Republic In Deals With Midwest, Frontier
Click here for more news / Clique aqui para mais notícias
By Andrew Compart
Republic Airways Holdings unveiled an agreement to acquire Milwaukee-based Midwest for $31 million the day after revealing its deal to acquire Denver-based Frontier for $108.8 million, aiming to transform Republic because of its belief that the prospects for growth as a fixed-fee regional carrier are limited at best.
“You can either be proactive or wait until things get better,” a Republic spokesman said June 24.
“In a perfect world, I think we would have been happy with the traditional model,” he said. But “things are changing,” he added, citing Republic’s concerns about the future growth or survivability of some of its major airline partners.
Of course, there is also a potential downside.
The Midwest and Frontier deals expose Republic to the risks of independent flying: its Republic Airlines, Chautauqua and Shuttle America subsidiaries generate income from fee-for-service deals flying for airlines such as American, Continental, Delta, Midwest, US Airways and United under those carriers’ brands. Its fuel costs are reimbursed by its partners, reducing its direct exposure to fuel cost increases.
With Frontier and Midwest, Republic’s income would depend in part on how many tickets they sell and what happens with the cost of fuel. Frontier, in bankruptcy protection, has reported six straight months of operating profits. But Midwest has been in financial trouble, lost $25 million in the first quarter and faces new and increasing competition in Milwaukee from AirTran and Southwest.
On June 24, analysts at Raymond James who have long followed regional carriers agreed that a lack of regional growth and the potential future troubles for its major airline partners propelled Republic in this direction. But they were not particularly excited about the prospects for success given what would be its new exposure to passenger demand fluctuations and fuel price volatility.
‘Hail Mary Pass’“In summary, we like the team on the field, but given the difficult operating environment and limited margin for error from a liquidity standpoint, this play equates to a Hail Mary pass in the midst of a blizzard,” Raymond James analysts Duane Pfennigwerth and James Parker said in their research note.
Republic, naturally, is more optimistic and believes the deals will pay off. It describes both carriers as “established brands” and believes it can provide efficiency, “synergy” and, in Midwest’s case, fleet changes that will improve the product and profitability. The Republic spokesman said the company plans to maintain Frontier and Midwest as separate strong brands — assuming the deals make it through the bankruptcy and regulatory process, respectively — but did not rule out finding ways they can “complement” each other.
Republic is acquiring 100% of the equity of Midwest from TPG Capital, a Fort Worth, Texas-based private equity firm. TPG will get $6 million in cash, a $25 million five-year note that can be converted to Republic Airways stock at $10 a share, and the right to nominate a member to Republic’s board. The Republic spokesman said the Midwest deal is not contingent upon the Frontier deal going through.
TPG and minority partner Northwest acquired Midwest in January 2008 for about $450 million. Northwest had a 47% share, but wrote off the entire value of its $215 million investment in the second quarter of last year because of Midwest’s “financial deterioration.”
Republic said it expects the Midwest deal to close in four to six weeks, making Midwest a wholly owned subsidiary. Midwest would continue flying with the Midwest brand, but its nine remaining Boeing 717 aircraft would be replaced with Embraer 190 aircraft.
That fleet transition would take nine to 12 months, the Republic spokesman said. The E-190s, configured for as many as 99 seats, would be used at least in part to bring back more West Coast services. Midwest’s reduction in services while in “survival mode” have hurt the brand with frequent flyers, he said.
Republic’s deal to aquire Frontier still must survive a bankruptcy-court supervised auction, which could produce a higher bidder, and some other procedural hurdles. The Midwest deal faces fewer hurdles, but will need clearance from federal regulatory agencies
Republic already has deep financial and operational ties with Midwest, including $31 million in loans that have helped it survive since last fall. In exchange, Republic has signed air service agreements with Midwest that have made it the primary operator of Midwest services — even more so than Midwest itself.
Photo: Airlines Gallery
