Sunday, November 17, 2013

Republic Airways Holdings - Contract Airline

There are few mysteries to this idea. RJET was once an entity operating two different businesses, (1) a nascent, branded low-cost airline, and (2) a contract carrier. The branded airline ("Frontier") was bleeding cash, has since healed, and is in any case to be sold in this quarter.  The price has more or less been agreed and, after all is said and done, the sale will add ~$75 million in net cash to the parent's balance sheet.

What will remain of RJET - the "Republic" segment - transports passengers on behalf of the legacies under contracts that see it compensated by departure. Fuel is a pass-through cost and Republic gets paid the same irrespective of how empty or full the flight.

The Republic segment's profile looks like this:

There are a couple of uncertainties: the American/USair merger may decrease demand (i.e. departures) slightly as the number of hubs is reduced, and the outcome of the labor agreement negotiations with its pilots may knock two percentage points off current run-rate EBIT.

So, at the low end, one might reasonably expect run-rate EBIT of ~$180 million less interest expense of $110 million for earnings of $70 million on a market cap of $500 million. (There are a billion dollars or so of useable NOLs, so RJET won't be paying taxes for a while).

The company will also have ~$270 million in cash at the end of the year, after the sale of Frontier and, given the strong cash flow generation from the business, it seems to me not unlikely that, say, $50m to $100m of that is paid out in the form of dividends.

Disclosure: I'm long RJET


  1. I had a quick look at this, one thing that struck me is it has over $1.7bn in net debt, is that correct?

    Seems like quite a high amount of leverage, are you comfortable with it because of the assets covering it?

  2. Stable, fixed-fee business with debt that's secured and underwritten by aircraft & parts.

    The carrying value of the aircraft & parts is greater than debt, and the carrying value is, given the nature of the assets, likely an accurate representation of their marketable value.

    There's cash, too, of course, and the business is inherently cash generative.

  3. A general comment: How do you find your names? Screens? Other blogs? Just curious...

  4. I don't screen because I don't want the first thing I see to be price (i.e. a multiple of some sort). I am weak of character and I worry about making up stories about why this or that stock is "cheap" when the only thing that is obvious is that it is trading at a low multiple to book or whatever.

    So my process is time-intensive and inefficient (at least in the short-run). I crack open as many ARs as I can in under 10 hours a week.

    Blogs help a lot (though I try not to write about stocks that other bloggers have covered) but mostly it is a matter of making time for it and knowing what I'm looking (and what I'm not looking for) for in terms of fundamentals.

    If the description of the business strikes me as interesting, I'll spend 5 minutes looking at the report, looking at the cover letter, the segments, and trying to reconcile margins, turns, working capital with what I think they should be.

    Sometimes that 5 minutes turns into several hours. If I understand and like it, I add it to a watch list. If it's well priced, uncorrelated with something else that I own, and has a near-term catalyst of some kind, I sleep on it and then buy it.

    A side benefit to blogging is that people send me ideas to look at, too.

  5. interesting description of your process - would love more posts on this part of your investing...

    how do you keep track of your companies and which annual report is next on the "read" list? do you read 10 years worth of reports, con calls, etc. or much less?

    and when you get to valuation, what sort of hurdle are you shooting for? (say on earnings yield)

  6. I think this post crystallizes your approach to investing very well:

    Thanks for the good work.

  7. any concerns on this one about having to renegotiate some leases next year?

  8. It seems to me that aircraft rent expenses are pass-through costs under Delta and American CPAs.
    (It is not clear to me whether they're pass through costs under the United CPA.)

    In any case, all of the leases include options to renew at the maturity which implies that the renewal terms were negotiated at the front end. Based on that, I'd say that bif negative surprises are unlikely.


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