with Pratt
& Whitney for support of the aircraft engines.
11
In July
2010, the Company signed a letter of intent to acquire 24 new E190 aircraft with
the option to convert any of the aircraft in the order to the larger E195 model.
The letter of intent is subject to final documentation, including final
commercial terms. Under the agreement, deliveries would begin in mid
2011. On November 5, 2010, the Company announced it had placed a firm
order for 6 E190 aircraft with Embraer for delivery in 2011 starting in
August. The Company also has conditional firm orders for 18 E190 or
E195 aircraft. Both aircraft types would be configured with STRETCH
seating. These aircraft will be used to replace smaller regional jets
in the Company as well as provide flexibility for growth at Frontier through
2013.
In
October 2010, the Company entered into agreements to lease three A319 aircraft
for eight years from the date of delivery. These aircraft will be
delivered between October and November 2010 and are expected to enter revenue
service for Frontier between February and April 2011.
Results
of Operations
Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
The
following table sets forth fixed-fee operational statistics and the
percentage-of-change for the periods identified below:
Operating
Highlights - Fixed-Fee
|
Three
Months Ended September 30,
|
|||||||||||
2010
|
2009
|
Change
|
||||||||||
Fixed-fee
service revenues, excluding fuel ($000) (1)
|
244,918 | 265,899 | (7.9 | %) | ||||||||
Passengers
carried
|
4,636,672 | 4,881,571 | (5.0 | %) | ||||||||
Revenue
passenger miles (000) (2)
|
2,285,299 | 2,510,784 | (9.0 | %) | ||||||||
Available
seat miles ("ASM") (000) (3)
|
2,955,620 | 3,242,019 | (8.8 | %) | ||||||||
Passenger
load factor (4)
|
77.3 | % | 77.4 | % |
-0.1
pts
|
|||||||
Cost
per ASM (cents) (5) (6)
|
8.08 | 8.09 | (0.1 | %) | ||||||||
Cost
per ASM, including interest expense
|
||||||||||||
and
excluding fuel expense (cents) (6)
|
7.52 | 7.61 | (1.2 | %) | ||||||||
Operating
aircraft at period end:
|
||||||||||||
37-50
seat jets
|
64 | 79 | (19.0 | %) | ||||||||
70-86
seat jets
|
113 | 113 | - | |||||||||
Block
hours (8)
|
153,506 | 165,428 | (7.2 | %) | ||||||||
Departures
|
93,273 | 97,897 | (4.7 | %) | ||||||||
Average
daily utilization of each
|
||||||||||||
aircraft
(hours) (9)
|
10.2 | 9.8 | 4.1 | % | ||||||||
Average
length of aircraft flight (miles)
|
476 | 500 | (4.8 | %) | ||||||||
Average
seat density
|
67 | 66 | 1.5 | % |
12
The
following table sets forth branded passenger service operational statistics for
the period identified below:
Three
Months Ended September 30,
|
||||||||||||
Operating
Highlights - Branded
|
2010
|
2009 (10)
|
Change
|
|||||||||
Total
revenues ($000)
|
445,834 | 73,892 | 503.4 | % | ||||||||
Passengers
carried
|
4,065,352 | 669,901 | 506.9 | % | ||||||||
Revenue
passenger miles (000) (2)
|
3,494,871 | 450,437 | 675.9 | % | ||||||||
Available
seat miles ("ASM") (000) (3)
|
3,997,183 | 575,785 | 594.2 | % | ||||||||
Passenger
load factor (4)
|
87.4 | % | 78.2 | % |
9.2
pts
|
|||||||
Total
revenue per available seat mile (cents)
|
11.15 | 12.83 | (13.1 | %) | ||||||||
Passenger
revenue per ASM (cents)
|
10.76 | 11.27 | (4.4 | %) | ||||||||
Cost
per ASM (cents) (5) (6) (7)
|
10.60 | 14.78 | (28.3 | %) | ||||||||
Fuel
cost per ASM (cents) (7)
|
3.43 | 4.14 | (17.1 | %) | ||||||||
Cost
per ASM, excluding fuel expense (cents) (6)
|
7.17 | 10.64 | (32.6 | %) | ||||||||
Gallons
consumed
|
58,967,933 | 9,930,214 | 493.8 | % | ||||||||
Average
cost per gallon (7)
|
$ | 2.32 | $ | 2.13 | 8.6 | % | ||||||
Operating
aircraft at period end:
|
||||||||||||
37-50
seat jets
|
13 | 12 | 8.3 | % | ||||||||
70-99
seat jets
|
36 | 25 | 44.0 | % | ||||||||
120+
seat jets
|
51 | - |
NM
|
|||||||||
Block
hours (8)
|
97,977 | 23,346 | 319.7 | % | ||||||||
Departures
|
47,961 | 15,422 | 211.0 | % | ||||||||
Average
daily utilization of each
|
11.0 | 10.0 | 10.0 | % | ||||||||
aircraft
(hours) (9)
|
||||||||||||
Average
length of aircraft flight (miles)
|
827 | 551 | 50.1 | % | ||||||||
Average
seat density
|
101 | 68 | 48.5 | % |
(1)
|
Fixed-fee
service revenues exclude cargo and other revenues.
