Republic Airways Holdings Inc. ($RJET)

Well, good afternoon, everyone. Andrew Didora here with the BofA Airlines research team. Our next fireside is with the team here from Republic. We have the Chairman and CEO, David Grizzle, President and incoming CEO, Matt Koscal and CFO, Joe Allman. So gentlemen, thanks for joining us today.

We're really glad to be here. Thank you so much for inviting us. That's the 3 of us right there. How do we look? I want to pick up on what Andrew just talked about here. We are a company that prides itself on our culture. And A lot of companies talk about culture, but for us, it is truly foundational. And Andrew just mentioned that Matt has been promoted to the role of CEO effective June 15. That's very important. And I want Matt to be the one to actually walk us through this slide here. So this is not just wallpaper, but you actually hear this because our culture is foundational and Matt is the artisan of these cultural artifacts that are presented here. Matt, would you go through that for us?

Sure. Thanks, David. So let me start, though, by reemphasizing what David just said, I truly believe any CEO who doesn't have culture as their #1 initiative is missing the boat today. The workforce is more demanding than ever. We've transitioned into employee-employer relationship in mass that is more transactional in nature. And if you have a transactional workforce relationship, you get the 9 to 5, and that's it. And you never get the discretionary effort. You never get that discretionary connectivity to folks feeling that they own a part of the mission that they're part of. And you can't be excellent, and you definitely can't run an excellent airline if you don't have that discretionary effort. We rely on it every single day to deliver the product that we deliver in a very complicated work environment. And that is why culture is so important to everything that we do. I'll guide you to the guiding principles on this page because that truly, as we talk through it, David just had an opportunity to join me and 40 of our associates on a mission trip and under risk something we do once a year. We take them down, and we've got a sustainability mission that we've been working on down there. And one of the things he came back and highlighted for me goes is every one of your conversations, I've seen you do it in the workplace. I haven't seen you do it in our -- you just hadn't been a part of it with me. But every conversation we have with every partner and everyone that we engage with, we lean back into 1 of our 4 pillars of guiding principles. stewardship excellence, trust respect, care for one another, fund in action. And I think that is essential because it provides that connectivity and fabric for our associates into what we're doing and connects their mission with their work and their purpose. And we believe that's a competitive advantage. Where we look at a marketplace where human capital and access to human capital retention of that human capital is the most competitive thing we compete in each and every day. We've made tremendous investments in our training infrastructure. David will talk about in a minute. And for us to not invest in culture in a way that allows us to get the most out of that investment and to retain those associates is something that's a huge miss. So it's not just words on a slide, but it is the #1 mission that I have as CEO that our leadership team has is that we create a culture and a work environment that is committed to excellence that allows our associates to connect each and every day to that mission and to be empowered to make it happen. And as you'll see in the presentation as we go further, we do something that is not very easy to replicate. And at the end of the day, it is because of our culture.

