Shocking Results at Republic Airways

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When reviewing the quarterly results for Republic Airways (NASDAQ: RJET), a couple of numbers really stuck out as shocking and actually in a good way. The company reported the amazing combination of lower revenue yet higher operating margin. What is going on in the airline industry that is allowing this focus on profits?

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 of Allegiant Travel (NASDAQ: ALGT) and Spirit Airlines (NASDAQ: SAVE). Allegiant, though, reported disappointing results that sent the stock plunging, but Spirit Airlines was able to beat results.

Shocking positive numbers

These numbers may not be that shocking to investors following the industry, but those on the outside seeing airlines with the legacy issues will be amazed. The attention grabbing numbers for Republic Airways were that operating revenues plunged 8.7% while the operating margin jumped 1.6 points. The combination led to a 15% jump in earnings per share.

So what led to the situation where an airline could reduce revenue and actually improve earnings? Mainly the industry is more focused on profitable revenue instead of market share. In fact, the Republic segment saw pre-tax income surge 46% to $27.7 million partly by reducing passenger service revenue with the Frontier division that is up for sale. The aircraft used for that reduced service were either transitioned to more profitable fixed-fee services or sold.

The Frontier segment actually saw pre-tax income decline slightly to $13.7 million Considering the extremely high load factor of over 90%, the division continues to struggle to prove a high level of profits. The inability to increase utilization suggests a new strategy is needed for that division.

Beating earnings

Republic Airways reported earnings of $0.46 that beat estimates of $0.42. Considering the stock only traded at 7.4 times forward earnings, anything that boosts those numbers should help push the stock higher. Investors will be keen to follow whether the company can continue boosting earnings without revenue growth. Analysts expect a jump in earnings from $1.11 in 2012 to $1.49 this year and $1.77 next year. Note that this surge in earnings will take place with revenues slightly declining from 2012 to 2014.

The stock initially acted weak due to missing the revenue expectations with $664.4 million versus the $671 million consensus, but it quickly rebounded to solid gains.

Industry remains cheap

This group isn’t as value priced as the major airlines, but the stocks all trade considerably below growth multiples. Spirit Airlines generally reported in-line results that should provide support to a stock trading at 14 times forward earnings while analysts forecast a long-term growth rate of 24%.

Allegiant is probably the conundrum in the industry based on the Q2 2013 earnings miss and analysts reducing 2013 estimates to $5.08 from $5.40. The forward earnings still provide value if the 21% long-term growth rate remains intact.

Bottom line

Republic Airways continues to make positive moves that improve profitability regardless of the impact to revenue. This news remains refreshing for an industry that historically struggled to be profitable. All of the stocks in the ULCC are extremely cheap based on growth rates. Most investors look at the recent stock returns and lose focus that the industry still trades at below market multiples. Investors should continue buying these stocks especially on dips with Republic Airways as the value play and Spirit Airlines as the growth play.

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Mark Holder and Stone Fox Capital Adisors, LLC have no positions in any stocks mentioned. The Motley Fool owns shares of Spirit Airlines. 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!

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