|
(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)
|
Revenue
passenger miles divided by available seat miles.
|
(5)
|
Total
operating and interest expenses divided by available seat
miles.
|
(6)
|
Costs
(in all periods) exclude impairments and other expenses not attributable
to either fixed-fee or branded segments. Total operating and
interest expenses excluding goodwill impairment and 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)
|
Excludes
mark-to-market fuel hedge adjustment of $0.2 million for the three months
ended September 30, 2010.
|
(8)
|
Hours
from takeoff to landing, including taxi time.
|
(9)
|
Average
number of hours per day that an aircraft flown in revenue service is
operated (from gate departure to gate arrival).
|
(10)
|
Branded
statistics consist of the operations of Mokulele beginning in April 2009
and Midwest beginning in August 2009.
|
13
The
following table sets forth information regarding the Company’s revenues and
expenses for the three months ended September 30, 2010 and 2009. Individual
expense components are also expressed in cents per available seat mile
(“ASM”).
Consolidated
Results of Operations
|
Three
Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Amounts
|
Cents
|
Amounts
|
Cents
|
|||||||||||||
(in
thousands)
|
per
ASM
|
(in
thousands)
|
per
ASM
|
|||||||||||||
OPERATING
REVENUES:
|
||||||||||||||||
Fixed-fee
service
|
$ | 261,648 | $ | 281,415 | ||||||||||||
Passenger
service
|
429,939 | 64,876 | ||||||||||||||
Cargo
and other
|
20,278 | 13,336 | ||||||||||||||
Total
operating revenues
|
711,865 | 359,627 | ||||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Wages
and benefits
|
143,953 | 2.07 | 76,864 | 2.01 | ||||||||||||
Aircraft
fuel
|
153,968 | 2.22 | 39,477 | 1.03 | ||||||||||||
Landing
fees and airport rents
|
46,205 | 0.66 | 20,026 | 0.53 | ||||||||||||
Aircraft
and engine rent
|
60,687 | 0.87 | 33,592 | 0.88 | ||||||||||||
Maintenance
and repair
|
68,778 | 0.99 | 58,852 | 1.54 | ||||||||||||
Insurance
and taxes
|
11,791 | 0.17 | 6,648 | 0.17 | ||||||||||||
Depreciation
and amortization
|
50,775 | 0.73 | 38,398 | 1.01 | ||||||||||||
Promotion
and sales
|
35,056 | 0.50 | 5,341 | 0.14 | ||||||||||||
Other
|
67,630 | 0.98 | 43,834 | 1.15 | ||||||||||||
Total
operating expenses
|
638,843 | 9.19 | 323,032 | 8.46 | ||||||||||||
OPERATING
INCOME
|
73,022 | 36,595 | ||||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
expense
|
(38,213 | ) | (0.55 | ) | (34,862 | ) | (0.91 | ) | ||||||||
Other—net
|
323 | - | 2,779 | 0.07 | ||||||||||||
Total
other income (expense)
|
(37,890 | ) | (0.55 | ) | (32,083 | ) | (0.84 | ) | ||||||||
INCOME
BEFORE INCOME TAXES
|
35,132 | 4,512 | ||||||||||||||
INCOME
TAX EXPENSE
|
13,845 | 1,864 | ||||||||||||||
NET
INCOME
|
21,287 | 2,648 | ||||||||||||||
Add:
Net loss attributable to noncontrolling interest in
|
||||||||||||||||
Mokulele
Flight Service Inc.
|
- | (623 | ) | |||||||||||||
NET
INCOME OF THE COMPANY
|
$ | 21,287 | $ | 3,271 | ||||||||||||
Total
operating and interest expense
|
$ | 677,056 | 9.74 | $ | 357,894 | 9.37 | ||||||||||
Total
operating and interest expense
|
||||||||||||||||
less
fuel
|
$ | 523,088 | 7.52 | $ | 318,417 | 8.34 |
14
Operating
revenue in 2010 increased 97.9%, or $352.3 million, to $711.9 million from
$359.6 million primarily as a result of revenues from branded airlines that were
acquired during the second half of 2009. Excluding reimbursement for
fuel expense, which is a pass-through cost to our Partners, fixed-fee service
revenues decreased 7.9% for 2010. Total block hours for the fixed-fee
business declined 7.2%. We have removed 15 aircraft from our
fixed-fee operations since September 30, 2009. Seven 50-seat aircraft
were removed from Continental and seven 50-seat aircraft were removed from
United. We also transitioned one aircraft previously reported in our
fixed-fee business to our branded business.
Total
operating and interest expenses, excluding fuel, increased $204.7 million, to
$523.1 million for 2010 compared to $318.4 million during 2009 due to the
acquisitions of our branded airlines, Midwest and Frontier. The cost
per available seat mile on total operating and interest expenses, excluding fuel
expenses, decreased to 7.52¢ in 2010 compared to 8.34¢ in
2009. Factors relating to the change in operating expenses are
discussed below.
Wages and
benefits increased 87.3%, or $67.1 million, to $144.0 million for 2010
compared to $76.9 million for 2009 due primarily to $57.0 million of expenses at
Frontier and Midwest. The remainder of the increase was due to
a shift in the mix of regional flying towards larger regional jets coupled with
rising health care expenses. The cost per available seat mile
increased to 2.07¢ for 2010 compared to 2.01¢ in 2009.