So you'll continue to hear us harp on this idea of culture. And the reason is that it is our culture that enables us to achieve industry-leading operational reliability. That is what we sell, operational reliability, especially in the most challenging aerospace in America. We fly predominantly in the Northeast. That is where we have the worst weather compounded by the most significant air traffic control challenges, and we are hands down the best operator in that geography. And we are that good because of our culture, particularly in an irregular operation situation, it is culture more than it is technology that enables you to recover quickly from a significant irregular operation like we've had in spades during the first quarter. And so we rely very heavily on culture because we're selling operational excellence. We have a leadership team that has been with this company for decades, but more importantly, they have been in regional airlines, and they are experienced in this geography for decades. They have learned the particular techniques that are necessary to achieve high operational reliability and very challenging work environment. I've gotten a lot of calls from friends recently. asking me how we're being affected at Republic Airways with the surging fuel prices. And I explained to them, it's had no adverse impact on us at all because we don't bear any fuel risk in our capacity purchase agreement model, we don't bear fuel risk. And in addition, we don't bear passenger marketing demand risk. Now again, indirectly, it will have an impact over time, but we have no direct passenger marketing risk as well. So our CPA model insulates us from the most significant vagaries that the airline business, in general, has to deal with. We have made a significant number of very smart investments over time to create an infrastructure that supports our company from the first time an employee walks in the door until the time that, that pilot is sitting in a left seat. Starting in 2018, we identified that a pilot shortage was coming. And we immediately embarked on significant self-help activities, starting with creating a flight school that is an avid issue of flight school. So people can come into our flight school lift Academy with absolutely no flight experience at all. And we work with them providing financial support so that they are able to emerge from there, build hours in one of our subsidiaries or as a certified flight instructor and move to our right seat in our airplanes. And then they begin enjoying another area of investment that we have made, which is to build an integrated training facility, where we have our headquarters in Carmel. And the beauty of what we have done, and I really have to credit Matt with a large part of this is that from the moment a pilot, a prospective pilot walks in the door at Lyft Academy, until he or she finds themselves sitting in the left seat of one of our Embraer 170 or 175s, they have received an integrated training experience involving not only preparing them for understanding the technology we use. But again, in culturating them in what makes Republic such a special place to fly. And we have found that by doing that, that we have been able to avoid the challenges of pilot supply shortage in a way that has not been fully mastered by some of our other participants in the industry here. And finally, we have a strong balance sheet. We have a very strong balance sheet and one that we have a I would call it a leverage efficiency strategy that we are also pursuing even with the balance sheet that we have so that we intend to make it stronger and to make it more serviceable -- increasingly serviceable for our operation. Matt said that -- or I said that Matt has been promoted to CEO. That is a change that was envisioned a year ago when our former CEO and essentially our founder, departed to become the FAA administrator. At that time, we put in place a transition plan to move us from Brian to Matt, and we will fully complete that June 15, and we have the highest [indiscernible] of confidence that Matt will be able to build significantly on what exists at Republic because he's been such a significant architect of it thus far. Matt, until here a little bit more about what we are. We're a single fleet airline. We fly just 170s and 175s. We have 3 customers. You can see the distribution of our aircraft positioning among those 3 there. And again, as I said before, almost all of our operations are in the Northeast. It is because of what we do in the Northeast, that these 3 customers, in particular, value us so very highly. In this slide here, you can see that we have been through a number of manifestations as an airline. And where we are now, is a significantly more simple and consistent operation of what we've been at, at many times in the past. But the important thing about our history within the industry is that we have now emerged after the failures of other carriers, the consolidation of other carriers as the one fully scaled, pure-play CPA carrier with a single fleet. None of the others have that, and each of those elements is important. The fact that we are a pure-play CPA, I told you the advantage that we have for that. We have a single fleet type, and we are fully scaled. With that, let me turn it over to Matt.

