Yesterday, it was announced that Republic had signed an MOU for up to 80 A320neo-family aircraft. The fact that the company made the order in the first place isn’t all that shocking, as the carrier had dropped a major hint about it during its first quarter earnings call.
What was more interesting was the make-up of the order – 40 A319neos and 40 A320neos. The latter makes perfect sense. But the former is a bit of a head-scratcher since Republic already has Bombardier’s CS300 on order, which is basically the same size.
Now, if were Republic to mention that it had canceled its CSeries order, that would’ve made sense, especially because Republic also has 40 of those aircraft on order. But Republic has said yesterday that the order is still on!
The other confusing item is that Republic decided to go with CFM for the engines. The only engine option for the CSeries is Pratt & Whitney’s new P1000G. That engine is also an option for the A320neo family, though it’s a slightly different version than the CSeries. Either way, it seems like Republic might want to keep things simple and have the same engine family powering its two narrowbody flights of the same size but from different vendors.
But, as I did some research, the order began to make more and more sense, especially when you place it against the backdrop that Frontier is essentially in survival mode these days and in the midst of restructuring….and Frontier’s engine choice seems to have a lot to do with it.
Frontier’s current Airbus fleet is powered with CFM56 engines, and Frontier’s MOU with CFM about the LEAP-X includes “a reduction in the overhaul cost of existing Airbus engines,” according to an SEC filing.
Now, here’s the other part of my theory. CFM is a 50/50 joint venture between GE and Snecma. Many of Frontier’s aircraft are leased from GECAS, another part of GE. That same SEC filing said that Frontier was able to renegotiate its A319 leases with them. Four aircraft are now going back next year, but the remaining 18 are sticking around for an extra three years at a reduced lease rate. Synergy!
So does Republic’s order necessarily make sense from a long-term fleet perspective? Probably not, and we’ll see if the CSeries order sticks around. Even if the order stays around, Republic now has a lot of airplanes starting to come in the 2015-2016 timeframe, and those will probably all end up with Frontier barring a new branded operation or massive scope relief at a mainline carrier.
But, this move does make sense for an airline that’s trying to survive and restructure, and this deal has plenty of pieces to make Frontier’s short-term results improve.
Of course, I do have some other questions. First, would this still have happened if FAPA had not approved those labor concessions?
Secondly, what’s up with Airbus’ $25 million loan to Frontier? The airframer’s financial services arm made it in October 2009, and according to a Republic 10-Q from the time, “the loan is scheduled to be repaid in twelve quarterly installments with interest beginning in January 2010.”
Yesterday’s SEC filing said this:
In connection with the term sheet the Company entered into (i) an amendment to the Credit Agreement with Airbus Financial Services, dated as of October 30, 2009 between the Company, Frontier and Lynx Aviation, Inc., a subsidiary of the Company, and (ii) an amendment to Frontier’s purchase agreement with Airbus.
So in review…Frontier is probably still getting money from Airbus, they probably got neos cheap, they probably got engines cheap, they got cheaper lease rates for a significant portion of its fleet, and also now have cheaper engine maintenance rates.
Not too shabby.
Anyway, it’ll be interesting to see how this plays out, especially from the CSeries angle.
(Updated to reflect change in Airbus loan…completely missed that in the filing!)
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