Aircraft
fuel expense increased 290.0%, or $114.5 million, to $154.0 million for
2010 compared to $39.5 million for 2009 due primarily to the increase of
$113.4 million of expenses at Frontier and Midwest. The cost per
gallon for fuel used in the branded operation was $2.32 in 2010. The
unit cost increased to 2.22¢ in 2010 compared to 1.03¢ in 2009.
Landing
fees and airport rents increased 131.0%, or $26.2 million, to
$46.2 million in 2010 compared to $20.0 million in
2009. This was due to the acquisition of Frontier and Midwest during
the prior year, which accounted for $28.3 million of additional expense in
2010. Fixed-fee landing fees declined $1.4 million due to one of our
Partners paying directly for landing fees since August 2009. Our
fixed-fee agreements provide for a direct reimbursement of landing
fees. The unit cost increased to 0.66¢ in 2010 compared to 0.53¢ in
2009.
Aircraft
and engine rent increased 80.7%, or $27.1 million, to $60.7 million in 2010
compared to $33.6 million in 2009. Expense at Frontier and
Midwest was $28.3 million for the quarter. The unit cost decreased to
0.87¢ for 2010 compared to 0.88¢ for 2009.
Maintenance
and repair expenses increased 16.8%, or $9.9 million, to $68.8 million in 2010
compared to $58.9 million for 2009 due mainly to the acquisition of
Frontier and Midwest. Maintenance expense at Frontier for the quarter
was $15.7 million. Increase was offset by fewer small jet repairs of
$5.7 million. The unit cost decreased to 0.99¢ in 2010 compared to
$1.54¢ in 2009.
Insurance
and taxes increased 77.4%, or $5.1 million, to $11.8 million in 2010
compared to $6.6 million in 2009. Expense at Frontier and Midwest was $4.1
million for the quarter. Our fixed-fee agreements generally provide
for a direct reimbursement of insurance and property taxes. The unit
cost remained consistent at 0.17¢ for both 2010 and 2009.
Depreciation
and amortization increased 32.2%, or $12.4 million, to $50.8 million
in 2010 compared to $38.4 million in 2009 due mainly to $8.5 million of
depreciation on assets acquired from Frontier and Midwest. The unit
cost decreased to 0.73¢ in 2010 compared to 1.01¢ in 2009.
Promotion
and sales expenses increased 556.4%, or $29.8 million, to $35.1 million in 2010
compared to $5.3 million. Expense at Frontier and Midwest was $29.7
million for the quarter. The unit cost was 0.50¢ in 2010 compared to
0.14¢ in 2009.
Other
expenses increased 54.3%, or $23.8 million, to $67.6 million in 2010 from $43.8
million in 2009. Of the increase, $21.5 million related to expenses
from Frontier and Midwest, of which $7.6 million related to the integration
costs and return of aircraft. The unit cost decreased to 0.98¢ in
2010 compared to $1.15 in 2009.
Interest
expense increased 9.6%, or $3.3 million, to $38.2 million compared with $34.9
million due primarily to the acquisition of Frontier and Midwest and the related
aircraft debt. The unit cost decreased to 0.55¢ from 0.91¢ in
2009.
We
recorded an income tax expense of $13.8 million or 39.4% in the current quarter
compared with an income tax expense of $1.9 million or 41.3% effective tax rate
in the prior year quarter. The effective tax rate for 2010 and 2009
were higher than the statutory rate due to the effect of the state income taxes
and non-deductible meals and entertainment expense, primarily for our flight
crews.
15
Nine Months
Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
The
following table sets forth fixed-fee operational statistics and the
percentage-of-change for the periods identified below:
Operating
Highlights - Fixed-Fee
|
Nine
Months Ended September 30,
|
|||||||||||
2010
|
2009
|
Change
|
||||||||||
Service
revenues, excluding fuel ($000) (1)
|
722,609 | 839,473 | (13.9 | %) | ||||||||
Passengers
carried
|
13,042,918 | 14,365,238 | (9.2 | %) | ||||||||
Revenue
passenger miles (000) (2)
|
6,478,772 | 7,359,971 | (12.0 | %) | ||||||||
Available
seat miles ("ASM") (000) (3)
|
8,546,288 | 9,930,228 | (13.9 | %) | ||||||||
Passenger
load factor (4)
|
75.8 | % | 74.1 | % |
1.7
pts
|
|||||||
Cost
per ASM, (cents) (5) (6)
|
8.40 | 8.55 | (1.8 | %) | ||||||||
Cost
per ASM, including interest expense
|
||||||||||||
and
excluding fuel expense (cents) (6)
|
7.81 | 7.80 | 0.1 | % | ||||||||
Operating
aircraft at period end:
|
||||||||||||
37-50
seat jets
|
64 | 79 | (19.0 | %) | ||||||||
70-99
seat jets
|
113 | 113 | - | |||||||||
Block
hours (8)
|
445,769 | 518,255 | (14.0 | %) | ||||||||
Departures
|
265,875 | 304,905 | (12.8 | %) | ||||||||
Average
daily utilization of each
|
||||||||||||
aircraft
(hours) (9)
|
9.9 | 9.6 | 3.1 | % | ||||||||
Average
length of aircraft flight (miles)
|
482 | 495 | (2.6 | %) | ||||||||
Average
seat density
|
67 | 66 | 1.5 | % |
16
The