Thanks, David. So great background. And really, as we look at it, it all comes together as to why we have the relationships we have with our 3 large partners. And a keyword to focus on here is brands, right? And why? Because over the last decade, we've seen our customer strategy change to brand-loyal airlines, right? And no different with our product. If you went back 15 years ago and you were selling CPA service, it was all about low cost. Who's providing the lowest cost of flight hour operations. Today, we are seeing the haves and the have-nots in the aviation industry. And our 3 partners here are delivering the brands that are at the top of that curve. and are really starting to show the differentiation of premium product, brand loyal customers in premium environments. And we've had to adapt our business model over that same period of time to recognize that we have a brand ourselves. And if we're going to be the solution provider for the 3 major carriers who are looking to deliver a differentiated brand goes right back to this culture story, needs to start by us delivering a differentiated premium experience to our associates and providing them differentiated tools to deliver operational excellence unlike anyone else. It's worked for us well. We have had several iterations, as David has described, but each one of those iterations had a common theme. It was being a proactive solution provider for a need from our codeshare partners. And today, it's all about brand, dual large class service. And when you look at our density of operation, hopefully, folks in here realize you flown us, if you've flown out of New York City, you've flown us. I guarantee it. We're the largest airline that many people have never heard of if they're really not paying attention to the operated by signal. But what does this tell you? This tells you what we do is incredibly important for our code-share partners by the markets we fly in. It's incredibly valuable for our co-chair partners, and it is incredibly difficult to replicate. The entry threat that we have by somebody coming in and trying to replicate what we do at scale, is incredibly high hurdle. Every day, we'll hear from our associates, man, can't we get some easier flying, and I quickly remind them that the fact that it's not easy makes us incredibly relevant long term. So a barrier to entry we have is the operational excellence that we've been able to deliver year in and year out. And as you look at this map, this shows you 2 things, 2 important notes. One is it gives you a visual of the density that we have in some of the most important markets in the country, markets that in good times and bad times or everything in between are relevant. They're the quickest to recover, and they're the least impacted even when we have slower times. And what David didn't mention, which I think is a really important thing to keep front of mind in a very busy aviation market. is we almost have a countercyclical trend when times slow down, right? When there's a de gauging because demand actually slows and we're not seeing that signal even in today's marketplace. But when there's a de-guaging, what you see is our code-share partners turn to higher utilization of our product because it fits the density and demand for the connectivity that they need to feed their hubs. So even in a historic slowdown, we've actually seen this countercyclical trend that our demand remains either robust, flat or increasing because they de-gauge to use our aircraft even with greater frequency. What's not on here in this slide is to recognize we do all of this, and David talked about with better excellence than anybody else out there with operational reliability. What does that mean in our world? Last year, we had a 99.99% controllable completion factor mark. So if it wasn't being canceled by air traffic control for weather, we weren't canceling it. Our operational reliability as far as maintenance reliability and crew reliability is second to none in the most difficult environments. And [indiscernible] I want to highlight that as well. David talked about irregular operations. Realized irregular operations are becoming more regular, okay? In March alone, 24 days were irregular operational days for us. So having the tools and the resources to deliver that high level of reliability is becoming increasingly more important as we see stresses in staffing at ATC and some of the other constraints that are really impacting the industry. And we've demonstrated year in and year out robustness in delivering that. An important thing on here as well as you see this new blue spider web coming out of the Texas area. And that represents our expansion with Mesa. And what's great about that is it not only gives us scale that I'll talk about increased scale, but it gives us our first geographic diversity in where we operate. And we saw some real uplift in Q1 in regards to well the Northeast corridor was a very difficult operating environment. The performance and the weather patterns through Houston and that part of the country gave us our first level of diversification and operational disruption, and that was a great early sign that we saw in the first full quarter of MACE operations. As we look at this merger that we closed last November on November 25, what's the obvious part is it gives us increased scale and increased scale is a wonderful thing to have in our part of the business for a whole host of reasons, which I know you're aware of. But what this gave us was immediate scale. If you look at an organic opportunity, bringing 60 aircraft on, if we had signed up this deal and just stolen share from Mesa. That's a 2-year, 2.5-year uplift to actually get those aircraft into the operation. And here, we've got the full year benefit of 60 aircraft in day 1. So the transaction strategically, the way we put it together, there gave us an immediate uptick of 60 aircraft in the operation. It also has been an underperforming asset. So we're already seeing early signs of us improving the maintenance turn times, applying our expertise, our planning, our supply chain management, and that gives us increased confidence that as we get through this integration over the next 2 years, we will see improved built-in growth out of improving the performance and utilization of the Mesa assets. So great opportunities there for us to actually take an underperforming asset and bring it up to our level of operational excellence to the benefit of our shareholders and our customers. And finally, it's great for our employees. right? It gives them additional basing opportunities, additional growth, additional code share opportunities to fly on. So a great strategic transaction for us that worked for our code-share partners at fixed an underperforming asset for one of our code-share partners and provided us with growth and scale, and we're really pleased with where we sit today with the Mesa integration. We're ahead of pace as we look at the Mesa integration road map, it's really a 1, 2, 3 kind of phased process here. Phase 1 is corporate integration in the back office work streams. We're ahead of our initial internal plan and expect that to be completed in Q4 of this year. Phase 2 is our fleet harmonization, bringing these 60 aircraft onto our maintenance program. And when we get through that process, we are on target with each one of the milestones that we've established, which were aggressive for us. They really were aggressive targets, but we've been hitting those through Q1. And as we get through that process, that will unlock additional utilization opportunity in that fleet as we bring it to our maintenance program, our level of maintenance care. which is a great long-term 2027, 2028 opportunity for us. And then the last piece is this regulatory integration, bringing the 2 operational certificates into harmonization. And that's a multiyear process that will take us through 2027 into 2028. There's typically 5 revision cycles that we go through. bringing the 2 ops specs together. We're filing the first revision cycle this month with the FAA. It's focused on bringing our safety management systems into harmonization and unifying those programs. and we're on track to deliver a unified operation over the next 2 years. All of that is encompassed obviously, by IT systems integration and building up, which we've done in the last months really building the hardware infrastructure at Mesa to allow our systems and processes to come in and be supportive there. We've already seen improvements in operational reliability within that operation on the installed fleet, and we'll continue to envelope this entire process over the next 2.5 years as we bring the 2 organizations together. And it really just brings us back to our competitive advantage. And I know it sounds like a broken record, but it starts with culture. We have the right ingredients because we have the right culture. We marry that with we've got the right fleet the E175 fleet, if any of you are flying regional aircraft on a regular basis, it's the aircraft you want to be on. You've got overhead bins, you've got 2x2 seating. You've got first-class cabins. I mean it is a wonderful product to fly on, and it's built for the business and leisure customers alike. We've got the right infrastructure in place. We have made the right investments over the last several years from training infrastructure to ammunition training solutions to our IT solutions to be positioned to be the right solution provider for our customer needs today and into the future. And that's really what will differentiate us as we continue to move forward. We've built a reputation of being the solution provider for our customers, American Delta and United, in their most complicated areas of operation, and we've made the right investments to position ourselves for that into the future. So with that, I'll let Joe briefly take you through some financials and then we'll open it up to some Q&A.

