Republic Unloads Struggling Frontier to Provide Better Focus
After years of attempting to turn around Frontier Airlines, Republic Airways made a move that should have surprised no one in the industry. The operator of fixed-fee flights for partner airlines agreed to sell Frontier to a group run by William Franke, the former chairman of Spirit Airlines . Exiting the troubled subsidiary allows Republic to focus on the profitable fixed-fee segment, but the airline failed to obtain anything significant for its four years of work attempting to make Frontier viable.
Record load factors not enough
Republic has spent the last four years improving Frontier's operations, but it hasn't been able to turn the struggling airline into a winner. Frontier has been able to juice the load factor to record heights, but squeezing more people on planes without grabbing fees hasn't produced meaningful profits. In fact, for the first half of 2013, Frontier is still in the red while even a still-bankrupt American Airlines is reporting sizzling profits.
Republic Airways is only getting $36 million in cash for the money loser, plus the assumption of over $100 million in debt, but investors clearly see dumping Frontier for virtually nothing as questionable; Republic's stock is trading down since the deal was announced and now trades at multi-month lows. The Republic division, which focuses on fixed-fee flights operated under airline partner brands, is solidly profitable, and likely didn't fit well with the low-cost carrier model.
Frontier removal impact
For the second quarter, Frontier generated revenue of $327.6 million -- a revenue base close to that of Spirit Airlines. Frontier's also similar in size to the remaining Republic segment. As with any massive change, investors need to understand that Republic's reported numbers will be vastly different in 2014 -- nearly 50% lower. That kind of change typically leads some investors to make invalid comparisons to previous periods.
Frontier recorded a profit in 2012, which might lead to further questions about why a segment that generated pre-tax income of $29.6 million wasn't able to obtain a higher offer than $36 million.In the last year, Republic has done an exceptional job of improving profits even as revenue stalled out. During its second quarter, pre-tax income soared 45.8%, even with revenue declining 5.8%.
Like Republic, SkyWest focuses on operating regional flights for the major airlines, running both SkyWest and ExpressJet. However, SkyWest isn't able to generate the same level of margins as Republic -- only around 6% during its seasonally strong second quarter. Incredibly high aircraft maintenance costs, amounting to 20% of revenue, ate into its profits.
SkyWest's numbers highlight Republic's operating efficiency, even including the struggling Frontier division; Republic as a whole generated operating margins of 10.6% and only spent 11% on aircraft maintenance costs. Going forward without the distractions of Frontier, Republic may be able to further improve margins.
While the market has been volatile since the announced deal, investors appear reasonably disappointed that Republic wasn't able to obtain more for an airline into which it poured four years of work. Regardless, a focused corporate structure and strong profits for the remaining Republic segment might drive some multiple expansion for its shares, which would compensate the company for its solid results and reduced risk.
The article Republic Unloads Struggling Frontier to Provide Better Focus originally appeared on Fool.com.Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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