following table sets forth branded passenger service operational statistics for
the period identified below:
Nine
Months Ended September 30,
|
||||||||||||
Operating
Highlights - Branded
|
2010
|
2009 (10)
|
Change
|
|||||||||
Total
revenues ($000)
|
1,216,604 | 79,404 | 1432.2 | % | ||||||||
Passengers
carried
|
11,167,176 | 757,933 | 1373.4 | % | ||||||||
Revenue
passenger miles (000) (2)
|
9,632,994 | 462,598 | 1982.4 | % | ||||||||
Available
seat miles ("ASM") (000) (3)
|
11,581,584 | 607,183 | 1807.4 | % | ||||||||
Passenger
load factor (4)
|
83.2 | % | 76.2 | % |
7.0
pts
|
|||||||
Total
revenue per available seat mile (cents)
|
10.50 | 13.08 | (19.7 | %) | ||||||||
Passenger
revenue per ASM (cents)
|
10.11 | 11.59 | (12.8 | %) | ||||||||
Cost
per ASM (cents) (5) (6) (7)
|
10.74 | 15.67 | (31.5 | %) | ||||||||
Fuel
cost per ASM (cents) (7)
|
3.48 | 4.26 | (18.3 | %) | ||||||||
Cost
per ASM, excluding fuel expense (cents) (6)
|
7.26 | 11.41 | (36.4 | %) | ||||||||
Gallons
consumed
|
172,608,798 | 9,930,214 | 1638.2 | % | ||||||||
Average
cost per gallon (7)
|
$ | 2.33 | $ | 2.13 | 9.4 | % | ||||||
Operating
aircraft at period end:
|
||||||||||||
37-50
seat jets
|
13 | 12 | 8.3 | % | ||||||||
70-99
seat jets
|
36 | 25 | 44.0 | % | ||||||||
120+
seat jets
|
51 | - |
NM
|
|||||||||
Block
hours (8)
|
291,883 | 25,660 | 1037.5 | % | ||||||||
Departures
|
140,593 | 18,695 | 652.0 | % | ||||||||
Average
daily utilization of each
|
11.1 | 10.0 | 11.0 | % | ||||||||
aircraft
(hours) (9)
|
||||||||||||
Average
length of aircraft flight (miles)
|
827 | 476 | 73.7 | % | ||||||||
Average
seat density
|
100 | 68 | 47.1 | % |
(1)
|
Fixed-fee
service revenues exclude cargo and other revenues.
|
(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)
|
Revenue
passenger miles divided by available seat miles.
|
(5)
|
Total
operating and interest expenses divided by available seat
miles.
|
(6)
|
Costs
(in all periods) exclude impairments and other expenses not attributable
to either fixed-fee or branded segments. Total operating and
interest expenses excluding goodwill impairment and 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)
|
Excludes
mark-to-market fuel hedge adjustment of $5.6 million for the nine months
ended September 30, 2010.
|
(8)
|
Hours
from takeoff to landing, including taxi time.
|
(9)
|
Average
number of hours per day that an aircraft flown in revenue service is
operated (from gate departure to gate arrival).
|
(10)
|
Branded
statistics consist of the operations of Mokulele beginning in April 2009
and Midwest beginning in August
2009.
|
17
The
following table sets forth information regarding the Company’s revenues and
expenses for the nine months ended September 30, 2010 and 2009. Individual
expense components are also expressed in cents per available seat mile
(“ASM”).
Consolidated
Results of Operations
|
Nine
Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Amounts
|
Cents
|
Amounts
|
Cents
|
|||||||||||||
(in
thousands)
|
per
ASM
|
(in
thousands)
|
per
ASM
|
|||||||||||||
OPERATING
REVENUES:
|
||||||||||||||||
Fixed-fee
service
|
$ | 772,834 | $ | 913,524 | ||||||||||||
Passenger
service
|
1,170,448 | 70,388 | ||||||||||||||
Cargo
and other
|
60,579 | 20,982 | ||||||||||||||
Total
operating revenues
|
2,003,861 | 1,004,894 | ||||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Wages
and benefits
|
423,876 | 2.11 | 207,446 | 1.97 | ||||||||||||
Aircraft
fuel
|
458,553 | 2.28 | 100,179 | 0.95 | ||||||||||||
Landing
fees and airport rents
|
129,444 | 0.64 | 55,434 | 0.53 | ||||||||||||
Aircraft
and engine rent
|
182,309 | 0.91 | 95,400 | 0.91 | ||||||||||||
Maintenance
and repair
|
190,057 | 0.94 | 151,487 | 1.44 | ||||||||||||
Insurance
and taxes
|
33,559 | 0.17 | 19,930 | 0.19 | ||||||||||||
Depreciation
and amortization
|
153,113 | 0.76 | 112,002 | 1.06 | ||||||||||||
Promotion
and sales
|
103,368 | 0.51 | 5,341 | 0.05 | ||||||||||||
Goodwill
impairment
|
- | - | 13,335 | 0.13 | ||||||||||||
Other
impairment charges
|
11,473 | 0.05 | - | - | ||||||||||||
Other
|
221,549 | 1.11 | 109,340 | 1.03 | ||||||||||||
Total
operating expenses
|
1,907,301 | 9.48 | 869,894 | 8.26 | ||||||||||||
OPERATING
INCOME
|
96,560 | 135,000 | ||||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
expense
|
(115,839 | ) | (0.57 | ) | (105,246 | ) | (1.01 | ) | ||||||||
Other—net
|
753 | - | 10,418 | 0.10 | ||||||||||||
Total
other expense
|
(115,086 | ) | (0.57 | ) | (94,828 | ) | (0.91 | ) | ||||||||
INCOME(LOSS)
BEFORE INCOME TAXES
|
(18,526 | ) | 40,172 | |||||||||||||
INCOME
TAX EXPENSE(BENEFIT)
|
(5,969 | ) | 23,894 | |||||||||||||
NET
INCOME(LOSS)
|
(12,557 | ) | 16,278 | |||||||||||||
Add:
Net loss attributable to noncontrolling interest in
|
||||||||||||||||
Mokulele
Flight Service Inc.