Great. Thanks, Matt. I'll just touch on a few highlights from the first quarter. But as Matt and David have already covered, it was an extremely challenging operational environment. And so our completion factor inclusive of ATC cancellations and weather was down about 3% from what would be a normal first quarter. around 97%. We actually were below 94%, at 93.87%. That's nearly about 5 days worth of flying that we lost entirely in the first quarter. But with that, the business still performed quite strong and was very resilient. We had adjusted EBITDA of approximately $100 million, had about $9 million of add-back related to merger and integration-related costs to get to that number. Our revenues, as we sit here during the quarter were up 34% on increased block hour activity, which is what we measure as kind of the flight and block hour produced for our airline partners and how we get compensated from them. The balance sheet, as David is extremely well positioned. We've made all the critical investments necessary for not just 2026 and 2027, but really for the next decade and a half. I mean, that truly is what I think any new investor coming into Republic should understand that the capital infrastructure and training infrastructure investments that we've made over the last 5 years are just transformative, and we believe we'll set the airline up extremely well for the future. As we look at the year, this year, we see gross CapEx of about $170 million. Much of that has already taken place in Q1, we'll see CapEx over the balance of the year kind of lighten up as we've concluded all of our recent new aircraft deliveries that were coming in to replace 170s at United with new 175 aircraft. The balance sheet continues to strengthen with a deleveraging effort. We see long-term goal of leverage targets below or at 1.5x. Today, we sit just at 2.7x in terms of turns. And by the end of the year, we should be below 2.2x. We are well positioned for the future, and I want to leave time for questions. Our last slide was just reaffirming the guidance that we issued at the end of our year-end call in Q1. Obviously, given the performance of the airline in any other environment, we probably would have been looking at or talking about raising guidance, given the performance of the business in the first quarter. But with the volatility that we have in the markets, and in particular, with just where we see the business shaping up. We're not seeing anything negative in terms of those trends. They're all positive. But as we sit here, we just felt like it was so recent from our year-end call to the first quarter call, we just reaffirmed guidance. But hopefully, we can provide you an update as we move into 2Q. So with that, conclude. Sorry, Andrew, we left 8 minutes

No, all great overview and great intro to the company. I know it's probably -- you guys are probably a little bit new to some of the folks in the audience. So if there are any people have any questions, just let me know. But I'd love like your culture point is certainly taken maybe 2 questions on that. One, just in terms of Mesa, I would think the culture at Mesa was a lot different than what you have at Republic now. Like how did you go about like trying to effect change in that or a cultural change in that organization? And then second, you spoke about your culture driving your great performance in the Northeast like what's your secret sauce here? -- to tell you -- there are some pilots here that would like to know, I think.

Yes. Look, on the culture side at Mesa, first and foremost, let's go back to the type of folks that stay in aviation. You stay in aviation because you have a passion for it. It's a difficult business, right? Every day you wake up and you don't know where you're going to be as far as we talked about IROPs, you think you're going to end up in Buffalo and you end up in Columbus overnight, right? So you have to love this business. And Mesa's frontline employees absolutely love this business. And it's been an easy road map for us to follow because it's where we were a decade and a half ago, right? We were underinvested in our technology and our infrastructure. and coming in and taking a passionate group of aviation professionals and saying, "Hey, we're ready to invest in your airline and here's the road map has been probably one of the easiest work tasks you could have as a leader. They've been hungry for the help, hungry for the investment and really responsive. Like anything, you make immediate changes. We made some changes where if we identified any roadblocks early on to culture, we made those changes. And we've been on the ground and visible and present each and every day and week in Mesa and Phoenix since the closing date on November 25. So it really -- it's not a secret recipe. It's just genuine presence. and investment in being there with the team.

