Republic Airways Making the Right Moves
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When reviewing the airline sector, the moves made by Republic Airways (NASDAQ: RJET) appear to be all the right ones. In an industry long focused on market share and size, the airlines as a group have undertaken a new dedication to focusing on profits regardless of market share or supposed industry importance.
Republic Airways is a jumbled group of airlines including Chautauqua Airlines, Frontier Airlines, Republic Airlines, and Shuttle America, serving more than 1,500 flights daily. Probably surprising to most is that the airline also serves as a fixed-fee flight operator for AmericanConnection, Delta Connection, United Express, and US Airways Express.
The company competes in the ultra-low-cost-carrier (ULCC) segment versus the better run companies Allegiant Travel (NASDAQ: ALGT) and Spirit Airlines (NASDAQ: SAVE). As the one-year chart below shows, this airline segment as a whole has done well over the last year:
The right moves
Like most in the industry, the company reported a quarterly profit during Q1 for the first time in many years. In order to achieve this target, the company made numerous moves, including cutting revenue. The beneficial moves included the following:
- Republic operated 12 fewer E190 aircraft under operations with Frontier. Five of the aircraft were sold, two were returned to lessors, while the remaining five were turned into fixed-fee charters.
- Republic placed 16 Q400 aircraft into service at United.
- For June 2013, Frontier had a 19% reduction in available seat miles (ASMs) via reducing the amount of Airbus planes operated by four.
The Republic segment actions led to an 8.6% reduction in revenue, led by a $52 million reduction in passenger revenue. Combined with a 9.4% increase in fixed-fee service revenues and a dramatic $46 million drop in fuel costs, the company was able to increase the pre-tax operating income. Likewise, the Frontier segment turned a 9.2% decline in revenue into a large drop in fuel cost and a smaller pre-tax loss.
Incredible load factor at Frontier
With the dramatic 19% reduction in ASMs for June 2013, Frontier Airlines was able to set a new record with a 94% load factor for a month. Unfortunately, all the work only increased the load factor from 93% last year.
For the year, the load factor is only 89% compared to 86% through June last year. Considering the segment had a $20 million pre-tax loss during Q1, Republic will need the record load factor in order to generate any profits from the segment.
Cheap industry in general
The above moves by Republic Airways reinforce the general airline focus of improving profits regardless of revenues and market share. Unfortunately the Frontier segment hasn’t been unable to compete with the profits of either Allegiant Travel or Spirit Airlines in the ULCC segment. Both of those airlines have summer operating margins in excess of 15% and therefore trade at multiples of revenue.
Republic Airways trades at one of the lowest sales multiples; this shouldn’t be a huge surprise considering the weak margins at Frontier. In addition, Republic has declining revenue while Spirit is growing over 20% and Allegiant is pegged at around 10% growth.
As with every airline stock, this group trades at earnings multiples below the market. Allegiant is about the closest at 16 times forward earnings while Spirit only trades at 13 times forward earnings with growth exceeding 22%. Republic, though, trades at a paltry 7 times forward earnings.
Republic Airways has made several positive moves to improve profitability and reduce pricing competition in the airlines sector. The company trades at a below-market multiple though it hasn’t proven that the stock should be bought over some of the cheap major airlines that trade at similar earnings multiples. Allegiant Travel appears on the expensive side compared to Spirit Airlines. Investors might want to stick with Spirit in the ULCC sector, though keeping an eye on the turnaround at Frontier should keep Republic on investors' radar for now.
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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool owns shares of SPIRIT AIRLINES INC. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!