|
- | (3,270 | ) | |||||||||||||
NET
INCOME(LOSS) OF THE COMPANY
|
$ | (12,557 | ) | $ | 19,548 | |||||||||||
Total
operating and interest expense
|
$ | 2,023,140 | 10.05 | $ | 975,140 | 9.26 | ||||||||||
Total
operating and interest expense
|
||||||||||||||||
less
fuel, goodwill impairment,
|
||||||||||||||||
and
other impairment charges
|
$ | 1,553,115 | 7.72 | $ | 861,626 | 8.18 |
18
Operating
revenue in 2010 increased 99.4%, or $1.0 billion, to $2.0 billion from
$1.0 billion primarily as a result of revenues from branded airlines that
were acquired during the second half of 2009. Excluding reimbursement
for fuel expense, which is a pass-through cost to our Partners, fixed-fee
service revenues decreased 13.9% for 2010. Total block hours for the
fixed-fee business declined 14.0%. We have removed 15 aircraft from our
fixed-fee operations since September 30, 2009. Seven 50-seat aircraft
were removed from Continental and seven 50-seat aircraft were removed from
United. We also transitioned one aircraft previously reported in our
fixed-fee business to our branded business.
Total
operating and interest expenses, excluding fuel, goodwill impairment, and other
impairment charges increased $691.5 million, to $1.55 billion for 2010
compared to $861.6 million during 2009 due primarily to the acquisitions of
Frontier and Midwest airlines. The cost per available seat mile on
total operating and interest expenses, excluding fuel expenses, goodwill
impairments and other impairment charges, decreased to 7.72¢ in 2010 compared to
8.18¢ in 2009. Factors relating to the change in operating expenses
are discussed below.
Wages and
benefits increased by 104.4%, or $216.5 million, to $423.9 million for
2010 compared to $207.4 million for 2009 due primarily to $190.0 million of
expenses at Frontier and Midwest. The remainder of the
increase was due to a shift in the mix of regional flying towards larger
regional jets coupled with rising health care expenses. The cost per
available seat mile increased to 2.11¢ for 2010 compared to 1.97¢ in
2009.
Aircraft
fuel expense increased 357.7%, or $358.4 million, to $458.6 million for
2010 compared to $100.2 million for 2009 due primarily to $382.2 million of
expenses at Frontier and Midwest. The cost per gallon for fuel used
in the branded operation was $2.33 in 2010. The $23.8 million
decrease in fixed-fee fuel expenses over the prior year related to American and
Delta, which began paying directly for fuel in May and June 2009,
respectively. The unit cost increased to 2.28¢ in 2010 compared to
0.95¢ in 2009.
Landing
fees and airport rents increased by 133.5%, or $74.0 million, to
$129.4 million in 2010 compared to $55.4 million in
2009. This was due to the acquisition of branded airlines during the
prior year, which accounted for $85.4 million of expense in
2010. Fixed-fee landing fees declined $11.5 million due to one of our
Partners paying directly for landing fees since August 2009. Our
fixed-fee agreements provide for a direct reimbursement of landing
fees. The unit cost was increased to 0.64¢ in 2010 compared to 0.53¢
in 2009.
Aircraft
and engine rent increased by 91.1%, or $86.9 million, to $182.3 million in
2010 compared to $95.4 million in 2009. Expense at Frontier was
$89.0 million for the nine months ended September 30, 2010. The unit cost
for 2010 and 2009 was 0.91¢.
Maintenance
and repair expenses increased by 25.5%, or $38.6 million, to $190.1 million in
2010 compared to $151.5 million for 2009 due mainly to the acquisition of
our branded operations. Maintenance expense at Frontier for the nine
months ended was $34.2 million. The remaining increase is
attributable to higher engine restoration costs. The unit cost
decreased to 0.94¢ in 2010 compared to 1.44¢ in 2009.
Insurance
and taxes increased 68.4%, or $13.6 million, to $33.6 million in 2010
compared to $19.9 million in 2009. Expense at Frontier was $12.7 million
for the nine months ended September 30, 2010. Our fixed-fee
agreements generally provide for a direct reimbursement of insurance and
property taxes. The unit cost decreased to 0.17¢ in 2010 compared to
0.19¢ in 2009.