But I do want to say one thing about your final question about where does culture fit into irregular operations and managing those. We have an every morning ops call where we go through every event that occurred in the preceding day. And I sit in on that call probably once a week. And I've seen there what I call competitive collaboration which I have never seen in any other environment, where the ops people are genuinely at one time competing with one another to do their job, the very best, and they recognize an exhibit that doing the very best can only be done collaboratively. And so you have these 2 principles at work that are generally thought of as antithetical, but they come together because of the culture that has been developed here in a way that drives excellent performance in the regular operations, competitive collaboration.

Doesn't help me on my Northeast question though. Look, I had a ton of base list of questions here. I would like with 5 minutes left, I kind of want to just focus on maybe your core customer just being the network carriers, right? I guess when you speak to your partners today, what do you think they value the most out of Republic? Is it your staffing stability, cost structure, like what are the -- so how do they choose you over internal operation, their own affiliates or other regional careers.

Look, it's a great and fair question. And cost is absolutely important, right? Cost though is the entry fee. You've got to be cost competitive at what you do. What do we do that's differentiated? One, we perform with excellence. We do it with very little intervention, right? I mean, well, it is wonderful to have -- we all have partners, right, that are high maintenance and low maintenance. And we are a low maintenance partner because we're proactive. We've made investments. We're industry-leading and what we've done. And we are proactively collaborative with each one of our codeshare partners, meaning when we identify trends, we bring those trends to their attention. We come up with collaborative approaches to actually tackle that and help them deliver a better product in their regional space. So it really is just the operational excellence each and every day that we're able to produce and the proactive nature to solving problems and helping them take that make their other partners better. We want this to be a strong industry. There's nothing that we do that we try and like keep from others. The stronger this industry is, the better for everyone. We've got a lot of confidence that we've got such a head start that we can continue to outperform our peers as they try to catch up on the infrastructure and technology and cultural investments.

Got it. And a theme that has popped up among the network carriers of late is just potential consolidation, right? Like I know you're not like -- when we think about network carrier consolidation, how do you think that impacts the regional industry?

Yes. So look, I'm going to stick to talking about our consolidation with Mesa and our code-share partners talk about what they think about their level of consolidation. Other than to say, we've seen everything as an industry over the last 20 years. We've seen a lot of consolidation. We've seen it in the regional space. You've seen it in the mainline space. And I think at the end of the day, as long as we stick to our core values as far as being able to provide them solutions in the most complicated environment, no matter what that is, we're going to continue to be their partner of choice that they look to. And we really value ourselves that in their most complicated and difficult times. New York is a complicated and difficult time every day. and they've leaned into us to solve that problem for them. And it hasn't always been the case. They brought other folks into New York, and they've moved them out and reduce their frequency and density there. So we'll let them figure out what's the right footprint for their long-term strategy. But I know that the value proposition we bring to them is enduring long term.

Got it. Just maybe last one for me in the final couple of minutes that we have is just when you think about -- when you speak to your partners, kind of when you think about your balance sheet, right, just in terms of matching up kind of debt profiles, how do you think about the long-term margin potential of the business?

Yes. I'll tell you, I think right now, our focus is on continuing to evaluate ways to delever. The business is extremely well positioned going forward. We believe, as we continue to progress through the MESA integration, we will see some uplift in the margin. this business is quite stable. That's the one thing as an investor, you should understand. The regional business doesn't have really high highs and it really shouldn't have really low lows. I would -- I don't want to call us a utility, but at some level, it has that utility type concept, where we focus on the cash flow generation and obviously, how that cash gets redeployed across the balance sheet, whether it's reinvested through CapEx, taking down leverage through debt paydowns or shareholder-friendly activities.

Got it. Any final questions from the audience in the last few seconds that we have? No. Thank you, gentlemen.

Thank you.

Thank you.