Depreciation
and amortization increased 36.7%, or $41.1 million, to $153.1 million
in 2010 compared to $112.0 million in 2009 due mainly to $30.3 million of
depreciation on assets at Frontier and Midwest. Depreciation on E190
aircraft purchased from US Airways in late 2009 was $11.3 million for the nine
months ended September 30, 2010. The unit cost decreased to 0.76¢ in
2010 compared to 1.06¢ in 2009.
Promotion
and sales expenses of $103.4 million were included as a result of the
acquisitions of our branded airlines. All of these expenses relate to
the branded operations only. The unit cost was 0.51¢ in
2010.
Other
impairment charges of $11.5 million for the nine months ended September 30, 2010
are primarily the result of management’s decision to combine the branded
operations under one name. Trademark intangibles and other tangible
assets related to the Midwest brand livery and tradename were written down to
their fair values. The unit cost was 0.05¢ in 2010.
Goodwill
impairment of $13.3 million in 2009 is a result of goodwill impairment within
our fixed-fee segment. The unit cost was 0.13¢ in 2009.
Other
expenses increased 102.6%, or $112.2 million, to $221.5 million in 2010 from
$109.3 million in 2009. Of the increase, $119.0 million related to
expenses from our branded airlines, of which $45.8 million related to the
integration of the branded business and return of aircraft. The unit
cost increased to 1.11¢ in 2010 compared to 1.03¢ in 2009.
Interest
expense increased 10.1%, or $10.6 million, to $115.8 million compared with
$105.2 million due primarily to the acquisition of Frontier and Midwest and
the related aircraft debt. The unit cost decreased to 0.57¢ from
1.01¢ in 2009.
19
We
recorded an income tax benefit of $6.0 million or 32.2% for the nine months
ended September 30, 2010, compared with an income tax expense of $23.9 million
or 59.5% effective tax rate in the prior year nine months. The effective
tax rate for the nine months ended September 30, 2010, was lower than the
statutory rate due to non-deductible meals and entertainment expense, primarily
for flight crews, reduced our income tax benefit recorded related to the loss
before income taxes of $18.8 million.
Liquidity
and Capital Resources
As of
September 30, 2010, we had total cash of $390.4 million of which $191.4 million
was unrestricted. At September 30, 2010, we had a working capital
deficit of $154.7 million. The Company currently anticipates
that its unrestricted cash on hand, the cash generated from operations, and
other financings will be sufficient to meet its anticipated working capital and
capital expenditure requirements for at least the next
12 months.
Working
capital deficits are customary for airlines since the air traffic liability and
a portion of the frequent flyer liability are classified as current
liabilities. Our liquidity depends to a large extent on the financial
strength of our Partners in relation to our fixed-fee business and the
number of passengers who fly in our branded passenger service, the fares they
pay, our operating and capital expenditures, our financing activities, the
amount of cash holdbacks imposed by our credit card processors, and the cost of
fuel. We cannot predict what the effect on our business might be from the
extremely competitive environment we are operating in or from events that are
beyond our control, such as volatile fuel prices, the economic recession, the
global credit and liquidity crisis, weather-related disruptions, the impact of
airline bankruptcies or consolidations, U.S. military actions or acts of
terrorism.
Net cash
provided by operating activities was $166.5 million and $133.5 million for the
nine months ended September 30, 2010 and 2009, respectively. The
$33.0 million increase in operating cash flows is primarily attributable to the
acquisition of Frontier and Midwest. The acquisitions allowed the
Company to complete flights without using a code-share partner. This
increased the air traffic liability $32.0 million during the first nine months
of 2010 compared to very minimal change to the air traffic liability during the
same period in 2009. The other $1.0 million were related to changes
in working capital.
Net cash
provided in investing activities was $39.0 million for the nine months ended
September 30, 2010, compared to $19.6 million of cash used in investing
activites as of September 30, 2009. The $58.6 million increase in
investing cash flows is primarily attributable to the decrease of funding
supplied to airlines within the industry.
Net cash
used by financing activities was $164.0 million for the nine months ended
September 30, 2010 compared to $158.1 million for the nine months ended
September 30, 2009. During the first nine months of 2010, we received
proceeds of $54.7 million as a result of debt financing previously unencumbered
aircraft engines and other equipment. The majority of the financings
relate to the Company’s new credit agreement for $22.9 million, which is secured
by certain equipment and accrues interest at a rate of LIBOR plus a
margin. The increase from the prior year relates to approximately the
difference between the payments made on new debt offset by the
proceeds.
Other
Liquidity Initiatives
The
Company expects to receive net proceeds from this offering of approximately
$102.8 million after deducting underwriting discounts and commissions and
estimated transaction expenses payable by us of approximately $0.6 million (or
approximately $118.3 million if the underwriters exercise their option to
purchase additional shares in full), assuming a public offering per share of
$9.07, which was the last reported sales price of our common stock on the NASDAQ
Global Select Market on November 5, 2010. We will use the net
proceeds from this offering of the common stock for general corporate purposes,
including to finance a portion of our Embraer 190 aircraft, and to bolster our
liquidity position.
Aircraft
Leases and Other Off-Balance Sheet Arrangements
We have
significant obligations for aircraft and engines that are classified as
operating leases and, therefore, are not reflected as liabilities on our balance
sheet. Aircraft leases expire between 2010 and 2024. As of September 30, 2010,
our total mandatory payments under operating leases for aircraft aggregated
approximately $1.52 billion and total minimum annual aircraft rental payments
for the next 12 months under all non-cancelable operating leases is
approximately $229.7 million.
Other
non-cancelable operating leases consist of engines, terminal space, operating
facilities, office space and office equipment. The leases expire through 2033.
As of September 30, 2010, our total mandatory payments under other
non-cancelable operating leases aggregated approximately $157.4 million. Total
minimum annual other rental payments for the next 12 months are
approximately $21.6 million.
20
Contractual
Obligations and Commercial Commitments
As of
September 30, 2010, we had firm orders to purchase eight A320 aircraft that have
scheduled delivery dates beginning in August 2013 and continuing through
November 2014. The current total list price of the eight aircraft is $349.0
million. Through September 30, 2010, we made aircraft deposits in
accordance with the aircraft commitments of $5.5 million. We also had a
commitment to acquire eight spare aircraft engines with a current list price of
approximately $41.9 million. We expect to take delivery of two
engines during 2010, three engines in 2011 and the final two engines in
2012. These commitments are subject to customary closing
conditions.
During
2010, the Company entered into agreements to lease seven A320 aircraft for six
years from the date of delivery. These aircraft will be delivered
between January 2011 and June 2011. The total lease commitment for
the lease term is $160.3 million with payments being made on a monthly
basis.
During
the nine months ended September 30, 2010, the Company entered into a purchase
agreement with Bombardier for the purchase of 40 CS300 aircraft and the option
to purchase up to an additional 40 aircraft with delivery beginning in the
second quarter of 2015. In connection with the purchase agreement,
the Company also signed an exclusive 15-year maintenance contract with Pratt
& Whitney for support of the aircraft engines and agreed to purchase six
engines. The combination of these agreements increases our
outstanding purchase commitments by approximately $2.84 billion in the periods
beyond March 15, 2015.
During
the nine months ended September 30, 2010 the Company took delivery of
three A 320 aircraft. The Company entered into operating leases
with payments of $12.0 million annually for each of the next five years and
$81.2 million thereafter.
In
October 2010, the Company entered into agreements to lease three A319 aircraft
for eight years from the date of delivery. These aircraft will be
delivered between October and November 2010. The total lease
commitment for the remainder of the lease term is $80.6 million with payments
being made on a monthly basis.
In
November 2010, the Company announced a firm order for six E190 jets and a
conditional firm order for 18 E190 or 195 jets. The six aircraft will
be delivered between August and December 2011. The total commitment
for the six firm ordered aircraft is $27.0 million and the total commitment for
all aircraft is $111.4 million.
Asset
Impairment
The
Company announced publicly on April 13, 2010, that Frontier Airlines is the name
for its consolidated branded network. As a result, the Midwest
tradename intangible was fully impaired and certain other assets related to the
Midwest brand and aircraft liveries were written down to their fair
values. These impairments totaled $11.5 million and are included in
other impairment charges in the Statements of Operations.
Critical Accounting
Policies
Recent Accounting
Pronouncements
In July
2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables
(Topic 310): Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. ASU 2010-20 requires that more information be disclosed about the
credit quality of a company’s loans and the allowance for loan losses held
against those loans. A company will need to disaggregate new and existing
disclosure based on how it develops its allowance for loan losses and how it
manages credit exposures. Existing disclosures to be presented on a
disaggregated basis include a rollforward of the allowance for loan losses, the
related recorded investment in such loans, the nonaccrual status of loans, and
impaired loans. Additional disclosure is also required about the credit quality
indicators of loans by class at the end of the reporting period, the aging of
past due loans, information about troubled debt restructurings, and significant
purchases and sales of loans during the reporting period by class. For public
companies, ASU 2010-20 requires certain disclosures as of the end of a reporting
period effective for periods ending on or after December 15, 2010. Other
required disclosures about activity that occurs during a reporting period are
effective for periods beginning on or after December 15, 2010. Management is
currently evaluating the impact that the ASU will have on its consolidated
financial statements.
In
January 2010, the FASB issued an amendment to the Fair Value Measurements
and Disclosures topic of the ASC. This amendment requires disclosures about
transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements.
It also clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair
value. This amendment is effective for periods beginning after December 15,
2009, except for the requirement to provide the Level 3 activity of purchases,
sales, issuances, and settlements, which will be effective for fiscal years
beginning after December 15, 2010. Accordingly, the Company has adopted this
amendment on January 1, 2010 by adding additional disclosures, except for the
additional Level 3 requirements which will be adopted in fiscal year
2011.
21
In
October 2009, the FASB issued guidance that changes the accounting for revenue
arrangements with multiple deliverables. The guidance requires an entity to
allocate consideration at the inception of an arrangement to all of its
deliverables based on their relative selling prices and eliminates the use of
the residual method of allocation. The guidance establishes a
hierarchy for determining the selling price of a deliverable, based on
vendor-specific objective evidence, third-party evidence or estimated selling
price. In addition, this guidance expands required disclosures
related to a vendor’s multiple-deliverable revenue arrangements. The
guidance will be effective for the Company prospectively for revenue
arrangements entered into or materially modified on or after January 1, 2011,
with early adoption permitted. Management has elected not to early adopt this
guidance and is currently evaluating the impact that this change will have on
its consolidated financial statements.
22
Item
3: Quantitative and Qualitative Disclosures about Market Risk
Interest
Rates
Our
earnings can be affected by changes in interest rates due to amount of cash and
cash equivalents held and variable rate debt. At September 30, 2010 and December
31, 2009, approximately $448.0 million and $506.8 million, respectively, of our
outstanding debt was at variable interest rates. A one hundred
basis point change in the LIBOR rate would increase or decrease interest expense
by $4.5 million.
Aircraft
Fuel Price Risk
Our
results of operations are materially impacted by changes in aircraft fuel
prices. In an effort to manage our exposure to this risk, we periodically
purchase call options on crude oil. We do not hold or issue any derivative
financial instruments for trading purposes. These fuel hedges were not
designated for hedge accounting, and, as such, realized and unrealized non-cash
mark-to-market adjustments are included in aircraft fuel expense. A
one dollar change in the price per barrel of crude oil will increase or decrease
our fuel expense by $1.4 million and $4.1 million for the three months and nine
months ended September 30, 2010. A one-cent change in the cost of
each gallon of fuel would impact our pre-tax income by approximately $.6 million
and $1.7 million for the three months and nine months ended September 30, 2010,
based on our current fleet and aircraft fuel consumption.
Airline
Industry Competition
As
mergers and other forms of industry consolidation including antitrust immunity
grants take place, we might
or might
not be included as a participant. Depending on which carriers combine and which
assets, if any, are sold or otherwise transferred to other carriers in
connection with such combinations, our competitive position relative to the
post-combination carriers or other carriers that acquire such assets could be
harmed. In addition, as carriers combine through traditional mergers or
antitrust immunity grants, their route networks will grow and that growth will
result in greater overlap with our network, which in turn could result in lower
overall market share and revenues for us.
Item
4: Controls and Procedures
We
maintain "disclosure controls and procedures", as such term is defined under
Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. We have carried out an evaluation, as of the end of the period
covered by this report, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon their evaluation and subject to the foregoing, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective.
Changes
in Internal Control
Except as set forth below, during the
three months ended September 30, 2010, we did not make any changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. We are in the process of completing our integration of
Midwest and Frontier. We are currently integrating policies, processes,
people, technology and operations for the combined companies. Management
will continue to evaluate our internal control over financial reporting as we
execute integration activities.
23
Part
II. OTHER INFORMATION
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2009 (the “10-K”), which
could materially affect our business, financial condition or future results. The
risks described in our 10-K are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Our
customers may react negatively to our planned change to combine our branded
businesses as our flight offerings may change.
As we
move toward a unified branded operation, there may be customer dissatisfaction
with the branding direction taken by us. Additionally,
customers in certain markets may not respond positively or recognize the new
brand.
Item
6.
|
Exhibits
|
||
(a)
|
Exhibits
|
|
10.67*
|
Purchase
Agreement COM 0190-10, by and between Embraer - Empresa Brasileira de
Aeronáutica S.A. and Republic Airline Inc., dated as of November 3,
2010.
|
|
10.68*
|
Letter
Agreement COM 0191-10, by and between Embraer - Empresa Brasileira de
Aeronáutica S.A. and Republic Airline Inc., dated as of November 3,
2010.
|
|
31.1
|
Certification
by Bryan K. Bedford, Chairman of the Board, Chief Executive Officer and
President of Republic Airways Holdings Inc., pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, in connection with Republic Airways
Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010.
|
|
31.2
|
Certification
by Robert H. Cooper, Executive Vice President and Chief Financial Officer
of Republic Airways Holdings Inc., pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, in connection with Republic Airways Holdings
Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2010.
|
|
32.1
|
Certification
by Bryan K. Bedford, Chairman of the Board, Chief Executive Officer and
President of Republic Airways Holdings Inc., pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in connection with Republic Airways Holdings Inc.’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2010.
|
|
32.2
|
Certification
by Robert H. Cooper, Executive Vice President and Chief Financial Officer
of Republic Airways Holdings Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in
connection with Republic Airways Holdings Inc.’s Quarterly Report on Form
10-Q for the quarter ended September 30,
2010.
|
*A
request for confidential treatment was filed for certain portions of the
indicated document. Confidential portions have been omitted and filed
separately with the Commission as required by Rule 24b-2 of the
Commission.
24
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
REPUBLIC AIRWAYS HOLDINGS INC. | ||
(Registrant) | ||
Dated:
November 8, 2010
|
By: |
/s/
Bryan K. Bedford
|
Name:
Bryan K. Bedford
|
||
Title:
Chairman of the Board, Chief Executive Officer and
President
|
||
(principal
executive officer)
|
||
Dated:
November 8, 2010
|
By: |
/s/
Robert H. Cooper
|
Name:
Robert H. Cooper
|
||
Title:
Executive Vice President and Chief Financial Officer
|
||
(principal
financial and accounting officer)
|
||
25